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PART II B.

WAR-PROFITS AND EXCESS-PROFITS TAX.

GENERAL DEFINITIONS.

SEC. 300. That when used in this title the terms "taxable year," “fiscal year,” “personal service corporation," "paid or accrued,” and "dividends" shall have the same meaning as provided for the purposes of income tax in sections 200 and 201. The first taxable year for the purposes of this title shall be the same as the first taxable year for the purposes of the income tax under Title II.

ART. 701. War-profits and excess-profits tax.-The war-profits and excess-profits tax, like the income tax, is a tax upon net income. See Part II A of the regulations. It applies only to corporations. See section 301 of the statute and articles 711-720. The terms "taxable year," ," "fiscal year," "personal service corporation," "paid or accrued," and "dividends," and in general all other terms used in connection with the income tax, have here the same meaning as provided for the purposes of the income tax. See sections 1, 200, and 201 and articles 1501-1510, 1523-1533 and 1541-1549. For other teras see sections 310 and 325 and articles 771 and 811-818.

IMPOSITION OF TAX.

SEC. 301. (a) That in lieu of the tax imposed by Title II of the Revenue Act of 1917, but in addition to the other taxes imposed by this Act, there shall be levied, collected, and paid for the taxable year 1918 upon the net income of every corporation a tax equal to the sum of the following:

FIRST BRACKET,

30 per centum of the amount of the net income in excess of the excess-profits credit (determined under section 312) and not in excess of 20 per centum of the invested capital;

SECOND BRACKET.

65 per centum of the amount of the net income in excess of 20 per centum of the invested capital;

THIRD BRACKET.

The sum, if any, by which 80 per centum of the amount of the net income in excess of the war-profits credit (determined under section 311) exceeds the amount of the tax computed under the first and second brackets.

(b) For the taxable year 1919 and each taxable year thereafter there shall be levied, collected, and paid upon the net income of every cor

poration (except corporations taxable under subdivision (c) of this section) a tax equal to the sum of the following:

FIRST BRACKET.

20 per centum of the amount of the net income in excess of the excessprofits credit (determined under section 312) and not in excess of 20 per centum of the invested capital;

SECOND BRACKET.

40 per centum of the amount of the net income in excess of 20 per centum of the invested capital.

(c) For the taxable year 1919 and each taxable year thereafter there shall be levied, collected, and paid upon the net income of every corporation which derives in such a year a net income of more than $10,000 from any Government contract or contracts made between April 6, 1917, and November 11, 1918, both dates inclusive, a tax equal to the sum of the following:

(1) Such a portion of a tax computed at the rates specified in subdivision (a) as the part of the net income attributable to such Government contract or contracts bears to the entire net income. In computing such tax the excess-profits credit and the war-profits credit applicable to the taxable year shall be used;

(2) Such a portion of a tax computed at the rates specified in subdivision (b) as the part of the net income not attributable to such Government contract or contracts bears to the entire net income.

For the purpose of determining the part of the net income attributable to such Government contract or contracts, the proper apportionment and allocation of the deductions with respect to gross income derived from such Government contract or contracts and from other sources, respectively, shall be determined under rules and regulations prescribed by the Commissioner with the approval of the Secretary.

(d) In any case where the full amount of the excess-profits credit is not allowed under the first bracket of subdivision (a) or (b), by reason of the fact that such credit is in excess of 20 per centum of the invested capital, the part not so allowed shall be deducted from the amount in the second bracket.

(e) For the purposes of the Act approved March 21, 1918, entitled "An Act to provide for the operation of transportation systems while under Federal control, for the just compensation of their owners, and for other purposes," the tax imposed by this title shall be treated as levied by an Act in amendment of Title II of the Revenue Act of 1917. ART. 711. Imposition of tax.-The tax is imposed upon the net income of every corporation, domestic or foreign, except personal service corporations and certain other classes of corporations. See section 304 of the statute and articles 751-753. Special provisions of the statute deal with corporations deriving net income from Government contracts (see section 1), transportation corporations (see article 504), corporations partly partaking of the nature of personal service corporations (see section 303), corporations engaged in the

mining of gold (see section 304), foreign and abnormal corporations (see section 327), reorganized and consolidated corporations (see sections 330 and 331), corporations making their returns upon the basis of a fiscal year (see section 335), and corporations which have sold mines or oil or gas wells (see section 337). For the requirements as to rendering returns see section 336.

