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First bracket.--The excess profits credit ($4,600) exceeds 20 per cent of the invested capital (20 per cent of $20,000) or $4,000, and there is no amount taxable under this bracket. ·

Second bracket. The portion of the net income ($7,000) in excess of 20 per cent of the invested capital (20 per cent of $20,000) or $4,000 is $3,000. In this case, however, the full amount of the excess profits credit could not be allowed under the first bracket, so that the $3,000 which would ordinarily be taxable under this bracket is reduced by the amount of the excess profits credit not allowed under the first bracket ($600), leaving only $2,400 taxable under th's bracket. The tax computed under th ́s bracket is 65 per cent of this amount (i. e., 65 per cent of $2,400) or $1,560.

Third bracket. The war profits credit ($10,000) exceeds the net inconre ($7,000), so that there is no tax under this bracket.

Total tax. The total tax for 1918 would be the sum of the taxes computed under the three brackets (i. e., nothing plus $1,560 plus nothing) or $4,560, were it not that section 302, provides that the maximum tax shall not in this case exceed $1,200. See articles 731-733. The total tax for 1918 is therefore $1,200.

ART. 719. Illustration of computation where net income derived from Government contract.

If in the case of the corporation used as an illustration in article 716 the $50,000 net income for 1919 includes $20,000 of net income from Government contracts, the tax for that year would be the sum of the amounts computed under clauses (1) and (2) of section 301 (c) of the statute.

(1) Under clause (1) the excess profits credit is $11,800, the same as under clause (2). The war profits credit is a specific exemption of $3,000, plus the average prewar net income, or $10,000, plus 10 per cent of $60,000 (the difference in invested capital) or $6,000, making a total war profits credit of $19,000. 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 30 per cent of this amount (i. e., 30 per cent of $10,200) or $3,060.

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 65 per cent of this amount (65 per cent of $28,000) or $18,200.

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 $50,000 exceeds $19.000, or $31,000) is $24,800. The amount of the tax computed under the first and second brackets ($3,060 plus $18.200) is $21,260. The tax computed under this bracket is the amount by which $24,800 exceeds $21,260, or $3,540.

The portion of the tax computed under clause (1) is the same proportion of the total amount computed under the above brackets at the rates for 1918 (i. e., $3,060 plus $18,200 plus $3,540) or $24,800, as the part of the net income attributable to Government contracts ($20,000) is of the entire net income ($50,000). This portion of the tax is therefore 2/5 of $24,800, or $9,920.

(2) The portion of the tax computed under clause (2) is the same proportion of the total amount computed at the rates for 1919 or $13,240 (for the details see illustration for 1919 under article 716) as the part of the net income not attributable to Government contracts ($30,000) is of the entire net income ($50,000). This portion of the tax is therefore 3/5 of $13,240 or $7,944.

(3) The total tax for the year 1919 is the sum of the amounts computed under paragraphs (1) and (2) above ($9,920 plus $7,944) or $17,864.

ART. 720. Illustration of computation where return for period of less than 12 months.

A corporation which has reported on the basis of the fiscal year ending March 31, 1918, later changes to a calendar year basis and files a return covering the 9 months from April 1, 1918, to December 31, 1918. It had an average prewar capital of $50,000, an average prewar net income of $3,500, an invested capital for the 9 months ending December 31, 1918, of $120,000, and a net income for such period of $50,000. It should be noted that this is a somewhat different method of arriving at the same result which would be reached under a literal application of sections 305, 311 (a) (2) and 326 (d) of the statute. The excess profits credit is computed by adding the specific exemption of $3,000 to 8 per cent of the full invested capital of $120,000, or $9,600, a total of $12,600, and - taking 9/12 of this result, or $9,450, as the excess profits credit. The war profits credit is computed by adding the specific exemption of $3,000 to 10 per cent of the full invested capital of $120,000, or $12,000, a total of $15,000, and taking 9/12 of this result, or $11,250, as the war profits credit. The war profits credit is computed in this case under section 311 (b), because the amount computed under section 311 (a) (2) is less than 10 per cent of the invested capital. The amount computed under section 311 (a) (2) would be the sum of the average prewar net income, or $3,500, plus 10 per cent of the amount by which the full invested capital of $120,000 actually used during the taxable period exceeds the average prewar invested capital of $50,000 (i. e., 10 per cent of $70,000), or $7,000, a total of $10,500. This amount is less than 10 per cent of the full invested capital for the taxable year as computed under section 311 (b). "First-bracket.-The amount or portion of the net income ($50,000) in excess of the excess-profits credit ($9,450) and not in excess of 9/12 of 20 per cent of the invested capital (i. e., 9/12 of 20 per cent of $120,000), or $18.000, is $8,550. The tax computed under this bracket is 30 per cent of this amount (i. e., 30 per cent of $8,550), or $2,565.

