and partnership is deemed to be engaged in business and all of its income is deemed to be the income of a single trade or business.28 In other words, the tax is not imposed with respect to income from the trade or business of a corporation or partnership, but with respect to its entire net income from all taxable sources. With respect to individuals, the Treasury Department has already defined the term "trade or business" under the income tax law.29 The term has been given a very narrow construction under the income tax law, and it has been held that one deriving income from the purchase and sale of securities is not engaged in business, unless he is a member of an exchange. This ruling was made with reference to deducting losses incurred in trade, and it was naturally to the interest of the Government to give a very narrow definition to the term "in trade." It is not at all unlikely that under the present law the same term will be given a broader definition, since the interests of the Government are now served by including as many activities as possible within the term, and the present statute expressly defines the term to include "all trades or businesses of whatever description, whether continuously carried on or not," including "professions and occupations. Income derived from the business of life, health, and accident insurance combined in one policy issued on the weekly premium payment plan is exempt from the tax.31 ,, 30 Net Income of Domestic Corporations. The net income of a domestic corporation, to which this tax applies, 28 Section 201. 29 See Chapter 4, p. 32. 30 Section 200 and section 201. 31 Section 201. is the income of the taxable year as reported in the return of net income, except that the amounts received by it as dividends upon the stock or from the net earnings of other corporations subject to the income tax are deducted.32 It is to be noted that the net income is ascertained by excluding income defined to be exempt under the income tax law, and further, by excluding dividends received from corporations subject to the income tax. It is also to be noted that such dividends may be deducted if the corporation is subject to the income tax, although it may not be subject to this excess profits tax. Dividends received from corporations, not subject to the income tax, may not be deducted. NET INCOME FOR PREWAR PERIOD. The net income of a domestic corporation for the year 1911 is to be determined according to the provisions of the 1909 Law (excluding dividends) except that the amount of the tax assessed by the Federal Government on the income of the corporation for the year 1910 (and paid by the corporation in 1911) should not be deducted.33 Corporations were permitted to deduct such amounts in ascertaining their net income under the 1909 Law, but in ascertaining the net income of the prewar period, for the purpose of this tax, the amount need not be deducted. It is, of course, a slight advantage to the corporation to include the amount of such taxes, in order to increase the amount of income for the prewar period. The net 32 Section 206. 33 The language of the statute is "except that income taxes paid by it within the year imposed by the authority of the United States shall be included." The tax imposed by the 1909 Law was not an income tax but an excise tax but Congress undoubtedly had reference to that tax in using the language quoted, income for 1912 is ascertained in the same manner as indicated above for 1911, except that the tax imposed by the Federal Government upon the net income of the corporation for the year 1911 (and paid by the corporation in 1912) should be included. The net income for the year 1913 is ascertained in the manner provided by the 1913 Law, except that the tax assessed under the 1909 Law on income for 1912 (and paid in 1913) should be included, and the amount received by the corporation as dividends upon the stock of other corporations taxable under the 1913 Law should be deducted. 34 Net Income of Foreign Corporations. The net income of a foreign corporation is the net income received from sources within the United States,35 as reported for the purpose of the income tax, but not including the income received from dividends of domestic or resident corporations subject to the income tax. It follows from this that in so far as a foreign corporation receives dividends from this country it is not subject to the tax imposed by this law. NET INCOME FOR PREWAR PERIOD. The income of a foreign corporation for the prewar period is ascertained in the same manner as indicated above in the case of domestic corporations, except that it will include only net income received during that period from sources within the United States. 36 Net Income of Partnerships. The net income of domestic partnerships is determined in the same manner 34 Section 206. 35 Section 200 and section 206. See Definition of United States, supra. as in the case of citizens and residents of this country, and the net income of foreign partnerships is determined in the same manner as in the case of non-resident aliens. Net Income of Individuals. The net income of individuals (and of partnerships) is ascertained for the years of the prewar period, and for the taxable year, upon the same basis and in the same manner as provided in the 1916 Law, as amended, except that dividends received from a corporation taxable upon its net income may be deducted. It is to be noted that returns of net income filed for the year 1913 do not disclose the net income required to be reported under this law, since the 1913 Law differed in many respects from the 1916 Law. The net income of citizens and residents and the net income of non-resident aliens will be ascertained, respectively, by following the provisions applicable to each class. The law is not clear as to whether or not an individual engaged in two or more businesses should report separately the income from each business, or even if, by reason of being engaged in business, he must report all his income from every source, except dividends.37 Invested Capital. Invested capital as used in the law, is what the law defines it to be, and not what is generally understood by the term. It does not mean the assets of a business or trade or the book value of a plant. Generally speaking, it means the amount which has been contributed by the stockholders of a corporation, the members of a partnership, or the individual engaged in business on his own account, to the business, either directly, or by permitting the earnings of the corporation, partnership or business to be kept in the business. Money or 37 See § 206, second paragraph, § 201, first paragraph. property borrowed is not "invested capital." Further, capital which may have been contributed to the business loses the status of "invested capital" by being invested in stocks (the dividends of which are not included in net income) or by being invested in state, municipal or other bonds of that character (the interest on which is exempt under the income tax law) or other assets, the income from which is not subject to the tax. An exception is made in the case of capital invested in the obligations of the United States. Such capital does not lose its status as "invested capital" although the interest from the bonds may be excluded from net income.38 The intent of the law seems to be that if capital is invested in an asset the income from which, if any, would not be included as net income, the capital so invested shall not be included as "invested capital" for the purpose of ascertaining the amount of deduction. Thus, if capital is invested in stocks, bonds or other assets the income from which would not be taxable, the capital invested in such assets must be excluded, whether or not any income is actually derived from the assets in question. 39 The purpose of ascertaining the "invested capital" of a business is to allow what Congress considered a fair return or earning thereon before imposing the tax, hence, it follows that if the earnings are not taxable the asset is not "invested capital." AVERAGE INVESTED CAPITAL FOR THE YEAR. Since, as indicated in the preceding paragraph, the amount of in 38 The purpose of this exception is, of course, to stimulate investment in bonds and certificates of indebtedness issued by the United States for the purpose of raising money to defray the cost of the war. 39 Section 207. F. I. Tax.-33 |