5. Tax on Undistributed Profits. In addition to the taxes on income, corporations are hereafter subject to a tax on undistributed profits, under an amendment to the Pre-War Income Tax Act. The Act provides that there shall be levied, assessed, collected and paid annually a tax of 10 per cent upon the amount of the net income received by a taxable corporation during any year which remains undistributed six months after the end of each calendar or fiscal year. There is exempted from the tax on undistributed profits the following: 1. The amount of any income taxes paid by the corporation within the year imposed by the authority of the United States; 2. That portion of the undistributed net income which is actually invested and employed in the business or is retained for employment in the reasonable requirements of the business; and 3. That portion of the undistributed net income which is invested in obligations of the United States issued after September 1, 1917 (i. e., the second Liberty Loan and possible later obligations). It is provided that if the Secretary of the Treasury ascertains and finds that any portion of the amount retained under subdivision 2 above is not employed in the business or is not needed for the future requirements of the business, a tax of 15 per cent shall be levied and paid thereon. 6. Methods of Assessment and Collection. Both of the corporation income taxes are to be assessed on the return required to be made by every taxable corporation, which must be filed with the Collector of Internal Revenue for the district in which the corporation has its principal place of business on or before March 1 of each year, beginning 1918. Both of the taxes relate to the whole of the calendar year 1917. All assessments of income tax are made by the Commissioner of Internal Revenue, and taxpayers are notified of the amount of taxes due on or before June 1 following. Taxes are payable on or before June 15, at the office of the district collector. Information at the Source: The same requirements as to information which must be furnished the Government of payments of income to individuals apply also to payments of income to corporations. (See under this heading in digest of Individual Income Taxes.) III. THE EXCESS PROFITS TAX. The War Revenue Act approved October 3, 1917, repeals Title II of the Revenue Act of March 3, 1917 (which levied a tax on the excess profits of certain corporations and partnerships), and imposes an entirely new Excess Profits Tax affecting not only corporations and partnerships, but also individuals. The following is a brief description and digest of the new Act. 1. Who Are Subject to the Tax. The Excess Profits Tax applies to "all trades and businesses of whatever description," including professions and occupations, whether continuously carried on or not, excepting only the following: (a) In the case of officers and employees under the United States, or any State, Territory or the District of Columbia, or any local subdivision thereof, the compensation or fees received by them as such officers or employees are exempt from the tax; (b) Corporations exempt from the Corporation Income Tax (see Title I, Part II, Section 11 of the Act of September 8, 1916); also partnerships and individuals carrying on or doing the same business, or coming within the same description; and (c) Incomes derived from the business of life, health, and accident insurance combined in one policy issued on the weekly premium payment plan. Therefore, subject to the allowable deductions (described below), the Excess Profits Tax affects every domestic corporation and partnership, every citizen or resident alien, and every foreign corporation, partnership and non-resident alien, engaged in any trade or business, including professions and occupations. Unlike the income tax, partnerships are subject to the Excess Profits Tax as such partnerships, and not in the individual capacity of the partners. 2. Nature of the Excess Profits Tax. In plain reality, the Excess Profits Tax is only a further tax on the net incomes of the corporations, partnerships and individuals subject thereto. Although it is essentially a tax on incomes, it applies to business incomes only-to the gains, profits and other proceeds arising out of the trade or business of any corporation, partnership or individual, but not out of their investments. The deductions are so arranged as to exempt that part of any income which represents a return on invested capital, leaving the remainder subject to the tax. In the case of trades and businesses having invested capital, the Excess Profits Tax does not apply to that part of the net income which represents an average return on capital similarly invested during the prewar period (meaning the calendar years 1911, 1912 and 1913). A small exemption is also allowed, after which the tax is applied at a graduated rate upon the remaining net income, if any. In the case of trades and businesses in which no capital or only nominal capital is employed (as in the case of many professions and salaried occupations), a small exemption is allowed, after which the tax is applied at a flat rate upon the amount of net income remaining, if any. 3. How Net Income Is Computed. For the purpose of the Excess Profits Tax, corporations, partnerships and individuals are required to ascertain and make return of their incomes for the calendar years 1911, 1912 and 1913, and for the taxable year (meaning 1917 and subsequent years), on the following basis: (a) Corporations: For the calendar years 1911 and 1912, upon the same basis and in the same manner as returns of net income were made for the income tax levied by the Act of August 5, 1909, except that income taxes paid by the corporation during each of the two years shall be included; For the calendar year 1913, upon the same