amount computed under 311 (a) (2) is less than 10 per cent of the invested capital. The amount computed under 311 (a) (2) would be 9/12 of the sum of the average prewar net income or $3,500, plus 10 per cent of the amount by which the full invested capital of $120,000 actually used during the taxable period exceeds the average prewar invested capital of $50,000 (i. e., 10 per cent of $70,000) or $7,000, a total of $10,500, 9/12 of which is $7,875. This amount is less than 10 per cent of the invested capital for the taxable year as computed under Section 311 (b). It will be noted that as provided in Section 326 (d) the invested capital used in Section 311 (a) (2) is the full amount of $120,000, but that the invested capital used for all other purposes of 275/365 of this amount or $90,410.96. FIRST BRACKET. The amount or portion of the net income ($50,000) in excess of the excess-profits credit ($9,482.88) and not in excess of 20 per cent of the invested capital (i. e., 20 per cent of $90,410.96) or $18,082.19 is $8,599.31. The tax computed under this bracket is 30 per cent of this amount (i. e., 30 per cent of $8,599.31) or $2,579.79. SECOND BRACKET. The amount or portion of the net income ($50,000) in excess of 20 per cent of the invested capital (i. e., 20 per cent of $90,410.96) or $18,082.19 is $31,917.81. The tax computed under this bracket is 65 per cent of this amount (i. e., 65 per cent of $31,917.81) or $20,746.58. THIRD BRACKET. Eighty per cent of the amount or portion of the net income in excess of the war-profits credit (i. e., 80 per cent of the amount by which $50,000 exceeds $11,291.11, or $38,708.89) is $30,967.11. The amount of the tax computed under the first and second brackets ($2,579.79 plus $20,746.58) is $23,326.37. The tax computed under this bracket is the amount by which $30,967.11 exceeds $23,326.37 or $7,640.74. TOTAL TAX. The total tax would be the sum of the taxes computed under the three brackets (i. e., $2,579.79 plus $20,746.58 plus $7,640.74) or $30,967.11, were it not that Section 302 provides that the maximum tax shall not in this case exceed $29,100. The total tax for the nine months ending December 31, 1918, is therefore $29,100. No. 10. Illustration of Computation of Limitation. In illustration No. 9, the net income is $50,000 and the war excess-profits tax as computed under Section 301 (a) is $30,967.11. Section 302 of the statute provides, however, that the tax under Section 301 (a) shall not be more than 30 per cent of the net income in excess of $3,000 and not in excess of $20,000 (i. e., 30 per cent of $17,000 or $5,100, plus 80 per cent of $30,000) or $24,000, a total of $29,100. In this case the tax under Section 301, amounting to $30,967.11, will be reduced by the provisions of Section 302 to $29,100. CHAPTER 46 THE CAPITAL STOCK TAX 3 This tax is popularly known as the Capital Stock Tax, although the statute describes it as "a special excise tax with respect to carrying on or doing business." The present law describes the tax in the same manner as did the 1916 Law 2 and imposes a tax "on and after July 1, 1918, in lieu of the tax imposed by the 1916 Law." The tax is imposed upon every domestic corporation and upon every foreign 5 corporation doing business in the United States. The Revenue Act of 1918 in imposing this tax, does not, like the 1916 Law, limit the corporations taxed to those organized "for profit" and apparently applies to every corporation having capital stock whether organized for profit or not, except those exempt from income tax under Section 231 of the Revenue Act of 1918.6 The tax is imposed "with respect to carrying on or doing business" and is payable in advance by every taxable cor 1 Rev. Act of 1918, § 1000. 2 Act of September 8, 1916, § 407. 3 The term "domestic" when applied to a corporation, means "created or organized in the United States." 1918, §1.) (Revenue Act of 4 The term "corporation" includes "associations, joint-stock companies and insurance companies." (Rev. Act of 1918, § 1.) 5 The term 'foreign," when applied to a corporation, means "created or organized outside the United States." (Rev. Act of 1918, §1.) 6 Rev. Act of 1918, § 1000. The 1916 Law provided expressly that corporations exempt under the provisions of Section 11 of the 1916 income tax law were also exempt for purpose of the capital stock tax. poration engaged in business during any part of the preceding year. Definitions. The word "corporation" is used in this chapter, unless otherwise stated, in the sense defined in the Revenue Act of 1918, and includes a corporation, association, joint-stock company, or insurance company. The phrase "taxable year" as used in this chapter means the fiscal year of the Government beginning on the first day of July of each calendar year and ending on the last day of June the year following. The phrases "preceding year" and "preceding taxable year" mean the twelve-month period ending immediately prior to the "taxable year" as above defined. Domestic Corporations. The tax applies to a domestic corporation if (a) it is carrying on or doing business; (b) has capital stock; (c) was engaged in business for some part of the preceding year ending June 30th, and (d) is not one of the corporations enumerated as exempt for purpose of income tax. The 1916 Law provided that the corporation should be organized for profit and have a capital stock represented by shares. In this respect the 1918 Law is broader in its scope. It should be noted that the law applies not only to corporations but also to all associations "organized in the United States" and in this respect seems to be broader in its scope than the 1909 Law, which was construed to apply only to corporations, joint-stock companies or associations "organized under the laws of the United States or of any State or Territory of the United States or under the Acts of Congress applicable to Alaska or the District of Columba." Appar some 7 It was the intention of Congress to embrace within the 1909 Law only such corporations and joint-stock associations as were organized under some statute or derived from that source quality or benefit not existing at the common law. (Eliot v. Freeman, 220 U. S. 178.) This was a case involving a so-called "Massachusetts Real Estate Trust" which was held not to be taxable under the 1909 Law but which would seem to be taxable under the capital stock tax law. ently it was the intent of Congress to make the present as well as the former capital stock tax law apply to associations which were held not to be taxable under the 1909 Law, because not organized under some statute. Foreign Corporations. A foreign corporation is taxable if (a) it is "carrying on or doing business in the United States' during the taxable year; (b) was engaged in business in the United States during some part of the preceding year ending June 30th; (c) is not one of the corporations enumerated in Section 231 of the law as exempt from income tax, and (d) has capital employed in the transaction of its business in the United States. It is to be noted that a foreign corporation is not subject to this tax merely because it receives income from sources within this country. To be taxable, a foreign corporation must be carrying on or doing business in the United States and must have capital employed in the transaction of such business. The chapter on foreign corporations, in the foregoing part of this book, contains decisions and rulings which define what is "doing business" by foreign corporations, and such decisions and rulings have application to this tax. It should be borne in mind, however, that some of the rulings with respect to the taxability of foreign corporations under the income tax law have no application to this law, since this tax is imposed only when the foreign corporation is carrying on or doing business in this country and has capital employed in the transaction of such business.9 Basis and Rate of Tax. The basis of the capital stock tax differs accordingly as the taxable corporation is domestic or foreign or is an insurance company. Domestic Corporations. The basis of the tax in the case of all domestic corporations is "the fair average value of its capital stock for the preceding year ending June 30th." No deduction is allowed by reason of the fact that a part 8 Rev. Act of 1918, § 1000. 9 Laurentide Co., Ltd., v. Durey, 231 Fed. 223, and Bryant & May, Ltd. v. Scott, 226 Fed. 875 are cases in point. See Page 251. F. T.-50 |