ILLUSTRATIONS OF COMPUTATIONS OF THE WAR-PROFITS AND EXCESS-PROFITS TAXES.

No. 1. Illustration of Ordinary Computation of Tax.-A corporation has an average prewar invested capital at $50,000, an average prewar net income of $10,000, an invested capital for 1918 of $100,000, a net income for 1918 of $40,000, an invested capital for 1919 of $110,000 and a net income of $50,000.

(1) For 1918 the excess-profits credit is a specific exemption of $3,000, plus 8 per cent of the invested capital (i. e., 8 per cent of $100,000) or $8,000, making a total of $11,000. The war profits credit is a specific exemp tion of $3,000, plus the average prewar net income or $10,000, plus or minus 10 per cent of the difference between the average prewar invested capital and the invested capital for 1918. In this case it is plus, because the in- \ vested capital for 1918 is greater than the average prewar invested capital. The amount added is 10 per cent of the difference between $100,000 and $50,000, i. e., 10 per cent of $50,000, or $5,000, making a total war-profits credit of $18,000.

First Bracket. The amount or portion of the net income ($40,000) in excess of the excess-profits credit ($11,000) and not in excess of 20 per cent of the invested capital (i e., 20 per cent of $100,000) or $20,000 is $9,000. The tax computed under this bracket is 30 per cent of this amount (i. e., 30 per cent of $9,000) or $2,700.

Second Bracket.-The amount or portion of the net income ($40,000) in excess of 20 per cent of the invested capital (i. e., 20 per cent of $100,000) or $20,000 is $20,000. The tax computed under this bracket is 65 per cent of this amount (i. e., 65 per cent of $20,000) or $13,000.

Third Bracket.-Eighty per cent of the amount or portion of the net ineome in excess of the war-profits credit (i. e., 80 per cent of the amount by which $40,000 exceeds $18,000, or $22,000) is $17,600. The amount of the tax computed under the first and second brackets ($2,700 plus $13,000) is $15,700. The tax computed under this bracket is the amount by which $17,600 exceeds $15,700, or $1,900.

Total Tax. The total tax for 1918 is the sum of the taxes computed under the three brackets (i. e., $2,700 plus $13,000 plus $1,900) or $17,600.

(2) For 1919 the excess-profits credit is a specific exemption of $3,000 plus 8 per cent of the invested capital (i. e., 8 per cent of $110,000) or $8,800, a total of $11,800.

First Bracket.-The amount or portion of the net income ($50,000) in excess of the excess-profits credit ($11,800) and not in excess of 20 per cent of the invested capital (i. e., 20 per cent of $110,000) or $22,000 is $10,200. The tax computed under this bracket is 20 per cent of this amount (i. e., 20 per cent of $10,200) or $2,040.

Second Bracket.-The amount or portion of the net income ($50,000) in excess of 20 per cent of the invested capital (i. e., 20 per cent of $110,000) or $22,000 is $28,000. The tax computed under this bracket is 40 per cent of this amount (i. e., 40 per cent of $28,000) or $11,200.

Total Tax.-The total tax for 1919 is the sum of the taxes computed under the two bracket (i. e., $2,040 plus $11,200) or $13,240.

No. 2. Illustration of Computation Where No Tax Under Third Bracket. -If the corporation used in the foregoing illustration had an average prewar net income of $20,000 instead of $10,000, the excess-profits credit and the tax for 1918 computed under the first and second brackets would be the same, but the war-profits credit and the tax computed under the third bracket would not be the same. The war-profits credit would be a specific exemption of $3,000 plus the average prewar net income or $20,000, plus 10 per cent of $50,000 (the difference in invested capital) or $5,000, making a total war-profits credit of $28,000.

There is

Third Bracket.-Eighty per cent of the amount of the net income in excess of the war profits (i. e., 80 per cent of the amount by which $40,000 exceeds $28,000 or 80 per cent of $12,000) is $9,600. The amount of the tax computed under the first and second brackets ($2,700 plus $13,000) is $15,700. accordingly no tax under the third bracket, as $9,600 does not exceed $15,700. Total Tax. The total tax for 1918 is the sum of the taxes computed under the three brackets (i. e., $2,700 plus $13,000 plus nothing) or $15,700. The total tax of 1919 would, of course, be the same as in the foregoing illustration. No. 3. Illustration of Computation Where Excess-Profits Credit Not Exhausted Under First Bracket.-A corporation has an average prewar invested capital of $20,000, an average prewar net income of $7,000, and invested capital and net income for 1918 of the same amounts, respectively. The excess-profits credit is a specific exemption of $3,000 plus 8 per cent of the invested capital (i. e., 8 per cent of $20,000) or $1,600, a total of $4,600. The war-profits credit is a specific exemption of $3,000 plus the average prewar net income of $7,000, a total of $10,000. There is nothing further to be added or deducted in this case, as there is no difference between the average invested capital for the prewar period and invested capital for the taxable year.

