computed at the rate of 8 per cent upon the amount thereof in excess of $3,000 in the case of a domestic corporation; upon the amount thereof in excess of $6,000 in the case of a domestic partnership or of a citizen or resident of the United States; and upon the whole thereof in the case of a foreign corporation or partnership or of a non-resident alien individual.

Art. 16. Rate of tax on income of class B.-The tax upon net income of class B as defined in Art. 14 shall, except as otherwise provided in Art. 17, be computed at the following rates:

20 per cent of the amount of the net income in excess of the deduction (determined as provided in Articles 21, 23, and 24) and not in excess of 15 per cent of the invested capital for the taxable year;

25 per cent of the amount of the net income in excess of 15 per cent and not in excess of 20 per cent of such capital;

35 per cent of the amount of the net income in excess of 20 per cent and not in excess of 25 per cent of such capital;

45 per cent of the amount of the net income in excess of 25 per cent and not in excess of 33 per cent of such capital;

60 per cent of the amount of the net income in excess of 33 per cent of such capital.

Illustrations.-(1) A corporation has a capital of $100,000, prewar earnings of 7 per cent, and a net income for the taxable year of $75,000.

The deduction allowed will be 7 per cent of the capital, or $7,000, plus $3,000 specific deduction, a total of $10,000.

The amount of the net income taxable at each rate will be as follows:

F. I. Tax Supp.-7

In excess of the deduction and not in excess of 15 per cent of the capital (rate, 20 per cent).... $5,000 In excess of 15 per cent of the capital and not in excess of 20 per cent thereof (rate, 25 per cent) 5,000 In excess of 20 per cent of the capital and not in excess of 25 per cent thereof (rate, 35 per cent) In excess of 25 per cent of the capital and not in excess of 33 per cent thereof (rate, 45 per cent) 8,000 In excess of 33 per cent of the capital (rate, per cent)

The tax would then be computed as follows:

5,000

60

42,000

$ 1,000

1,250

1,750

3,600

25,200

. $32,800

60 per cent of 42,000..

Total tax...

(2) An individual or partnership has a capital of $100,000, prewar earnings of 8 per cent, and a net income for the taxable year of $22,500.

The deduction allowed will be 8 per cent of the capital, or $8,000, plus $6,000 specific deduction, a total of $14,000.

The amount of the net income taxable at each rate will be as follows:

In excess of the deduction and not in excess of 15 per cent of the capital (rate, 20 per cent).... $1,000 In excess of 15 per cent of the capital and not in excess of 20 per cent thereof (rate, 25 per cent) 5,000 In excess of 20 per cent of the capital and not in

excess of 25 per cent thereof (rate, 35 per cent) 2,500

Art. 17. When deduction exceeds 15 per cent of invested capital.-In any case in which the deduction determined as provided in articles 21, 23 and 24 is greater than 15 per cent of the invested capital and therefore can not be fully allowed under the first rate or bracket of Art. 16, then any remaining portion of the deduction will be allowed under the second bracket, and continued if necessary into the succeeding bracket or brackets until the entire amount of the deduction is allowed.

Illustrations. (1) A corporation has a capital of $9,000; prewar earnings of 9 per cent; and a net income for the taxable year of $10,000.

The deduction allowed will be 9 per cent of the capital, or $810, plus $3,000 specific deduction, a total of $3,810. The amount of the net income in each bracket will be as follows:

15 per cent of the capital..

$1.350

In excess of 15 per cent of the capital and not in excess of 20 per cent thereof.....

450

In excess of 20 per cent of the capital and not in

excess of 25 per cent thereof....

450

In excess of 25 per cent of the capital and not in

excess of 33 per cent thereof.....

720

In excess of 33 per cent of the capital.

7,030

It is evident that the total deduction of $3,810 is greater than 15 per cent of the capital and so is not fully

absorbed by the amount of net income not in excess of 15 per cent of the capital. In such case, applying Art. 17, the total deduction of $3,810 will be distributed as follows:

$1,350 in the first bracket, leaving nothing to be taxed at the 20 per cent rate.

$450 in the second bracket, leaving nothing to be taxed at 25 per cent rate.

$450 in the third bracket, leaving nothing to be taxed at the 35 per cent rate.

$720 in the fourth bracket, leaving nothing to be taxed at the 45 per cent rate.

There still remains $840 of the deduction to be allowed in the fifth bracket against the $7,030 of income which would otherwise be taxable under that bracket. There would then be $6,190 of net income left to be taxed at 60 per cent rate under the fifth bracket. Hence, the total excess-profits tax in this case would be $3,714.

(2) An individual or partnership has a capital of $40,000, prewar earnings of 9 per cent, and a net income for the taxable year of $12,000.

The deduction allowed will be 9 per cent of the capital, or $3,600, plus $6,000 specific deduction, a total of $9,600.

The amount of the net income in each bracket will be as follows:

15 per cent of the capital.

$6,000

In excess of 15 per cent of the capital and not in

excess of 20 per cent thereof....

2,000

In excess of 20 per cent of the capital and not in

excess of 25 per cent thereof.....

2,000

In excess of 25 per cent of the capital and not in

excess of 33 per cent thereof...

2,000

It is evident that the total deduction of $9,600 is greater than 15 per cent of the capital and so is not fully absorbed by the amount of net income not in excess of 15 per cent of the capital. In such case, applying Art. 17, the total deduction of $9,600 will be distributed as follows:

$6,000 in the first bracket, leaving nothing to be taxed at the 20 per cent rate.

$2,000 in the second bracket, leaving nothing to be taxed at the 25 per cent rate.

$1,600, the balance of the deduction, to be allowed against the $2,000 of income in the third bracket.

There would then be $400 of income left in the third bracket to be taxed at the 35 per cent rate, and $2,000 in the fourth bracket to be taxed at the 45 per cent rate. Hence, the total excess-profits tax in this case would be $1,040.

Art. 18. Constructive capital for application of rates. -Where the deduction allowed to a taxpayer is determined under Art. 24, the invested capital for the purpose of applying the rates of taxation under Art. 16 shall be deemed to be an amount which bears the same ratio to the net income of the trade or business for the taxable year which the average invested capital for the corresponding calendar year of representative corporations, partnerships, and individuals engaged in a like or similar trade or business bears to their average net in

come.

The Commissioner of Internal Revenue in determining for any calendar year the ratio which the average invested capital of representative corporations, partnerships, and individuals engaged in any particular trade or business bears to their average net income, will in