UNIVERSITY OF CALIFORNIA LOS ANGELES SCHOOL OF LAW LIBRARY REGULATIONS No. 41 RELATIVE TO THE WAR EXCESS PROFITS TAX IMPOSED BY THE WAR REVENUE ACT, APPROVED OCTOBER 3, 1917 Released for Publication February 4, 1918 Reprinted and Distributed by The National City Company National City Bank Building, New York PHILADELPHIA, PA. BOSTON, MASS. BALTIMORE, MD. CHICAGO, ILL. CORRESPONDENT OFFICES PITTSBURGH, PA. ALBANY, N. Y. BUFFALO, N. Y. CLEVELAND, O. WILKES-BARRE. PA. PORTLAND, ORE. SAN FRANCISCO, CAL. DETROIT, MICH. NEW ORLEANS, LA. KANSAS CITY, MO. ATLANTA, GA. ST. LOUIS, MO. WASHINGTON, D. C. SEATTLE, WASH. LOS ANGELES, CAL. MINNEAPOLIS, MINN. DENVER, COLO. LONDON, E. C, 2; ENG. s 56 r n s. 4-1 \9l INDEX R Page Abatement claim on Form 47 when making return in cases of prewar income being undeterminable satisfactorily; low or none H Accounting: Defective; bearing on invested capital..~23 Adjustment of in connection with sur- plus 28, 29 Individuals: Books kept 31 Books not kept 31 Ultraconservatism in past year 23 Accounts payable in relation to invested capital 20 Accounts receivable construed to be tan- gible property 21 Additions on annual balance sheet in com- puting "invested capital" 23 Adjustments' required on annual balance sheet of corporations and partnerships 23 Invested capital determined on basis of balance sheet as adjusted 24 Affiliated corporations return, etc 33, 34 Agents and brokers versus commission houses and merchants 32 Agents: Nominal capital 32 Alaska 3 Amortization in relation to invested capital23 Annual balance sheet (See "Balance Sheet") 23, 24, 25 Appreciation in value of assets in connec- tion with invested capital 19, 33 Correction of annual balance sheet 24 Tangible property acquired prior to Jan- uary 1, 1914 25 Assessment and collection of tax 34 Parent, subsidiary and affiliated corpora- tions 34 Assets and liabilities in connection with invested capital of individuals 31 Averaging invested capital; method of 20 Balance sheet required annually of cor- porations and partnerships 25 Corrections necessary 23 Invested capital determined on basis of balance sheet as corrected 24 Bequest, value of is exempt from tax 13 Bills payable in connection with invested capital 20 Bills receivable construed to be tangible property 21 Bonds may be required when claim for abatement is made on making return in cases of prewar income being unde- terminable satisfactorily, low or none. .11 Bonded indebtedness versus capital; bear- ing on invested capital 33 Bonds in relation to invested capital 20, 33 Intangible property paid for in bonds not considered as paid for in cash or tan- gible property 21 Surplus or undivided profits invested in tax-free bonds 27 Tangible and intangible property; bonds issued for mixed aggregates of 26 Tangible property; bonds construed to be 21 Books; defective or poorly kept; bearing on invested capital : 23 Adjustment of in connection with sur- plus 23 Books of account; individuals 31 Not kept 31 Borrowed money and other property in re- lation to invested capital *>0 Brokers; nominal capital 32 Business defined (See "Trade or Business") Invested capital: business which will be deemed not to have nominal capital 32 Nominal capital: businesses involving personal service 32 Capital invested (See "Invested capital") No invested capital (See "Nominal capi- tal") Nominal Capital (See "Nominal capital") Capital of considerable amount does not preclude nominal capital 32 Capital versus "invested capital" 23, 32 Capitalization, small or nominal; relation to invested capital 32 Change of ownership since January 2, 1913 10, 22 Change of ownership since March 3, 1917; invested capital 22 Page Citizens and residents (See "Individuals") Claim for abatement when making return in cases of prewar income being undeter- minable satisfactorily; low or none 11 Class A income 6 Rate of tax 6 Class B income 6 Rate of tax 6 Classification of net income subject to tax 6 Commission merchants versus agents and brokers in connection with nominal and invested capital 32 Compensation (See "Salaries") Computation of deduction 9 (See also "Deduction: computation of") Computation of invested capital; rule 23 (See also "Invested Capital") Computation of tax (See "Tax: computa- tion of") Consolidations since January 2, 1913 10, 22 Consolidations since March 3, 1917; invest- ed capital 22 Constructive capital for application of rates 8 Copartnerships (See "Partnerships") Copyrights paid in for stock or shares; valuation of 25 Correction of annual balance sheet 24 Mixed tangibles, intangibles, patents and copyrights 26 Corporations defined 3 Corporations: Affiliated corporations 21, 34 Balance sheet as of last day of taxable year to be submitted 25 Corrections required 23 Invested capital determined on basis of balance sheet as corrected 24 Business defined 4 All trades or businesses considered one 4 Consolidated since January 2, 1913 10, 22 Consolidations since March 3, 1917 22 Deduction; computation of 7 Exempt corporations 5 Fiscal year Invested capital not satisfactorily deter- minable ...12 Less than 12 months' period 9 Partially within 1916 9 Foreign: return and tax liability 5 Holding companies 33, 34 Income taxable: Classification 6 Invested capital 19 Rule for computing 23 (See also "Invested Capital") Investment of surplus in securities, tax- free and otherwise 27 Net income: Prewar period 14 Taxable year 13 Nominal capital (See "Nominal Capital") Parent corporations 33, 34 Prewar income: How determined 14 Not satisfactorily determinable, low or none 10 Reorganizations subsequent to January 2, 1913 10 Invested capital for prewar period 22 Reorganizations subsequent to March 3, 1917 22 Return 33 Liability to make 5 Parent, holding and affiliated com- panies 33, 34 Subsidiaries 33, 34 Specific deduction 6 Subsidiaries 33, 34 Surplus (See "Surplus in relation to in- vested capital") Tax: Assessment and collection of 34 Liability to pay 5 Parent, subsidiary and affiliated com- panies 33, 34 Rates 6 Taxable year 3 Trade or business defined 4 All trades or businesses considered as one 6 Undivided profits (See "Undivided profits in relation to invested capital") Index — Continued Page Corrections required on annual balance sheet of corporations and partnerships. .23 Invested capital determined on basis of balance sheet as corrected 24 Current liabilities in relation to invested capital 20 Deduction; computation of 9 Exceeding 15% of capital 7 In case of invested capital satisfactorily determinable 9 Citizen or resident individuals 10 More than one trade or business 31 Domestic corporations 9 Domestic partnerships 10 Foreign corporations 10 Foreign partnerships 10 Nonresident aliens 10 More than one trade or business 31 In case of invested capital not satisfac- torily determinable 12 Prewar period income being undetermin- able satisfactorily; low; or none 10 Reorganizations subsequent to January 2, 1913 10 Deduction, specific: Citizens or residents 6, 10 Domestic corporations 6, 9 Domestic partnerships 6, 10 Foreign corporations; none 6 Foreign partnerships; none 6 Nonresident aliens; none 6 Definitions: Assets and liabilities in connection with invested capital of individuals 31 Corporation 3 Dividend 5 "Domestic" _ 3 "Foreign" 3 Intangible property 21 Money or other property borrowed 20 Nominal capital 32 "Prewar period" 4 Tangible property 21 Taxable year 3 "Trade or "business": Corporations and partnerships 4 Individuals 4 "United States" 4 Depletion in relation to invested capital. ...19 Adjustment of, in connection with sur- plus 28, 29 Correction necessary on annual balance sheet Depreciation in relation to invested capi- tal 19, 23 Adjustment of, in connection with sur- plus 28, 29 Correction on annual balance sheet 24 Development of good-will, trade-mark, etc., charged to current expense; no read- justment permitted 29 Devises; value of, is exempt from tax 13 Distributive interests of partnerships not taxable to members of partnerships....l9 Dividend d< fined _ 5 Dividends deductible: Individuals 17 Corpora t ions 13, 1 4 Partnerships 15 Dividends received from foreign corporation which is subject to income tax. .14, 17, 21 Domestic corporation defined 3 (See also "Corporations") Equipment originally charged as expense; readjustment of surplus account 2S Estimated capital invested 8 Examples of tax computations (See "Illus- trations") rcxception.il cases; invested capital 22 Exceptional profits because of the war; bearing on invested capital 32 Exempt from tax liability 5 Exempt income 13 Exemption; specific (See "Deduction; spe- cific") Expense involved in securing data for com- putation of invested capital by foreign taxpayers unreasonable in view of amount of tax Page Expenses in relation to invested capital. ...19 Adjustment of book records in connec- tion with surplus _ 28 Fee (See "Salaries") Fiscal year: P'irst return for less than 12 months' period 9 Invested capital not satisfactorily deter- minable 9, 12 Partially falling within 1916 9 Relation to taxable year 3 Fixtures originally charged as expense; readjustment of surplus account 28 Foreign corporation stock in relation to in- vested capital 21, 24 Foreign corporations: Deduction; computation of ._ _ 10 Definition of 3 Income from sources within the United States taxable 13 Invested capital of; specifically 21, 38 Return 33 Liability to make 5 Specific deduction; none „ _ 6 Tax; assessment and collection of 34 Liability to pay 5 Foreign dividends 13, 17, 21 Foreign partnership: Deduction; computation of _ _ 10 Income from sources within the United States taxable 13 Invested capital of; specifically 22, 23 Return 33 Liability to make 5 Salaries of members 15 Specific deduction 6 Tax; assessment and collection of 34 Liability to pay 5 Franchises 21 (See also "Intangible Property") Furniture originally charged as expense; readjustment of surplus account 28 Gifts made; deductibility of by individuals .17 Gifts of tangible property, value of may be included as surplus 27 Gifts; value of, is exempt from tax 13 Good will 21, 24, 29 (See "Intangible Property") Government bonds in relation to invested capital 20, 24, 27 Government bonds; interest from Issued prior to September 24, 1917, is exempt from tax 13 Issued subsequent to September 24, 1917, taxability of: Corporations 13 Partnerships 14 Hawaii considered as domestic 3 Hawaii considered as part of United States 3 Holding companies 33, 34 Illustrations in computation of tax: Corporations 7 When deductions exceed 15% of in- vested capital 8 Individuals; one or more trades or busi- nesses with invested capital with sal- ary in addition 17, 18 Individuals and partnerships; trade or business with invested capital 7 When deduction exceeds 15% of in- vested capital 8 Income disproportionate to invested capital 23 Income during prewar period: How determined: Corporations 14 Individuals 18 I 'artnershlps 18 Not satisfactorily determinable; low; or none 10 Return of, not required when 38 Income exempt 13 Income for taxable year how determined: Corporations 13 individuals 18 I 'a rtnerships 14 Income subject to tax, generally • Class A: No invested capital or nominal capital merely 8 Class B: Invested capital 8 Indebtedness, bonded versus capitalization; bearing on invested capital 33 Index — Continued Page Indebtedness, evidence of construed to be tangible property 21 Indebtedness in relation to invested capital 20 Adjustment of annual balance sheet 24 Individuals: Accounting records 31 Books not kept 31 Books of account 31 Not kept iX~«l Change of ownership of business 10, 11 Deduction; computation of 10 Exempt to extent engaged in certain businesses or occupations 5, 13 Gifts made by, deductibility of 17 Government bonds; interest on 4, 13, 17 Income taxable: Classification of 6 How determined when there is invested capital 16 How determined when there is no in- vested capital or nominal capital merely - 16 Intangible property; valuation of in connec- tion with invested capital 30 Invested capital; how measured 30 Rule for computing 31 Invested capital not satisfactorily deter- minable 12 Returns in such cases - 12 Investments merely; profits from 4 Isolated, incidental and infrequent trans- actions ;--- | Married woman may make separate ret n33 Nonresident aliens (See "Nonresident aliens") Partnerships; members of Distributive interests 19 Salaries received from partnership ....16, 19 Prewar income: How determined when there is invested capital 18 Not satisfactorily determinable; low; or