p'^liiptil|M:pfv^^.:^'^:'t4^ A 8 UNIVERSITY OF CALIFORNIA LOS ANGELES SCHOOL OF LAW LIBRARY TREASURY DEPARTMENT UNITED STATES INTERNAL REVENUE U-i. lK-ferna( R^-'^'^'^e Se^ui^:^ m REGULATIONS No. 41 RELATIVE TO THE WAR EXCESS PROFITS TAX IMFOSED BY THE WAR REVENUE ACT. APPROVED OCTOBER 3. 1917 WASHINGTON GOVERNMEN I PRINTING OFFICE 1918 4 WAR EXCESS PROFJTS TAX. - 5 Art. 5. Taxable year. — Tlic term "taxable year" means the 12 months ending December 31 of each year, except in the case of a corporation or partnership which has fixed its own fiscal year, in which case it moans siicli fiscal year. The first taxable year is the year ending December 31, 1917, except that in the case of a corporation or partnership which has fixed its own fiscal j^ear, the first taxable year is the fiscal year ending during the calendar year 1917. (For special provisions as to prorating the amiaunt of tax due for the portion, of any fiscal year ending during the calendar year 1917, see articles 19 and 20.) 6 Art. 6. Prewar period. — Tha term "prew^ar period'* means the calendar years 1911, 1912, and 1913, or if a corporation or partner- ship was not in existence or an individual w^as not engaged in the trade or business during the whole of such three years, then a,s many of such years during the whole of which the corporation or ^^^artnership was in existence or the individual was engaged in the trade or busi- ness. 7 Art. 7. "Trade," "business," "trade ar business" in case of corpo- rations and partnerships. — In the case of a corporation or partnership all iacome from whatever source derived is deemed, to be received from its trade or business, and the terms "trade/' "business," ajid "trade or business" include all sources of iiLcome. 8 Art. 8. "Trade" in the case of individuals. — In the case of an individual, 'th© terms "trade," "business," and "trade or business" comprehend aU his activities for gain, profit, or livelihood, entered into with sufficient frequency, or occupying such portion of his time or attention as to coiistitute a vocation, including occupa- tions and professions. ^Vllen such activities constitute a vocation they shall be construed to be a trade or business w^hetber continu- Qusiy carried on dming the taxable 3'^ear or not, and all tlie income arising therefrom sh^dl be included in liis return for excess-profits tax. 9 In the following cases the gain or income is not subject to excess- profits taJx, and the capital from whichsuch gain or income is derived shall not be included in "invested capital" : (a) Gains or profits from transactions entered into for profit, but which are isolated^ incidental^ or so infrequent as not to constitute an occupation, and (6) the income from property arising merely from its ownership, ineluding interest^ rent, and similar income from investments excepifc in thoso cases in which the management of such investments really consti- tutes a trad© or business.; ly Art. 9. "Dividend." — The term "dividend" has the same meaning as in section 31 of the act of September 8, 1916, as amended by the act- of October 3, 1917. (See Income Tax Regulations, art. 106.) WAR EXCESS PEOFITS TAX. 5 CORPORATIONS, PARTNERSHIPS, AND INDIVIDUALS SUBJECT TO THE TAX. Art. 10. Corporations. — Every domestic corporation which has for 11 the taxable year a net income of So, 000 or more is, unless exempt under article 13, required to make a return and to pay the tax, if any. Every foreign corporation which has for the taxable year a net 12 income of $3,000 or more from sources within the United States is, unless exempt under article 13, required to make a return and to pay the tax, if any. Art. 11. Partnerships. — Every domestic partnership which has for 13 the taxable year a net income of $6,000 or more is, unless exempt under article 13, required to make a return and to pay the tax, if any. Every foreign partnership which has for the taxable year a net in- 14 come of S3, 000 or more from sources within the United States is, unless exempt under article 13, required to make a return and to pay the tax, if any. Art. 12. Individuals. — Every citizen or resident of the United 15 States who has for the taxable year an aggregate net income in excess of $6,000 from trades, businesses, occupations or professions is, un- less exempt under article 13, required to make a return and to pay the tax, if any. Every nom'esident alien individual who has for the taxable year an 16 aggregate net income of $3,000 or more from trades, businesses, occupations, or professions carried on within the United States is, unless exempt under article 13, required to make a return and to pay the tax, if any. Art. 13. Exemptions. — The following are exempt from the tax: 17 (a) Corporations exempt under the provisions of section 11 of 18 Title I of the act of September 8, 1916, from the tax imposed by such title. (See Income Tax ReguLitions, arts. G7, ff.) (b) Partnerships carrpng on or doing the same kind of business or 19 coming within the same description, {c) In(Hviduals to the extent that they carry on or do the same 20 kind of business or come within the same description. RATES AND COMPUTATION OF TAX. Art. 14. Classification of net income. — For the purposes of the 21 excess profits tax net income which is subject to the tax shall be divided into two classes, as follows: A. Net income which is derived from a trade or bitsiness having 22 no invested capital, or not more than a nominal capital, incluchng in the case of an individual salaries, wages, fees, or other compensa- tions; and 6 WAR EXCESS PROFITS TAX. 13 B. Net income which is derived from a trade or business having invested capital. 24 In the case of a corporation or partnership, all the trades and busi- nesses in which it is engaged will bo treated as a single trade or business (as provided in sec. 201), and its entire income will be held to be of the same class as the income from its principal trade or business. 25 In the case of an individual the net income subject to the excess profits tax shall be classified as provided in this article. Net in- come of class A shall be taxed as provided in article 15, and net income of class B shall be taxed as provided in article 16. 26 Art. 15. Kate of tax on income of class A. — The tax upon net income of class A as defined in article 14 shall be computed at the rate of 8 per cent upon the amount thereof in excess of $3,000 in the case of a domestic corporation ; upon the amovmt thereof iii excess of $6,000 in the case of a domestic partaersMp or of a citizen or resident of the United States; and upon the whole thereof in the case of a foreign corporation or partnership or"of a nonresident alien individual. 27 Art. 16. Eate of tax on income of class B. — ^The tax upon net income of class B as defined in article 14 shall, except as otherwise provided in article 17, be computed at the follov/ing rates: 20 per cent of the amount of the net income in excess of the deduction (deteniiined as provided in articles 21, 23, and 24) and not in excess of 15 per cent of the invested capital for the taxa- ble year; 25 per cent of the amount of the net income in excess of 15 per cent and not in excess of 20 per cent of such capital; 35 per cent of the amount of the net income in excess of 20 per cent and not in excess of 25 per cent of such capital; 45 per cent of the amount of the net income in excess of 25 per cent and not in excess of 33 per cent of such capital; 60 per cent of the amount of the net income in excess of 33 per cent of such capital. 28 Illustrations. — (1) A corporation has a capital of .SIOO.OOO, prewar earnings of 7 per cent, and a net income for the taxable year of $75,000: The deduction allowed will be 7 per cent of the capital, or $7,000, plus $3,000 .specific deduction, a total of $10,000. The amount of the net income taxable at each rate will be as follows: In excess of the deduction and not in excess of 15 per cent of the capital (rate, 20 per cent) $5, 000 In excess of 15 per cent of the capital and not in excess of 20 per cent thereof (rate, 25 per cent) 5, 000 In excess of 20 per cent of the capital and not in excess of 25 per cent thereof (rate, 35 per cent) 5, 000 In excess of 25 per cent of the capital anci not in excess of 33 per cent thereof (rate, 45 per cent) 8, 000 In excess of 33 per cent of the capital (rate, 60 per cent) 42, 000 WAE EXCESS PROFITS TAX. 7 The tax would then be computed as follows: 20 per cent of S5,000 $1, 000 25 per cent of $5,000 1, 250 35 per cent of $5.000 1, 750 45 per cent of $8,000 3, GOO 60 per cent of §42,000 25. 200 Total tax 32, 800 (2) An individual or partnership has a capital of $100,000, prewar earnings of 8 per 29 cent, and a net income for the taxable year of §22,500. The deduction allowed will be 8 per cent of the capital, or $8,000, plus $6,000 Bpecific deduction, a tntal of $14,000. The amount of the net income taxable at each rate will be as follows: In excess of the deduction and not in excess of 15 per cent of th(?rapital (rate, 20 per cent) . . . -. $1, 000 In excess of, J5 per cent of the capital and not in excess of 20 per cent thereof (rate, 25 per cent) 5, 000 In excess of 20 per cent of the capital and not in excess of 25 per cent thereof (rate, 35 per cent) 2, 500 The tax would then be computed as follows: 20 per cent of $1 ,000 $200 25 per cent of $5.000 1, 250 35 per cent of $2,500 875 Total tax 2, 325 Art. 17. When deduction exceeds 15 per cent of invested capital. — - 30 In any case in which the deduction determined as provided in articles 21, 23, and 24 is greater than 15 per cent of the invested capital and therefore can not be fully allowed under the first rate or bracket of article 16, then any remaining portion of the deduction wiU be allowed under the second bracket, and continued if necessary into the succeeding bracket or brackets until the entire amount of the deduc- tion is allowed. Illustrations. — (1) A corporation has a capita! of $9,000; prewar earnings of 9 31 per cent; and a net income for the taxable year of $10,000. The deduction allowed will be 9 per cent of the capital, or |810, plus $3,000 specific deduction, a total of $3,810. The amount of the net income in each bracket will be as follows: 15 per cent of the capital $1, 350 In excess of 15 per cent of the capital and not in excess of 20 per cent thereof. 450 In excess of 20 per cent of the capital and not in excess of 25 per cent thereof. 450 In excess of 25 per cent of tlie capital and not in excess of 33 per cent thereof. 720 In excess of 33 per cent of the capital 7, 030 It is evident" that the total deduction of $3,810 is greater than 15 per cent of the capital and so is not fully absorbed by the amount of net income not in excess of 15 per cent of the capital. In such case, applying article 17, the total deduction of $3,810 will be distriljuted as follows: $1,350 in the first bracket, leaving nothing to be taxed at the 20 per cent rate. $450 in the second bracket, leaving nothing to be taxed at the 25 per cent rate. $450 in the third bracket, leaving nothing to be taxed at the 35 per cent rate. $720 in the fourth bracket, leaving nothing to be taxed at the 45 per cent rate. 8 WAR EXCESS PKOFITS TAX. There still remains $840 of the deduction to be allowed in the fifth bracket against the $7,030 of income which would otherwise be taxable under that bracket. There would then be $6,190 of net income left to be taxed at the 60 per cent rate under the fifth bracket. Hence, the total excess-profits tax in this case would be" $3,714. S2 [2) An individual or partnership has a capital of $40,000, prewar earnings of 9 per cent, and a net income for the taxable year of $12,000. The deduction allowed will be 9 per cent of the capital, or $3,000, plus $6,000 specific deduction, a total of $9,600. The amount of the net income in each bracket will be as follows: 15 per cent of the capital $6, 000 In excess of 15 per cent of the capital and not in excess of 20 per cent thereof. . . 2, 000 In excess of 20 per cent of the capital and not in excess of 25 per cent thereof. . . 2, 000 In excess of 25 per cent of the cajDital and not in excess of 33 per cent thereof. . . 2. 000 It is e^^dent that the total deduction of $9,000 is greater than 15 per cent of the capital and so is not fully absorbed by the amount of net income not in excess of 15 per cent of the capital. In such case, applying article 17, the total deduction of $9,000 will be distributed as follows: $6,000 in the first bracket, lea\dng nothing to be taxed at the 20 per cent rate. $2,000 in the second bracket, leaving nothing to be taxed at the 25por cent rate. $1,600, the balance of the deduction, to be allowed against the $2,000 of income in the third bracket. There would then be $400 of income left in the third bracket to be taxed at the 35 per cent rate, and $2,000 in the fourth bracket to be taxed at the 45 per cent rate. Hence, the total excess-profits tax in this case vvould be $1,040. 