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DEFINITIONS

ARTICLE I. 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 meaning ascribed to them respectively in such articles.

ART. 2. Corporation.-The term "corporation" includes joint-stock companies or associations, no matter how created or organized, 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, Hawaii, 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 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 corporation 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.) 1

ART. 6. Prewar period. The term "prewar period" means the calendar years 1911, 1912, and 1913, or if a corporation or partnership 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.2

7 ART. 7. Trade," " ," "business," "trade or business" in case of corporations and partnerships.-In the case of a corporation or partnership all income from whatever source derived is deemed to be received from its trade or business, and the terms "trade," "business," and "trade or business" include all sources of income.3

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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 occupations and professions. When such activities constitute a vocation they shall be construed to be a trade or business whether continuously 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 derived shall not be included in "invested capital": (a) Gains or profits from transactions entered into for profit, but which are isolated, incidental, or so infrequent as not to constitute an occupation, and (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.4

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, 1917.5 (See Income Tax Regulations, art. 106.)

2" Prewar Period," see page 120.

3 Profits and income from the sale of capital assets as well as the profits from sales of commodities, are subject to the excess profits tax in the case of a corporation or partnership.

4 Illustration: "Land owner," page 123.

"Dividends," see page 21.

CORPORATIONS, PARTNERSHIPS, AND INDIVIDUALS SUBJECT TO

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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 13,6 required to make a return and to pay the tax, if any."

ART. II. 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 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. 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 II of Title I of the act of September 8, 1916, from the tax imposed by such title."

(b) Partnerships carrying on or doing the same kind of business or coming within the same description.

20 (c) Individuals to the extent that they carry on or do the same kind of business or come within the same description.

• "Exempt Organizations," see page 85.

7 Note that domestic corporations having a net income of $3,000 or more,

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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 compensations; and

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B. Net income which is derived from a trade or business having invested capital.10

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.11

In the case of an individual the net income subject to the excess profits tax shall be classified as provided in this article. Net income of class A shall be taxed as provided in article 15, and net income of class B shall be taxed as porvided in article 16.11

and domestic partnerships and citizens or residents of the United States having a net income of $6,000 or more, for the taxable year, are required to make returns, and respectively, under Article 21 (a) and (b) receive specific deductions of $3,000 and $6,000; that foreign corporations and partnerships and nonresident alien individuals, having net incomes of $3,000 or more, for the taxable year, are required to make returns, but, under Article 21 (c), receive no specific deduction. See "Inequity in case of foreign partnership," page 121. The inequality is not remedied by the Regulations.

8 "Nominal capital” is defined and restricted by Article 74.

'See Illustrations, page 133.

10 For relation of "invested capital" to book values, see page 130.

11 Take notice that the entire net income of corporations and partnerships is treated as a whole, whereas the income of individuals may be separated and be made subject to the respective rates according to whether actual capital is or is not employed. For example, in the case of a corporation, the principal business of which is manufacturing, earning $10,000 from that source upon invested capital, and $5,000 from sources requiring no invested capital, as commissions, the entire net income of $15,000 would be subject to rates applicable to invested capital; whereas, an individual

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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 resident of the United States; and upon the whole thereof in the case of a foreign corporation or partnership or of a nonresident alien individual.12

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: 13

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.

28 ILLUSTRATIONS. 13-(1) A corporation has a capital of $100,000, prewar earnings of 7 per cent, and a net income for the taxable years 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.

conducting a similar business would pay the tax, based on invested capital, upon $10,000 and the fixed rate of 8 per cent upon the amount of earnings requiring no invested capital, as commissions, less the specific exemption.

12 See foot-note No. 7, herein.

13 See Illustrations, page 142.