"SEC. 444. AVERAGE BASE PERIOD NET INCOME INCREASE IN CAPACITY FOR PRODUCTION OR OPERATION.

"(a) IN GENERAL.-If a taxpayer which commenced business on or before the first day of its base period establishes that, during the 36-month period ending on the last day of its base period, there was an increase, as defined in subsection (b), in its capacity for production or operation, the taxpayer's average base period net income determined under this section shall be the amount computed under subsection (c). "(b) INCREASE IN CAPACITY.-An increase in capacity for production or operation shall be deemed to have occurred, for the purposes of this section, if the taxpayer establishes that it made an addition or additions to its facilities (as defined in subsection (d)) or replaced all or a part of its existing facilities, and that:

"(1) as a result of such additions or replacements, its capacity for production or operation on the last day of its base period was 200 per centum or more of its capacity for production or operation on the day prior to the beginning of such 36-month period, or

"(2) (A) as a result of such additions or replacements, its capacity for production or operation on the last day of its base. period was 150 per centum or more of its capacity for production or operation on the day prior to the beginning of such 36-month period, and (B) the adjusted basis for determining gain upon sale or exchange of its total facilities on the last day of its base period was 150 per centum or more of the adjusted basis for determining gain upon sale or exchange of its total facilities on the day prior to the beginning of such 36-month period, or

"(3) the basis (unadjusted) for determining gain upon sale or exchange of its total facilities on the last day of its base period was 200 per centum or more of the basis (unadjusted) for determining gain upon sale or exchange of its total facilities on the day prior to the beginning of such 36-month period.

"(c) AVERAGE BASE PERIOD NET INCOME.-The average base period net income determined under this section shall be computed as follows:

"(1) By multiplying the amount of the taxpayer's total assets for the last day of its taxable year immediately preceding its first taxable year under this subchapter by the base period rate of return, proclaimed by the Secretary under section 447, for the taxpayer's industry.

"(2) By subtracting from the amount ascertained under paragraph (1) an amount equal to the total interest paid or incurred by the taxpayer for the 12 months ending with the end of such immediately preceding taxable year.

"(d) FACILITIES.-For the purposes of this section, the term 'facilities' means real property and depreciable tangible property, held by the taxpayer in good faith for the purposes of the business.

"(e) TAXPAYER'S INDUSTRY CLASSIFICATION.-For the purposes of this section, the taxpayer's industry classification shall be the industry classification under section 447 to which is attributable the largest amount of the taxpayer's gross receipts for its taxable year immediately preceding its first taxable year under this subchapter.

"(f) RULES FOR APPLICATION OF SECTION.-The benefits of this section shall not be allowed unless the taxpayer makes application therefor in accordance with section 4 17 (e).

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"(g) CROSS REFERENCES.

36

"(1) For definition of gross receipts, see section 435 (e) (5). "(2) For definition of total assets, see section 442 (f).

"(3) For computation of excess profits credit based on income in the case of certain reorganizations, see Part II of this subchapter.

"SEC. 445. AVERAGE BASE PERIOD NET INCOME-NEW CORPORATION. "(a) NEW CORPORATION.-A taxpayer which commenced business after the first day of its base period shall, except as provided in subsection (g), be considered a new corporation for the purposes of this section, and its average base period net income determined under this section shall be the amount computed under subsection (b).

"(b) AVERAGE BASE PERIOD NET INCOME.-The average base period net income of a new corporation determined under this section shail be computed as follows:

"(1) For the purpose of determining the excess profits credit for any of the taxpayer's first three taxable years which is a taxable year under this subchapter

"(A) By multiplying the amount of the total assets for such taxable year (determined under subsection (c)), held by the taxpayer in good faith for the purposes of the business, by the base period rate of return, proclaimed by the Secretary under section 447, for the taxpayer's industry classification.

"(B) By subtracting from the amount ascertained under subparagraph (A) the total interest paid or incurred by the taxpayer for the 12 months ending with the last day of such taxable year.

"(2) For the purpose of determining the excess profits credit for any taxable year under this subchapter other than a taxable year described in paragraph (1)—

"(A) By multiplying the amount of the taxpayer's total assets (as defined in section 442 (f)) for (i) the last day of its taxable year immediately preceding its first taxable year under this subchapter, or (ii) the last day of its third taxable year, whichever day is later, by the base period rate of return, proclaimed by the Secretary under section 447, for the taxpayer's industry classification.