Second bracket.-The amount or portion of the net income ($50,000) in excess of 9/12 of 20 per cent of the invested capital (i. e., 9/12 of 20 per cent of $120,000), or $18,000, is $32,000. The tax computed under this bracket is 65 per cent of this amount (i. e., 65 per cent of $32,000), or $20,800.

Third bracket.-80 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 $50,000 exceeds $11,250, or $38,750), is $31,000. The amount of the tax computed under the first and second brackets ($2,565 plus $20,800) is $23,365. The tax computed under this bracket is the amount by which $31,000 exceeds $23,365, or $7,635, Total tax. The total tax will be the sum of the taxes computed under the three brackets (i. e., $2,565 plus $20,800 plus $7,635) or $31,000.

LIMITATION OF TAX.

SEC. 302. That the tax imposed by subdivision (a) of section 301 shall no case be more than 30 per centum of the amount of the net income in excess of $3,000 and not in excess of $20,000, plus 80 per centum of the amount of the net income in excess of $20,000; the tax imposed by *subdivision (b) of section 301 shall in no case be more than 20 per centum of the amount of the net income in excess of $3,000 and not in excess of $20,000, plus 40 per centum of the amount of the net income

in excess of $20,000; and the above limitations shall apply to the taxes computed under subdivisions (a) and (b) of section 301, respectively, when used in subdivision (c) of that section. Nothing in this section shall be construed in such manner as to increase the tax imposed by section 301.

ART. 731. Short form of computation of limitation.-In any case where the net income is at least $20,000 the computation under section 302 of the statute may be shortened as follows:

(1) The tax imposed by subdivision (a) of section 301 shall not exceed $5,100, plus 80 per cent of the amount of the net income in excess of $20,000; and

(2) The tax imposed by subdivision (b) of section 301 shall not exceed $3,400, plus 40 per cent of the amount of the net income in excess of $20,000.

Where the net income is less than $20,000 the tax shall not exceed 30 per cent or 20 per cent, as the case may be, of the amount of the net income in excess of $3,000.

ART. 732. Limitation when return for fractional part of year. When a return is rendered for a fractional part of a year the limitation shall be computed by taking that proportion of $3,000 and of $20,000, respectively, which the period covered by the return bears to a full year. The rates of tax, however, will not be affected and should be applied as in the ordinary case.

ART. 733. Illustration of computation of limitation of tax.—

If in the illustration used in article 720 the invested capital had been $100,000 and the net income $80,000, the tax computed under section 301 (a) of the statute would be $56,200. Section 302 provides, however, that the tax under section 301 (a) shall not be more than 30 per cent of the net income in excess of $3,000 and not in excess of $20.000 plus 80 per cent of the net income in excess of $20,000. In this case the return is for three-fourths of a year and the $3,000 and $20,000 are reduced to $2,250 and $15,000, respectively. The tax is therefore 30 per cent of $12,750 (the difference between $2,250 and $15,000), plus 80 per cent of $65,000 (the balance of the net income), a total of $55,825. The tax under section 301 (a), amounting to $56,200, will accordingly be reduced to $55,825.

TAX WHEN PARTLY PERSONAL SERVICE BUSINESS.

SEC. 303. That if part of the net income of a corporation is derived (1) from a trade or business (or a branch of a trade or business) in which the employment of capital is necessary, and (2) a part (constituting not less than 30 per centum of its total net income) is derived from a separate trade or business (or a distinctly separate branch of the trade or business) which if constituting the sole trade or business would bring it within the class of "personal service corporations," then (under regulations prescribed by the Commissioner with the approval of the Secretary) the tax upon the first part of such net income shall be separately computed (allowing in such computation only the same proportionate part of the credits authorized in sections

311 and 312), and the tax upon the second part shall be the same percentage thereof as the tax so computed upon the first part is of such first part: Provided, That the tax upon such second part shall in no case be less than 20 per centum thereof, unless the tax upon the entire net income, if computed without benefit of this section, would constitute less than 20 per centum of such entire net income, in which event the tax shall be determined upon the entire net income, without reference to this section, as other taxes are determined under this title. The total tax computed under this section shall be subject to the limitations provided in section 302.