none 10 Profits earned during taxable year and retained in trade or business 30 Reorganizations subsequent to January 2, 1913 10 Reorganizations subsequent to March 3, 1917 22 Returns 33 Liability to make 5 Rule for computing invested capital 31 Salaries considered income from trade or business having no invested capital or nominal capital merely 6, 16 Salaries paid to members of partner- ships by the firm 16, 19 Salaries paid to selves 18 Prewar period IS Salaries paid to members of partnerships by the firm 16, 19 Salaries paid to selves by individuals 18 Prewar period 18 Specific deduction 6, 10 Tangible property; valuation of in connection with invested capital 30 Tax; assessment and collection of 34 Liability to pay 5 Taxable year for individuals - 3 Trade or business: Defined 4 Different businesses separately taxed according to classification of income 6 More than one trade or business 31 Insurance companies; invested capital of.. ..29 Intangible property: Appreciation in value of; correction of annual balance sheet 24 Appreciation in value through develop- ment; relation to invested capital 33 Defined 21 Development of having been charged as current expense 29 Valuation of as invested capital of an individual 30 Valuation of when purchased with cash or intangible property 27 Correction of annual balance sheet 24 No adjustment of on account of sur- plus account 26, 27 Pas* Intangible Property: Payment for in stock or bonds not con- sidered as payment in cash or tan- gible property - 2 Valuation of when purchased with stock or shares: „. Application of the 20% limitation ^6 Correction of annual balance sheet 23 Mixed tangibles, intangibles, patents and copyrights 26 Non-par value stock -26 Prior to March 3, 1917 26 Interest on loans to partnership by mem- bers thereof 1" Interest on obligations of State and political subdivisions thereof is exempt from tax 13 Interest on obligations of United States: Issued prior to September 24, 1917; ex- empt from tax 1* Issued subsequent to September 24, 1917; taxability of: Corporations 1' Individuals 17 Partnerships 1* Invested Capital •- —19 Accounting; defective 23, 28, 29 Accounting; ultra-conservative 23 Adjustment of annual balance sheet 23 Agents and brokers.... nominal capital 32 Amortization 23 Appreciation in value of capital assets 19, 24, 33 Tangible property acquired prior to January 1, 1914 ~ 25 Averaging by months 20 Balance sheet required annually from corporations and partnerships 25 Corrections necessary 23 Invested capital determined on basis of balance sheet as corrected 24 Bonds in relation to invested capital.— 20, 33 Surplus or undivided profits invested in 27 Tangible and intangible property; bonds issued for mixed aggregate of 26 Businesses which will not be deemed to have nominal capital 32 Capital versus invested capital 23, 32 Capital assets; appreciation in value of 19, 24, 33 Tangible property acquired prior to January 1, 1914 25 Capitalization small or negligible; bear- ing on invested capital 32 Commission houses and merchants 32 Computation of: rule Corporations and partnerships 23 Individuals ------- :— 31 Copyrights; valuation of when paid for in stock or shares 26 Correction of annual balance sheet 24 Correction of annual balance sheet 23 Defined as invested capital of present owner 1° Depletion of property 19 Adjustment of in connection with sur- rjlus ___ _ % 6 Correction of annual balance sheet 24 Adjustment of in connection with surplus^ Occupations involving personal service ...32 Organizations subsequent to January 2, 1913, which are substantially a contin- uation of a former business 10 Invested capital for prewar period 11 Correction of annual balance sheet 24 Original capital; liquidation of 19 Ownership of property; income arising merely because of 4 Paid-in surplus 23 > 28 Parent corporations 33, 34 Partial year; return and payment of tax for 9 Partnerships: Balance sheet required annually on last day of taxable year 25 Corrections required -23 Invested capital determined on basis of balance sheet as corrected 24 Deduction; computation of 10 Distributive interests not taxable to members — 19 Dividends deductible 15 Exempt partnerships 5 Fiscal year «j Less than 12 months' period 9 Partially within 1916 --- 9 Foreign partnerships: return and tax- liability % Specific deduction; none *> Income taxable: Classification of ■»--- « How determined for prewar period 15 How determined for taxable year 14 Interest on loans by members to the firmlb Invested capital not satisfactorily deter- minable 12 Fiscal year basis 12 Returns in such cases 12 Invested capital 1-j Rule for computing 2.J (See also "Invested Capital") Investment of surplus in securities, tax- free and otherwise 27 Limited partnerships considered as cor- porations 3 Nominal capital (See "Nominal capital") Prewar income: How determined 15 Not satisfactorily determinable; low; or none 10 Salaries of, and interest paid to, mem- bers 16 Reorganizations subsequent to: January 2, 1913 22 March 3, 1917 {% .21 .10 .24 .22 Returns 33 pense; readjustment of surplus account President of the United States, salary of is exempt from tax i4 Prewar period: , Defined ------ * Income of: how determined: Corporations -. TK""^ Individuals when there is invested cap- ital - }l Salaries paid to selves j» Partnerships -- ...............ad Salaries of, and interest paid to members .... ...lb, i» Income not determinable satisfactorily; low; or none during prewar period. .27 Invested capital; manner of determining..^ Surplus earned during any prewar year..2( Professions; nominal capital --- 6 * Profits earned during taxable year and re- tained in business in case of mdividual30 (See "undivided profits" for corporations and partnerships) Profits, exceptional because of war condi- tions; bearing on invested capitalL..^-' Promissory notes construed to be tangible property -- S"""Voia Reorganizations since January 2, I9id Correction of annual balance sheet Invested capital for prewar period . Reorganization since March 3, 1917, in- vested capital — ----- — ; " Correction of annual balance sheet £i Returns o "tpi af»Q i vGur - ----- o Less than the "regular 12 mos\ period 9 Partially falling within 1916 •••"■' Holding companies ............ ----;»*» ** Invested capital not satisfactorily deter- minable; returns in such cases 12 Liability to make return: Citizens and residents j> Domestic corporations «? Domestic partnerships •? Foreign corporations - j} Foreign partnerships » Nonresident aliens *~"~;v~«l Married woman may make separate retndd Parent corporations 6 % 6 l Period covered -- 6> ' Statement of proposed additions to sur- plus on account of readjustments to be included on return "ooQd Subsidiaries ia > 6 i Taxable year ----- -- ------- v-i— x Fiscal year partially falling within 191b 9 Less than the regular 12 mos. period 9 Rule for computing invested capital: Corporations and partnerships ^ Individuals -■ V" '"JT""™ Salaries considered income from trade or business having no invested capital or nominal capital only «>, ±t> Exempt salaries -.- -• i'";"~ a Minimum amounts received as salaries taxable * Partnerships -"salaries of members of 16, 19 Self; salary paid to •■ f? United States, State, etc., employees....... °" United aiaies, owic, ^., -"r--^-:- Liability to make 5 salaries paid members of partnership by Salaries of members: Deductible by firm !•> Prewar period ----- --*» Taxable to members 16, 19 Specific deduction ------ 6, 10 Tax; assessment and collection of 34 Liability to pay 5 Taxable year » Income of, how determined 14 Trade or business: All trades or businesses considered as one ^ Defined - 4 Patents and copyrights paid in for stock or shares; valuation of 2b the firm: Deductible by firm - ™ Foreign partnerships J" Prewar period i«"io Taxable to members J-°. j£ Salary paid to self " Nonresident aliens " Prewar period - ------- —•— — xo Securities in relation to invested capita^ ^ Foreign corporation stock •:-v 2 V 24 Surplus or undivided profits invested in securities tax-free and otherwise £1 Tangible property; securities construed to be 21 Index — Continued Page Services: occupations, professions, trades, businesses, involving personal service: nominal capital 32 Specific exemption or deduction (See "De- duction: specific") State, etc., employees; salaries of are ex- empt from tax 13 State obligations; interest on is exempt from tax 13 (See also "Tax-free securities") Stock or shares issued or exchange for property: Correction of annual balance sheet in connection with 23 Intangible property: valuation of 26 Application of 20% limitation 26 Non-par value stock 26 Payment made in stock not considered as payment made in cash or tan- gible property 21 Mixed tangibles, intangibles, patents and copyrights 26 Patents and copyrights; valuation of 26 Stock returned to corporation as gift or for consideration considerably less than par 24 Tangible property; valuation of 25 Stock insurance companies; invested capi- tal of 30 Stock without par value; purchase of in- tangible property therewith 26 Stocks and bonds in relation to invested capital 20, 24, 33 Foreign corporation stock 21, 24 Government bonds 20, 27 Surplus or undivided profits invested in securities, tax-free and otherwise 20, 27 Tangible property; stocks and bonds con- strued to be 21 Subsidiaries 33, 34 Subtractions on annual balance sheet in computing, "invested capital" 23 Surplus in relation to invested capital 19, 23, 27 Earned during taxable year 27 Earned during any prewar year 27 Government bonds; investments in. ...20, 27 Individuals; profits earned during taxable year and retained in business 30 Invested in tax-free and other securities 20, 27 Paid-in surplus 23, 28 Readjustment of surplus account 28, 29 Tangible property: Cost of originally charged to expense; readjustment of surplus account 2S.29 When to be included as surplus 28 Tangible property: Appreciation in value of: correction of annual balance sheet 24 Cost of originally charged to expense; readjustment of surplus account....28, 29 Intangible purchased with 27 Items construed to be 21 Purchased for nominal sum; excess of value over purchase price may be in- cluded as surplus 28 Surplus: when tangible property may be ini hided as 28 Valuation of as invested capital of indi- vidual 30 Valuation of when purchased with stock or shares: Correction of annual balance sheet 24 Mixed aggregate of tangibles, intan- gibles, patents and copyrights 26 Prior to January 1, 1914 Subsequent to January 1, 1914 25 Tax: assessment and collection of 34 Parent, subsidiary, and affiliated com- panies 33, 34 Tax: computation of 6 e capital invested 8 Deduction exceeding 15% of capital in- vested 7 Fiscal year partially within 1916 9 Illustrations: Corporations 7 When deduction exceeds 15% of in- vested capital - 8 Individuals and partnerships; trade or business with invested capital 7 When deduction exceeds 15% of in- vested capital _ 8 Pag« Individuals; one or more trades or busi- nesses with invested capital with salary in addition 17, 18 Tax: computation of _ 6 In case of invested capital 6 In case of no invested capital or nominal capital merely _ 6 Less than 12 months' period _ 9 Tax-free securities 20, 24, 33 Surplus or undivided profit invested in. ...27 Tax liability __ 6 Citizens and residents _ S Corporations _ _ S Foreign corporations ~ _ 5 Exemptions _ _ 6 Nonresident aliens 6 Partnerships i Foreign partnerships S Tax rates: In case of invested capital 6 In case of no invested capital or nom- inal capital merely 6 Taxable year: Fiscal year partially falling within 1916.... 9 First return for less than 12 months' period 9 Income of determined how: Individuals _ 16 Corporations 13 Partnerships 14 Surplus earned during _ 27 Profits in case of individual „ 30 Taxes paid within calendar years 1911, 1912 and 1913 by corporations to be in- cluded in taxable income 14 Tools originally charged as expense; read- justment or surplus account 28 Trade brands -.21 (See also "Intangible property") Trade-marks are intangible property 21 (See also "Intangible property") Trade or business defined: Corporations and partnerships 4 All trades or businesses considered as one 6 Individuals 4 Different business separately taxed ac- cording to classification of income.. 