83 Art. 18. Constructive Capital for Application of Sates. — Where the deduction allowed to a taxpayer is dcterminod under article 24, the invested capital for the purpose of applying the rates of taxation under article 16 shall be deemed to be an amount v/liich bears the same ratio to the net income of the trade or business for the taxable year which the average invested capital for the corresponthng calendar year of representative corporations, partnerships, and individuals engaged in a lik-e or similar trade or business bears to their average net income. 34 The Commissioner of Internal Revenue in determining for any calendar year the ratio wltich the average invested capital of rep- resentative corporations, partnerships, and individuals engaged in any particular trade or business bears to their average net income, mil include the invested capital and net income of representative corporations and partnerships for fiscal years ending during such cal- endar j^ear. 35 For the purpose of applying this article in the case of a corpora- tion or partnersliip which has fixed its own fiscal year, the ratio determined for the calendar year ending during such fiscal year shall be used. 36 Art. 19. Computation of tax for fiscal year, part of which falls within calendar year 1916.— If a corporation or partnership prior to March 1, 1918, makes a return for a fiscal year, part of which falls within the calendar year 1916, the tax for the first taxable year shall WAR EXCESS PEOFITS TAX. 9 be that proportion of the tax computed upon the net income for such fiscal year which the number of months from January 1, 1917, to the end of such fiscal year bears to the entire number of months in such fiscal year. Art. 20. Computation of tax for period of less than 12 months. — 37 If a corporation or partnership at any time, either because it has just designated a fiscal year as provided in sections 8 or 13 of the act of September 8, 1916 (see Income Tax Regulations, arts. 31 and 211), or for any other reason, makes a return for a period of less than 12 months, the deduction will be an amomit which bears the same ratio to the deduction allowable for a full year as the number of months in such period bears to 12 months. COMPUTATION OF THE DEDUCTION. Art. 21. "Jjade or business having invested capital. — The de- 38 duction used in computing the rates of tax under article 16 shall, except in cases coming within the conditions specified in articles 23 and 24, be as follows: (a) In the case of a domestic corporation the sum of (1) an amount 39 ecpial to the same percentage of the invested capital for the taxable year which the average amount of the annual net income of the trade or business during the prewar period was of the invested capital for the prewai* period (except that 7 per cent shall be used if such per- centage was less than 7 per cent, and 9 per cent shall be used if such percentage was more than 9 per cent, and 8 per cent shall be used if the corporation was not in existence during the whole of at least one calendar year during the prewar period), and (2) $3,000. (b) In the case of a domestic partnership or of a citizen or resident 40 of the United States, the sum of (1) an amount equal to the same percentage of the invested capital for the taxable year which the average amount of the anniTal net income of the trade or business during the prewar period was of the invested capital for the prewar period (except that 7 per cent shall bo used if such percentage was less than 7 per cent, and 9 per cent shall be used if sucli percentage was more than 9 per cent, and 8 per cent shah be used if the partner- ship was not in existence or the individual was not engaged in the trade or business during the whole of at least one calendar year during the prewar period), and (2) S6,000. (c) In the case of a foreign corpora.tion oi" partnership or of a non- 41 resident alien individual, an amount equal to the same percentage of the invested ca])ital for the taxable year which the average amount of the annual net income of the trade or business during the prewar period was of the invested ca])ital for the prewar period (except that 7 per cent sliaU be used if such percentage was less than 7 per cent, and 9 per cent shall bo used if such percentage was more than 9 per 33761°— 18 2 10 WAE EXCESS PEOFITS TAX. cent; and 8 per cent shall be used if the corporation or partnership was not in existence or the individual was not engaged in the trad6 or business during the whole of at least one calendar year during the prewar period) . 42 Art. 22. Trade or business reorganized on or after January 2, 1913. — If a trade or business carried on by a corporation, partnership or individual was formally organized or reorganized on or after Janu- ary 2, 1913, but is substantially a continuation of a trade or business carried on prior to that date, then the corporation or partnership shall be deemed to have been in existence, or the individual shall be deemed to have been engaged in the trade or business, prior to that date, and for the purpose of computing the deduction the net income and invested capital of the predecessor shall be deemed to have been the net income and invested capital of the present owner for the prewar period. 43 Art. 23. When income for prewar period can not be satisfactorily determined, or when net income was low during prewar period, or when there was no net income during prewar period. — In the follow- ing cases the deduction shall be determined as provided in this article; 44 (a) If the Secretary of the Treasury is unable satisfactorily to de- termine the average amount of annual net income of. the trade or business for the prewar period ; 45 (h) If the Secretary of the Treasury upon complaint finds that dur- ing the prewar period the percentage of the net income to the invested capital of the taxpayer was lower by 1 per cent or more than the percentage of the net income to the invested capital of representative corporations, partnerships or individuals engaged in a like or similar trade or business during the same period. 46 (c) If, in the case only of a domestic corporation or partnership which was in existence during the prewar period, or of a citizen or resident of the United States who was engaged in the trade or busi- ness during the prewar period, the Secretary of the Treasury upon complaint finds that during the prewar period there was no net in- come from the trade or business. In such cases the deduction shall be — 47 (1) An amount equal to the same percentage of the invested capital for the taxable year which the average deduction (determined in the same manner as provided in article 21, without including the $3,000 or S6,000 therein referred to) for such year of representative corpora- tions, partnerships, or individuals engaged in a like or similar trade or business, is of their average invested capital for such year, plus 48 (2) In the case of a domestic corporation, $3,000, and in the case of a domestic partnership or a citizen or resident of the United States, S6,000. WAR EXCESS PROFITS TAX. 11 In cases arising under subdivision (a) or (c) of this article the tax 49 shall be assessed in the first instance upon the basis of a deduction computed by the use of 7 per cent. In cases arising under sub- division (b) the tax shall be assessed in the first instance upon the basis of a deduction determined as provided in article 21. In any case under this article a taxpayer claiming the benefit of 60 this provision shall at the time of making the return file a claim for abatement (Form 47) of the amount by which the tax so assessed exceeds a tax computed upon the basis of the deduction deter- pained as provided in this article. In cases coming within the pro- visions of this article payment of that portion of the tax covered by the claim for abatement will not be required until the claim is decided. If, however, in the judgment of the Commissioner of Internal Revenue the interests of the United States would be jeop- ardized thereby, the right is reserved to require the claimant to give a bond of such amount and with such sureties as the commis- sioner thinks wise to safeguard such interests. The bond shall be conditioned for the payment of any tax found to be due with in- terest thereon, and if a bond satisfactory to the commissioner is not given within such time as he prescribes, the fuU amount of the tax assessed will become immediately due and the amount over- paid, if any, will upon final decision of the application, be refunded as a tax erroneously or illegally collected. Art. 24. When invested capital can not be satisfactorily deter- 51 mined. — If the Secretary of the Treasury is unable satisfactorily to determine the invested capital, the deduction shall be the sum of — (1) An amount equal to the same proportion of the net income of 52 the trade or business for the taxable vear as the average deduction (determined in the same manner as provided in article 21 without including the .$3,000 or S6,000 therein referred to) for the corre- sponding calendar year, of representative corporations, partner- ships, and individuals engaged in a like or similar trade or business, is of their average net income, plus (2) In the case of a domestic corporation $3,000, and in the case of 53 a domestic partnership or a citizen or resident of the United States, S6,000. The Commissioner of Internal Revenue in determining for any cal- 54 endar year the proportion which the average deduction of repre- sentative corporations, partnerships, and individuals engaged in any particular trade or business is of their average net income, will in- clude the deductions and net income of representative corporations and partnerships for fiscal years ending during such calendar year. For the purpose of applying this article in the case of a corporation 55 or partnership which has fixed its own fiscal year, the proportion determined for the calendar year ending during such fiscal year shall be used. 12 WAR EXCESS PROFITS TAX. 56 In every case of a trade or business having invested capital a return shall be made in the first instance in accordance with article 21 or 23, but the taxpayer may submit therewith a statement of reasons why in his opinion the tax should be assessed in accordance with this article. NET INCOME— GENERAL PROVISIONS. 57 Art. 25. Exemptions. — The following classes of income are exempt from the tax: 68 (a) Income exempt from taxation under section 4 of the act of September 8, 1916, as amended. (See Income Tax Regulations, art. 5.) 59 (b) Income derived from the business of life, health, and accident insurance combined in one policy issued on a weekly premium pay- ment plan. 60 (c) Compensation or fees received by officers and em])loyees under the United States or any State, Territorj^, or the District of Columbia for their services as such. 61 Art. 26. Net income of foreign corporations, pa.rtnerships, and non- resident alien individuals. — In the case of a foreign corporation or partnership or a nonresident alien individual the net income shall be the net income from sources within the United States. 62 Art. 27. Dividends received from a foreign corporation which is subject to Federal income tax. — In the case of income derived by a corporation or partnership from dividends upon the stock of a foreign corporation, part of whose net income is subject to the income tax, there shall be deducted only that proportion of the dividends received upon such stock which the net income of such foreign corporation from sources within the United States is of its entire net income, 63 Where dividends upon the stock of a foreign corporation are received by an individual, as a part of his income from trade or business, there shall be included in the net income tliat proportion of the dividends received upon such stock which the net income of sucii corporation from sources outside the United States is of its entire net income. NET INCOME— CORPORATIONS. 