(1) A war excess-profits tax for the year ending March 31, 1918, as computed under the provisions of Title II of the Revenue Act of 1917, and upon the basis of an invested capital of $100,000 and a net income of $75,000 as computed under that Act, is $32,800. A war-profits and excess-profits tax for the entire period as computed under subdivision (a) of Section 301 of the present statute, and upon the basis of an invested capital of $125,000 and a net income of $70,000 as computed under the statute, is $43,600. Section 335 provides that the tax for this period is the sum of 275/365 of the tax of $32,800 as computed under the Revenue Act of 1917 or $24,712.33, plus 90/365 of the tax of $43,600 as computed under the present statute or $10,750.68, making a total war excess-profits tax for the fiscal year ending March 31, 1918, of $35,463.01.

(2) A war-profits and excess-profits tax for the year ending March 31, 1919, as computed under subdivision (a) of Section 301 of the statute is $35,600. A war-profits and excess-profits tax for the entire period as computed under subdivision (b) of Section 301 is $16,400. Section 335 provides that the tax for this period is the sum of 275/365 of the tax of $35,600, as computed under subdivision (a) of Section 301, or $26,821.92, plus 90/365 of the tax of 16,400, as computed under subdivision (b) of Section 301 or $4,043.84, making a total war-profits and excess-profits tax for the fiscal year ending March 31, 1919, of $30,865.76.

No. 9. Illustration of Computation Where Return for Period of Less Than 12 Months. A corporation which has reported on the basis of the fiscal year ending March 31, 1918, later changes to a calendar year basis and files a return covering the 9 months from April 1, 1918, to December 31, 1918. It had an average prewar capital of $50,000, an average prewar net income of $3,500, an invested capital for the 9 months ending December 31, 1918, of $120,000, and a net income for such period of $50,000. Under the provisions of Section 326 (d) of the statute the invested capital to be used for the taxable period would, except for the purposes of Section 311 (a) (2), be 275/365 of $120,000 or $90,410.96. Under the provisions of Section 305 the specific exemption of $3,000 is reduced to 9/12 of $3,000 or $2,250. The excess-profits credit is a specific exemption of $2,250, plus 8 per cent of the invested capital (i. e., 8 per cent of $90,410.96) or $7,232.88, a total of $9,482.88. The war-profits credit is a specific exemption of $2,250 plus 10 per cent of the invested capital (i. e., 10 per cent of $90,410.96) or $9,041.11, a total of $11,291.11. The war-profits credit is computed in this case under Section 311

(b), because the

amount computed under 311 (a) (2) is less than 10 per cent of the invested capital. The amount computed under 311 (a) (2) would be 9/12 of the sum of the average prewar net income or $3,500, plus 10 per cent of the amount by which the full invested capital of $120,000 actually used during the taxable period exceeds the average prewar invested capital of $50,000 (i. e., 10 per cent of $70,000) or $7,000, a total of $10,500, 9/12 of which is $7,875. This amount is less than 10 per cent of the invested capital for the taxable year as computed under Section 311 (b). It will be noted that as provided in Section 326 (d) the invested capital used in Section 311 (a) (2) is the full amount of $120,000, but that the invested capital used for all other purposes of 275/365 of this amount or $90,410.96.

FIRST BRACKET. The amount or portion of the net income ($50,000) in excess of the excess-profits credit ($9,482.88) and not in excess of 20 per cent of the invested capital (i. e., 20 per cent of $90,410.96) or $18,082.19 is $8,599.31. The tax computed under this bracket is 30 per cent of this amount (i. e., 30 per cent of

$8,599.31) or $2,579.79.

SECOND BRACKET. The amount or portion of the net income ($50,000) in excess of 20 per cent of the invested capital (i. e., 20 per cent of $90,410.96) or $18,082.19 is $31,917.81. The tax computed under this bracket is 65 per cent of this amount (i. e., 65 per cent of $31,917.81) or $20,746.58.

THIRD BRACKET. Eighty per cent of the amount or portion of the net income in excess of the war-profits credit (i. e., 80 per cent of the amount by which $50,000 exceeds $11,291.11, or $38,708.89) is $30,967.11. The amount of the tax computed under the first and second brackets ($2,579.79 plus $20,746.58) is $23,326.37. The tax computed under this bracket is the amount by which $30,967.11 exceeds $23,326.37 or $7,640.74.