ART. 741. Apportionment of invested capital and net income.-For the purpose of determining whether or not a corporation partly partaking of the nature of a personal service corporation is within the scope of section 303 of the statute and also for the purpose of establishing the basis for the computation of the tax, the corporation shall apportion or allocate its invested capital between each trade or business or branch thereof as nearly as may be in accordance with the actual facts, and shall submit with its return an explanatory statement setting forth the manner in which the apportionment of the invested capital employed in the production of each part of its net income has been determined. There must be assigned to any personal service trade or business or branch thereof an amount of invested capital at least as great as that which would ordinarily be employed by a personal service corporation of similar size and standing for the payment of salaries and office expenses, maintenance of library and equipment, credit advances to clients, etc. For the method of determining the portion of the net income derived from each trade or business or branch thereof see article 715. For the definition of "personal service corporation" see articles 1523-1532. ART. 742. Computation of tax upon net income.-(1) The tax upon the non-personal service part of the net income is computed upon the basis of (a) such part of the entire average net income for the prewar period as was derived from the same trade or business or branch thereof; (b) such part of the entire average invested capital for the prewar period as was employed in the production of the part of the net income for that period determined under (a); (c) such part of the entire invested capital for the taxable year as has been employed in the production of the net income upon which the tax is being computed; and (d) the same proportion of the specific exemption as the proportion which the part of the net income upon which the tax is being computed is of the entire net income. If the corporation was in existence during the prewar period, but did not conduct this trade or business or branch thereof during that period, the war profits credit shall be computed as provided in section 311 (b) of the statute. (2) The tax upon the personal service part of the net income is the same percentage thereof as the tax computed under (1) is of the non

personal service part of the net income. The tax under this paragraph shall in no case be less than 20 per cent of the personal service part of the entire net income, unless the tax upon the entire net income if computed in the ordinary way would be less than 20 per cent of such entire net income. In that event, and in any case in which the amount of the total tax as computed under this article is the same as or greater than the tax as computed in the ordinary way, the tax shall be computed under section 301 of the statute. See section 302 and articles 711-720 and 731-733.

ART. 743. Illustration of computation of tax where partly personal service business.

A corporation is engaged in contracting and construction work (a non-personal service business in which the employment of capital is necessary) and also renders consulting engineering service (a personal service business which if constituting its sole business would bring it within the class of personal service corporations). It has an average prewar invested capital of $50,000 (of which $38,000 was used in contracting work and $12,000 in engineering); an average prewar net income of $52,000 (of which $12,000 was derived from contracting and $40,000 from engineering); an invested capital for 1918 of $100,000 (of which $81,000 is used in contracting and $19,000 in engineering); and a net income for 1918 of $90,000 (of which $30,000 is derived from contracting and $60,000 from engineering).

(1) In computing the tax upon the first or nonpersonal service part of the net income (i. e.. $30,000 derived from contracting) the specific exemption is $1,000 (i. e., the same proportion of $3,000 which $30,000 is of the entire net income of $90,000). The excess profits credit is a specific exemption of $1,000, plus 8 per cent of the invested capital used in contracting (i. e., 8 per cent of $81,000) or $6,480, a total of $7,480. The war profits credit is a specific exemption of $1,000, plus the average prewar net income derived from contracting or $12,000, plus 10 per cent of $43,000 (the difference in invested capital used in contraeting) or $4,300, making a total of $17,300.

First bracket. The amount of the net income derived from contracting ($30,000) in excess of the excess profits credit ($7,480) and not in excess of 20 per cent of the invested capital (i. e., 20 per cent of $81.000) or $16,200 is $8,720. The tax under this bracket is 30 per cent of this amount (i. e., 30 per cent of $8,720) or $2,616.

Second bracket. The amount of the net income derived from contracting ($30,000) in excess of 20 per cent of the invested capital used in contracting (i. e., 20 per cent of $81,000) or $16,200 is $13,800. The tax computed under this bracket is 65 per cent of this amount (65 per cent of $13,800) or $8,970.

Third bracket.-Eighty per cent of the amount of the net income derived from contracting in excess of the war profits credit (i. e., 80 per cent of the amount by which $30,000 exceeds $17,300 or 80 per cent of $12,700) is $10,160. The amount of the tax computed under the first and second brackets ($2,616 plus $8,970) is $11,586. There is no tax under this bracket, as $10,160 does not exceed $11,586.

Tax. The tax upon the first portion of the net income (i. e., $30,000 derived from contracting) is the sum of the taxes computed under the three brackets (i. e., $2,616 plus $8,970 plus nothing) or $11,586. This is 38.62 per cent of $30,000 of the net income from contracting.

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