First Bracket. The excess-profits credit ($4,600) exceeds 20 per cent of the invested capital (20 per cent of $20,000) or $4,000, and there is no amount taxable under this bracket.

Second Bracket. The portion of the net income ($7,000) in excess of 20 per cent of the invested capital (20 per cent of $20,000) or $4,000 is $3,000. In this case, however, the full amount of the excess-profits credit could not be allowed under the first bracket, so that the $3,000 which would ordinarily be taxable under this bracket is reduced by the amount of the excess-profits credit not allowed under the first bracket ($600), leaving only $2,400 taxable under this bracket. The tax computed under this bracket is 65 per cent of this amount (i. e., 65 per cent of $2,400) or $1,560.

Third Bracket. The war-profits credit ($10,000) exceeds the net income ($7,000), so that there is no tax under this bracket.

Total Tax. The total tax for 1918 would be the sum of the taxes com

puted under the three brackets (i. e., nothing plus $1,560 plus nothing) .or $1,560, were it not that Section 302 provides that the maximum tax shall not in this case exceed $1,200. The total tax for 1918 is therefore $1,200. (See illustration No. 10.)

No. 4. Illustration of Computation Where Net Income Derived from Government Contract.-If in the case used in illustration No. 1 the $50,000 net income for 1919 includes $20,000 of net income from Government contracts, the tax for that year would be the sum of the amounts computed under clauses (1) and (2) of Section 301 (c) of the statute.

(1) Under clause (1) the excess-profits credit is $11,800, the same as under clause (2). The war-profits credit is a specific exemption of $3,000, plus the average prewar net income, or $10,000, plus 10 per cent of $50,000 (the dif ference in invested capital) or $6,000, making a total war-profits credit of $19,000.

First Bracket.—The amount or portion of the net income ($50,000) in excess of the excess-profits credit ($11,800) and not in excess of 20 per cent of the invested capital (i. e., 20 per cent of $110,000), or $22,000, is $10,200. The tax computed under this bracket is 30 per cent of this amount (i. e., 30 per cent of $10,200) or $3,060.

Second Bracket.-The amount or portion of the net income ($50,000) in excess of 20 per cent of the invested capital (i. e., 20 per cent of $110,000) or $22,000, is $28,000. The tax computed under this bracket is 65 per cent of this amount (65 per cent, of $28,000) or $18,200.

Third Bracket.-Eighty per cent of the amount of the net income in excess of the war-profits credit (i. e., 80 per cent of the amount by which $50,000 exceeds $19,000, or $31,000) is $24,800. The amount of the tax computed under the first and second brackets ($3,060 plus $18,200) is $21,260. The tax computed under this bracket is the amount by which $24,800 exceeds $21,260, or $3,540.

The portion of the tax computed under clause (1) is the same proportion of the total amount computed under the above brackets at the rates for 1918 (i. e., $3,060 plus $18,200 plus $3,540) or $24,800, as the part of the net income attributable to Government contracts ($20,000) is of the entire net income $50,000). This portion of the tax is therefore 2/5 of $24,800 or

$9,920.

(2) The portion of the tax computed under clause (2) is the same proportion of the total amount computed at the rates for 1919 or $13,240 (for the details see computation for 1919 in illustration No. 1 above) as the part of the net income not attributable to Government contracts ($30,000) is of the entire, net income ($50,000). This portion of the tax is therefore 3/5 of $13,240 or $7,944.

(3) The total tax for the year 1919 is the sum of the amounts computed under paragraphs (1) and (2) above ($9,920 plus $7,944) or $17,864.

No. 5. Illustration of Computation of Tax Where Net Income Is Partly from Personal Service Business.-A corporation is engaged in contracting and construction work (a non-personal service business in which the employ. ment of capital is necessary) and also renders consulting engineering service (a personal service business which if constituting its sole business would bring

it within the class of personal service corporations). It has an average prewar invested capital of $50,000 (of which $38,000 was used in contracting work and $12,000 in engineering); an average prewar net income of $52,000 (of which $12,000 was derived from contracting and $40,000 from engineer ing); invested capital for 1918 of $100,000 (of which $81,000 is used in contracting and $19,000 in engineering); and a net income for 1918 of $90,000 (of which $30,000 is derived from contracting and $60,000 from engineering. (1) In computing the tax upon the first or non-personal-service part of the net income (i. e., $30,000 derived from contracting) the specific exemption is $1,000 (i. e., the same proportion of $3,000 which $30,000 is of the entire net income of $90,000). The excess-profits credit is a specific exemption of $1,000, plus 8 per cent of the invested capital used in contracting (i. e., 8 per cent of $81,000) or $6,480, a total of $7,480. The war-profits credit is a specifie exemption of $1,000, plus the average prewar net income derived from contracting or $12,000, plus 10 per cent of $43,000 (the difference in invested capital used in contracting) or $4,300, making a total of $17,300.