"(B) By subtracting from the amount ascertained under subparagraph (A) the total interest paid or incurred by the taxpayer for the 12 months ending with whichever day is used under such subparagraph.

For the purposes of this section, the taxable year of the taxpayer in which it commenced business and its two succeeding taxable years shall be considered to be its first three taxable years.

"(c) TOTAL ASSETS FOR FIRST THREE YEARS.-The amount of the total assets for any taxable year referred to in subsection (b) (1) shall, for the purposes of such subsection, be the sum of

"(1) the total assets (as defined in section 442 (f)) for the last day of the taxpayer's taxable year immediately preceding its first taxable year under this subchapter, and

"(2) the net capital addition (determined under section 435

ABD

income, estate, and

(g)) for such taxable year referred to in subsection (b) (1), minus the net capital reduction (determined under section 435 (g)) for such taxable year referred to in subsection (b) (1).

"(d) TAXPAYER'S INDUSTRY CLASSIFICATION.-The taxpayer's industry classification shall be determined, for the purposes of subsection (b) (1), by reference to the particular taxable year for which the excess profits credit is thereunder determined, and, for the purposes of subsection (b) (2), by reference to the taxpayer's third taxable year; and, in either case, shall be the industry classification under section 447 to which is attributable the largest amount of the taxpayer's gross receipts for such taxable year.

"(e) CAPITAL ADDITION OR REDUCTION.-If the average base period net income of the taxpayer is determined under this section

"(1) the excess profits credit for any taxable year for which such determination is made under subsection (b) (1) shall not include any net capital addition or reduction determined under section 435 (g), and

"(2) in computing the net capital addition or reduction under section 435 (g) for any taxable year for which such determination is made under subsection (b) (2), the expression 'the first day of the taxpayer's first taxable year under this subchapter' shall be read as the first day of the taxpayer's first taxable year under this subchapter or the day following the close of the taxpayer's third taxable year, whichever day is later'.

"(f) RULES FOR APPLICATION OF SECTION.-The benefits of this section shall not be allowed unless the taxpayer makes application therefor in accordance with section 447 (e).

"(g) INELIGIBLE CORPORATIONS.

"(1) If a taxpayer, on or after December 1, 1950, and prior to the end of its third taxable year, acquires any properties in any of the transactions described in paragraph (2), it shall not, for the taxable year in which such acquisition occurs or for succeeding taxable years, be entitled to the benefits of this section except under the circumstances and subject to the limitations provided in section 462 (g).

"(2) The transactions to which paragraph (1) applies are as follows:

"(A) The acquisition by the taxpayer from another corporation of properties the basis of which in its hands is determined by reference to the basis of such properties to the transferor;

"(B) The acquisition by the taxpayer of a substantial part of its assets from another corporation, or of a substantial part of the properties of another corporation, if 50 per centum or more in value of the outstanding stock or outstanding voting stock of the taxpayer is directly or indirectly owned, at the time of such acquisition, by individuals owning directly or indirectly 50 per centum or more in value of the outstanding stock, or outstanding voting stock of the transferor;

(C) The acquisition by the taxpayer of a substantial part of the properties distributed on or after December 1, 1950, by another corporation, if such properties constituted a sub

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38

stantial part of the business assets of such other corporation, and if 50 per centum or more in value of the outstanding stock or outstanding voting stock of the taxpayer is owned directly or indirectly by individuals who at the time of such distribution owned directly or indirectly 50 per centum or more in value of the outstanding stock or outstanding voting stock of such other corporation;

"(3) For the purposes of this subsection, the provisions of section 503 shall be applicable in the determination of ownership of stock.

"(h) CROSS REFERENCES.—

"(1) For definition of gross receipts, see section 435 (e) (5). "(2) For computation of excess profits credit based on income in the case of certain reorganizations, see Part II of this subchapter.

"SEC. 446. AVERAGE BASE PERIOD NET INCOME-DEPRESSED INDUSTRY SUBGROUPS.

"(a) IN GENERAL.-If a taxpayer which commenced business on or before the first day of its base period is a member of a depressed industry subgroup, as defined in subsection (c), its average base period net income determined under this section shall be the amount computed under subsection (b).

