"(d) COMPUTATION OF TAX FOR FUTURE TAXABLE YEAR.-The amount of the net abnormal income attributable to any future taxable year shall, for the purposes of this subchapter, be included in the gross income for such taxable year. The tax under this subchapter for such future taxable year shall not exceed the sum of "(1) the tax under this subchapter for such future taxable year computed without the inclusion in excess profits net income of the portion of such net abnormal income which is attributable to such year, and "(2) the decrease in the tax under this subchapter for the previous taxable year in which the whole of such abnormal income would without regard to this section be includible, which resulted by reason of the exclusion of the whole or a part of the abnormal income from the gross income for such previous taxable year; but the amount of such decrease shall be diminished by the aggregate of the increases in the tax under this subchapter which have resulted for the taxable years intervening between such previous taxable year and such future taxable year because of the inclusion in the gross income of the portions of such net abnormal income attributable to such intervening years." SEC. 6. ABNORMAL BASE PERIOD EARNINGS. Section 722 of the Internal Revenue Code is amended to read as follows: "SEC. 722. ADJUSTMENT OF ABNORMAL BASE PERIOD NET INCOME. "(a) GENERAL RULE.-In the case of a taxpayer whose first taxable year under this subchapter begins in 1940, if the taxpayer establishes "(1) that the character of the business engaged in by the taxpayer as of January 1, 1940, is different from the character of the business engaged in during one or more of the taxable years in its base period (as defined in section 713 (b) (1)); or "(2) that in one or more of the taxable years in such base period normal production, output, or operation was interrupted or diminished because of the occurrence of events abnormal in the case of such taxpayer; and "(3) the amount that would have been its average base period net income "(A) if the character of the business as of January 1, 1940, had been the same during each of the taxable years of such base period; and "(B) if none of the abnormal events referred to in paragraph (2) had occurred; and (C) if in each of such taxable years none of the items of gross income had been abnormally large, and none of the items of deductions had been abnormally small; and "(4) that the amount established under paragraph (3) is greater than the average base period net income computed under section 713 (d) or section 742, as the case may be, then the amount established under paragraph (3) shall be considered as the average base period net income of the taxpayer for the purposes of this subchapter. "(b) RULES FOR APPLICATION OF SUBSECTION (a).-For the purposes of subsection (a)— "(1) High prices of materials, labor, capital, or any other agent of production, low selling price of the product of the taxpayer, or low physical volume of sales owing to low demand for such product or for the output of the taxpayer, shall not be considered as abnormal. Ante, p. 19 Post, p. 701. "(2) The character of the business engaged in by the taxpayer as of January 1, 1940, shall be considered different from the character of the business engaged in during one or more of the taxable years in its base period only if "(A) there is a difference in the products or services furnished; or "(B) there is a difference in the capacity for production or operation; or "(C) there is a difference in the ratio of nonborrowed capital to total capital; or "(D) the taxpayer was in existence during only part of its base period; or "(E) the taxpayer acquired, before January 1, 1940, all or part of the assets of a competitor, with the result that the competition of such competitor was eliminated or diminished. "(3) The average base period net income determined under subsection (a) (3) shall be computed in the same manner as provided in section 713 (d), except paragraphs (2) and (4), but for such purposes computing excess profits net income and deficit in excess profits net income on the basis of the assumptions made in subsection (a) (3). "(4) If subsection (a) (1), or both subsections (a) (1) and (a) (2) are applicable to any taxpayer, its average base period net income under subsection (a) (3) shall not exceed the excess profits net income (as computed for the purposes of subsection (a) (3)) for the last taxable year in such base period. For the purposes of this paragraph, if such last taxable year is of less than twelve months, the excess profits net income for such taxable year shall be placed on an annual basis by multiplying by twelve and dividing by the number of months included in such taxable year. "(c) LIMITATION ON APPLICATION OF GENERAL RULE.