ART. 712. Computation of tax for 1918.-For the taxable year 1918, (a) if the net income, as defined in section 320 (a) (3) of the statute, is not in excess of 20 per cent of the invested capital, as defined in section 326, then under the first bracket the tax is 30 per cent of the amount of the net income in excess of the excess profits credit, as defined in section 312, and the second bracket is not applicable. (b) If the net income is in excess of 20 per cent of the invested captal, then under the first bracket the tax is 30 per cent of the excess of an amount of net income equal to 20 per cent of the invested capital over the excess profits credit, and under the second bracket the tax is per cent of the amount of the remaining net income less any excess profits credit not exhausted under the first bracket. (c) If the tax under (a) or the aggregate tax under (b) equals or exceeds 80 per cent of the amount of the net income in excess of the war profits credit, as defined in section 311, then the tax under (a) or (b) is the amount of the tax payable. But if such tax is less than such 80 per cent, then the tax payable is 80 per cent of the amount of the net income in excess of the war profits credit. But see section 302 and articles 731-733.

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ART. 713. Computation of tax for years after 1918.-For the taxable year 1919 and subsequent years, (a) if the net income, as defined in section 320 (a) (3) of the statute, is not in excess of 20 per cent of the invested capital, as defined in section 326, then under the first bracket the tax payable is 20 per cent of the amount of the net income in excess of the excess profits credit, as defined in section 312, and the second bracket is not applicable. (b) If the net income is in excess of 20 per cent of the invested capital, then under the first bracket the tax is 20 per cent of the excess of an amount of net income equal to 20 per cent of the invested capital over the excess profits credit, and under the second bracket the tax is 40 per cent of the amount of the remaining net income less any excess profits credit not exhausted under the first bracket. The sum of the taxes computed under the two brackets is the tax payable. But see the following article and section 302.

ART. 714. Computation of tax on income from Government contracts.In the case of a corporation which derives in any taxable year after 1918 a net income of more than $10,000 from any Government contracts made after April 5, 1917, and before November 12, 1918, the

tax shall be such a proportion of a tax computed at the rates for 1918 as the portion of the net income attributable to the Government contracts bears to the entire net income, plus such a proportion of a tax computed at the rates for 1919 as the amount of the remaining net income bears to the entire net income. In computing such taxes, however, the excess profits credit and the war profits credit applicable to the taxable year shall be used. But see section 302 of the statute. The part of the net income attributable to such Government contracts shall be determined in accordance with the following article. See also section 1 and article 1510.

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ART. 715. Allocation of net income to particular source. Whenever it is necessary to determine the portion of the net income derived from or attributable to a particular source, the corporation shall allocate to the gross income derived from such source, and to the gross income derived from each other source, the expenses, losses, and other deductions properly appertaining thereto, and shall apply any general expenses, losses, and deductions (which can not properly be otherwise apportioned) ratably to the gross income from all sources. The gross income derived from a particular source, less the deductions properly appertaining thereto and less its proportion of any general deductions, shall be the net income derived from such source. The corporation shall submit with its return a statement fully explaining the manner in which such expenses, losses, and deductions were allocated or distributed.

ART. 716. Illustration of computation of tax.

A corporation has an average prewar invested capital of $50,000, an average prewar net income of $10,000, an invested capital for 1918 of $100,000, a net income for 1918 of $40,000, an invested capital for 1919 of $110,000, and a net income of $50,000.