"(b) AVERAGE BASE PERIOD NET INCOME.-The average base period net income determined under this section shall be computed as follows:

"(1) By determining the amount of the taxpayer's total assets for the last day of each of its taxable years ending after the first day of its base period and prior to the first day of its first taxable year under this subchapter.

"(2) By computing the average of the amounts ascertained under paragraph (1).

"(3) By multiplying the amount ascertained under paragraph (2) by the adjusted rate of return, proclaimed by the Secretary under subsection (e), for the taxpayer's industry subgroup.

"(4) By determining the aggregate amount of interest paid or incurred by the taxpayer for all taxable years ending after the first day of its base period and prior to the first day of its first taxable year under this subchapter, dividing such aggregate by the total number of months in such years, and multiplying the quotient by 12.

"(5) By subtracting the amount ascertained under paragraph (4) from the amount ascertained under paragraph (3).

"(c) DEPRESSED INDUSTRY SUBGROUPS.-The Secretary shall determine and proclaim as a depressed industry subgroup any industry subgroup (defined in accordance with subsection (f).) having a rate of return (determined under subsection (d) (1)) for the period 1946 through 1948 which is less than 63 per centum of its rate of return (determined under subsection (d) (2)) for the period 1938 through

1948.

"(d) RATES OF RETURN FOR INDUSTRY SUBGROUPS.

"(1) PERIOD 1946-1948.-The rate of return for an industry subgroup for the 3-year period 1946 through 1948 shall be obtained

by dividing the sum of the aggregate net income (computed without regard to the net operating loss deduction provided in section 23 (s)) for the 3 years 1946 through 1948 and the aggregate interest deduction for such years shown on the income tax returns filed by the corporations in such industry subgroup submitting balance sheets, by the aggregate assets for such years of such corporations as of the close of the taxable years for which such returns were filed. Such aggregate net income, interest deduction and total assets shall include the amounts reported on the income tax returns for the calendar years 1946, 1947, and 1948, and the amounts reported on returns for other taxable years the greater part of which falls in such calendar years.

"(2) PERIOD 1938-1948.-The rate of return for an industry subgroup for the 11-year period 1938 through 1948 shall be determined in the same manner as is provided in paragraph (1) with the substitution of the years 1938 through 1948 for the years 1946 through 1948.

"(e) ADJUSTED RATES OF RETURN FOR DEPRESSED INDUSTRY SUBGROUPS. The adjusted rate of return for a depressed industry subgroup shall be a rate equal to four-fifths of the rate of return for such industry subgroup for the 11-year period 1938 through 1948 as determined under subsection (d) (2). The Secretary shall determine and proclaim the adjusted rate of return (computed to the nearest thousandth) for each industry subgroup determined and proclaimed to be depressed under subsection (c).

(f) INDUSTRY SUBGROUPS.-For the purposes of this section, industry subgroups shall be generally in accord with the industry subgroups regularly used by the Treasury Department in compiling published statistics from income tax returns, but with such combinations of subgroups as the Secretary determines are necessary to provide reasonably comparable data over the period 1938 through 1948.

"(g) MEMBERS OF INDUSTRY SUBGROUP.-For the purposes of this section, a taxpayer is a member of an industry subgroup if more than fifty per centum of the taxpayer's gross receipts (as defined in section. 435 (e) (5)) for the taxable years beginning with or within its base period is attributable to such industry subgroup.

"(h) TENTATIVE DETERMINATIONS OF DEPRESSED INDUSTRY SUBGROUPS AND ADJUSTED RATES OF RETURN.-The Secretary, not later than March 1, 1951, shall proclaim the industry subgroups tentatively determined to be depressed in accordance with subsection (c) and the tentative adjusted rates of return (computed to the nearest thousandth), determined under subsection (d), for such industry subgroups. Such tentative determinations shall be effective until such time as final determinations are proclaimed by the Secretary. Such final determinations shall relate back as though such determinations had been in effect in place of the tentative determinations. If the application of this section is made in accordance with a tentative determination, such application shall be redetermined in accordance with the final determination when proclaimed. The period of limitation prescribed under sections 275. 276, and 322 shall not begin to run with respect to overpayments or deficiencies in tax caused by such redeter