6 Distributive interests of members of partnerships 19 More than one trade or business 31 Salaries, wages, compensations, etc. 6, 16, 18 Members of partnerships 16, 19 Invested capital business in general 33 Nominal capital business in general 32 Personal service; nominal capital 32 Twenty per cent limitation on intangible property purchased with stock or shares26 Undivided profits in relation to invested capital 19, 23, 27 (See "Surplus in relation to invested capital") United States bonds in relation to invest- ed capital 20, 27 United States bonds; interest on (See "Government bonds") "United States" defined 8 Valuation of intangible asset purchased with cash or tangible property 27 Appreciation in value of through devolp- ment; bearing on invested capital 33 Correction of annual balance sheet 24 Valuation of property paid for in stock or shares: Correction of annual balance sheet 23 Intangibles 26 Appreciation through development; bearing on invested capital 33 Stock without par value 25 Mixed tangibles, intangibles, patents and copyrights 26 Patents and copyrights 26 Stock returned to corporation as gift or for consideration considerably below par 25 Tangible 25 War: exceptional profits: bearing on in- vested capital 32 War: inability to recognize amortization, obsolescence, or exceptional deprecia- tion because of 28 Year: taxable 3 Fiscal year partially falling within 1916.... 9 Return for less than 12 month' period... 9 REGULATIONS No. 41 RELATIVE TO THE WAR EXCESS PROFITS TAX Imposed by Title II, Act of October 3, 1917. TABLE OF CONTENTS. Articles Definitions ~ 1- 9 Corporations, partnerships, and individuals subject to the tax 10-13 Rates and computation of tax — 14-20 Computation of the deduction 21-24 Net income — General provisions 25-27 Net income — Corporations _ 28-29 Net income — Partnerships 30-34 Net income — Individuals - 35-41 Invested capital — General provisions 42-52 Invested capital — Corporations and partnerships 53-65 Invested capital — Individuals - 66-70 Nominal capital _ _ 71-74 Returns . „ _.. 75-78 Assessment and collection „ 79 DEFINITIONS. Article 1. Definitions. — When used in these regulations the terms defined in articles 2 to 9, inclusive, shall, unless otherwise indicated by the context, be deemed to be used only with the scope or mean- ing ascribed to them respectively in such articles. Art. 2. Corporation. — The term "corporation" includes joint- stock companies or associations, no matter how created or organ- ized, insurance companies, and limited partnerships. Art. 3. Domestic and foreign. — The term "domestic" means created under the law (statutory or other) of the United States or any State thereof, Alaska, Hawaii, or the District of Columbia, and the term "foreign" means created under the law (statutory or other) of any other possession of the United States or of any foreign country or government. Art. 4. United States.— The term "United States" (when used in a geographical sense) means only the States thereof, Alaska, Ha- waii, and the District of Columbia. Art. 5. Taxable year. — The term "taxable year" means the 12 months ending December 31 of each year, except in the case of a 4 WAR EXCESS PROFITS TAX corporation or partnership which has fixed its own fiscal year, in which case it means such fiscal year. The first taxable year is the year ending December 31, 1917, except that in the case of a corpora- tion or partnership which has fixed its own fiscal year, the first taxable year is the fiscal year ending during the calendar year 1917. (For special provisions as to prorating the amount of tax due for the portion of any fiscal year ending during the calendar year 1917, see articles 19 and 20.) Art. 6. Prewar period. — The term "prewar period" means the calendar years 1911, 1912, and 1913, or if a corporation or partner- ship was not in existence or an individual was not engaged in the trade or business during the whole of such three years, then as many of such years during the whole of which the corporation or partnership was in existence or the individual was engaged in the trade or business. Art. 7. "Trade," "business," "trade or business" in case of corpo- rations and partnerships. — In the case of a corporation or partner- ship all income from whatever source derived is deemed to be re- ceived from its trade or business, and the terms "trade," "business," and "trade or business" include all sources of income. Art. 8. "Trade" in the case of individuals. — In the case of an individual, the terms "trade," "business," and "trade or business" comprehend all his activities for gain, profit, or livelihood, entered into with sufficient frequency, or occupying such portion of his time or attention as to constitute a vocation, including occupa- tions and professions. When such activities constitute a vocation they shall be construed to be a trade or business whether continu- ously carried on during the taxable year or not, and all the income arising therefrom shall be included in his return for excess-profits tax. In the following cases the gain or income is not subject to excess- profits tax, and the capital from which such gain or income is de- rived 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 (b) the income from property arising merely from its ownership, including interest, rent, and similar income from investments except in those cases in which the management of such investments really constitutes a trade or business. WAR EXCESS PROFITS TAX 5 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.) CORPORATIONS, PARTNERSHIPS, AND INDIVIDUALS SUBJECT TO THE TAX. Art. 10. Corporations. — Every domestic corporation which has for the taxable year a net income of $3,000 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 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 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- come 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. 12. Individuals. — Every citizen or resident of the United States who has for the taxable year an aggregate net income in excess of $6,000 from trades, businesses, occupations or professions is, unless exempt under article 13, required to make a return and to pay the tax, if any. Every nonresident alien individual who has for the taxable year an 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 : (a) Corporations exempt under the provisions of section 11 of Title I of the act of September 8, 1916, from the tax imposed by such title. (See Income Tax Regulations, arts. 67, ff.) (b) Partnerships carrying on or doing the same kind of business or coming within the same description. (c) Individuals to the extent that they carry on or do the same kind of business or come within the same description. 6 WAR EXCESS PROFITS TAX RATES AND COMPUTATION OF TAX. Art. 14. Classification of net income. — For the purposes of the 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 business having no invested capital, or not more than a nominal capital, including in the case of an individual salaries, wages, fees, or other compensa- tions; and B. Net income which is derived from a trade or business having invested capital. In the case of a corporation or partnership, all the trades and businesses in which it is engaged will be 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. 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. Art. 15. Rate 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 amount thereof in excess of $6,000 in the case of a domestic partnership or of a citizen or resi- dent of the United States ; and upon the whole thereof in the case of a foreign corporation or partnership or of a nonresident alien in- dividual. Art. 16. Rate 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 following rates: 20 per cent of the amount of the net income in excess of the deduction (determined as provided in articles 21, 23, and 24) and not in excess of 15 per cent of the invested capital for the taxable 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. WAR EXCESS PROFITS TAX 7 Illustrations.— (1) A corporation has a capital of $100,000, prewar earn- ings 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 and 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 The tax would then be computed as follows: 20 per cent of $5,000 $1,000 25 per cent of $5,000 1,250 35 per cent of $5,000 1,750 45 per cent of $8,000 3,600 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 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 specific deduction, a total 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 the capital (rate, 20 per cent) $1,000 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) 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. — 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 will be allowed under the second bracket, and continued if necessary into the succeeding bracket or brackets until the entire amount of the deduction is allowed. Illustrations. — (1) A corporation has a capital of $9,000; prewar earnings of 9 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. g WAR EXCESS PROFITS TAX 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 45 ° 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 the 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 distributed 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 the 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. 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. (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 $3,600, 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 $6,00C 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 capital and not in excess of 33 per cent thereof , 2,000 It is evident that the total deduction of $9,600 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 $9,600 will be distributed as follows: $6,000 in the first bracket, leaving nothing to be taxed at the 20 per cent rate. $2,000 in the second bracket, leaving nothing to be taxed at the 25 per cent rate. $1,600, the balance of the deduction, to be allowed against the $2,000 of in- come 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 would be $1,040. Art, 18. Constructive Capital for Application of Rates. — Where the deduction allowed to a taxpayer is determined under article 24. the invested capital for the purpose of applying - the rates of taxation WAR EXCESS PROFITS TAX 9 under article 16 shall be deemed to be an amount which bears the same ratio to the net income of the trade or business for the taxable year which the average invested capital for the corresponding calendar year of representative corporations, partnerships, and in- dividuals engaged in a like or similar trade or business bears to their average net income. The Commissioner of Internal Revenue in determining for any calendar year the ratio which the average invested capital of rep- resentative corporations, partnerships, and individuals engaged in any particular trade or business bears to their average net income, will include the invested capital 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 corpora- tion or partnership which has fixed its own fiscal year, the ratio determined for the calendar year ending during such fiscal year shall be used. 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 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. — 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 amount 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. Trade or business having invested capital. — The de- 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 equal to the same percentage of the invested capital for the taxable year which the average amount of the annual net income of 10 WAR EXCESS PROFITS TAX the trade or business during the prewar period was of the invested capital for the prewar period (except that 7 per cent shall be used if such percentage 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 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 annual 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 be used if such percentage 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 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) $6,000. (c) In the case of a foreign corporation or partnership or of a non- resident alien individual, an amount equal 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 prewar period (except that 7 per cent shall be used if such percentage 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 or partnership 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). 