(1) For 1918 the excess profits credit is a specific exemption of $3,000, plus 8 per cent of the invested capital (i. e., 8 per cent of $100,000) or $8,000, making a total of $11,000. See section 312 of the statute and article 791. The war profits credit is a specific exemption of $3,000, plus the average prewar net income or $10,000, plus or minus 10 per cent of the difference between the average prewar invested capital and the invested capital for 1918. In this case it is plus, because the invested capital for 1918 is greater than the average prewar invested capital. The amount added is 10 per cent of the difference between $100,000 and $50,000, i. e., 10 per cent of $50,000, or $5,000, making a total war profits credit of $18,000. See section 311 and article 781.

First bracket.-The amount or portion of the net income ($40,000) in excess of the excess profits credit ($11,000) and not in excess of 20 per cent of the invested capital (i. e., 20 per cent of $100,000) or $20,000 is $9,000. The tax computed under this bracket is 30 per cent of this amount (i. e., 30 per cent of $9,000) or $2,700.

Second bracket.-The amount or portion of the net income ($40,000) in excess of 20 per cent of the invested capital (i. e., 20 per cent of $100,000) or $20,000 is $20.000. The tax computed under this bracket is 65 per cent of this amount (i. e., 65 per cent of $20,000) or $13,000.

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 $40,000 exceeds $18,000, or $22,000) is $17,600. The amount of the tax computed under the first and second brackets ($2,700 plus $13,000) is $15,700. The tax computed under this bracket is the amount by which $17,600 exceeds $15,700, or $1,900.

Total tax. The total tax for 1918 is the sum of the taxes computed under the three brackets (i. e., $2,700 plus $13,000 plus $1,900) or $17,600.

(2) For 1919 the excess profits credit is a specific exemption of $3,000 plus 8 per cent of the invested capital (i. e., 8 per cent of $110,000) or $8,800, a total of $11,800. See section 312 and article 791.

First bracket.-The amount or portion of the net income ($50,000) in excess of the excess profits credit ($11,800) and not in excess of 20 per cent of the invested capital (i. e., 20 per cent of $110,000) or $22,000 is $10,200. The tax computed under this bracket is 20 per cent of this amount (i. e., 20 per cent of $10,200) or $2.040.

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 $110,000) or $22.000 is $28,000. The tax computed under this bracket is 40 per cent of this amount (i. e., 40 per cent of $28,000) or $11,200.

Total tax. The total tax for 1919 is the sum of the taxes computed under the two brackets (i. e., $2,040 plus $11,200) or $13,240.

ART. 717. Illustration of computation where no tax under third bracket.

If the corporation used as an illustration in article 716 had an average prewar net income of $20,000 instead of $10,000, the excess profits credit and the tax for 1918 computed under the first and second brackets would be the same, but the war profits credit and the tax computed under the third bracket would not be the same. The war profits credit would be a specific exemption of $3,000 plus the average prewar net income, or $20,000, plus 10 per cent of $50,000 (the difference in invested capital) or $5,000, making a total war profits credit of $28,000.

Third bracket.-Eighty per cent of the amount of the net income in excess of the war profits credit (i. e., 80 per cent of the amount by which $40,000 exceeds $28,000 or 80 per cent of $12,000) is $9,600. The amount of the tax computed under the first and second brackets ($2,700 plus $13,000) is $15,700. There is accordingly no tax under the third bracket, as $9,600 does not exceed $15,700.

Total tax. The total tax for 1918 is the sum of the taxes computed under the three brackets (i. e., $2,700 plus $13,000 plus nothing) or $15,700. The total tax for 1919 would, of course, be the sanre as in article 716.

ART. 718. Illustration of computation where excess profits credit not exhausted under first bracket.

A corporation has an average prewar invested capital of $20,000, an average prewar net income of $7.000, and invested capital and net income for 1918 of the same amounts, respectively. The excess profits credit is a specific exemption of $3,000 plus 8 per cent of the invested capital (i. e., 8 per cent of $20,000) or $1,600, a total of $4,600. The war profits credit is a specific exemption of $3,000 plus the average prewar net income of $7,000, a total of $10.000. There is nothing further to be added or deducted in this case, as there is no difference between the average invested capital for the prewar period and the invested capital for the taxable year.

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