64 Art. 28. Taxable year. — The net income of a corporation for the taxable year shall be determined by adding (1) the amount of net income ascertained and returned for income tax purposes for such taxable year as provided in Title I of the act of September 8, 1916, as amended, and (2) the amount, if any, received as interest on bonds or other obligations of the United States, issued after Septem- ber 24, 1917 (other than the interest received on an amount of such bonds or obligations the aggregate principal of which does not exceed S5,000), and deducting from the total so obtained the amounts WAR EXCESS PROFITS TAX. 13 received during the taxable year as dividends upon the stock or from the net earnings of other corporations, joint-stock companies or associations, or insurance companies, subject to the income tax imposed by Title I of such act of Septembci- S, 1916, as amended, except as otherwise provided in article 27. Art. 29. Prewar period. — The net income of a corporation for the 65 prev\^ar period shall be computed as follows: (a) For the calendar 3'ear 1911 by adding (1) the amount of net 66 income shown in item 9 of the return made under section 38 of the act of August o, 1909, for the calendar year 1911, and (2) the amount of taxes paid to the United States within the calendar year 1911 under section 38 of such act; (6) For the calendar year 1912 by adding (1) the amount of net 67 income shown in item 9 of the return made under section 38 of the act of August 5, 1909, for the calendar year 1912, and (2) the amount of taxes paid to the United States within the calendar year 1912 under section 38 of such act; and (f) For the calendar year 1913 by adding (1) the amount of the 68 entire net income shown in item 8 of the return made under Section II of the act of October 3, 1913, for the calendar year 1913, and (2) the amount of taxes paid within the calendar year 1913 under section 38 of the act of August 5, 1909, and Section II or TV of the act of October 3, 1913, and deducting from the total so obtained the amounts received during the calendar year 1913 ag dividends upon the stock or from the net earnings of other corporations, joint- stock companies or associations, or insurance companies, subject to the income tax imposed by Section II of the act of October 3, 1913. NET INCOME— PARTNERSHIPS. Art. 30. Taxable year. — The net income of a partnership for the 69 taxable year shall be determined by adding the amount of its entire net income (or in the case of a foreign partnership, its entire net income from sources within the United States) ascertained upon the same basis and in the same manner as provided with respect to individuals for income-tax purposes by Title I of the act of Septem- ber 8, 1916, as amended (see Income Tax Regulations, art. 30), in- cluding the amounts, if any, received during the 3^ear as interest on bonds or other obligations of the United States issued after Septem- ber 24, 1917 (other than the interest on an 'amount of such bonds or obligations, the aggregate principal of which does not exceed $5,000), and dechicting therefrom — - (1) The amounts received during the taxable year as dividends 70 upcHi the stock or from the net earnings of corporations, joint- stock companies or associations, or insurance com]iainos, subject to the income tax imposed by Title I of the act of September 8, 1916, as amended, except as otherwise provided in article 27 ; and 14 WAR EXCESS PROFITS TAX. 71 (2) The deductions, if any, for salaries or interest allowed by articles 32 and 33, if such deductions have not already been made. 72 Art. 31. Prewar period. — The net income of a partnership for each of the calendar years 1911, 1912, and 1913 shall bo determined in the same manner as the net income for the taxable year, except that dividends upon the stock or from the net earnings of corporations, joint-stock companies or associations, or insurance companies, subject to the tax imposed by section 38 of the act of August 5, 1909, or by Section II of the act of October 3, 1913, shall be deducted. (See art. 30.) 73 Art. 32. Deductions allowed for salaries paid to partners. — In com- puting net income for purposes of the excess profits tax a partner- ship will be allowed to deduct as an expense reasonable salaries or compensation paid to individual partners for personal services actu- aU}" rendered during the taxable year, if the payments are made in accordance with prior agreements and are properly recorded on the books of the partnership. In no case shall the salaries or comi^ensa- tion so deducted be in excess of the salaries or compensation cus- tomarily paid for similar services under like responsibilities by cor- porations engaged in like or similar trades or businesses, 74 With respect to any period prior to March 1, 1918, regardless of whether a previous agreement has been made as to salaries or com- pensation, a similar deduction will be allowed for services actually rendered. 75 In the case of a foreign partnershi]) the deduction shall be limited to those portions of salaries or compensation which are jjaid for services rendered with respect to trade or business carried on in the United States. 76 A partner in his individual capacity is, however, subject to the excess profits tax, if any, at the 8 per cent rate under article 15 with respect to any salary or compensation from the partnership for personal services (including any amounts allowed to the partnership as a deduction on his account for the period prior to March 1, 1918). 77 Art. 33. Deductions allowed for interest on bona fide loans by partners. — In computing net income for purposes of the excess profits tax a partnership will be allowed to deduct amounts paid during the year to an individual partner as interest upon any bona fide loan, but no deduction for so-called interest upon capital will be allowed. 78 Art. 34. If deduction is made under article 32 or 33, corre- sponding deduction must also be made for prewar period. — If, in com- puting net income for purposes of the excess profits tax, a partnership makes a deduction as allowed by article 32 for salaries paid to part- ners during the taxable year, it must also in computing net income for the prewar period make a corresponding deduction; and if it WAR EXCESS PROFITS TAX. ' 15 makes sucli a deduction as allowed by article 33 for interest paid to partners, it must also in computing net income for the prewar period make a corresponding deduction for an}- such interest actually paid during that period. NET INCOME— INDIVIDUALS. Art. 35. Determination of net income where there is no invested 79 capital or only nominal capital. — The net income which is derived from a trade or business having no invested capital or not more than a nominal capital, including salaries, wages, fees or other compensa- tions (constituting net income of class A as defined in art. 14) shall be determined for the taxable year by adding the total net income from all such sources (or in the case of a nonresident alien individual the total net income from all such sources within the United States) as reported for income tax purposes for the same year. Art. 36. Determination of net income for taxable year when there 80 is invested capital.— The net income which is derived from a trade or business having invested capital (constituting net income of class B, as defined in art. 14) shall be determined for the taxable year by adding the total net income from such sources (or in the case of a nonresident alien individual the total net income from such sources within the United States) as reported for income tax purposes for the same year and deducting therefrom the deduction, if any, for salary allowed by article 39, if such deduction has not already been made. There shall be excluded the amounts received during the year upon 81 the stock or from the net earnings of corporations, joint-stock com- panies or associations, or insurance companies, subject to the income tax imposed by Title I of the act of September S, 1916, as amended. In the case, however, of an individual dealing in securities or other- 82 wise using securities in trade or business there shall be included (1) the amount, if any, received as interest on bonds or obligations of the United States, issued after September 24, 1917 (otlicr than the interest received on an amount of such bonds or obligations the aggregate principal of which docs not exceed $5,000), and (2) such proportion of dividends received upon the stock of foreign corpora- tions as is required to be included by article 27. Illustration. — An individual owns a farm representing an invested capital of 83 $25,000, a country store with an invested capital of ^G,000, and a flour mill with an invested capital of $10,000. His net income from the farm is $4,000, from the store $3,000, and from the mill $3,000. Thus \m total net income of class B is $10,000. Ilis total invested capital ia $41,000. Assuming that his deduction is at the rate of 8 per cent, his total deduction will be $3,280 plus $6,000, or $9,280, to be applied against his net income of $10,000 in computing the tax at the graduated rates under articles 16 and 17. The same individual allows himself a salary of $1,000 for working the farm and $900 for running the store, draws a salary of $1,200 as president of the local bank, 16 WAR EXCESS PROFITS TAX. and receives $250 in compensation for personal services of various kinds, sucli as road work, helping neighbors in lArvest, etc. He also receives $300 in dividends on an investment in certain stocks and $100 as supervisor's fees. The last item — that is, supervisor's fees — is exempt under the law (sec. 201, subdivision a). The $300 in dividends is not taxable, inasmuch as it is derived from a mere investment not con- nected with his trade or business. Ilis net income of class A will therefore consist of his salaries and his compensation for personal services, a total of $3,350. Since he is entitled to a deduction of $6,000 as to this class of income, he will have no tax to pay at the 8 per cent rate under article 15. 84 Art. 37. Deduction of contributions for religious, charitable, etc., purposes. — Contributions or gifts for religious, charitable, etc., purposes allowed as a deduction for purposes of tlie income tax under paragraph "Ninth" of subdivision (a) of section 5 of the act of September 8, 1916, as amended, may, subject to the limitations therein contained, be deducted in computing the net income of the trade or business for purposes of the excess profits tax only when it is shown to the satisfaction of the Conmiissioner of Internal Revenue that such contributions or gifts are made by the trade or business and not by the individual in his personal capacity. 85 Art. 38. Determination of net income for the prewar period where there is invested capital. — The net income which is derived from a trade or business having invested cajntal (constituting net income of class B as defined in article 14) shall be determined for each of the calendar years 1911. 1912, and 1913 upon the same basis and in the same manner as provided in article 36. 86 Art. 39. Deduction allowed for salary to himself. — An individual carrying on a trade or business having an invested capital may in computing the net income of the trade or business for purposes of the excess profits tax deduct a reasonable amount designated by him as salary or compensation for personal service actually rendered by him in the conduct of such trade or business. In no case shall the am.omit so designated be in excess of the salaries or compensa- tion customarily paid for similar service under Uke responsibilities by corporations or partnerships engaged in Hke or similar trades or businesses. 87 In the case of a nonresident alien individual, the amount deducted shall be limited to that portion of the salary or compensation wiiich is for service rendered with respect to trade or business carried on in the United States. 88 The amount so designated shall, however, be included in com- puting his net income of class A under article 35; and the balance of the income from his trade or business shall be included in computing his net income of class B under article 36. 89 Illustration. — An indi\ddual owns and runs a newspaper having an invested capital of $50,000. The net income from the newspaper, without making any allow- ance for the salary of the owner, is $20,000, and, as income of class B, is subject to the WAR EXCESS PROFITS TAX. 17 graduated rates prescribed in article 16. His deduction, as provided for in sub- division (6) of article 21, would be $4,500 (9 per cent of his capital) plus $6,000, a total of $10,500. If, however, he allows himself a salary of $3,000, the net income from the newspaper will be $17,000, and the deduction of $10,500 will be applied against that amount. His salary of $3,000 must be included in his return as income of class A, which is Bubject to the 8 per cent rate under article 15. If it constitutes his only income of that class he will pay no tax thereon, inasmuch as it is less than the deduction of $6,000 to which he is entitled as to that class of income. But if, for example, he re- ceives in addition a salary of $4,000 as president of the local bank, his total net income of class A will be $7,000, and he will be required to pay a tax of 8 per cent on $1,000 thereof, or $80. Art. 40. If deduction is made under article 39 corresponding deduc- tion must also be made for prewar period. — If, in computing net income for purposes of the excess profits tax, an individual deducts a reason- able amount designated as salary or compensation for personal serv- ices rendered by liimself, as allowed by article 39, he must also in computing net income for the prewar period, make a corresponding deduction. Art. 41. Individual member of partnership. — Inasmuch as a partner in his individual capacity is not considered to be engaged in trade or business with respect to his share in the profits of the partnership, he is not subject to excess profits tax thereon. Consequently, in computing his net income for purposes of the excess profits tax he need not include his share of the partnership profits. He shall, how^CA^er, in computing his net income of class A under article 35, include any salary or compensation from the partnership for personal services (including any amount allowed to the partner- ship as a deduction on his account for the period prior to March 1, 1918, in accordance with article 32). INVESTED CAPITAL— GENERAL PROVISIONS. Art. 42. Allowance for depletion, depreciation, and obsolescence in computation of invested capital. — The term "invested capital" as used in the excess profits tax law means the invested capital of the present owner. The basis, or starting point, in the computation of invested capital is found in the amount of cash and other property paid in, the original values of such other property being determined in accordance with the rules laid down in these regulations. But the computation docs not stop with such original entries or amounts; it must take properly into account the surplus and undivided profits. In the computation of surplus and undivided profits, however, full recognition must first be given to expenses incurred and losses sus- tained from the original organization of the business concern down to the taxable year, including among such expenses and losses a reasonable allowance for depletion, depreciation, or obsokscence of 33761°— 18 3 18 WAK EXCESS PROFITS TA.X. property originally acquired for cash or for stock or shares or in any other manner. If value appreciation of a kind not subject to mcome tax (other than that allowed under article 55) has been taken up in the accounts, a deduction must be made in respect of such apprecia- tion so taken up. In the computation of the invested capital for any year full effect must also be given to any liquidation of the original capital. 