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 Jan- uary 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. Art. 23. When income for prewar period can not be satisfactorily determined, or when net income was low during prewar period, or WAR EXCESS PROFITS TAX 11 when there was no net income during prewar period. — In the follow- ing cases the deduction shall be determined as provided in this article : (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; (b) If the Secretary of the Treasury upon complaint finds that during the prewar period the percentage of the net income to the invested capital of the taxpayer was lower by one 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. (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 — (1) An amount equal to the same percentage of the invested capital for the taxable year which the average deduction (deter- mined in the same manner as provided in article 21, without includ- ing the $3,000 or $6,000 therein referred to) for such year of repre- sentative corporations, partnerships, or individuals engaged in a like or similar trade or business, is of their average invested capital for such year, plus. (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, $6,000. In cases arising under subdivision (a) or (c) of this article the tax 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 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- mined as provided in this article. In cases coming within the pro- visions of this article payment of that portion of the tax covered 12 WAR EXCESS PROFITS TAX 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 full 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- 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 the trade or business for the taxable year as the average deduction (determined in the same manner as provided in article 21 without including the $3,000 or $6,000 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 a domestic partnership or a citizen or resident of the United States, $6,000. The Commissioner of Internal Revenue in determining for any calendar 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 corpora- tion or partnership which has fixed its own fiscal year, the propor- tion determined for the calendar year ending during such fiscal year shall be used. In every case of a trade or business having invested capital a re- turn shall be made in the first instance in accordance with article 21 or 23, but the taxpayer may submit therewith a statement of WAR EXCESS PROFITS TAX 13 reasons why in his opinion the tax should be assessed in accordance with this article. NET INCOME— GENERAL PROVISIONS. Art. 25. Exemptions. — The following classes of income are ex- empt from the tax : (a) Income exempt from taxation under section 4 of the act of September 8, 1916, as amended. (See Income Tax Regulations, art. 5.) (b) Income derived from the business of life, health, and accident insurance combined in one policy issued on a weekly premium pay- ment plan. (c) Compensation or fees received by officers and employees under the United States or any State, Territory, or the District of Columbia for their services as such. Art. 26. Net income of foreign corporations, partnerships, and nonresident 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. 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 in- come tax, there shall be deducted only that proportion of the divi- dends received upon such stock which the net income of such foreign corporation from sources within the United States is of its entire net income. 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 that proportion of the dividends received upon such stock which the net income of such corporation from sources outside the United States is of its entire net income. NET INCOME— CORPORATIONS. 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 Sep- 14 WAR EXCESS PROFITS TAX tember 24, 1917 (other than the interest received on an amount of such bonds or obligations the aggregate principal of which does not exceed $5,000), and deducting from the total so obtained the amounts 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 September 8, 1916, as amended, except as otherwise provided in article 27. Art. 29. Prewar period. — The net income of a corporation for the prewar period shall be computed as follows : (a) For the calendar year 1911 by adding (1) the amount of net income shown in item 9 of the return made under section 38 of the act of August 5, 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 ; (b) For the calendar year 1912 by adding (1) the amount of net 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 (c) For the calendar year 1913 by adding (1) the amount of the 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 zvithin the calendar year 1913 under section 38 of the act of August 5, 1909. and Section II or IV of the act of October 3, 1913, and deducting from the total so obtained the amounts received during the calendar year 1913 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 Section II of the act of October 3, 1913. NET INCOME— PARTNERSHIPS. Art. 30. Taxable year. — The net income of a partnership for the 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 year as interest on WAR EXCESS PROFITS TAX 15 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 deducting therefrom — (1) The amounts received during the taxable year as dividends upon the stock or from the net earnings of corporations, joint- stock companies or associations, or insurance companies, 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 (2) The deductions, if any, for salaries or interest allowed by articles 32 and 33, if such deductions have not already been made. Art. 31. Prewar period. — The net income of a partnership for each of the calendar years 1911, 1912, and 1913 shall be 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, sub- ject 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.) Art. 32. Deductions allowed for salaries paid to partners. — In computing net income for purposes of the excess profits tax a partnership will be allowed to deduct as an expense reasonable salaries or compensation paid to individual partners for personal services actually 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 compensation so deducted be in excess of the salaries or compensation customarily paid for similar services under like re- sponsibilities by corporations engaged in like or similar trades or businesses. 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. In the case of a foreign partnership the deduction shall be limited to those portions of salaries or compensation which are paid for services rendered with respect to trade or business carried on in the United States. 16 WAR EXCESS PROFITS TAX 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). 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. Art. 34. If deduction is made under article 32 or 33, correspond- ing 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 makes such 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 any such interest actually paid during that period. NET INCOME— INDIVIDUALS. Art. 35. Determination of net income where there is no invested 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 denned 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 in- dividual 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 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 WAR EXCESS PROFITS TAX 17 salary allowed by article 39, if such deduction has not already been made. There shall be excluded the amounts received during the year upon the stock or from the net earnings of corporations, joint-stock companies or associations, or insurance companies, subject to the income tax imposed by Title I of the act of September 8, 1916, as amended. In the case, however, of an individual dealing in securities or otherwise using securities in trade or business there shall be in- cluded (1) the amount, if any, received as interest on bonds or obligations of the United States, issued after September 24, 1917 (other than the interest received on an amount of such bonds or obligations the aggregate principal of which does not exceed $5,000), and (2) such proportion of dividends received upon the stock of foreign corporations as is required to be included by article 27. Illustration. — An individual owns a farm representing an invested capi- tal of $25,000, a country store with an invested capital of $6,000, 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 his total net income of class B is $10,000. His total invested capital is $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, and receives $250 in compensation for personal services of various kinds, such as road work, helping neighbors in harvest, 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 tax- able, inasmuch as it is derived from a mere investment not connected with his trade or business. His 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. Art. 37. Deduction of contributions for religious, charitable, etc., purposes. — Contributions or gifts for religious, charitable, etc., pur- poses allowed as a deduction for purposes of the 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 Commissioner of Internal Rev- 18 WAR EXCESS PROFITS TAX enue that such contributions or gifts are made by the trade or busi- ness and not by the individual in his personal capacity. 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 capital (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. 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 amount so designated be in excess of the salaries or compensa- tion customarily paid for similar service under like responsibilities by corporations or partnerships engaged in like or similar trades or businesses. In the case of a nonresident alien individual, the amount deducted shall be limited to that portion of the salary or compensation which is for service rendered with respect to trade or business carried on in the United States. 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 comput- ing his net income of class R under article 36. Illustration. — An individual owns and runs a newspaper having an invested capital of $50,000. The net income from the newspaper, without making any allowance for the salary of the owner, is $20,000, and, as income of class B, is subject to the graduated rates prescribed in article 16. His deduction, as provided for in subdivision (b) 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 the amount. His salary of $3,000 must be included in his return as income of class A, which is subject 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 in- come. But if, for example, he receives in addition a salary of $4,000 as presi- ident 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 de- duction must also be made for prewar period. — If, in computing net WAR EXCESS PROFITS TAX 19 income for purposes of the excess profits tax, an individual deducts a reasonable amount designated as salary or compensation for per- sonal services rendered by himself, as allowed by article 39, he must also in computing net income for the prewar period, make a corre- sponding deduction. Art. 41. Individual member of partnership.1 — Inasmuch as a part- ner 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. Con- sequently, in computing his net income for purposes of the excess profits tax he need not include his share of the partnership profits. He shall, however, 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 does not stop with such original entries or amounts ; it must take properly into account the surplus and un- divided profits. In the computation of surplus and undivided profits, however, full recognition must first be given to expenses incurred and losses sustained 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 obsolescence of property originally acquired for cash or for stock or shares or in any other manner. If value appreciation of a kind not subject to income tax (other than that allowed under article 55) has been taken up in the accounts, a deduction must be made in respect of such appreciation so taken up. In the computation of the in- vested capital for any year full effect must also be given to any liquidation of the original capital. 20 WAR EXCESS PROFITS TAX 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, according to the following rules: (a) Add the capital for each of the several months during which no change occurs, and the average capital (ascertained 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. (b) To ascertain the capital for any month in which a change occurs multiply the capital as of the first day of the month by the number 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 which it remains constant, add the products, and divide the sum by the number of days in the month. 