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statute is passed. 15 A statute imposing a tax upon all income of a previous year, although one tax on that income has already been paid, is valid. 16

15 Brushaber v. Union Pacific R. R. Co., 240 U. S. 1. 16 Stockdale v. Insurance Companies, 20 Wall. 323.

APPENDLX

CHAPTER 44

TAX ON UNDISTRIBUTED INCOME OF CORPORATIONS

The provisions imposing this tax are contained in and are a part of the 1916 Law as amended. The tax has been sometimes referred to as a "supertax on corpora

The purpose of the tax is to counteract the tendency of corporations to permit their earnings to accumulate as surplus, which action, although not taken with the intent of evading the supertaxes, would, nevertheless, operate to reduce the supertaxes paid by individual stockholders. Under this provision of the law a corporation may retain any part or all of its earnings for the year, provided it) is willing to pay a tax of 10% upon such portion thereof as is not actually invested and employed in the business, retained for employment in the reasonable requirements of the business, or invested in obligations of the United States issued after September 1, 1917. Of course, if the earnings of the corporation are accumulated with a fraudulent purpose or intent of preventing the imposition of the supertaxes on the stockholders, such stockholders will be taxed as though the earnings had been distributed. The provision imposing this tax is not intended to take the place of the provision contained in Section 3 of the 1916 Law, but is intended to operate in cases where the annual net income is retained beyond the reasonable requirements of the business of the corporation and yet not with fraudulent intent to avoid the imposition of the supertaxes on the stockholders of the corporation.

tions."

1 Act of September 8, 1916, § 10 (b), added by Act of October 3, 1917. 2 See Chapter 2.

Corporations Subject to the Tax. The law provides that the tax shall apply to "every corporation, jointstock company or association or insurance company." This language, however, can hardly be construed to mean every corporation which derives any income from sources within the United States, since such income is derived by foreign corporations over which this Government would not have sufficient jurisdiction to impose a tax of this character. The tax, undoubtedly, applies to every domestic corporation and to such foreign corporations as have their principal office or place of business in the United States, that is, the class of corporations, somewhat indefinitely referred to in the 1916 Law as resident corporations.” The line between foreign corporations which are, and those which are not, subject to this tax might be drawn with reference to the taxability of the non-resident alien stockholders of the corporation on dividends received from the corporation. Thus, if the Government has no jurisdiction to tax the stockholders on their dividends it would seem to have no jurisdiction to impose this tax on the undistributed income of the corporation.

Undistributed Net Income. The undistributed net income referred to in this provision of the law is the income for the taxable year, either the calendar year or the fiscal year as the case may be. The first year for which the tax is imposed is the calendar year 1917 or, if the corporation has elected to report its net income for the fiscal year, the fiscal year ending in 1917; in the latter case, however, the tax applies only to the proportion of the taxable undistributed net income for such fiscal year as the period between January 1, 1917, and the end of the fiscal year bears to the whole of such fiscal year. For example, if the fiscal year of a corporation ends on the 30th day of June, 1917, and its taxable undistributed income for that fiscal year is $50,000 only one half thereof or $25,000 will be taxable, since only one half of the fiscal year is in the calendar year 1917. This provision of the law has no reference to the income, profits or surplus earned or accumulated by the corporation prior to January 1, 1917, whether or not such income, profits or surplus is employed in the business. The fact that surplus accumulated prior to January 1, 1917, may not be employed in the business or retained for the reasonable requirements of the business, may, however, have a bearing upon the taxability of the income for the current year, since it would be difficult to earmark the current income and employ it in business while surplus previously accrued is not so employed. Within the meaning of this provision of the law, the net income for the current year is distributed only when paid to the stockholders as dividends. Another provision of the law, respecting dividends, deems such dividends to have been paid out of the most recently accumulated undivided profits or surplus. Hence, any dividends declared within six months after the close of a calendar year or fiscal year may be considered as a distribution of the income of such preceding year, unless the books of a

3 Act of September 8, 1916, § 31 (b), added by Act of October 3, 1917.

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corporation have been closed within the six months and earnings of the current year have been credited to surplus or undivided profits. The difference between the amount of net income reported by the corporation in its return of annual net income and the amount thereof distributed by the corporation at any time before the expiration of six months after the end of its fiscal or calendar year, constitutes the undistributed net income which this provision of the law seeks to tax. From such amount of undistributed net income may be deducted (a) the amount of any income taxes paid by the corporation within the taxable year imposed by authority of the United States; (b) that portion of such undistributed net income which is actually invested and employed in the business or; (c) is retained for employment in the reasonable requirements of the business, or (d) is invested in obligations of the United States issued after September 1st, 1917.4.

For the pur

INCOME TAXES PAID WITHIN THE YEAR. pose of determining the net income subject to the income tax a corporation is not permitted to deduct the amount of the Federal income taxes paid within the year, but such amounts may be deducted for the purpose of this tax. Excess profits taxes paid during the year are not deductible for the purpose of this tax since the net income subject to this tax is the same as that determined for the purpose of the tax imposed by Subdivision 10a of the 1916 Law, which is the income remaining after the Commissioner of Internal Revenue has deducted the amount of excess profits taxes assessed against the cor

4 Act of September 8, 1916, § 10' (b) added by Act of October 3, 1917.

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