TOTAL TAX. The total tax would be the sum of the taxes computed under the three brackets (i. e., $2,579.79 plus $20,746.58 plus $7,640.74) or $30,967.11, were it not that Section 302 provides that the maximum tax shall not in this case exceed $29,100. The total tax for the nine months ending December 31, 1918, is therefore

$29,100.

No. 10. Illustration of Computation of Limitation. In illustration No. 9, the net income is $50,000 and the war excess-profits tax as computed under Section 301 (a) is $30,967.11. Section 302 of the statute provides, however, that the tax under Section 301 (a)

shall not be more than 30 per cent of the net income in excess of $3,000 and not in excess of $20,000 (i. e., 30 per cent of $17,000 or $5,100, plus 80 per cent of $30,000) or $24,000, a total of $29,100. In this case the tax under Section 301, amounting to $30,967.11, will be reduced by the provisions of Section 302 to $29,100.

CHAPTER 46

THE CAPITAL STOCK TAX

This tax is popularly known as the Capital Stock Tax, although the statute describes it as "a special excise tax with respect to carrying on or doing business." The present law describes the tax in the same manner as did the 1916 Law 2 and imposes a tax "on and after July 1, 1918, in lieu of the tax imposed by the 1916 Law." The tax is imposed upon every domestic 3 corporation and upon every foreign 5 corporation doing business in the United States. The Revenue Act of 1918 in imposing this tax, does not, like the 1916 Law, limit the corporations taxed to those organized "for profit" and apparently applies to every corporation having capital stock whether organized for profit or not, except those exempt from income tax under Section 231 of the Revenue Act of 1918.6 The tax is imposed "with respect to carrying on or doing business" and is payable in advance by every taxable cor

1 Rev. Act of 1918, § 1000.

2 Act of September 8, 1916, § 407.

3 The term "domestic" when applied to a corporation, means "created or organized in the United States." (Revenue Act of 1918, § 1.)

4 The term "corporation" includes "associations, joint-stock companies and insurance companies.”’ (Rev. Act of 1918, § 1.)

5 The term "foreign," when applied to a corporation, means "created or organized outside the United States." (Rev. Act of 1918, § 1.)

6 Rev. Act of 1918, § 1000. The 1916 Law provided expressly that corporations exempt under the provisions of Section 11 of the 1916 income tax law were also exempt for purpose of the capital stock tax.

poration engaged in business during any part of the preceding year.

Definitions. The word "corporation" is used in this chapter, unless otherwise stated, in the sense defined in the Revenue Act of 1918, and includes a corporation, association, joint-stock company, or insurance company. The phrase "taxable year" as used in this chapter means the fiscal year of the Government beginning on the first day of July of each calendar year and ending on the last day of June the year following. The phrases "preceding year" and "preceding taxable year" mean the twelve-month period ending immediately prior to the "taxable year" as above defined.

Domestic Corporations. The tax applies to a domestic corporation if (a) it is carrying on or doing business; (b) has capital stock; (c) was engaged in business for some part of the preceding year ending June 30th, and (d) is not one of the corporations enumerated as exempt for purpose of income tax. The 1916 Law provided that the corporation should be organized for profit and have a capital stock represented by shares. In this respect the 1918 Law is broader in its scope. It should be noted that the law applies not only to corporations but also to all associations organized in the United States" and in this respect seems to be broader in its scope than the 1909 Law, which was construed to apply only to corporations, joint-stock companies or associations “organized under the laws of the United States or of any State or Territory of the United States or under the Acts of Congress applicable to Alaska or the District of Columba." Appar

7 It was the intention of Congress to embrace within the 1909 Law only such corporations and joint-stock associations as were organized under some statute or derived from that source some quality or benefit not existing at the common law. (Eliot v. Freeman, 220 U. S. 178.) This was a case involving a so-called “Massachusetts Real Estate Trust" which was held not to be taxable under the 1909 Law but which would seem to be taxable under the capital stock tax law.