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 : (a) Stocks, bonds (other than obligations of the United States), or other assets, the income from which is not subject to the excess profits tax ; and (b) Money or other property borrowed. The term "money 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 which 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 propor- tion of its permanent indebtedness as the amount of interest upon such indebtedness which the corporation is not allowed to deduct is of the total amount of interest paid upon such indebtedness dur- ing the taxable year. Art. 45. When income from tax-free securities consists partly of trading profits and partly of interest, dividends, etc. — Whenever income consists partly of gains or profits subject to the excess WAR EXCESS PROFITS TAX 21 profits tax arising from trading in stocks, bonds, etc., the dividends or interest on which are not subject to such tax, and partly of such dividends or interest, then, subject to the limitations as to bor- rowed 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. Art. 46. Treatment of stock of foreign corporations when held by domestic corporations or partnerships or by citizens or residents of the United States. — In the case of domestic corporations or partner- ships 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 propor- tion 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 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 following classes of property, when paid in for stock or shares in a corporation or partnership, will be regarded as tangible prop- ety 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 or nonresident alien individuals. — When used with reference to a foreign corporation or partnership or a nonresident alien individual, the term "invested capital" means that proportion of the entire 22 WAR EXCESS PROFITS TAX 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 business carried on by a corporation, partnership, or individual, which has been formally organized or reorganized on or after Janu- ary 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 apply to the invested capital for the taxable year. Art. 50. Reorganization after March 3, 1917. — In case of the reorganization, consolidation, or change of ownership 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 computing the invested capital of such prior trade or business if such asset had not been so transferred or re- ceived, 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 payment. Art. 51. Invested capital for prewar period. — The invested capital for the prewar period shall, in general, be determined in the same manner as for the taxable year, except that the valuation as of January 1. 1914. shall not apply to tangible property paid in for stock or shares. 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 claim for assessment under the provisions of section 210. (See articles 18 and 24.) Such exceptional cases may consist, among others, of the following: WAR EXCESS PROFITS TAX 23 (1) Where, through defective accounting or the lack of adequate data, it is impossible accurately to compute invested capital. (2) Where upon application by a foreign taxpayer the Secretary of the Treasury finds that the expense of securing the data neces- sary for the computation of the invested capital would be unreason- able 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." (3) Long-established business concerns which by reason of ultra- conservative accounting or the form and manner of their organiza- tion would, through the operation of section 207, be placed at a serious disadvantage in competing with representative concerns in a like or similar trade or business. (4) Where the invested capital is seriously disproportionate to the taxable income. Such cases may arise through : (a) The realization in one year of the earnings of capital unpro- ductively invested through a period of years or of the fruits of activities antedating the taxable year; or, (b) Inability to recognize or properly allow for amortization, 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- 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 be 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. When 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 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 24 WAR EXCESS PROFITS TAX 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- erty, patents and copyrights and good will or other intangible property. (See art. 59.) 3. Stock or shares issued for patents and copyrights, valued at (a) their actual cash value at the time of payment, or (b) 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, 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 to the corporation as a gift, etc. (See art. 54.) 6. Add any proportion of its permanent indebtedness which may be included under article 44. 7 . Add value of tangible property paid in for stock or shares in excess of the par value of such shares, when authorized by article 63. 8. Add amounts expended in the past for (a) the acquisition of tangible property or (b) specifically for good will and other similar intangible property, when authorized by article 64. 9. For the valuation of assets acquired in reorganizations, etc., (a) effected after March 3, 1917, see article 50; (b) as to the prewar period, see articles 49 and 51. 10. Deduct amounts representing appreciation excluded by arti- cle 42. 11. Make any additional deductions required by reason of insuffi- cient allowances in the accounts of the taxpayer for depletion, de- preciation, and obsolescence. (See art. 42.) Whenever any corrections are made in respect of the capital stock and surplus, corresponding corrections must be made in the re- spective asset items in the balance sheet of the taxpayer. 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 WAR EXCESS PROFITS TAX 25 than the amount of such adjusted total, then the invested capital must be further reduced to an amount equal to the sum of thead- 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. 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. 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. Thereafter 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 ex- plained in a separate statement attached to the balance sheet to which it relates. 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 fol- lowing rule will apply : When any of such stock is returned to the corporation as a gift or 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 ex- changed 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 shares. — Tangible property paid in for stock or shares prior to Janu- ary 1, 1914, must be valued at either (a) the actual cash value of such property on January 1, 1914, or (b) 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, 1914 will be taken at the actual cash value of such property at 26 WAR EXCESS PROFITS TAX the time of payment, irrespective of the par value of the stock or shares. Art. 56. Patents and copyrights. — Patents and copyrights paid in 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- 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 (b) 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 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, 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- ing 20 per cent of the total shares of stock outstanding on March 3, 1917, measured by their value as at the date or dates of issue. Art. 59. Rules to govern cases where shares or securities are issued for mixed aggregate of tangible and intangible property. — Where stock or shares (or stock or shares and bonds or other ob- ligations) have, prior to March 3, 1917, been issued for a mixed aggregate of — i a i Tangible property. (b) Patents and copyrights, and (c) Good will or other intangible property, the following rules will govern : WAR EXCESS PROFITS TAX 27 (1) In the absence of satisfactory evidence to the contrary, it will be presumed in the case of a corporation, that its stock was issued for the following purposes in the order named: (a) Good will or other intangible property, (b) Patents and copyrights, and (c) Tangible property. (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 (b) the patents and copyrights, the sum of these two items may be applied against the total par value of the securities issued and the remainder will then be deemed to represent the par value of the securities issued for the good will or other intangible property. (3) Cases where mixed aggregates of tangible and intangible property have been paid in for stock and bonds shall, if the Secre- tary of the Treasury is unable to determine satisfactorily the respec- tive 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. Art. 60. Valuation of intangible assets purchased. — Good will 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. Art. 61. Surplus or undivided profits earned during any year 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 "surplus" upon the books or distributed in the form of stock dividends. 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 profits of a corporation or partnership (exclusive of undivided profits earned during the year), from whatever source derived, will, unless invested in stocks, bonds (other than obligations of the United States), or other assets, the income from which is not sub- ject to the excess profits tax, be deemed to be used or employed in the business and may be included in the invested capital. 28 WAR EXCESS PROFITS TAX Art. 63. When tangible property may be included in surplus. — Where it can be shown by evidence satisfactory to the Commis- sioner of Internal Revenue that tangible property has been con- veyed to a corporation or partnership by gift or at a value, ac- curately ascertainable or definitely known as at the date of con- veyance, 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 ascertainable or definitely known at that time. Evidence tending to support a claim for a paid-in surplus under 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 shares. Art. 64. Reconstruction of surplus and undivided profits accounts. — Where through failure to provide for depletion, depreciation, ob- solescence, 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 profits, in the compu- tation 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 books of account will be presumed to show the 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- sition of plant, equipment, tools, patterns, furniture, fixtures, or like tangible property having a useful life extending substantially be- yond the year in which the expenditure was made, and which have been charged as current expense, may (less proper reduction for depreciation or obsolescence) be added to the surplus account in 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 not been so recovered and they are held for only occasional use, they shall not be, assigned a value in ex- WAR EXCESS PROFITS TAX 29 cess of the fair value based upon the earnings actually arising from their current use. Assets of this kind not in current use shall not be valued at more than their nominal or scrap value. (2) Amounts expended in the past for good will, trade-marks, trade brands, franchises, and other intangible assets of a like charac- ter, are controlled by the language of the statute which provides that such assets "shall be included in invested capital if the corpora- tion or partnership made payment bona fide therefor specifically as such in cash, or tangible property." The Commissioner of Internal Revenue will recognize additions to invested capital on account of intangible assets only if such assets have been explicitly paid for in the manner prescribed by the statute. Where expenditures have been made for the general development of intangible assets, and charged as current expense, no readjustment thereof will be allowed. (3) Amounts under (1) and (2) above, expended on or after March 1, 1913, will, in the case of a corporation, be limited strictly to items which have not been deducted in computing taxable in- come upon its income tax return. Whenever 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. (4) The taxpayer shall in his return to the Commissioner of In- ternal Revenue make a statement of the proposed additions, specify- ing the kinds and amounts of property involved, the years in which the expenditures were made, and the method followed in distin- guishing between capital outlays and current expenses. (5) The 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. Art. 65. Invested capital of insurance companies. — (a) The in- vested capital of a mutual insurance company will be deemed to consist of the sum of (1) any surplus or contingent reserves main- tained for the general use of the business, plus (2) any legal re- serves, 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. 