94 Art. 43. How to ascertain average invested capital for the year, averaged monthly. — The invested capital for any prewar or taxable year (or where the tax is computed upon the basis of a period less than a year, for such period) is the average invested capital for the year or period averaged monthly, accordmg to the following rules: 95 (a) Add the capital for each of the several months durmg wliich no change occurs, and the average capital (ascertamed as provided in subdivision (b) of this article) for each month in which a change occurs and divide the total by the number of months in the year or period. 66 (6) To ascertam the capital for any month in which a change occurs multiply the capital as of the first day of the month by the nimiber of days it remains constant and the capital after each change by the number of days (including the day on which the change occurs) during wliich it remains constant, add the products, and di- vide the sum by the number of days in the month. 87 Art. 44. Items not allowed to be included in invested capital. — The second paragraph of section 207 of the excess profits law specifies certain items which may not be included in invested capital, namely: 98 (a) Stocks, bonds (other than obhgations of the United States), or other assets, the income from which is not subject to the excess profits tax; and 99 (b) Money or other property borrowed. 100 The term "mone}^ or other property borrowed" as used in section 207 and these regulations includes not only cash or other borrowed property which can be identified as such, but current liabilities and temporary indebtedness of all kinds, and any permanent indebted- ness upon wliich the taxpayer is entitled to an interest deduction in computing net income. A corporation which under the income-tax law is allowed to deduct only a part of the entire interest paid upon its indebtedness, may include in its invested capital such a proportion of its permanent indebtedness as the amount of interest upon such indebtedness wliich the corporation is not allowed to deduct is of the total amount of interest paid upon such indebtedness during the taxable year. 101 Art. 45. When income from tax-free securities consists partly of trading profits and partly of interest, dividends, etc. — Whenever WAR EXCESS PROFITS TAX. 19 income consists partly of gains or profits subject to the excess profits tax arising from trading in stocks, bonds, etc., the dividends or inter- est on which are not subject to such tax, and partly of such dividends or interest, then, subject to the hmitations as to borrowed money, there shall be included in the invested capital an amount which bears the same ratio to the total amount invested in such stocks or bonds as the amount of such gains or profits bears to the total amount of such income. Aet. 46. Treatment of stock of foreign corporations when held by 102 domestic corporations or partnerships or by citizens or residents of the United States. — In the case of domestic corporations or partnerships and of citizens or residents of the United States holding stock in a foreign corporation part of whose net income is subject to the income tax, there shall be included in invested capital such proportion of the value of the stock in such foreign corporation as the net income of such foreign corporation from sources outside the United States is of its entire net income. Art. 47. Construction of terms "tangible property" and "intangible 103 property." — The term "other intangible property" as used in section 207 will be construed to mean property of a character similar to good will, trade-marks, and the other specific kinds of property enumerated in the same clause. With respect to property not clearly of such a character, rulings will be issued as occasion may demand to indicate whether it shall be regarded as tangible or intangible. The foUowmg classes of property, when paid in for stock or shares 104 in a corporation or partnership, will be regarded as tangible property so paid in: (a) Stocks. (b) Bonds. (c) Bills and accounts receivable. (d) Notes and other evidences of indebtedness. (e) Leaseholds. But when a corporation pays for intangible property by the issuance of its own stock or bonds, this will not be regarded as being a payment bona fide made in cash or tangible property within the meaning of section 207. Art. 48. Invested capital of foreign corporations or partnerships 105 or nonresident alien individuals. — When used with refereiu'o to a foreign corporation or partnership or a nonresident alien individual, the term ''invested capital'' means tHat proportion of the entire invested capital as defined and limited by these regulations which the net income from sources within the United States is of the entire net income. Art. 49. Reorganization on or after January 2, 1913.— A trade or 106 business earned on by a corporation, partnership, or individual, which 20 WAE EXCESS PROFITS TAX. has been formally organized or reorganized on or after January 2, 1913, but which is substantially a continuation of a trade or business carried on prior to that date, shall, for the purposes of the excess profits tax, be deemed to have been in existence prior to that date and the invested capital of its predecessor prior to that date shall be deemed to have been its invested capital. This article relates to the prewar period and does not ai^ply to the invested capital for tho taxable j^ear. 107 iVPvT. 50. Reorganization after March 3, 1917. — In case of the reorganization, consolidation, or chiinge of owners*hip of a trade or business after March 3, 1917, if an interest or control in such trade or business of 50 per cent or more remains in control of the same persons, corporations, associations, partnerships, or any of them, then in ascertaining the invested capital of the trade or business no asset transferred or received from the prior trade or business shall be allowed a greater value than would have been allowed under these regulations in comj^uting the invested capital of such prior trade or business if such asset had not been so transferred or received, unless such asset was paid for specifically as such, in cash or tangible property, and then not to exceed the actual cash or actual cash value of the tangible property paid therefor at the time of such pajrment. 108 Art. 51. Invested capital for prewar period. — Tlie invested capital for the prewar period shall, in general, be determinetl in the same manner as for the taxable yetir, except that the valuation as of January 1, 1914, shall not apply to tangible property paid in for stock or shares. i09 Art. 52. Scope of section 210. — Section 210 provides for excep- tional cases in which the invested capital can not be satisfactorily determined. In such cases the taxpayer may submit to the Com- missioner of Internal Revenue evidence in support of a clauu for assessment under the provisions of section 210. (See articles 18 and 24.) Such exceptional cases may consist, among otliers, of the following: 110 (1) Where, through defective accounting or the lack of adequate data, it is impossible accurately to compute invested capital. 111 (2) Where upon apphcation by a foreign taxpayer the Secretary of the Treasury finds that the expense of securmg the data necessary for the computation of the invested capital would be unreasonable in view of the amount of tax involved, or that it is impracticable to determine either the "entire invested capital" or the "entire net income." 112 (3) Long-established business concerns which by reason of ultra- conservative accounting or the form and manner of their oi*ganiza- tion would, through the operation of section 207, be placed at a serious disadvantage in competing with representative concerns in a hke or similar trade or business. WAR EXCESS PROFITS TAX. 21 (4) Where the mvested capital is seriously disproportionate to 113 the taxable income. Such cases may arise through: («) The realization in one year of the earnings of capital unpro- 114 ductively invested through a period of years or of the fruits of activities antedating the taxable year; or, (&) Inability to recognize or properly allow for amortization, lift obsolescence, or exceptional depreciation due to the present war, or to the necessity in connection with the present war of providing plant which will not be wanted for the purposes of the trade or business after the termination of the war. INVESTED CAPITAL-CORPORATIONS AND PARTNERSHIPS. Art. 53. Rule for computing invested capital. — In computing in- 116 vested capital, every corporation or partnership paying taxes at the graduated rates prescribed in section 201 (see art. 16), shall add together its paid in capital and its paid in or earned surplus and un- divided profits (under whatever name the same may bo called) as shown by its books at the beginning of the taxable year. The total thus obtained shall be adjusted for any asset or item which it covers that is not carried on the books at the valuation prescribed by law or by these regulations. Wlien necessary, adjustment (addition or subtraction) shall be made in respect of the following: ADJUSTMENTS. 1. Stock or shares issued in the purchase of intangible property 117 prior to March 3, 1917, which can not be included in an amount ex- ceeding (a) 20 per cent of the par value of the total stock or shares outstanding on that date, (b) the actual value of such intangible property at the date acquired, or (c) the par value of the stock or shares issued in payment therefor, whichever is the lowest. (See arts. 57 and 58.) 2. Stock or shares issued for a mixed aggregate of tangible prop- 118 erty, patents and cop3'rights, and good wiU or other intangible property. (See art. 59.) 3. Stock or shares issued for patents and copyrights, valued at (a) 119 their actual cash value at the time of payment, or (6) the par value of the stock or shares issued therefor, whichever is lower. (See art. 56.) 4. Stock or shares issued for tangible property prior to January 1, 120 1914, valued at (a) the actual cash value of such property on Jan- uary 1, 1914, or (b) the par value of the stock, whichever is lower. (See art. 55.) 5. Stock originally issued for property and subsequently returned 121 to the corporation as a gift, etc, (See art. 54.)' 6. Add any proportion of its permanent indebtedness which may 122 be included under article 44. 22 WAR EXCESS PROFITS TAX. 123 •/. Add value of tangible property pai4 in for stock or shares in excess of tlic par value of such shares, when authorized by article 63. 124 8. Add amounts expended in the past for (a) the acquisition of tangible property or (&) specifically for good will and other similar intangible property, when authorized by article 64. 125 9. For the valuation of assets acquired in reorganizations, etc., (a) effected after March 3, 1917, see article 50; (&) as to the prewar period, see articles 49 and 51. 126 10. Deduct amounts representing appreciation excluded by arti- cle 42. 127 11. Make any additional deductions required by reason of insuffi- cient allowances in the accounts of the taxpayer for depletion, depreciation, and obsolescence. (See art. 42.) 128 Whenever any corrections are made in respect of the capital stock and sm*plus, corresponding corrections must be made in the re- spective asset items in the balance sheet of the taxpayer. 