fund and deprivation of the use of their money in the meantime; (3) that the limitation on the amount of interest deductible by corporations is wanting in due process; (4) that the privilege granted to individuals of deducting dividends for purposes of normal tax was a discrimination against corporations; 25 (5) that the deduction of $3,000 or $4,000 to those who pay the normal tax and not to those with incomes over $20,000 was wanting in due process; 26 (6) that the discrimination between married and single people and between husbands and wives living together and husbands and wives not living together was wanting in due process; 27 (7) that the law involved a discrimination and want of due process in favor of house owners living in their own

25 In holding that the application of a different rate in the case of corporations and individuals was permissible, the Wisconsin Court said in the Income Tax Cases, 148 Wis. 456, 134 N. W. 673, 135 N. W. 164: "The corporate

privileges, which are exclusively held by corporations, and the real differences between the situation of a corporation and an individual, among which may be mentioned the fact that the corporation never is obliged to pay an inheritance tax, plainly justify a difference of treatment in the levying of the income tax. Were the income tax a tax upon property, there could be no difference in rate, for taxation of property must still be on a uniform rule, but, as has been heretofore noted, it is not a tax upon property within the meaning of our constitution."'

26 In Campbell v. Shaw, 11 Haw. 112, it was held that the Hawaiian Income Tax Act of 1896 was unconstitutional by reason of the fact that it allowed an exemption of $2000 on incomes under $4000, whereas no such exemption was allowed on incomes over $4000. In Robertson v. Pratt, 13 Haw. 590, it was decided that an exemption of incomes to the amount of $1000 was not invalid on the ground that it was excessive. See also Peacock v. Pratt, 121 Fed. 772; In re Income Tax Act, 10 Haw. 317.

27 With regard to the provision of the Wisconsin Income Tax Law that the income of a wife living with her husband shall be added to the income of the husband, the Wisconsin Court said in the Income Tax Cases, 148 Wis. 456, 134 N. W. 673, 135 N. W. 164: "This is another case of classification, and it is only justifiable in case there is some substantial difference of situation which suggests the advisability of difference of treatment. We think there clearly is such a difference, in this, that experience has demonstrated that otherwise there will be many opportunities for fraud and evasion of the law, which the close relationship of husband and wife or parent and child makes possible, if not easy. The temptation to make colorable shifts and transfers of property in order to secure double or even triple exemptions, if there were not some provision of this kind in the law, would unquestionably be very great. There is no such temptation or opportunity in the case of the single man, or the man and wife who are living separately."

houses who were not compelled to estimate the rental value against those who paid rent and were not allowed to deduct it and in favor of farmers who might deduct products of the farm used by them in sustaining their families whereas family expenses might not, as a rule, be deducted. In another case 28 it was held there exists a substantial difference between the carrying on of business by corporations and the same business by a private firm or individual, and the 1909 Law was, therefore, not unconstitutional on the ground of arbitrary discrimination. In another case the court held that the fact that the tax was levied on the income of mining companies without making adequate allowance for depletion did not amount to the taking of property without due process of law.29 In a case 30 arising under the law taxing foreign-built yachts it was stated by the court that the distinction between things foreign and things domestic, and their use, was apparent on the face of things and to tax them separately was not an arbitrary discrimination.

Uniformity. The Constitution exacts only a geographical uniformity of taxes and a lack of uniformity in other respects does not make the statute invalid.31

Exempting Certain Corporations from Tax. The provision of the Sixteenth Amendment authorizing a tax on incomes "from whatever source derived" does not require that the tax must be imposed upon all sources of income nor does it exclude the power to exempt certain classes of corporations.32

Retroactive Features. The right of Congress to impose a tax by a new statute, although the measure of the tax is governed by the income of the past year cannot be doubted; much less can it he doubted that Congress may impose a tax on income of the current year, though part of that year has elapsed when the statute is passed.33 A statute imposing a tax upon all income of a pre

28 Flint v. Stone-Tracy Co., 220 U. S. 107.

29 Stanton v. Baltic Mining Co., 240 U. S. 103.

30 Billings v. U. S., 232 U. S. 261.

31 Knowlton v. Moore, 178 U. S. 41; Patton v. Brady, 184 U. S. 608; Flint v. Stone-Tracy Co., 220 U. S. 107; Billings v. U. S., 232 U. S. 261; Brushaber v. Union Pacific R. R. Co., 240 U. S. 1.

