CHAPTER 45 THE WAR EXCESS PROFITS TAX 1 This momentous tax measure was framed by a Conference Committee composed of members of the House and the Senate, in the last days of the First Session of the 65th Congress, under stress and in a hurry. It bears many evidences of hurried workmanship, and lack of careful consideration of the effect, one upon the other, of the many uncorrelated provisions. In the early days of the session the House of Representatives introduced a measure proposing to raise the rate of the thenexisting excess profits tax. This was succeeded by a proposal of the Senate Finance Committee to make the measure a war profits tax, that is, a tax on the excess of profits for the current year over the average profits for the pre-war period. The final result was a compromise between the adherents of the two proposals, 1 Act of October 3, 1917 (Public No. 50), 65th Congress, Title II, §§ 200 to 214, inclusive. 2 This chapter is written before any indication has been given by the Treasury Department of its construction of the law. No attempt is made to foreshadow the rulings which will be issued. In the opinion of the author, the law is so defective that extensive amendment will be necessary before it can be applied to the purpose for which it was drafted. Many indications lead to the conclusion that pressure will be brought to bear on Congress to amend the law as soon as possible, and perhaps before any tax is assessed under the present statute. and the present tax is neither a tax on excess profits nor a tax on war profits, but a tax partaking of the characteristics of both. The tax is imposed on income over a fixed minimum exemption and a deduction of varying percentages of the invested capital. The taxability of a business concern existing during the prewar period is affected, but only slightly, by the rate of its earnings on invested capital during that period. The taxpayers under this statute are divided into four classes, special provisions applying to each class. These classes are (a) domestic corporations and partnerships, (b) individuals, citizens of or residing in the United States, (c) foreign corporations and partnerships and (d) non-resident alien individuals. The tax is imposed upon the entire net income of every corporation and partnership and upon the net income of every individual derived from business, trade, profession or occupation. The individual investor, it seems, who is not engaged in any business, trade, profession or occupation, is not intended to be taxed, but the individual deriving an income from a salary is within the purview of the law. For the purpose of the discussion in this chapter, a general statement of how the tax is imposed, or what might be called a formula, is given in the following paragraph, the terms and phrases used therein being defined in succeeding paragraphs. General Statement. The tax is imposed on the amount of net income 3 from any trade or business for the taxable year 5 after deducting (a) an amount not 3 See Definition on pp. 509 to 512. 4 See Definition on p. 508. 5 See Definition on p. 507. less than 7% nor more than 9% of the invested capital and (b) the specific exemption allowed by the law, at graduated rates unless no invested capital or not more than a nominal capital 10 is employed, in which case the tax is 8% of the net income of such trade or business in excess of the specific exemption allowed by law. The tax will be assessed on information given by the taxpayer in his or its return of annual net income, (partnerships being required to file returns for this purpose) and will be due and payable at the same time as the income tax. Corporation. The term "corporation" includes joint stock companies or associations, and insurance companies.11 A domestic corporation is one created under the laws of the United States or of any state, territory or district thereof. A foreign corporation is one created under the laws of Porto Rico, the Philippines, the Panama Canal Zone, Virgin Islands or the laws of any other possession of the United States or the laws of any foreign. country or Government.12 Corporations exempt from the income tax are also exempt from this tax.13 A foreign corporation deriving less than $3,000 of net income from sources within the United States during a taxable year is not required to pay any tax.14 6 See p. 527. 7 See Definition on pp. 512 to 526. 8 See Definition on p. 529. 9 See Definition on p. 530. 10 See Definition on p. 526. 11 The term, as used in this law, has the same meaning as in the income tax law. For a discussion of the definition under that law see Chapter 12. 12 Section 200. 13 Section 201, see Chapter 15. 14 Section 202. Partnerships. The law does not define the term "partnerships," but the intent is, undoubtedly, to include all kinds of partnerships, general and limited. Limited partnerships have been held by the Treasury Department to come within the definition of the term "corporations." 15 A domestic partnership is one created under the law of the United States, or of any state, territory or district thereof. A foreign partnership is one created under the law of any other possession of the United States or of any foreign country or government.16 Partnerships carrying on or doing the same business, or coming within the same description, as corporations exempt from the income tax law, are exempt from this tax.17 A foreign partnership deriving less than $3,000 of net income from sources within the United States during a taxable year is not required to file a return or pay any tax.18 Individuals. Special provisions apply to individuals who are citizens and residents of this country. The definition of the term "citizens and residents" will undoubtedly be the same as that made with respect to the income tax law,19 except that the term "United States" as defined in this statute does not include Porto Rico, the Philippines or other possessions. It would seem that Congress did not intend the tax to apply to the incomes of the citizens and residents of those possessions, except to the extent that such income is derived from business or trade conducted within the "United States," 15 See Chapter 12. 16 See Section 200. 17 Section 201; see Chapter 15. 18 Section 202. 19 See Chapter 4. as the term is defined in the following paragraph. The term "non-resident alien individuals" is not defined in the statute but the definition of the Treasury Department, under the income tax law, will probably be applied to the term as used in this statute.20 Individuals carrying on or doing the same business, or coming within the same description, as corporations exempt from the income tax, are exempt from this tax. Officers and employees of the United States, or any state, territory or the District of Columbia, or any local subdivision thereof, are exempt with respect to the compensation or fees received by them as such officers or employees.21 A nonresident alien deriving less than $3,000 of net income from sources within the United States during a taxable year is not required to pay any tax under this law.22 United States. The term "United States" means only the states, the territories of Alaska and Hawaii, and the District of Columbia.23 In view of this definition a foreign corporation, or partnership, or a non-resident alien, deriving income from Porto Rico, Philippines, Virgin Islands, Panama Canal Zone and other possessions will not be subject to this tax. Taxable Year. In the case of individuals, the term "taxable year" means the calendar year, the first taxable year being the year 1917. In the case of corporations and partnerships, the term means the calendar year, unless the corporation or partnership has fixed its own fiscal year, in which case it means such fiscal year. 20 See Chapter 5. 21 Section 201. 22 Section 202 23 Section 200. |