129 After making any adjustments required under paragraphs 1 to 11 above, the adjusted total of the capital and surplus account will represent the invested capital at the beginning of the taxable year, except that in any case where the admissible assets (and these include all assets when valued in accordance with these regulations, except stocks, bonds — other than obligations of the United States — the income of which is not subject to excess-profits tax) are less than the amount of such adjusted total, then the invested capital must be further reduced to an amoimt equal to the sum of the ad- missible assets. Tax-free securities and stock in foreign corporations may be included as admissible assets to the extent authorized in arti- cles 45 and 46. 130 If there has been any change made during the taxable year in the amount of the invested capital, the monthly average shall be taken (see art. 43), but in no case may the invested capital include any surplus or undivided profits earned during the taxable year. 131 With respect to the taxable year 1917, every such corporation and partnership will be required to submit a balance sheet as at the first day of the taxable year and also a balance sheet as at the close of the taxable year, Tliereafter every such corporation and partnership will be required to submit a balance sheet as at the close of each taxable year. Balance sheets should be made in accord- ance with the books of the taxpayer and changes in respect of any items therein made pursuant to these regulations should be explained in a separate statement attached to the balance sheet to which it relates. 132 Art. 54. Stock returned to corporation. — -For the purpose of com- puting invested capital, in cases where the stock of a corporation is issued or exchanged for property (tangible or intangible), the follow- ing rule will apply: WAR EXCESS PROFITS TAX, 23 When any of such stock is returned to the corporation as a gift v>r 133 for a consideration substantially less than its par value, the stock so returned shall not be treated as a part of the stock issued or exchanged for such property. The proceeds derived in cash or its equivalent from the resale of the stock so returned shall, however, be included in the invested capital if retained and employed in the business. Art. 55. Valuation of tangible property paid in for stock or 134 shares. — Tangible property paid in for stock or shares prior to January 1, 1914, must be valued at either (a) the actual cash value of such property on January 1, 1914, or (h) the par value of the stock or shares specifically issued therefor, whichever is lower. This is one of the few cases in which the law permits allowance to be made for appreciation, and here no appreciation can be recognized unless the original stock or shares were specifically issued in exchange for such tangible property. Tangible property paid in for stock or shares on or after January 1, 135 1914, will be taken at the actual cash value of such property at the time of payment, irrespective of the par value of the stock or shares. Art. 56. Patents and copyrights. — Patents and copyrights paid in 136 for stock or shares must be valued at either (a) the actual cash value at the time of payment or (b) the par value of the stock or shares issued therefor, whichever is lower. Art. 57. Valuation of intangible property. — If good will, trade- 137 marks, trade brands, franchises of a corporation or partnership, or other intangible property has been purchased with stock or shares issued prior to March 3, 1917, the amount that may be included in invested capital must not exceed (a) 20 per cent of the par value of the total stock or shares outstanding on that date, nor (h) the actual value of the asset at the date acquired, nor (c) the par value of the stock issued in payment for the asset. Art. 58. Application of 20 per cent limitation upon intangible 138 property. — The 20 per cent limitation upon intangible property purchased prior to March 3, 1917, for or with stock or shares of the corporation or partnership, applies not to each item or class of in- tangible property separately, but to the aggregate amount of all such property so purchased. Such intangible property may be in- cluded in the invested capital only up to an amount not exceeding 20 per cent of the total stock or shares of the corporation or partner- ship on March 3, 1917, even though the aggregate amount of such intangible property be greater in value than such 20 per cent of the par value of the total stock or shares. Intangible property bona fide purchased prior to March 3, 1917, 139 with stock having no par value may be included in invested capital at a value not exceeding the actual cash value of such intangible property at the time of the purchase and in an amount not exceed- 24 WAR EXCESS PROFITS TAX. ing 20 per cent of tho total shares of stock outstanding on March 3, 1917, measured by their value as at the date or dates of issue. 140 Art. 59. Rules to govern cases where shares or securities are issned for mixed aggregate of tangible and intangible property. — Where stock or shares (or stock or shares and bonds or other obligations) have, prioi to March 3, 1917, been issued for a mixed aggregate of — (a) Tangible property, (&) Patents and copyrights, and (c) Good will or other intangible property, the following rales will govern : ,141 (1) Id the absence of satisfactory evidence to the contrary, it will be presumed in tlie case of a corporation, that its stock was issued for the followmg purposes in the order named: (a) Good v'lII or other intangible property, (6) Patent-^ and copyrights, and (c) Tangible property. 142 (2) Upon the production by the taxpayer of evidence satisfactory to the Commissioner of Internal Revenue as to the actual values at the date of acquisition of (a) the tangible property and (&) the patents and copyrights, the sum of these two items may be applied against the total par value of the securities issned and the remainder • will then be deemed to represent the par value of the securities issued for the good will or other intangible property. 143 (3) Cases where mixed aggregates of tangible and intangible property have been paid m for stock and bonds shall, if the Secretary of the Treasui*}' is unable to determine satisfactorily the respective values of the several classes of property at the time of payment, be treated as coming under articles 18 and 24 and the tax shall be assessed accordingly, 144 Art. 60. Valuation of intangible assets purchased. — Good wall and other similar intangible assets purchased with cash or tangible property must be taken at a value not in excess of the cash or actual cash value of the tangible property specifically paid therefor. 145 Art. 61. Surplus or undivided profits earned during any jesi.T ex- cluded in computing invested capital for such year. — Profits earned during any taxable year or prewar year shall not be included in the computation of the invested capital for such year, even though set up as "surpliLs" upon the books or distributed in the form of stock dividends. 146 Art. 62. Scope of phrase "surplus and undivided profits." — Clause (3) of subdivision (a) of section 207 authorizes the inclusion in in- vested capital of earned surplus and undivided profits used or em- ployed in the business. Inasmuch as section 201 provides that all the income of a corporation or partnership shall be deemed to be received from its trade or business, all the surplus and undivided WAR EXCESS PllOFlTS TAX. 25 profits of a corporation or partnership (exclusive of undivided profits ea'-ned during the year), from wiiatever source derived, will, unless invested in stocks, bonds (other than obligations of the United States), or otiier assets, the income from which is not subject to the excess profits tax, be deemed to be used or employed in the business and may be included in the invested capital. Art. 63. When tangible property may be included in surplus. — 147 Where it can be shown by evidence satisfactory to the Commissioner of Internal Revenue that tangible property has been conveyed to a corporation or partnership by gift or at a value, accurately ascer- tainable or definitely known as at the date of conveyance, clearly and substantially in excess of the cash or the par value of the stock or shares paid therefor, then the amount of the excess shall be deemed to be paid in surplus. The adopted value shall not cover mineral deposits or other properties discovered or developed after the date of conveyance, but shall be confined to the value accurately ascer- tainable or definitely known at that time. Evidence tending to support a claim for a paid-in surplus under 148 these circumstances must be as of the date of conveyance, and may consist, among other things, of (1) an appraisal of the property by disinterested authorities, (2) the assessed value in the case of real estate, and (3) the market price in excess of the par value of the stock or siiares. Art. 64. Reconstruction of surplus and undivided profits accounts. -- 149 Where through failure to provide for depletion, depreciation, obso- lescence, or other expenses or losses, or where for any other cause or reason the books of account of the taxpayer do not show the true paid-in or earned surplus and undivided profit'^, hi the computa- tion of invested capital such adjustments shall be made as are necessary to arrive at a statement of the correct amount. Where a taxpayer claims additions to the capital account, the 150 books of account will be presumed to show tlic true facts and the burden of proof will rest upon the taxpayer. Such additions will be accepted only to the extent and under the conditions stated below: (1) Amounts which have been expended in the past for the acqui-161 sition of plant, equipment, tools, patterns, furniture, fixtures, or like tangible property, having a useful life extending substantially beyond the year in which the expenditure was made, and which have been charged as current expense, may (less propcf reduction for depreciation or obsolescence) be added to the surplus accountin computing invested capital when such assets are still owned and in active use by the taxpayer during the taxable year. Special tools, patterns, and similar assets shall not be assigned any value if their cost has been recovered through having been included in the price of goods. If their cost has iiot be(Oi so recovered and they are held for only 33781^—18 4 26 WAE EXCESS PEOFITS TAX. occasional use, they shall not be assigned a value in excess of the fair vahie hased ivpon the earnings actually arising from their cur- rent use. Ass'is of this kind not in current use shall not be valued at more tlian their jiominal or scrap value. 162 (2) xVmounts expended in the past for good will, trade-marks, trade brajids, franchises, and other intangible assets of a like character, are controlled by the language of the statute which provides that such assets "shall be included in invested capital if the corporation or partnership made payment bona fide therefor specifically as such in cash, or tangible property." The Commissioner of Internal Revenue will recognize adchtions to invested capital on account of intangible assets only if such assets have been explicitly paid for in the manner presciibcd by the statute. Where expenditures have been made for the general development of intangible assets, and charged as current expense, ho readjustment thereof will be aOowed. 153 (3) Amounts under (1) and (2) above, expended on or after March 1, 1913, wiE, in the case of a corporation, be limited strictly to items v/hich have not been deducted in computing taxable in- come upon its income tax return. Wlienever a corporation has claimed and the department has allowed a deduction in respect to its income tax, the item upon which the deduction is based shall not be restored to the surplus account nor included in the invested capital. 154 (4) The taxpayer sliaU in liis return to the Commissioner of Internal Revenue make a statement of the proposed additions, specifymg the kinds and amomits of property involved, the years in which the expenditures were made, and the method followed m distinguishing bctvv'coi capital outlays and current expenses. 155 (5) Tile taxpayer shall also show that adequate provision has been made for the depletion, depreciation, or obsolescence of such of the assets so acquired as are, under the rulings of the department, subject to recognized depreciation. 158 Art. 65. Invested capital of insurance companies. — («) The in- vested capital of a mutual insurance company will be deemed to con- sist oi the sum of (1) any sui^lus or contingent reserves maintained for the general use of the business, plus (2) any legal reserves the net additions to which are included in the net income subject to the tax — subject to the restrictive provisions of article 44 requiring the exclusion of tax-free assets other than obligations of the United States. 157 (6) The invested capital of a stock insurance company will be deemeil to consist of its capital stock, paid in or earned surplus and undivided profits (subject to the same restrictive provision of art. 44), computed in accordance with the provisions of article 53. IVAK EXCESS PKOFil>> TAX. 27 INVESTED CAPITAL— INDIVIDUALS. Art. 66. Items included in invested capital. — Subject to the 158 limitations stated in these regulations the invested capital of an in- dividual is measured by the total of three items: (1) Actual cash paid into the trade or business, (2) Tangible property paid into the trade or business, (3) Patents and copyrights, and good will, trade-marks, trade-brands, franchises, and other intangible property. (See art. 68.) Art. 67. Valuation of tangible property.