30 WAR EXCESS PROFITS TAX (b) The invested capital of a stock insurance company will be deemed 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. INVESTED CAPITAL— INDIVIDUALS. Art. 66. Items included in invested capital. — Subject to the 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 require- 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 valua- tion will be based upon the cost (estimated if not known) in cash at the time purchased. In the case of tangible property paid in as such prior to January 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, the valuation will be based upon its actual cash value at the time of payment. It will be presumed that the tangible assets employed in the trade 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 copy- rights, and good will, 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 property paid therefor, but only if bona fide payment was made therefor specific- ally as such in rash or tangible property. Art. 69. Profits earned during taxable year may be included. — The restriction in respect of undivided profits earned during the taxable year which is imposed upon corporations and partnerships WAR EXCESS PROFITS TAX 31 does not apply to individuals, and therefore, unless otherwise shown, the profits of the taxable year remaining in the trade or business will be deemed 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 busi- ness ayeraged monthly over the year. Art. 70. Rule for computing invested capital. — Where an individ- ual keeps books of account his invested capital will be found in his capital account (under whatever name it may be called) after making therein any adjustments or corrections required by these regulations, provided 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. Where an individual does not keep books of account he should prepare and preserve a statement as at the beginning of the taxable year and as at the end of the taxable year, 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 shall be the amount of such assets. The amount of the difference between the capital thus shown as at the beginning of the year and at the end of the year will, in the absence of evi- dence to the contrary, be deemed to have arisen ratably throughout the year, and the capital at the beginning of the year will be in- creased or decreased, as the case may be, by such amount averaged monthly over the year. 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 will be determined by taking the total invested capital of all such trades or businesses. The terms "assets" and "liabilities" as used in this article relate only to the assets or liabilities of the trade or business. 32 WAR EXCESS PROFITS TAX NOMINAL CAPITAL. 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 which the em- ployment of capital is not necessary and the earnings of which are to be ascribed primarily to the activities of the owners. 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 personal service unless the principal owners are regularly engaged in the active conduct of the trade or business. Art. 72. Application of section 209 not to be affected by mere size of capital, form of organization, etc. — Business concerns which ren- der professional or personal service and are of the class normally taxable under article 15 shall not be taken out of that class merely because of the size of the capital if the employment of such capital is necessitated by delay and irregularity in the receipt of fees, etc., or if such capital is wholly or mainly used as a fund from which to advance salaries, wages, etc., or to provide office furniture, ac- commodations, and equipment, nor because of the form of organi- zation, 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 using no capital or merely a nominal capital in their business are taxable under 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 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 from the war 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 doubtful cases stress will be laid upon the normal relation of net income to capital during prewar years; WAR EXCESS PROFITS TAX 33 (b) Corporations which, although their capitalization is nominal, employ a substantial amount of capital in their business; (c) A business having a substantial capital, but whose invested 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 appreciated in value, or where the capital is largely covered by indebtedness or consists principally of tax-free securities or of intangible assets built up or developed by expendi- tures which have been regularly deducted as items of current ex- pense. RETURNS. Art. 75. When a return of information as to the invested capital and net income for the prewar period will not be required. — For the purposes of the excess profits tax, a return of information with respect to the invested capital and net income for the prewar period will not be required of a corporation, partnership, or individual in the following cases : (1) If the taxpayer accepts the minimum percentage, viz., 7 per cent, as the percentage to be used in computing the deduction under article 21 ; or (2) If the trade or business is taxable only at the 8 per cent rate under article 15. This article must not be construed as not requiring a return of information as to all facts which may be necessary for the ascertain- ment of the capital and income for the taxable year whenever such a return is required by the Commissioner of Internal Revenue. Art. 76. A married woman may make separate return. — A mar- ried woman who is a sole trader or is entitled to any taxable in- come to her sole and separate use may, for purposes of the excess- profits tax, make a separate return in the same manner as any other individual. Art. 77. When affiliated corporations must furnish information as to intercorporate relations. — For the purpose of the excess profits tax every corporation will describe in its return all its intercorporate relationships with other corporations with which it is affiliated, and will furnish such information in relation thereto as will enable the Commissioner of Internal Revenue to compute the amount of the tax properly due from each corporation on the basis of an equitable and lawful accounting. For the purpose of this regulation two or more corporations will be deemed to be affiliated (1) when one such corporation owns 34 WAR EXCESS PROFITS TAX directly or controls through closely affiliated interests or by a nom- inee or nominees, all or substantially all of the stock of the other or others, or when substantially all of the stock of two or more corpor- ations is owned by the same individual or partnership, and both or all of such corporations are engaged in the same or a closely related business ; or (2) when one such corporation (a) buys from or sells to another products or services at prices above or below the current market, thus effecting an artificial distribution of profits, or (b) in any way so arranges its financial relationships with another cor- poration as to assign to it a disproportionate share of net income or invested capital. Art. 78. When affiliated corporations may be required to make consolidated return. — Whenever necessary to more equitably deter- mine the invested capital or taxable income, the Commissioner of Internal Revenue may require corporations classed as affiliated under article 77 to furnish a consolidated return of net income and invested capital. Where such consolidated return is required it may be made by any one or more of such corporations or by all of them acting jointly ; but if such affiliated corporations, when requested to file such consolidated return, neglect or refuse to do so, the Com- missioner of Internal Revenue may cause an examination of the books of all such corporations to be made and a consolidated state- ment to be made from such examination. In cases where consoli- dated returns are accepted, the total tax will be computed in the first instance as a unit upon the basis of the consolidated return and will be assessed upon the respective affiliated corporations in such proportions as may be agreed among them. If no such agreement is made the tax will be assessed upon each such corporation in accord- ance with the net income and invested capital properly assignable to it. ASSIGNMENT AND COLLECTION. Art. 79. Assessment and collection governed by income tax regu- lations. — All excess profits taxes to which any taxpayer is subject shall be assessed and collected at the same times and in the same manner as provided with respect to income taxes in the income tax regulations in so far as the same are applicable. DANIEL C. ROPER, Commissioner of Internal Revenue. Approved : W. G. McADOO, Secretary of the Treasury. WAR EXCESS PROFITS TAX 35 APPENDIX. (Public, No. 50, 65th Congress— H. R 4280.) AN ACT To provide revenue to defray war expenses, and for other purposes. ******* Title II.— War Excess Profits Tax. Sec. 200. That when used in this title — The term "corporation" includes joint-stock companies or associations and insurance companies; The term "domestic" means created under the law of the United States, or of any State, Territory, or District thereof, and the term "foreign" means created under the law of any other possession of the United States or of any foreign country or government; The term "United States" means only the States, the Territories of Alaska and Hawaii, and the District of Columbia; The term "taxable year" means the twelve months ending December thirty-first, excepting in the case of a corporation or partnership which has fixed its own fiscal year, in which case it means such fiscal year. The first taxable year shall be the year ending December thirty-first, nineteen hun- dred and seventeen, except that in the case of a corporation or partnership which has fixed its own fiscal year, it shall be the fiscal year ending during the calendar year nineteen hundred and seventeen. If a corporation or partnership, prior to March first, nineteen hundred and eighteen, makes a return covering its own fiscal year, and includes therein the income re- ceived during that part of the fiscal year falling within the calendar year nineteen hundred and sixteen, the tax for such taxable year shall be that proportion of the tax computed upon the net income during such full fiscal year which the time from January first, nineteen hundred and seventeeen, to the end of such fiscal year bears to the full fiscal year; and The term "prewar period" means the calendar years nineteen hundred and eleven, nineteen hundred and twelve, and nineteen hundred and thirteen, or, if a corporation or partnership was not in existence or an individual was not engaged in a trade or business during the whole of such period, then as many of such years during the whole of which the corporation or partner- ship was in existence or the individual was engaged in the trade or business. The terms "trade" and "business" include professions and occupations. The term "net income" means in the case of a foreign corporation or partnership or a nonresident alien individual, the net income received from sources within the United States. Sec. 201. That in addition to the taxes under existing law and under this act there shall be levied, assessed, collected, and paid for each taxable year upon the income of every corporation, partnership, or individual, a tax (hereinafter in this title referred to as the tax) equal to the following per- centages of the net income: Twenty per centum of the amount of the net income in excess of the deduction (determined as hereinafter provided) and not in excess of fifteen per centum of the invested capital for the taxable year. Twenty-five per centum of the amount of the net income in excess of fifteen