32 Brushaber v. Union Pacific R. R. Co., 240 U. S. 1.

33 Brushaber v. Union Pacific R. R. Co., 240 U. S. 1; Billings v. U. S., 232 U. S. 261. With regard to the retroactive feature of the Wisconsin Income

F. T.-41

vious year, although one tax on that income has already been paid, is valid.34

Tax Law the Wisconsin Court in the Income Tax Cases, 148 Wis. 456, 134 N. W. 673, 135 N. W. 164, overruled objection "without comment, for the reason that it seems very unsubstantial."

34 Stockdale v. Insurance Companies, 20 Wall. 323.

L

CHAPTER 43

WAR-PROFITS AND EXCESS-PROFITS TAX

The Act of March 3, 1917, was the first excess-profits tax law enacted in this country. It applied only to corporations and partnerships and imposed a tax of 8% on all net income in excess of the sum of $5,000 plus 8% of the actual capital invested. A small amount of tax was collected under this statute from corporations whose fiscal years ended in the succeeding months but any amounts so collected were credited or refunded to the taxpayers. The next law, enacted October 3, 1917, imposed a tax on the net income of individuals, partnerships and corporations, derived from any business or trade. This latter statute (referred to in this Chapter as the 1917 Law) was retroactive to January 1, 1917, and covered the period during which the Act of March 3, 1917, had been in effect. The rates of the 1917 Law as applied to corporations having invested capital were 20% of that part of the net income which exceeded the excess-profits deduction and did not exceed 15% of the invested capital; 25% on that part of the net income which exceeded 15% of the invested capital and did not exceed 20% of the invested capital; 35% of the net income which exceeded 20% of the invested capital and did not exceed 25% of the invested capital; 45% on that part of the net income which exceeded 25% of the invested capital and did not exceed 33% of the invested capital; and 60% on that part of the net income which exceeded 33% of the invested capital. In the case of a trade or business which had no invested capital or not more than a nominal capital, the excess-profits tax was 8% on the entire net income in excess of $3,000 in the case of a domestic

139 Stats. at Large 1000.

2 The statute defined the term "actual capital invested" to mean (1) actual cash paid in; (2) the actual cash value at the time of payment of assets other than cash paid in, and (3) paid in or earned surplus and undivided profits used or employed in the business; but to exclude money or other property borrowed. 3 Revenue Act of 1917, § 201.

corporation and $6,000 in the case of a domestic partnership, or a citizen or resident of the United States. In the case of a foreign corporation or partnership or a non-resident alien this rate was imposed upon the entire net income without deduction. The Act of February 24, 1919, (referred to in this chapter as the Revenue Act of 1918, the 1918 Law, or the present law) imposed a tax on income received during the year 1918 in lieu of the tax imposed by the 1917 Law. In view of the increased individual normal and surtax rates upon the income of individuals and partnerships, which in most cases make the income taxes paid by such individuals as high as the income and excess-profits or warprofits taxes paid by corporations engaged in similar business, and in view of the difficulty in administering an excess-profits tax applicable to individuals, it was decided by Congress that the war- and excess-profits taxes should apply to corporations only.5 It was also recognized that there exists a class of corporations which require very little or no invested capital and whose income is derived mainly from the personal services of the stockholders. Examples of such corporations are corporations composed of engineers or accountants, who might as readily have formed partnerships to carry on their business. Such corporations are called "personal service corporations" and are treated as though they were partnerships. No excess-profits tax is imposed upon their net income but the stockholders of the personal service corporation are taxable upon the entire net income of the year, whether or not such income is distributed in, the form of dividends. The tax imposed by the present law combines two general principles of taxation: (a) that of a war-profits tax, which is usually considered to be a tax on the excess of profits made during the years of the war period over the normal profits of the years prior to the war and (b) an excess-profits tax, which is considered as a tax upon the profits in excess of a specified percentage representing an approximate normal return on the invested capital. The law, however, does not adhere to a clear distinction between war-profits and excess-profits since the warprofits tax combines a feature of the excess-profits tax in that a

4 Revenue Act of 1917, § 209.

5 Report of the Committee on Ways and Means on the Revenue Bill of 1918, September 3, 1918.