12 of $7,500 $4,375, income tax for 7 months in 1920. 5/12 of $7,700 $3,208.33 income tax for 5 months in 1921.

Total tax: Excess-profits tax, 1920 .... $7,583.33

Sec. 205. (a): "That if a taxpayer makes return for a fiscal year beginning in 1920 and ending in 1921, his tax under this title 1 for the taxable year 1921 shall be the sum of: (1) the same proportion of a tax for the entire period computed under Title II1 of the Revenue Act of 1918 at the rates for the calendar year 1920 which the portion of such period falling within the calendar year 1920 is of the entire period, and (2) the same proportion of a tax for the entire period computed under this title at the rates for the calendar year 1921, which the portion of such period falling within the calendar year 1921 is of the entire period.

"Any amount paid before or after the passage of this Act on account of the tax imposed for such fiscal year by Title II of the Revenue Act of 1918 shall be credited toward the payment of the tax imposed for such fiscal year by this Act, and if the amount so paid exceeds the amount of such tax imposed by this Act, the excess shall be credited or refunded in accordance with the provisions of section 252."

Sec. 236: "That for the purpose only of the tax imposed by section 2302 there shall be allowed the following credits . . . (c): The amount of any war-profits and excess-profits taxes imposed by Act of Congress for the same taxable year. The credit allowed by this subdivision shall be determined as follows:

"(1) In the case of a corporation which makes return for a fiscal year beginning in 1920 and ending in 1921, in computing the income. tax as provided in subdivision (a) of section 205, the portion of the war-profits and excess-profits tax computed for the entire period under clause (1) of subdivision (a) of section 335 shall be credited against the net income computed for the entire period as provided in clause (1) of subdivision (a) of section 205, and the portion of the

war-profits and excess-profits tax computed for the entire period under clause (2) of subdivision (a) of section 335 shall be credited against the net income computed for the entire period as provided in clause (2) of subdivision (a) of section 205."

Sec. 301. (a): "That in lieu of the tax imposed by Title III3 of the Revenue Act of 1918, but in addition to the other taxes imposed by this Act, there shall be levied, collected and paid for the calendar year 1921 upon the net income of every corporation (except corporations taxable under subdivision (b) 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 excess-profits 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."

Sec. 335 (a) (Quoted under Problem 334)

Art. 1622, Regulations 62: "Fiscal year ending in 1921.-The method provided for computing the tax for a fiscal year beginning in 1920 and ending in 1921, is as follows: (a) The tax attributable to the calendar year 1920 is found by computing the income of the taxpayer and the tax thereon in accordance with Title II of the Revenue Act of 1918 as if the fiscal year was the calendar year 1920, and determining the proportion of such tax which the portion of such period falling within the calendar year 1920 is of the entire period; (b) the tax attributable to the calendar year 1921 is found by computing the income of the taxpayer and the tax thereon in accordance with the present statute as if the fiscal year was the calendar year 1921, and determining the proportion of such tax which the portion of such period falling within the calendar year 1921 is of the entire period; and (c) the tax for the fiscal year is found by adding the tax attributable to the calendar year 1920 and the tax attributable to the calendar year 1921."

1

Art. 1623, Regulations 62: "Credits in the case of fiscal year ending in 1921.-In computing the tax attributable to the calendar year 1920 the net income computed for the entire period under Title II of the Revenue Act of 1918 shall be credited with the amount of the excess-profits tax computed for the entire period under Title III 3 of the Revenue Act of 1918. In computing the tax attributable to the calendar year 1921 the net income computed for the entire period under the present statute shall be credited with the amount of the excess-profits tax computed for the entire period under Title III 3 of this statute. See section 236 of the statute and article 591. Amounts previously paid by the taxpayer on account of the income tax for such fiscal year shall be credited towards the payment of the income tax imposed for such fiscal year by the present statute. Any excess

shall be credited or refunded in accordance with the provisions of section 252. See articles 1031 and 1034-1036."

Art. 952, Regulations 62: "Fiscal year of corporation ending in 1921. The method provided for computing the tax for a fiscal year beginning in 1920 and ending in 1921 is as follows: (a) The tax attributable to the calendar year 1920 is found by computing the income of the taxpayer and the tax thereon in accordance with the Revenue Act of 1918 as if the fiscal year was the calendar year 1920, and determining the proportion of such tax which the number of months falling within the calendar year 1920 is of the number of months in the entire period; (b) the tax attributable to the calendar year 1921 is found by computing the income of the taxpayer and the tax thereon in accordance with the present statute as if the fiscal year was the calendar year 1921, and determining the proportion of such tax which the number of months falling within the calendar year 1921 is of the number of months in the entire period; and (c) the tax for the fiscal year is found by adding the tax attributable to the calendar year 1920 and the tax attributable to the calendar year 1921."

NOTE:

In the computation given above, the commendable method outlined by the Bureau in Regulations 62 has been followed, which method conforms with the procedure outlined in Treasury Decision 2796 with reference to the computation of the tax in the case of a fiscal year ended in 1918. The language of the 1921 Act is however quite different from that of the 1918 Act in respect to the computation of the tax in the case of a fiscal year. The following computation, although showing a result possibly not intended by Congress, is offered as one conforming more nearly to the language of the statute:

1920 RATES

Exemp

1921 RATES

tion...

$80,416.67 @ 10%

12 of $8,041.67

2,000.00

= $8,041.67

$4,690.97, income tax for 7 months in 1920. 5/12 of $8,458.33 $3,524.17, income tax for 5 months in 1921.

Illustrating Computation of Income and Profits Tax for a Fiscal Year Ended in 1922

FACTS:

The Warren Gardening Company in its fiscal year ended October 31, 1922, had a taxable net income of $15,000. Its invested capital for the year is $65,000.

PROBLEM:

Compute the tax liability.

SOLUTION:

Computation of excess-profits tax:

Excess-profits credit, $3,000+8% of $65,000, a total of $8,200.

Since only 12 of the fiscal year occurs prior to January 1, 1922, the excess-profits tax to be assessed will be 12, or %, of $1,760 which is $293.33.

Computation of income tax and total tax:

Tax for 12 year (2 months in 1921)

Excess-profits tax (2 months in 1921) (see above) Tax on $15,000, less exemption $2,000 at 122% for 12 year (10 months in 1922)

187.33

293.33

1,354.17

Total tax for fiscal year

... $1,834.83

REFERENCES:

Sec. 205 (b): "If a taxpayer makes return for a fiscal year beginning in 1921 and ending in 1922, his tax under this title for the taxable year 1922 shall be the sum of: (1) the same proportion of a tax for the entire period computed under this title (as in force on December 31, 1921) at the rates for the calendar year 1921 which the portion of such period falling within the calendar year 1921 is of the entire period, and (2) the same proportion of a tax for the entire period computed under this title (as in force on January 1, 1922) at the rates for the calendar year 1922 which the portion of such period falling within the calendar year 1922 is of the entire period: Provided, That in the case of a personal service corporation the amount to be paid shall be only that specified in clause (2)."

Sec. 236 (c) (2): "In the case of a corporation which makes return for a fiscal year beginning in 1921 and ending in 1922, in computing the income tax as provided in subdivision (b) of section 205, the war-profits and excess-profits tax computed under subdivision (b) of section 335 shall be credited against the net income computed for the entire period as provided in clause (1) of subdivision (b) of section 205."

Sec. 301 (a)-See Problem 44 for quotation.

281"

335"

66

66