per centum and not in excess of twenty per centum of such capital; Thirty-five per centum of the amount of the net income in excess of 36 WAR EXCESS PROFITS TAX twenty per centum and not in excess of twenty-five per centum of such capital; Forty-five per centum of the amount of the net income in excess of twenty-five per centum and not in excess of thirty-three per centum of such capital; and Sixty per centum of the amount of the net income in excess of thirty- three per centum of such capital. For the purpose of this title every corporation or partnership not exempt under the provisions of this section shall be deemed to be engaged in busi- ness, and all the trades and businesses in which it is engaged shall be treated as a single trade or business, and all its income from whatever source de- rived shall be deemed to be received from such trade or business. This title shall apply to all trades or businesses of whatever description, whether continuously carried on or not, except — (a) In the case of officers and employees under the United States, or any State Territory, or the District of Columbia, or any local subdivision there- of, the compensation or fees received by them as such officers or employees; (b) Corporations exempt from tax under the provisions of section eleven of Title I of such Act of September eighth, nineteen hundred and sixteen, as amended by this Act, and partnerships and individuals carrying on or doing the same business, or coming within the same description; and (c) Incomes derived from the business of life, health, and accident insur- ance combined in one policy issued on the weekly premium payment plan. Sec. 202. That the tax shall not be imposed in the case of the trade or business of a foreign corporation or partnership or a nonresident alien in- dividual, the net income of which trade or business during the taxable year is less than $3,000. Sec. 203. That for the purposes of this title the deduction shall be as follows, except as otherwise in this title provided — (a) In the case of a domestic corporation, 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 annual net income of the trade or business during the prewar period was of the invested capital for the prewar period (but not less than seven or more than nine per centum of the invested capital for the taxable year), and (2) $3,000; (b) In the case of a domestic partnership or of a citizen or resident 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 annual net income of the trade or business during the prewar period was of the invested capital for the prewar period (but not less than seven or more than nine per centum of the invested capital for the taxable year), and (2) $6,000; (c) In the case of a foreign corporation or partnership or of a nonresident alien individual, an amount ascertained in the same manner as provided in subdivisions (a) and (b) without any exemption of $3,000 or $6,000; (d) Tf the Secretary of the Treasury is unable satisfactorily to determine the average amount of the annual net income of the trade or business dur- ing the prewar period, the deduction shall be determined in the same manner as provided in section two hundred and five. Sec. 204. That if a corporation or partnership was not in existence, or an individual was not engaged in the trade or business, during the whole of WAR EXCESS PROFITS TAX 37 any one calendar year during the prewar period, the deduction shall be an amount equal to eight per centum of the invested capital for the taxable year, plus 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 $6,000. A trade or business carried on by a corporation, partnership, or individual, although formerly organized or reorganized on or after January second, nineteen hundred and thirteen, which is substantially a continuation of a trade or business carried on prior to that date, shall, for the purposes of this title, be deemed to have been in existence prior to that date, and the net income and invested capital of its predecessor prior to that date shall be deemed to have been its net income and invested capital. Sec. 205. (a) That if the Secretary of the Treasury, upon complaint finds either (1) that during the prewar period a domestic corporation or partner- ship, or a citizen or resident of the United Staes, had no net income from the trade or business, or (2) that during the prewar period the percentage, which the net income was of the invested capital, was low as compared with the percentage, which the net income during such period of representative corporations, partnerships, and individuals, engaged in a like or similar trade or business, was of their invested capital, then the deduction shall be the sum of (1) an amount equal to the same percentage of its invested capital for the taxable year which the average deduction (determined in the same manner as provided in section two hundred and three, without including the $3,000 or $6,000 therein referred to) for such year of representative cor- porations, partnerships, or individuals, engaged in a like or similar trade or business, is of their average invested capital for such year plus (2) in the case of a domestic corporation $3,000 and in the case of a domestic partner- ship or a citizen or resident of the United States $6,000. The percentage which the net income was of the invested capital in each trade or business shall be determined by the Commissioner of Internal Revenue, in accordance with regulations prescribed by him, with the approval of the Secretary of the Treasury. In the case of a corporation or partner- ship which has fixed its own fiscal year, the percentage determined by the calendar year ending during such fiscal year shall be used. (b) The tax shall be assessed upon the basis of the deduction determined as provided in section two hundred and three, but the taxpayer claiming the benefit of this section may at the time of making the return file a claim for abatement of the amount by which the tax so assessed exceeds a tax com- puted upon the basis of the deduction determined as provided in this section. In such event, collection of the part of the tax covered by such claim for abatement shall not be made until the claim is decided, but if in the judg- ment of the Commissioner of Internal Revenue, the interests of the United States would be jeopardized thereby he may require the claimant to give a bond in such amount and with such sureties as the commissioner may think wise to safeguard such interests, conditioned for the payment of any tax found to be due, with the interest thereon, and if such bond, satisfactory to the commissioner, is not given within such time as he prescribes, the full amount of tax assessed shall be collected and the amount overpaid, if any, shall upon final decision of the application be refunded as a tax erroneously or illegally collected. 38 WAR EXCESS PROFITS TAX Sec. 206. That for the purposes of this title the net income of a corpora- tion shall be ascertained and returned (a) for the calendar years nineteen hundred and eleven and nineteen hundred and twelve upon the same basis and in the same manner as provided in section thirty-eight of the Act en- titled "An Act to provide revenue, equalize duties, and encourage the indus- tries of the United States, and for other purposes," approved August fifth, nineteen hundred and nine, except that income taxes paid by it within the year imposed by the authority of the United States shall be included; (b) for the calendar year nineteeen hundred and thirteen upon the same basis and in the same manner as provided in section II of the Act entitled "An Act to reduce tariff duties and to provide revenue for the Government, and for other purposes," approved October third, nineteen hundred and thirteen, except that income taxes paid by it within the year imposed by the authority of the United States shall be included, and except that the amounts received by it as dividends upon the stock or from the net earnings of other corpora- tions, joint-stock companies or associations, or insurance companies, subject to the tax imposed by section II of such Act of October third, nineteen hundred and thirteen, shall be deducted; and (c) for the taxable year upon the same basis and in the same manner as provided in Title I of the Act entitled "An Act to increase the revenue, and for other purposes," approved September eighth, nineteen hundred and sixteen, as amended by this Act, except that the amounts received by it as dividends upon the stock or from the net earnings of other corporations, joint-stock companies, or associa- tions, or insurance companies, subject to the tax imposed by Title I of such Act of September eighth, nineteen hundred and sixteen, shall be deducted. The net income of a partnership or individual shall be ascertained and returned for the calendar years nineteen hundred and eleven, nineteen hun- dred and twelve, and nineteen hundred and thirteen, and for the taxable year, upon the same basis and in the same manner as provided in Title I of such Act of September eighth, nineteen hundred and sixteen, as amended by this Act, except that the credit allowed by subdivision (b) of section five of such Act shall be deducted. There shall be allowed (a) in the case of a domestic partnership the same deductions as allowed to individuals in subdivision (a) of section five of such Act of September eighth, nine- teen hundred and sixteen, as amended by this Act; and (b) in the case of a foreign partnership the same deductions as allowed to individuals in sub- division (a) of section six of such Act as amended by this Act. Sec. 207. That as used in this title, the term "invested capital" for any year means the average invested capital for the year, as defined and limited in this title, averaged monthly. As used in this title "invested capital" does not include stocks, bonds (other than obligations of the United States), or other assests, the income from which is not subject to the tax imposed by this title nor money or other property borrowed, and means subject to the above limitations: (a) In the case of a corporation or partnership: (1) Actual cash paid in, (2) the actual cash value of tangible property paid in other than cash, for stock or shares in such corporation or partnership, at the time of such payment (but in case such tangible property was paid in prior to January first, nineteen hundred and fourteen, the actual cash value of such property as of January first, nineteen hundred and fourteen, but in no case to exceed WAR EXCESS PROFITS TAX 39 the par value of the original stock or shares specifically issued therefor), and (3) paid in or earned surplus and undivided profits used or employed in the business, exclusive of undivided profits earned during the taxable year: Provided, That (a) the actual cash value of patents and copyrights paid in for stock or shares in such corporation or partnership, at the time of such payment, shall be included as invested capital, but not to exceed the par value of such stock or shares at the time of such payment, and (b) the good will, trade-marks, trade brands, the franchise of a corporation or partnership, or other intangible property, shall be included as invested capital if the corporation or partnership made payment bona fide therefor specifically as such in cash or tangible property, the value of such good will, trade-mark, trade brand, franchise, or intangible property, not to exceed the actual cash or actual cash value of the tangible property paid therefor at the time of such payment; but good will, trade-marks, trade brands, franchise of a corporation or partnership, or other intangible property, bona fide purchased, prior to March third, nineteen hundred and seventeen, for and with interests or shares in a partnership or for and with shares in the capital stock of a corporation (issued prior to March third, nineteen hun- dred and seventeen), in an amount not to exceed, on March third, nineteen hundred and seventeen, twenty per centum of the total interests or shares in the partnership or of the total shares of the capital stock of the corpora- tion, shall be included in invested capital at a value not to exceed the actual cash value at the time of such purchase, and in case of issue of stock therefor not to exceed the value of such stock; (b) In the case of an individual, (1) actual cash paid into the trade or business, and (2) the actual cash value of tangible property paid into the trade or business, other