— Subject to the refjuire- 159 ments of article 42 as to allowance for depletion, depreciation, and obsolescence, valuation of tangible property will be as follows: In the case of tangible property purchased with cash, the valuation 160 will be based upon the cost (estimated if not kno"^Ti) in cash at the time purchased. In the case of tangible property paid in as such prior to January 161 1, 1914, the valuation will be based upon its actual cash value as of that date. Adequate evidence of such value must be furnished by the taxpayer. In the case of tangible property paid in on or after January 1, 1914, 163 the valuation will be based upon its actual cash value at the time of payment. '.•. It w^iU be presumed that the tangible assets employed in the trade 163 or business have been acquired with cash which has been either paid in directly or derived from earnings of the trade or business; but the taxpayer will be entitled to show that such assets were paid in as tangible property. Art. 68. Valuation of intangible property. — Patents and copATights, 164 and good wiU, trade-marks, trade-brands, franchises, and other similar intangible assets may be included in invested capital at a value not to exceed the actual cash paid therefor or the actual cash value at the time of payment of the tangible ])roperty paid therefor, but only if bona fide payment was made therefor specifically as such in cash or tangible property. Art. 69. Profits earned during taxable year may be included. — The 165 restriction in respect of undivided profits earned during the taxable year which is imposed upon corporations and partner-hips does not apply to individuals, and therefore, unless otherwise shown, the profits of the taxable year rcmaijiing in the trade or business wiU be decjned to have arisen ratably throughout the year, and the capital at the beginning of the year may be increased by the total amount of such profits remaining in the trade or business averaged monthly over the year. Art. 70. Rule for computing invested capital. — Where an individual 166 keeps book« of account liis invested capital will be found in his capital account (under whatever name it may be called) after making therein 28 WAR EXCESS PEOPITS TAX. any adjustments or corrections required by these regulations, pro- vided that the assets other than those not allowed to be included equal or exceed the amount of such capital account. Otherwise the invested capital shall be the amount of such assets. 167 Wheve an individual does not keep books of account he shoidd pre- pare and preserve a statement as at the beginning of the taxable year and as at the end of the taxable 3'ear, showing in full all his assets valued in accordance with these regulations, and all his liabilities. The excess of such assets over such liabilities at the beginning of the year and again at the end of the year will constitute the invested capital of the individual on those dates, respectively, provided, that in each case the assets other than those not allowed to be included equal or exceed the amount of such excess. Otherwise the invested capital shaO be the amount of such assets. The amount of the difference between the capital thiLS shown as at the beginning of the year and at the end of the 3'ear wiU, in the absence of evidence to the contrary, be deemed to have arisen ratably throughout the year, and the capital at the begmning of the year will be increased or , decreased, as the case may be, by such amount averaged monthly over the year. 168 If an individual is engaged in more than one trade or business having invested capital, then his invested capital for the purposes of computing the deduction and applying the rates of taxation wiU be determined by taking the total invested capital of all such trades or businesses. 169 The terms "assets" and "liabilities" as used in this article relate only to the assets or liabilities of the trade or business. NOMINAL CAPITAL. 170 Art. 71. Application of section 209. — Section 209 (see art. 15) ap- plies primarily to occupations, professions, trades, and businesses engaged principally in rendering personal service in wliicli the em- ployment of capital is not necessary and the earnings of which are to be ascribed primarily to the activities of the owners. 171 In determining whether a trade or business is taxable under article 15 no weight will be given to the fact that it is carried on by means of i^ersonal service unless the principal owners are regularly engaged in the active conduce of the trade or business. 172 Art. 72. Application of section 209 not to be affected by mere size of capital, form of organization, etc. — -Business concerns which render professional or personal service and are of the class normally taxable under article 15 shall not bo taken out of that class merely because of the size of the capital if the employment of such capital is neces- sitated by delay and irregularity in the receipt of fees, etc., or if such capital is wholly or mairily used as a fund from which to advance WAR EXCESS PROFITS TAX. 29 salaries, wages, etc., or to provide office furniture, accommodations, and equipment, nor because of the form of organization, whether corporation or partnership, nor in the case of a partnership because of the number of partners. Art. 73. Agents and brokers. — Agents and brokers requiring and 173 using no capital or merely a nominal capital in their business are taxable mider article 15, but commission houses regularly employ- ing a substantial amount of capital, whether to lend to principals or to carry goods on their own account, are not deemed to be agents or brokers and are taxable under the provisions of article 16. Art. 74. Meaning of "nominal capital"; businesses which will not 174 be deemed to have nominal capital. — The term "nominal capital" as used in section 209 means in general a small or negligible capital whose use in a particular trade or business is incidental. The fol- lowing will not be construed as businesses having a nominal capital for purposes of excess profits tax: {a) A business which because of conditions arising fiom the war 175 or exceptional opportunities for profits earns a disproportionately high rate of profit during the taxable year, if it belongs to a class which necessarily and customarily requires capital for its operation. In the determination of doubtfid cases stress will be laid upon the normal relation of net income to capital during prewar years; (6) Corporations wiiich, although their capitalization is nomiutd, 176 employ a substantial amount of capital in their business; (c) A business having a substantial capital, but whose invested 177 capital within the meaning of section 207 is reduced to a nominal amount by the operation of the restrictive clauses of that section, e. g., where the capital, consisting originally of a small amount of cash paid in, has since appi-eciated in value, or v/herc the capital is largely covered by indebtedness or consists principally of tax-free securities or of intangible assets built up or developed by expenditures which have been regularly deducted as items of current expense. RETURNS. Art. 75. When a return of information as to the invested capital 178 and net income for the prewar period will not be required. — For the purposes of the excess profits tax, a return of infojivsation v,-ith respect to the invested capital and net incoine for the prev7ar period will not be required of a corporation, partnership, or individual in the following cases : (1) If the taxpayer accepts the mininmm percentage, viz., 7 per 179 cent, as the percentage to be used in computing the deduction unlus ' '■-' Books of account; individuals 1 ('(' Not kept If'' Bon'owed money and other property in relation to invested capital 99 Brokers; nominal capital ' ' -^ 4] 42 INDEX. Business defined. (5ec "Trade or business.") Paragraph. Invested capital: Business which will be deemed not to have nominal capital 174 Nominal capital : Businesses involving personal service 170 Capital invested. {See "Invested capital.") No invested capital. {See "Nominal capital.") Nominal capital. {See "Nominal capital.") Capital of considerable amount does not preclude nominal capital 172 Capital versus " invested capital" 112, 172, 174 Capitalization, small or nominal ; relation to invested capital 174 Change of ownership since Jan. 2, 1913 42, 106 Change of ownership since Mar. 3, 1917 ; invested capital ^ 107 Citizens and residents. {See " Individuals.") Claim for abatement when making return in cases of prewar income being undeterminable satisfactorily ; low or none 50 Class A income 22 Rate of tax 26 Class B income 23 Rate of tax 27 Classification of net income subject to tax 21 Commission merchants versus agents and brokers in connection with nominal and invested capital 173 Compensation. {See "Salaries.") Computation of deduction (see also "Deduction: computation of") 38 Computation of invested capital ; rule {see also " Invested capital ") 116 Computation of tax. (See "Tax: computation of.") Consolidated return. (5ee "Returns.") Consolidations since Jan. 2, 1913 42, 106 Consolidations since Mar. 3, 1917 ; invested capital 107 Constructive capital for application of rates 33 Copartnerships. (See "Partnerships.") Copyrights paid in for stock or shares: valuation of 136 Correction of annual balance sheet 118, 119 Mixed tangibles, intangibles, patents, and copyrights 140 Corporations defined 2 Corporations: Affiliated corporations 183, 185 Balance sheet as of last day of taxable year to be submitted 131 Corrections required 117 Invested capital determined on basis of balance sheet as corrected . . . 129 Business defined 7 All trades or businesses considered as one 24 Consolidated since January 2, 1913 42, 106 Consolidations since March 3, 1917 , 107 Deduction, computation of 38 Exempt corporations „ ,,. 18 Fiscal year 5 Invested capital not satisfactorily determinable 55 Less than 12 months' period 37 Partially within 1916 36 Foreign, return and tax liability 12 Holding companies 183, 185 Income taxable, classification 21 Invested capital 93 Rule for computing (see also " Invested capital") 116 INDEX. 43 « Corporations — Continued. Paragraph. Investment of surplus in securities, tax-free and otherwise 146 Net income — • Prewar period 65 Taxable year - 64 Nominal capital. {See "Nominal capital.") Parent corporations 183, 185 Prewar income — How determined 65 Not satisfactorily determinable, low or none 43 Reorganizations subsequent to January 2, 1913 42 Invested capital for prewar period 106 Reorganizations subsequent to March 3. 1917 - , 107 Return 178 Liability to make 11 Parent, holding, and affiliated companies 183, 185 Subsidiaries 183, 185 Specific deduction 26 Subsidiaries 183, 185 Surplus. {See " Surplus in relation to invested capital."') Tax- Assessment and collection of • - 186 Liability to pay 11 Parent, subsidiary, and affiliated companies 183, 185 Rates " 26,27 Taxable year - 5 Trade or business defined 7 All trades or lousinesses considered as one 24 Undivided profits. (See "Undivided profits in relation to invested capital.") Corrections required on annual balance sheet of corporations and paitnerships . . 117 Invested capital determined on liasis of balance sheet as corrected 129 Current liabilities in relation to invested capital 99 Deduction; computation of 38 Exceeding 15 per cent of capital 30 In case of invested capital satisfactorily determinable 38 Citizen or resident individuals 40 More than one trade or business 168 Domestic corporations 39 Domestic partnerships 40 Foreign corporations 41 Foreign partiierships 41 Nonresident aliens 41 More than one trade or business 168 In case of invested capital not sati8fa<:torily determinable 5 Prewar period income being undeterminable satisfactorily; low; or none. . 43 Reorganizations subsequent to January 2, 1913 42 Deduction, specific: Citizens or residents 26, 40 Domestic corporations 2G, 39 Domestic partnerships 2b, 40 Foreign corporations; none ""^ Foreign partnerships; none 23 Nonresident aliens; none '^^ -14 INDEX. . Paragrap»J. Definitions 1 Assets and liabilities in connection ^Yith invested capital of individuals 169 Corporal ion 2 Dividend 10 ' ' Domestic " 3 • ' Foreign " 3 Intangible property ' 103 Money or other property borrowed 100 Nominal capital 170, 174 ' Prewar period " ' 6 Tangilile property 104 Taxable year 5 "Trade" or "business" — Corporations and partnerships 7 Individuals 8 "United States" 4 Depletion in relation to invested capital 93 Adjustment of, in connection with surplus 149, 155 Correction necessary on annual balance sheet 127 Depreciation in relation to invested capital 93, 115 Adjustment of, in connection with surplus 149, 155 Correction on annual balance sheet 127 Development of good will, trade-marks, etc., charged to current expense; no readjustment permitted 152, 155 Devises; value of, is exempt from tax 58 Distributive interests of partnerships not taxable to members of partnerships. . 