capital will be found in his capital account (under whatever name it may be called) after making therein any adjustments or corrections required by these regulations, 48 provided that the assets other than those not allowed to be included equal or exceed the amount of such capital account.49 Otherwise the invested capital shall be the amount of such assets.

Where an individual does not keep books of account he should prepare and preserve a statement as at the beginning of the taxable year and as at the end of the taxable year, showing in full all his assets valued in accordance with these regulations, and all his liabilities. The excess of such assets over such liabilities at the beginning of the year and again at the end of the year will constitute the invested capital of the individual on those dates, respectively provided, that in each case the assets other than those not allowed to be included equal or exceed the amount of such excess. Otherwise the invested capital shall be the amount of such assets. The amount of the difference between the capital thus shown as at the beginning of the year and at the end of the year will, in the absence of evidence to the contrary, be deemed to have arisen ratably throughout the year, and the capital at the beginning of the year will be increased or decreased, as the case may be, by such amount averaged monthly over the year.

48 The adjustments and corrections referred to are evidently the ones described in Arts. 42 to 52 inc. See also Art. 53, paragraphs 8, 10 and 11.

49 That is, if the assets other than those described in Art. 44 equal the capital account, all of such account may be considered as invested capital. In other words, the assets which are excluded by Art. 44 are used first to offset borrowed money, and only the amount in excess of borrowed money is applied to reduce the capital account.

If an individual is engaged in more than one trade or business having invested capital, then his invested capital for the purposes of computing the deduction and applying the rates of taxation will be determined by taking the total invested capital of all such trades or businesses.

The terms "assets" and "liabilities” as used in this article relate only to the assets or liabilities of the trade or business.

NOMINAL CAPITAL

Art. 71. Application of Section 209.-Sec. 209 (see Art. 15) applies primarily to occupations, professions, trades, and businesses engaged principally in rendering personal service in which the employment of capital is not necessary and the earnings of which are to be ascribed primarily to the activities of the owners.

In determining whether a trade or business is taxable under Art. 15 no weight will be given to the fact that it is carried on by means of personal service unless the principal owners are regularly engaged in the active conduct of the trade or business.

Art. 72. Application of Section 209 not to be affected by mere size of capital, form of organization, etc.— Business concerns which render professional or personal service and are of the class normally taxable under Art. 15 shall not be taken out of that class merely because of the size of the capital if the employment of such capital is necessitated by delay and irregularity in the receipt of fees, etc., or if such capital is wholly or mainly used as a fund from which to advance salaries, wages, etc., or to provide office furniture, accommodations, and equipment, nor because of the form of organization, whether corporation or partnership, nor in the case of a partnership because of the number of partners.

Art. 73. Agents and brokers.-Agents and brokers. requiring and using no capital or merely a nominal capital in their business are taxable under Art. 15, but commission houses regularly employing a substantial amount of capital, whether to lend to principals or to carry goods on their own account, are not deemed to be agents or brokers and are taxable under the provisions of Art. 16.

Art. 74. Meaning of "nominal capital;" businesses which will not be deemed to have nominal capital.The term "nominal capital" as used in Sec. 209 means in general a small or negligible capital whose use in a particular trade or business is incidental. The following will not be construed as businesses having a nominal capital for purposes of excess profits tax:

(a) A business which because of conditions arising from the war or exceptional opportunities for profits earns a disproportionately high rate of profit during the taxable year, if it belongs to a class which necessarily and customarily requires capital for its operation. In the determination of doubtful cases stress will be laid upon the normal relation of net income to capital during prewar years;

(b) Corporations which, although their capitalization is nominal, employ a substantial amount of capital in their business;

(c) A business having a substantial capital, but whose invested capital within the meaning of Sec. 207 is reduced to a nominal amount by the operation of the restrictive clauses of that section, e. g., where the capital, consisting originally of a small amount of cash paid in, has since appreciated in value, or where the capital is largely covered by indebtedness or consists principally of tax-free securities or of intangible assets built up or

developed by expenditures which have been regularly deducted as items of current expense.50

RETURNS

Art. 75. When a return of information as to the invested capital and net income for the prewar period will not be required.-For the purposes of the excess profits tax, a return of information with respect to the invested capital and net income for the prewar period will not be required of a corporation, partnership, or individual in the following cases:

(1) If the taxpayer accepts the minimum percentage, viz., 7 per cent, as the percentage to be used in computing the deduction under Art. 21; or

(2) If the trade or business is taxable only at the 8 per cent rate under Art. 15.

This article must not be construed as not requiring a return of information as to all facts which may be necessary for the ascertainment of the capital and income for the taxable year whenever such a return is required by the Commissioner of Internal Revenue.

Art. 76. A married woman may make separate return. -A married woman who is a sole trader or is entitled to any taxable income to her sole and separate use may,

50 It will be noted that these rulings do not so much attempt to define "nominal capital" as to define or outline the kinds of businesses which are or can be carried on without the use of capital, except incidentally, and in which the profits depend primarily on the services of the individuals in the business. If the use of capital is essential, and the services of the individuals are incidental, the business does not come within the purview of Sec. 209, merely because the amount of "invested capital'' is small as compared with the profits. Where borrowed money enters largely into the capital of the business, see Art. 44.

for purposes of the excess-profits tax, make a separate return in the same manner as any other individual.

Art. 77. When affiliated corporations must furnish information as to intercorporate relations.51 For the purpose of the excess profits tax every corporation will describe in its return all its intercorporate relationships with other corporations with which it is affiliated, and will furnish such information in relation thereto as will enable the Commissioner of Internal Revenue to compute the amount of the tax property due from each corporation on the basis of an equitable and lawful accounting.

For the purpose of this regulation two or more corporations will be deemed to be affiliated (1) when one such corporation owns directly or controls through closely affiliated interests or by a nominee or nominees, all or substantially all of the stock of the other or others, or when substantially all of the stock of two or more corporations is owned by the same individual or partnership, and both or all of such corporations are engaged in the same or a closely related business; or (2) when one such corporation (a) buys from or sells to another products or services at prices above or below the current market, thus effecting an artificial distribution of profits, or (b) in any way so arranges its financial relationships with another corporation as to assign to it a disproportionate share of net income or invested capital.

51 This and the following paragraph recognize the unity of a business carried on by means of two or more separate corporations between which strict accounting of profits may not have been observed. By considering the affiliated corporations as a unit and consolidating the invested capital and the income of all, an average ratio of earnings to invested capital is reached for the business as a whole.