than cash, at the time of such payment (but in case such tangible property was paid in prior to January first, nineteen hundred and fourteen, the actual cash value of such property as of January first, nineteen hundred and fourteen), and (3) the actual cash value of patents, copyrights, good will, trade-marks, trade brands, franchises, or other intan- gible property, paid into the trade or business, at the time of such payment, if payment was made therefor specifically as such in cash or tangible prop- erty, not to exceed the actual cash or actual cash value of the tangible prop- erty bona fide paid therefor at the time of such payment. In the case of a foreign corporation or partnership or of a nonresident alien individual the term "invested capital" means that proportion of the entire invested capital, as defined and limited in this title, which the net income from sources within the United States bears to the entire net income. Sec. 208. That in case of the reorganization, consolidation or change of ownership of a trade or business after March third, nineteen hundred and seventeen, if an interest or control in such trade or business of fifty per centum or more remains in control of the same persons, corporations, asso- ciations, 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 this title in computing 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 40 WAR EXCESS PROFITS TAX property, and then not to exceed the actual cash or actual cash value of the tangible property paid therefor at the time of such payment. Sec. 209. That in the case of a trade or business having no invested capital or not more than a nominal capital there shall be levied, assessed, collected and paid, in addition to the taxes under existing law and under this Act, in lieu of the tax imposed by section two* hundred and one, a tax equivalent to eight per centum of the net income of such trade or business in excess of the following deductions; 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 $6,000; in the case of all other trades or business, no deduction. Sec. 210. That if the Secretary of the Treasury is unable in any case satisfactorily to determine the invested capital, the amount of the deduction shall be the sum of (1) an amount equal to the same proportion of the net income of the trade or business received during the taxable year as the proportion which the average deduction determined in the same manner as provided in section two hundred and three, without including the $3,000 or $6,000 therein referred to, for the same calendar year of representative corporations, partnerships, and individuals, engaged in a like or similar trade or business, bears to the total net income of the trade or business received by such corporations, partnerships, and individuals, plus (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 $6,000. For the purpose of this section the proportion between the deduction and the net income in each trade or business shall be determined by the Com- missioner of Internal Revenue in accordance with regulations prescribed by him, with the approval of the Secretary of the Treasury. In the case of a corporation or partnership which has fixed its own fiscal year, the pro- portion determined for the calendar year ending during such fiscal year shall be used. Sec. 211. That every foreign partnership having a net income of $3,000 or more for the taxable year, and every domestic partnership having a net income of $6,000 or more for the taxable year, shall render a correct return of the income of the trade or business for the taxable year, setting forth specifically the gross income for such year, and the deductions allowed in this title. Such returns shall be rendered at the same time and in the same manner as is prescribed for income-tax returns under Title I of such Act of September eighth, nineteen hundred and sixteen, as amended by this Act. Sec. 212. That all administrative, special, and general provisions of law, including the laws in relation to the assessment, remission, collection, and refund of internal-revenue taxes not heretofore specifically repealed, and not inconsistent with the provisions of this title are hereby extended and made applicable to all the provisions of this title and to the tax herein imposed, and all provisions of Title I of such Act of September eighth, nineteen hun- dred and sixteen, as amended by this Act, relating to returns and payment of the tax therein imposed, including penalties, are hereby made applicable to the tax imposed by this title. Sec. 213. That the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury, shall make all necessary regulations for carrying out the provisions of this title, and may require any corporation, WAR EXCESS PROFITS TAX 41 partnership, or individual, subject to the provisions of this title, to furnish him with such facts, data, and information as in his judgment are necessary to collect the tax imposed by this title. Sec. 214. That Title II (sections two hundred to two hundred and seven, inclusive) of the Act entitled "An Act to provide increased revenue to defray the expenses of the increased appropriations for the Army and Navy, and the extensions of fortifications, and for other purposes," approved March third, nineteen hundred and seventeen, is hereby repealed. Any amount heretofore or hereafter paid on account of the tax imposed by such Title II, shall be credited toward the payment of the tax imposed by this title, and if the amount so paid exceeds the amount of such tax the excess shall be refunded as a tax erroneously or illegally collected. Subdivision (1) of section three hundred and one of such Act of Septem- ber eighth, nineteen hundred and sixteen, is hereby amended so that the rate of tax for the taxable year nineteen hundred and seventeen shall be ten per centum instead of twelve and one-half per centum, as therein pro- vided. Subdivision (2) of such section is hereby amended to read as follows: "(2) This section shall cease to be of effect on and after January first, nineteen hundred and eighteen." Title X. — Administrative Provision. ******* Sec. 1001. That all administrative, special, or stamp provisions of law, including the law relating to the assessment of taxes, so far as applicable, are hereby extended to and made a part of this Act, and every person, corporation, partnership, or association liable to any tax imposed by this Act, or for the collection thereof, shall keep such records and render, under oath, such statements and returns, and shall comply with such regulations as the Commissioner of Internal Revenue, with the approval of the Secre- tary of the Treasury, may from time to time prescribe. ******* Sec. 1003. That in all cases where the method of collecting the tax imposed by this Act is not specifically provided, the tax shall be collected in such manner as the Commissioner of Internal Revenue with the approval of the Secretary of the Treasury may prescribe. All administrative and penalty provisions of Title VIII of this Act, in so far as applicable, shall apply to the collection of any tax which the Commissioner of Internal Revenue determines or prescribes shall be paid by stamp. Sec. 1004. That whoever fails to make any return required by this Act or the regulations made under authority thereof within the time prescribed or who makes any false or fraudulent return, and whoever evades or attempts to evade any tax imposed by this Act or fails to collect or truly to account for and pay over any such tax, shall be subject to a penalty of not more than $1,000, or to imprisonment for not more than one year, or both, at the discretion of the court, and in addition thereto a penalty of double the tax evaded, or not collected, or accounted for and paid over, to be assessed and collected in the same manner as taxes are assessed and collected, in any case in which the punishment is not otherwise specifically provided. Sec. 1005. That the Commissioner of Internal Revenue, with the approval 42 WAR EXCESS PROFITS TAX of the Secretary of the Treasury, is hereby authorized to make all needful rules and regulations for the enforcement of the provisions of this Act. ******* Sec. 1008. That in the payment of any tax under this Act not payable by stamp a fractional part of a cent shall be disregarded unless it amounts to one-half cent or more, in which case it shall be increased to one cent. Sec. 1009. That the Secretary of the Treasury, under rules and regulations prescribed by him, shall permit taxpayers liable to income and excess profits taxes to make payments in advance in installments or in whole of an amount not in excess of the estimated taxes which will be due from them, and upon determination of the taxes actually due any amount paid in excess shall be refunded as taxes erroneously collected: Provided, That when payment is made in installments at least one-fourth of such estimated tax shall be paid before the expiration of thirty days after the close of the taxable year, at least an additional one-fourth within two months after the close of the taxable year, at least an additional one-fourth within four months after the close of the taxable year, and the remainder of the tax due on or before the time now fixed by law for such payment: Provided further, That the Secre- tary of the Treasury, under rules and regulations prescribed by him, may allow credit against such taxes so paid in advance of an amount not ex- ceeding three per centum per annum calculated upon the amount so paid from the date of such payment to the date now fixed by law for such pay- ment; but no such credit shall be allowed on payments in excess of taxes determined to be due, nor on payments made after the expiration of four and one-half months after the close of the taxable year. All penalties pro- vided by existing law for failure to pay tax when due are hereby made ap- plicable to any failure to pay the tax at the time or times required in this section. Sec. 1010. That under rules and regulations prescribed by the Secretary of the Treasury, collectors of internal revenue may receive, at par and ac- crued interest, certificates of indebtedness issued under section six of the Act entitled "An Act to authorize an issue of bonds to meet expenditures for the national security and defense, and, for the purpose of assisting in the prosecution of the war, to extend credit to foreign governments, and for other purposes," approved April twenty-fourth, nineteen hundred and seventeen, and any subsequent Act or Acts, and uncertified checks in pay- ment of income and excess-profits taxes, during such time and under such regulations as the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury, shall prescribe; but if a check so received is not paid by the bank on which it is drawn the person by whom such check has been tendered shall remain liable for the payment of the tax and for all legal penalties and additions the same as if such check had not bee» tendered. General Provisions. Sec. 1212. That any amount heretofore withheld by any withholding agent as required by Title I of such Act of September eighth, nineteen hundred and sixteen, on account of the tax imposed upon the income of any in- dividual, a citizen or resident of the United States, for the calendar year nineteen hundred and seventeen, except in the cases covered by subdivision WAR EXCESS PROFITS TAX 43 (c) of section nine of such Act, as amended by this Act, shall be released and paid over to such individual, and the entire tax upon the income of such individual for such year shall be assessed and collected in the manner prescribed by such Act, as amended by this Act. ******* Sec. 1300. That if any clause, sentence, paragraph, or part of this Act shall for any reason be adjudged by any court of competent jurisdiction to be invalid, such judgment shall not affect, impair, or invalidate the remainder of said Act, but shall be confined in its operation to the clause, sentence, paragraph, or part thereof directly involved in the controversy in which such judgment shall have been rendered. ******* Sec. 1302. That unless otherwise herein specially provided, this Act shall take effect on the day following its passage. Approved, October 3, 1917. Effective October 4, 1917. LAW LIBRARY UNIVERSITY OF CALffW*** LOS ANGELES «n PRINTED BY KNISHT-COUNIHAN POINTING CO. FRANCISCO JAYLORD BROS. Inc Syracuse, N. Y. Stockton, Calif. W.H III H — —— — P UC SOUTHERN REGIONAL LIBRARY FACILITY AA 000 346 480 7