91 Dividend defined 10 Dividends deductible: Individuals 81 Corporations 64, 68 Partnerships 70, 72 Dividends received from foreign corporation which is subject to income tax . . 62, 82, 102 Domestic corporation defined {see also "Corporations") 3 Equipment originally charged as expense; readjustment of surplus account. . . 151 Estimated capital invested 33 Examples of tax computations. (See ' " Illustrations. ' ') Exceptional cases; invested capital 109 Exceptional profits because of the war; bearing on invested capital 175 Exempt from tax liability I7 Exempt income 57 Exemption; specific. (See "Deduction; specific") Expense involved in securing data for computation of invested capital by for- eign taxpayers unreasonable in view of amount of tax HI Expenses in relation to invested capital 93 Adjustment of book records in connection with surplus 149 Fees. (S^e "Salaries.") Fiscal year: First return for less than 12 months ' period 37 Invested capital not satisfactorily determinable 35, 55 Partially falling witliin 1916 36 Relation to taxable year 5 Fixtures originally charged as e.xpense; readjustment of surplus account 151 Foreign corporation stock in relation to invested capital 102, 129 INDEX. 45 Foreign corporations: Paragraph. Deduction; computation of .......>... ,.^^^....^ 61 Definition of 3 Income from sources witliin tlie United States taxable 61 Invested capital of; specifically 105, 111 Return 178 Liability to make 12 Specific deduction ; none 26 Tax; assessment and collection of 186 Liability to pay 12 Foreign dividends -..- 62.82.102 Foreign partnership: Deduction; computation of 41 Income from sources mtliin the United States taxable 61 Invested capital of; specifically 105. Ill Return 178 Liability to make - 14 Salaries of members 75 Specific deduction 26 Tax; assessment and collection of 186 Liability to pay 14 Fi-ancliises. (See also "Intangible property. ") 103 Furniture originally charged as expense; readjustment of surplus account 151 Gifts made; deductibi lity of by individuals 84 Gifts of tangible property ; value of may be included as surplus 146 Gifts; value of, is exempt from tax 58 Qood will (see "Intangible property ") . . ._. 103, 124, 152 Government bonds in relation to in vested capital 98, 129, 146 Government bonds; interest from: Issued prior to September 24, 1917, is exempt from tax 58 Issued subsequent to September 24, 1917, taxability of: Corporations 64 Partnerships 69 Hawaii considered as domestic 3 Hawaii considered part of United States 4 Holding companies 183, 185 Illustrations in computation of tax: Corporations 28 When deductions exceed 15 per cent of invested capital 31 Individuals; one or more trades or businesses with invested capital with salary in addition 83, 89 Individuals and partnerships; trade or business with invested capital 29 When deduction exceeds 15 per cent of invested capital 32 Income disproportionate to invested capital 113 Income during prewar period: Uow determined — , Corporations .' 65 Individuals 85 Partnershif)3 72 Not satisfactorily determinible; low; or none 43 Return of, not reqtiii ed v/licn 178 Income exempt 57 Income for taxable year, how determined : Corporations ('4 Individuals 71), :,0 Partnerships - - 69 46 INDEX. Paragraph. Income subject to tax, genoi-allj^ 21 Class A : No iu vested capital or nominal capital merely 22 Class B : Invested capital 23 Indebtedness, bonded, versus capitalization; bearing on invested capital 177 Indebtedness, evidences of construed to be tangil)le property 104 Indebtedness in relation to invested capital 99 Adjustment of annual balance sheet 122 Individuals: Accounting records 166 Books not kept 167 Books of account 166 Not kept 167 Change of ownership of business 42^ 107 Deduction; computation of 40 Exempt to extent engaged in certain businesses or occupations 20. GO Gifts made by; deductibility of 84 Government bonds; interest on 9,58,82 Income taxable — Classification of .^..^^ 21 How determined when there is invested capital 80 How determined when there is no invested capital or nominal capital merely i 79 Intangible property; valuation of, in connection with invested capital 164 Invested capital; how measured 158 Rule for computing 166 Invested capital not satisfactorily determinable 51 Returns in such cases .* 56 Investments merely; profits from 9 Isolated, incidental and infrequent transactions ._ 9 Married woman may make separate retiirn 182 Nonresident aliens. {See "Nonresident aliens. ") Partnerships ; members of — Distributive interests 91 Salaries received from partnership 76, 92 Prewar income — How determined when there is invested capital 85 Not satisfactorily determinable; low; or none 43 Profits earned during taxable year and retained in trade or business 165 Reorganizations subsequent to Januarj?- 2, 1913 42 Reorganizations subsequent to March 3, 1917 107 Returns ]78 Liability to make 15 Rule for computing invested capital 166 Salaries considered ' income from trade or business having n o invested capital or nominal capital merely 22, 79 Salaries paid to members of partnerships by the firm 76, 92 Salaries paid to selves 86 Prewar period 90 Salaries paid to members of partnerships by the firm 76, 92 Salaries paid to selves by individuals 86 Prewar period '. 90 Specific deduction 26,40 Tangible property; valuation of, in connection with invested capital 159 INDEX. 47 Individuals — Continued. . Paragraph. Tax; assessment and collection of 186 Liability to pay 16 Taxable year for indi\ddiials 5 Trade or business: Defined 5 Different businesses separately taxed according to classification of income 25 More than one trade or bnsiness 1G8 Insurance companies; invested capital of 156 Intangible property: Appreciation in value of; correction of annual balance sheet 126 Appreciation in value through development; relation to invested capital. . 177 Defined 103 Development of, having been charged aa current expense 152, 155 Valuation of, as iuA'ested capital of an individual 164 Valuation of, when purchased with cash or tangilile property 144 Correction of annual balance sheet 124 No adjustment of, on account of surplus account 152, 155 Payment for, in stock or bonds not considered as payment in cash or tangible property 104 Valuation of, when purchased with stock or shares: Application of the 20 per cent limitation 138 Correction of annual balance sheet 117 Mixed tangibles, intangibles, patents, and copyrights 140 Nonpar value stock 139 Prior to March 3, 1917 137 Interest on loans to partnership by mcml jers thereof 77 Interest on obligations of State and ]io]itical subdivisions thereof is exempt from tax 58 Interest on ol>ligations of United States: Issued prior to September 24, 1917 : E.xempt from tax 58 Issued subsequent to September 24, 1917: Taxability of: Corporations 64 Individuals 82 Partnerships 69 Invested capital 93 Accounting; defective 110, 149, 155 Accounting; ultraconservative Ill Adjustment of annual balance sheet 117 Agents and brokers; nominal capital 173 Amortization 115 Appreciation in value of capital assets 93, 126, 177 Tangible property acquired prior to January 1 , 1914 134 Averaging by months 94 Balance sheet required annually from corporations and partnerships 131 (.-orrections necessary 117 Invested capital determined on basis of balance sheet as corrected 129 lionds in relation to invested capital 98, 101, 177 Surplus or undivided profits invested in 14G Tangible and intangible property; bonds issued for mixed aggregate of 140 Businesses which will not be deemed to have nominal capital 174 Capital versus invested capital 112, 172, 174 Capital assets; appreciation in value of 93, 126, 177 Tangible property acquired prior to January 1, 1914 134 48 INDEX. Invested Capital — Cantinucd. Paragraph. Ca]Mlalization small or negligible; bearing on invested capital 174 Commission houses and merchants 173 Computation of, rule — Corporations and partnerships 116 Individuals 1G6 Copyrights; valuation of when paid for in stock or shares 136 Correction of anniial balance sheet 118, 119 Correction of annual balance sheet 117 Defined as invested capital of present owner 93 Depletion of property 93 Adjustment of, in connection with surplus 149, 155 Depreciation of 2:)roperty 93, 115 Adjustment of, in connection with surplus 149, 155 Exceptional cases 109 Expense involved in seciiring data for computation of invested capital in case of foreign taxpayers unreasonable in view of amount of tax Ill Expenses incurred 93 Adjustment of, in connection with surplus 149, 155 Foreign corporation stock 102, 129 Foreign corporations specifically 105, 111 Foreign partnerships specifically 105, 111 Good will 152 Correction of annual balance sheet 124 Is intangible property 103 Income disproportionate to invested capital 113 Indebtedness 99 Indi\dduals specifically 158 Rule for computing 166 Insurance companies 156 Intangible property: Appreciation in value of, because of development, etc 12G, 177 Correction of annual balance sheet 117 Defined 103 Valuation when paid for in cash or tangibles ] 44 Payment in stock or bonds not considered payment in cash or tan- gible property 104 Valuation when paid for in stock or shares 137 Mixed tangibles, intangibles, patents, etc 140 Nonpar value stock 139 Intangible property ; valuation of as invested capital of an individual 164 Items not allowed to be included 97 Liquidation of original capital 93 Losses sustained 93 Adjustment of, in connection with surplus * 149, 155 Mixed aggregate of tangible and intangible property and patents and copy- rights when paid for in stock or shares (or stock or shares and bonds or other obligations) 140 Correction of annual balance sheet 118 Money or other money borrowed not to be included 99 The term defined 100 Mutual insurance companies 156 No invested captial {see "Nominal capital"). Noioinal capital {see "Nominal capital"). INDEX. 49 Invested capital — Continued. Paragraph. Nonpar value stock; purchase of intangible property therewith. 139 Nonresident aliens specifically 105, 111 Not satisfactorily determinable , 33, 51, 109 Fiscal year basis 35, 55 Returns in .such cases 57 Obsolescence of property. , 93, 115 Adjustment of in connection with surplus 149, 150 Paid in surplus 116. 147 Patents and copjTiglits ; valuation of when paid for in stock or shares 136 Correction of annual balance sheet 118, 119 Prewar period 108 Profits earned during taxable year in case of an indi^'idual 165 Profits ; exceptional because of war conditions ; bearing on invested capital . 175 ' Reorganizations subsequent to: January 2, 1913 106 March 3, 1917 ] 07 Return of for prewar period not reqiured ; when 178 Return of for taxable year 181 Stock issued or exchanged for property, returned to corporation as gift or for consideration considerably less than par 132 Correction of annual balance sheet 121 Stock insurance companies 157 Stocks and bonds in relation to invested capital 98, 101, 129, 177 Foreign corporation stock 102, 129 Surplus or undivided profits invested in 146 Surplus in relation to invested capital 93, 116, 146 Earned during any prewar year 145 Earned during taxable year 145 Investment in securities, tax-free and otherwise 146 Paid-in surplus IIC, 147 Readjustment of surplus account 149, 155 Tangible property considered as surplus when 147 Tangible property considered as surplus when 147 Tangible property ; items construed to be : 104 Valuation when paid for in stock or shares 134 Correction of annual balance sheet 118 Mixed tangibles, intangibles, patents, etc 140 Tangible property valuation of, as invested capital of an individual 159 Tax-^free securities 98, 101, 129, 177 Surplus or undivided profits invested in 146 Trade or business having invested capital (See "Invested capital, trade or business having"). Undivided profits in relation to invested capital 93,116,146 Earned during any prewar year 145 Earned during taxable year 145 Invested in securities, tax-tree and otherwise 146 Paid in surplus 147 Readjustment of surplus account 149, 155 Tangible property considered as siuplus when 147 Invested capital — trade or business having Constructive capital for application of rates deduction, computation of 38 Tax rates 27 Invested capital versus capital 172, 174 50 INDEX. Paragraph. Investment of surplus in securities, tax-free and otherwise 146 Investments merely; profits from two indi viduals 9 January 2, 1913; reorgaiiizatious subsequent to 42 1 nvested capital for prewar period 106 January 1, 1914; tangible property paid in for stock or shares: Prior to this date 134 Appreciation in value of assets allowed 134 Subsequent to this date 135 Judges of United States; salary of, is exempt from tax 58, 60 Leaseholds construed to be tangible prop3rty 104 Life insurance; proceeds are exempt from UvX 58 Limited partnership considered a corporation 2 Loans to partnership by members thereof; interest on: Taxable year 77 Prewar period 78 Losses in connection with invested capital 93 Adjustment of books in connection with surplus 149 March 3, 1917; intangible property purchased with stock or shares prior to 137 Application of the 20 per cent limitation 138 Non-par- value stock 139 March 3, 1917; mixed property (tangible or intangible) purchased with stock or shares 140 March 3, 1917 ; reorganizations subsequent to ; invested capital 107 Married woman may make separate return 182 Mixed aggregate of tangibles, intangibles, patents, and copyrights purchased with or paid for in stock or shares (or stock or shares and bonds or other obli- gations) ; valuation of 140 Correction of annual balance sheet 118 Money or other propertj^ borrowed not to be included in invested capital 99 The term defined. 