First Bracket.-The amount of the net income derived from contracting ($30,000) in excess of the excess-profits credit ($7,480) and not in excess of 20 per cent of the invested capital (i. e., 20 per cent of $81,000) or $16,230 is $8,720. The tax under this bracket is 30 per cent of this amount (i. e., 30 per cent of $8,720) or $2,616.

Second Bracket. The amount of the net income derived from contracting ($30,000) in excess of 20 per cent of the invested capital used in contracting (i. e., 20 per cent of $81,000) or $16,200 is $13,800. The tax computed under this bracket is 65 per cent of this amount (65 per cent of $13,800) or $8.970. Third Bracket.-Eighty per cent of the amount of the net income derived from contracting in excess of the war-profits credit (i. e., 80 per cent of the amount by which $30,000 exceeds $17,300 or 80 per cent of $12,700) is $10,160. The amount of the tax computed under the first and second brackets ($2,616 plus $8,970) is $11,586, There is no tax under this bracket, as $10,160 does not exceed $11,586.

Tax. The tax upon the first portion of the net income (i. e., $30,000 derived from contracting) is the sum of the taxes computed under the three brackets (i. e., $2,616 plus $8,970 plus nothing) or $11,586. This is 38.62 per cent of $30,000 of the net income from contracting.

(2) The tax upon the second or personal service part of the net income (i. e., $60,000 derived from engineering is the same percentage of such part of the net income (i. e., 38.62 per cent of $60,000) or $23,172.

(3) The total tax is the sum of $11,586 (the tax upon the first part of the net income derived from contracting) and $23,172 (the tax upon the second part of the net income derived from engineering) or $34,758.

No. 6. Illustration of Computation of Tax Where Net Income Is from Gold Mining. In the case used in illustration No. 1, assume the corporation is engaged in the mining both of gold and of other rare metals; that the Commissioner finds that $35,000 of its gross income is properly attributa to the mining of gold; and that $20,000 of the deductions allowed are properly applicable to the gross income from that source. The portion of the net income attributable to the mining of gold and exempt from tax would be $15,000.

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The remaining portion of the net income is $25,000 and the tax thereon is the same proportion of the tax computed on the entire net income without the benefit of the exemption (i. e., a tax of $17,600) which the remaining portion of the net income ($25,000) bears to the entire net income ($40,000). The tax will therefore be 5/8 of the tax of $17,600 computed without the benefit of the exemption, or $11,000.

No. 7. Illustration of Computation of Tax Where Income from Sale of Mineral Deposits. In the case used in illustration No. 1, assume the gross income of the corporation for 1918 included $15,000 derived from a bona fide sale of an oil well, the principal value of which had been demonstrated by exploration and discovery work done by the corporation, and that the Commissioner finds that only $800 of the deductions allowed are properly applicable to the gross income derived from the sale. The portion of the net income attributable to the sale would be $14,200, which is 35.5 per cent of the entire net income of $40,000, and the portion of the tax for that year attributable to the sale will be 35.5 per cent of the entire tax of $17,600, or $6,248. But this portion of the tax can not exceed 20 per cent of the selling price ($15,000) and is accordingly reduced to $3,000. The total tax will be $11,352 (the portion of the tax not affected) plus $3,000, or $14,352 (instead of $17,600).

No. 8. Illustration of Consumption of Tax for Fiscal Year.--A corporation makes its return on the basis of a fiscal year ending March 31. It had an average prewar invested capital of $50,000 and an average prewar net income of $3,500. For the fiscal year ending March 31, 1918, its invested capital and net income are $100,000 and $75,000, respectively, as computed under Title II of the Revenue Act of 1917, and $125,000 and $70,000, respectively, as computed under the present statute. Such a difference in these amounts as computed under the two acts may readily occur where, for example, a corporation is allowed under the present statute a deduction for interest, amortization, etc., which it was not allowed under the Revenue Act of 1917, or where, under the present statute, it is allowed a greater amount of invested capital on account of intangible property paid in for stock or shares than allowed under the Revenue Act of 1917. For the fiscal year ending March 31, 1919, its invested capital and net income are $125,000 and $60,000, respectively.

(1) A war excess-profits tax for the year ending March 31, 1918, as computed under the provisions of Title II of the Revenue Act of 1917, and upon the basis of an invested capital of $100,000 and a net income of $75,000 as computed under that Act, is $32,800. For the details of this computation see illustration (1) under article 16 of Regulations 41. A war-profits and excessprofits tax for the entire period as computed under subdivision (a) of section 301 of the present statute, and upon the basis of an invested capital of $125,000 and a net income of $70,000 as computed under the statute, is $43,600. Section 335 provides that the tax for this period is the sum of 9/12 of the tax of $32,800 as computed under the Revenue Act, of 1917, or $24,600, plus 3/12 of the tax of $43,600 as computed under the present statute, or $10,900, making a total war excess-profits tax for the fiscal year ending March 31, 1918, of $35,500.