basis and in the same manner as returns of net income were made for the income tax levied by the Act of October 3, 1913, except that (a) the income tax paid by the corporation during the said year shall be included, and (b) any amounts received as dividends upon the stock or from the net earnings of other corporations shall be deducted; and For the taxable year (i. e., 1917), upon the same basis and in the same manner as returns of net income are made for the income tax levied by the Act of September 8, 1916, as amended, except that any amounts received as dividends upon the stock or from the net earnings of other corporations shall be deducted. (b) Partnerships and Individuals: For the calendar years 1911, 1912 and 1913, and for the taxable year (i. e., 1917), upon the same basis and in the same manner as returns of net income are made for the income tax levied by the Act of September 8, 1916, as amended, except that any amounts received as dividends upon the stock or from the net earnings of any corporation are to be deducted. In other words, net income for the purpose of the Excess Profits Tax is to be computed in the same manner as net income is computed for the purpose of the Pre-War Income Tax; except that income from dividends is not included. 4. How Deductions Are Computed. From the net incomes of corporations, partnerships and individuals, certain deductions are allowed by the Act. The deductions are computed differently in different cases, to-wit: (a) Trades and Businesses Having Capital Invested: 1. A domestic corporation is entitled to deduct from its net income for the taxable year an amount equal to the same rate of return on its average capital in said taxable year as it earned during the average of the prewar period, but not more than nine per cent. If its prewar earnings averaged less than seven per cent, the corporation is entitled to deduct an amount equal to at least seven per cent in the taxable year 1917 before the Excess Profits Tax applies. In addition to the earnings here allowed, a domestic corporation is entitled to deduct $3,000 more, in the nature of an exemption, before the tax is applied. 2. A foreign corporation is entitled to a similar deduction of between seven and nine per cent on its invested capital, but is not allowed the exemption of $3,000. 3. A domestic partnership or a citizen or resident alien is entitled to a similar deduction of between seven and nine per cent on invested capital, and is allowed a further deduction of $6,000 more, in the nature of an exemption, before the tax is applied. 4. A foreign partnership or non-resident alien individual is entitled to a similar deduction of between seven and nine per cent on invested capital, but is not allowed the exemption of $6,000. 5. A corporation or partnership which was not in existence, or an individual who was not engaged in business during the whole of any one calendar year of the prewar period, is entitled to deduct an amount equal to eight per cent on invested capital, plus in the case of a domestic corporation $3,000 and in the case of a domestic partnership or a citizen or a resident alien $6,000, as exemptions. (b) Trades and Businesses Having No Invested Capital: 1. A domestic corporation is entitled to deduct $3,000 in the nature of an exemption before the tax is applied. 2. A domestic partnership or a citizen or resident alien is entitled to deduct $6,000 in the nature of an exemption before the tax is applied. 3. A foreign corporation or partnership or a non-resident alien individual is not entitled to any deduction, but the tax applies to the whole net income of such foreign corporation, partnership or non-resident alien individual, except that any foreign corporation or partnership or non-resident alien whose net income from trade or business in the United States is less than $3,000 a year is not subject to the tax. 5. Rates of Excess Profits Tax. On the amount of net income for the taxable year remaining after the deductions and exemptions described above, the Excess Profits Tax is levied at the following rates: (a) On Corporations, Partnerships and Individuals Engaged in Trades and Businesses Having Capital Invested Therein: On the amount by which the net income exceeds the de- On the amount by which the net income exceeds 15 per On the amount by which the net income exceeds 20 per On the amount by which the net income exceeds 25 per On the amount by which the net income exceeds 33 per 20% 25% 35% 45% 60% (b) On Corporations, Partnerships and Individuals Engaged in Trades and Businesses Having No Invested Capital: On the amount by which the net income exceeds the deduc- 6. Meaning of "Invested Capital." 8% The Act specifically states that “invested capital" does not include the following: (a) Stocks or bonds (other than obligations of the United States), (b) Borrowed money or borrowed property; and (c) Other assets the income from which is not subject to the Excess Profits Tax, meaning money or property not employed in a taxable trade or business. Subject to these limitations, "invested capital" is declared to mean (a) In the Case of a Corporation or Partnership: 1. Actual cash paid in; 2. Actual cash value of tangible property paid in, other than cash, for stock or shares, at the time of such payment (except that if the tangible property was paid in prior to January 1, 1914, its value as of that date is to be taken); 3. Paid in or earned surplus and undivided profits used or employed in the business, exclusive of undivided profits earned during the taxable year; 4. Actual cash value of patents and copyrights paid in for stock or shares, but not to exceed the par value of such stock or shares at the time of such payment; and 5. Actual cash value (if any) of intangible property such as good will, trade-marks, trade brands, the franchise of a |