100 Mutual insurance companies, invested capital of 156 Is'et income subject to tax; classification of 21 Class A: JSo invested capital or nominal capital merely 22 Class B: Invested capital 23 Net income subject to tax; how determined: Corporations 64 Individuals 79, 80 Nonresident aliens 79, 80 Partnerships G9 Nominal or no invested capital 170 Agents and brokers 173 Businesses which will not be deemed to have nominal capital 174 Commission houses and merchants 173 Large capital does not preclude nominal invested capital 172 Personal service, occupation, profession, trade, and business 170 Salaries, wages, fees, etc., of individuals 22, 79 Tax rates 26 Nonpar value stock in connection with purchase of intangible property with stock 139 Nonresident aliens (see " Individuals" forgeneral provisions): Deduction ; computation of 41 Income from sources within the United States taxable 61, 79, 80 Income of, subject to tax ; how determined 79, 80 Invested capital of, specifically 105 INDEX. 51 Nonresident aliens — Continued. Paragraph. Keturn >. , 178 Liability to make 16 Salaries paid to selves 87 Specific deduction ; none 36 Tax; assessment and collection of 186 Liability to pay 16 Notes consti'ued to be tangible property 104 Obsolescence of property in relation to invested capital 93, 115 Correction of annual balance sheet 127 Adjustment of in connection with, surplus 149 Occupations involving personal service 170 Organizations subsequent to January 2, 1913, .which are substantially a con- tinuation of a former business 42 Invested capital for prewar period 106 Correction of annual balance sheet 125 Original capita! , liquidation of 93 Ownei'ship of property, income arising merely because of 9 Paid-in surplus 116, 147 Parent corporations , 183, 185 Partial year, retiu'n and pajonent of tax for 37 Partnerships: Balance sheet required annually on last day of taxable year 131 Corrections required 117 Invested capital determined on basis of balance sheet as corrected 129 Deduction, computation of 40 Distributive interests not taxable to members 91 Dividends deductible 70, 72 Exempt partnerships 19 Fiscal year. 5 Less than 12 months' period 37 Partially within 1916 36 Foreign partnerships ; return and tax liability 14 Si>ecific deduction; none. 26 Income taxable: Classification of 21 How detennined for prewar period 72 How detennined for taxable year 69 Interest on loans by members to the firm : 77 Invested capital not satisfactorily determinable 51 Fiscal year basis 55 Returns in such cases 56 Invested capital 93 Rule for computing (see aZso "Invested capital") 116 Investment of surplus in securities, tax-free and otherwise 146 Limited partnerships considered aa corporations q.v 2 Nominal capital. (6'ce "Nominal capital.") ftfewar income — How determined V2 Not satisfactorily determinable; low; or none 43 Salaries of, and interest paid to, members 78 Reorganization.s subsequent to — January 2, 1913 106 March 3, 1917 107 52 I^'DEX. Par tn ei-sh i ps- Cont i liued . Paragraph. Returns 178 T.ialility to make 13 Salaries of mombers — Ded uctible by firm 71, 73 Prewar period 78 Taxable to members 70, 92 Specific deduction 2G, 40 Tax, assessment and collection of 186 Liability to pay 13 Taxable year 5 Income of, how determined 69 Trade or business — All trades or businesses considered as one 24 Defined 7 Patents and copyrights paid in for stock or shares; valuation of 136 Correction of annual balance sheet 118, 119 Mixed tangibles, intangililes, patents, and copyrights 140 Patterns origiTially charged to expense; readjustment of surplus account. 151, 153, 155 Personal service occupations, professions, trades, and businesses, nominal capital 170 Plant expenditures charged originally to expense'; readjustment of surplus account -> 151 President of United States, salary of, is exempt from tax 58, 60 Prewar period : Defined 6 Income of, how determined — Corporations 65 Individ uals when there is invested capital 85 Salaries paid to selves 90 Partnerships 72 Salaries of, and interest paid to, members 78, 91 Income not determinaljle satisfactorily ; low ; or none during prewar period . 145 Invested capital, manner of determining 108 Surplus earned during any prewar year 145 Professions; nominal capital 170 Profits earned during taxable year and retained in business in case of individ- uals {see "Undivided profits" for corporaticns and partnerships) 165 Profits, exceptional becau^ of war conditions; bearing'on invested capital 175 Promissory notes construed to be tangible property 104 Reorganizations since January 2, 1913 42 Correction of annual balance sheet 125 Invested capital for prewar period 108 Reorganization since March 3, 1917 ; invested capital 107 Correction of annual balance sheet 125 Returns 178 Consolidated return 185 Fiscal year - 5 Less than the regular 12 months' period 37 Partially falling within 1918 38 Holding companies 183, 185 Invested capital not satisfactorily determinable; returns in such cases 58 Liability to make return — Citizens and residents 15 Domestic corporations 11 I t I INDEX. 53 Returns — Continued. Liability to make return — Continued. Paragraph. Domestic partnerships 13 Foreign corporations 12 Foreign partnerships - 14 INronresident aliens '. IG Married woman may make separate return 182 Parent corporations 183, 185 Period covered 5, 37 Statement of proposed additions to surphis on account of readjustments- to be inclnde*d on return 154 Subsidiaries 183, 185 Taxable year 5 Fiscal year partially falling within 1916 36 Less than the regular 12 months'* period 37 Rule for computing invested capital: fbrporations and partnerships = IIG Individuals 166 Salaries considered income from trade or business ha^dng no invested capital or nominal capital only 22, 79 Exempt salaries 58, 60 Minimum amounts received as salaries taxable 26, 40 Partnerships; salaries of members of 78, 92 Self, salary paid to 88 United States, State, etc., employees f;0 Salaries pitid members of partnership by the firm : Dedirctible by hrm 71, 73 ForeigH partnerships • 75 Prewar period 78 Taxable to members 76, 92 Salary paid to self 86 Nonresident aliens 87 Prewar period 90 Securities in relation to invested capital 9S, 101, 129, 177 Foreign corporati-on stock 102, 129 Surphis or undivided profits invested in securities, tax-free and otherwise. 146 Tangible property; securities construed to be 104 Services; occuparions, professions, trades, businesses, involving personal serv- ice ; nomrnal capita? 170 Specific exemption or deduction. {Sec "Deduction, specific") State, etc., employees; salaries of, are exempt from tax 60 State obHgations; interest on, is exempt from tax (see a?so" Tax-free securities") 58 Stock or shares issued or exchanged for property: Correction of annual balance sheet in connection Tvith 11 71f Intangible property, valuation of. 137 Application, of 20 per cent limitation 138 Nonpar value stock , '■ 1 39 Payment made in stock not considered as payment made in cash or tangible property ' t)'l Mixed tangibles, intangibles, patents, and copyrights HO Patentsaml copj-rights; valuation of. , l'^6 Stock returned to corporation as gift or for consideratien considerably less than par I "^ Tangible property; valuatron of i 34 Stock insurance companies; invested capital of 157 54 INDEX. raragraph. Stock without par value; purchase of intangible property therewith 139 Stocks and bonds in relation to invested capital 98, 101, 129, 177 Foreign corporation stock 102, 129 Government bonds 98, 146 Surplus or undivided profits invested in securities, tax-free and otherwise. 98, 146 Tangible property; stocks and bonds construed to be 104 Subsidiaries 183, 185 Subtractions on annual balance sheet in computing "invested capital " 117 Surplus in relation to invested capital 93, 116, 146 Earned during taxable year 145 Earned during any prewar year 145 Government bonds; investments in 98, 146 Individuals; profits earned during taxable year and retained in business. . 164 Invested in tax-free and other securities 98, 146 Paid-in surplus 116, 147 Readjustment of surplus account 149, 155 Tangible property — Cost of, originally charged to expense; readjustment of surplus ac- count 151, 153, 155 When to be included as surplus 147 Tangible property: Appreciation in value of; correction of annual balance sheet 126 Cost of, originally charged to expense; readjustment of surplus account 151, 153, 155 Intangibles purchased with 144 Items construed to be 104 Purchased for nominal sum; excess of value over purchase price may be included as surplus 147 Surplus; when tangible property may be included as 147 Valuation of, as invested capital of individual 159 Valuation of, when purchased with stock or shares — Correction of annual balance sheet .• . . . 118ff Mixed aggregate of tangibles, intangibles, patents, and copyrights 140 Prior to January 1, 1914 134 Subsequent to January 1, 1914 135 Tax ; assessment and collection of 186 Parent, subsidiary, and affiliated companies 183, 185 Tax; computation of 21 Constructive capital invested 33 Deduction exceeding 15 per cent of capital invested 30 Fiscal year partially within 1916 36 Illustrations — Corporations 28 When deduction exceeds 15 per cent of invested capital 31 Indi^'idua]s and partnerships; trade or business with invested capital. 29 When deduction exceeds 15 per cent of invested capital 32 Indi^-iduaIs; one or more trades or businesses with invested capital with salar>' in addition 83, 89 In case of invested capital 27 In case of no invested capital or nominal capital merely 26 Less than 12 months' period 37 Tax-free securities 98, 101, 129, 177 Surplus or undivided profits invested in 146 INDEX. 55 Paragraph. Tax liability ....*. , 11 Citizeus and residents 15 Corporations 11 Foreign corporations 12 Exemptions 17 Nonresident aliens , 16 Partnerships 13 Foreign partnerships 14 Tax rates: In case of invested capital 27 In case of no invested capital or nominal capital merely : 26 Taxable year 5 Fiscal year partially falling within 1916 36 First return for less than 12 months' period 37 Income of, determined how: Individuals 79, 80 Corporations 6-1 Partnerships. 09 Surplus earned during 145 Profits in case of individual 165 Taxes paid Avithin calendar years 1911, 1912, and 1913 by corporations to be included in taxable income 05,67 Tools originally charged as expense; readjustment of surplus account 151 Trade brands (see also "Intangible property ") 103 Trade-marks are intangible property (see also "Intangible property ") 103 Trade or business defined : Corporations and partnerships 7 A!l trades or businesses con.sidered as one 24 Individuals 8 Different businesses separately taxed according to classification of income 25 Distributive interests of members of partnersliips 91 More than one trade or business 168 Salaries, wages, compensation, etc 22, 79, 88 Members of partnerships 70, 92 Invested capital business in general 1 79 Nominal capital business in general 174 Personal service; nominal capital 170 Twenty per cent limitation on intangible property purchased Avilh stock or shares 138 Undivided profits in relation to invested capital {see "Surplus in relation to invested capital ") 93, 116, 146 United States bonds in relation to invested capital 98, 146 United States bonds interest on. (See "Government bonds. ") "United States " defined 4 Valuation of intangible assets purchased with cash or tangible property 144 Appreciation in value of, through development; bearing on invested capital 177 Correction of annual balance sheet 124 Valuation of property paid for in stock or shares: CoiTection of annual balance sheet 117ff Intangibles 137 Appreciation through development; bearing on invested capital 177 Stock wdthout par value 139 56 INDEX. Valuation of property paid for in stocks or shares — Continued. Paragi Mixed tangibles, intangibles, patents and copyrights .•. I'atents and cojiyrights 136, Stock returned to corporation as gift or for consideration considerably below par Tangible War, exceptional profits: Bearing on invested capital War, inability to recognize amortization, obsolescence, or exceptional deprecia- tion becaiise of Vear, taxable Fiscal year partially falling within 1916 Return for less than 12 months' period o LAW LIBRARY fVERSITY OF GAUP^RMA LOS ANGBbES Manufoctured by ^ ^YLORD BROS, tnt I Syracuse, N.Y. I Stockton, CoNf. fftCILlTV 4 ,' .-v :v^^:;'V, t :■:'■; ^^^V;/.-.)