-This section shall not be applicable unless "(1) the tax under this subchapter for the taxable year computed without reference to this section, exceeds 6 per centum of the taxpayer's normal-tax net income for such year; and "(2) the application of this section would result in a diminution of the tax otherwise payable under this subchapter for the taxable year by more than 10 per centum thereof. "(d) EXTENT OF REDUCTION IN TAX UNDER THIS SECTION.-The application of this section shall not reduce the tax payable under this subchapter for the taxable year below 6 per centum of the taxpayer's normal-tax net income for such year. The tax under this subchapter computed with the application of subsection (a) shall be increased by an amount equal to 10 per centum of the tax computed without reference to this section. "(e) APPLICATION FOR RELIEF UNDER THIS SECTION.-The taxpayer shall compute its tax and file its return under this subchapter without the application of this section. The benefits of this section shall not be allowed unless the taxpayer, within six months from the date prescribed by law for the filing of its return, makes application therefor in accordance with regulations to be prescribed by the Commissioner with the approval of the Secretary, except that if the Commissioner in the case of any taxpayer with respect to the tax liability of any taxable year (1) issues a preliminary notice stating a deficiency in the tax imposed by this subchapter such taxpayer may, within ninety days after the date of such notice, make such application, or "(2) mails a notice of deficiency (A) without having previously issued a preliminary notice thereof or (B) within ninety days after the date of such preliminary notice, such taxpayer may claim the benefits of this section in its petition to the Board or in an amended petition in accordance with the rules of the Board. If the application is not filed within six months after the date pre- SEC. 7. CONSOLIDATED RETURNS OF INSURANCE COMPANIES OTHER Section 730 (e) (6) of the Internal Revenue Code is amended to read as follows: "(6) Insurance companies subject to taxation under section 201 or 207." SEC. 8. INCORPORATION OF PARTNERSHIP OR SOLE PROPRIETOR SHIP. 54 Stat. 991. 26 U. S. C. § 740 (8) (a) Section 740 (a) (1) (C) of the Internal Revenue Code is amended by striking out "owned by such other corporation." and (1) (0). inserting in lieu thereof: "owned by such other corporation, or 53 Stat. 37, 39. "(D) Substantially all the properties of a partnership in an exchange to which section 112 (b) (5), or so much of section 112 (c) or (e) as refers to section 112 (b) (5), or to (5), 112 (c) or (e). which a corresponding provision of a prior revenue law, is or was applicable." 54 Stat. 991. 26 U. S. O. § 740 (b) (b) Section 740 (b) (4) of the Internal Revenue Code is amended by striking out the period at the end thereof and inserting in lieu (4). thereof a semicolon and the following: "or "(5) In the case of a transaction specified in subsection (a) (1) (D), the partnership whose properties were acquired." (c) Section 740 of the Internal Revenue Code is amended by inserting at the end thereof the following new subsection: (h) SOLE PROPRIETORSHIP.-For the purposes of sections 740 (a) (1) (D), 740 (b) (5), and 742 (g), a business owned by a sole proprietorship shall be considered a partnership.' (d) Section 742 of the Internal Revenue Code is amended by inserting at the end thereof the following new subsection: "(g) In the case of a partnership which is a component corporation by virtue of section 740 (b) (5), the computations required by this Supplement shall be made, under rules and regulations prescribed by the Commissioner with the approval of the Secretary, as if such partnership had been a corporation. For the purpose of such computations, in making the adjustment for income taxes required by section 711 (b) (1) (A), the partnership so regarded as a corporation shall be considered as having distributed all its net income as a dividend.” 54 Stat. 991. 26 U. S. C. § 740. 54 Stat. 992. Supra. 54 Stat. 977. 26 U. S. C. § 711 (b) (1) (A). Post, p. 701. 54 Stat. 975, 991. pp. Ante, PP. 18, 21, 23. 54 Stat. 986. 26 U. B. C. § 721, 722. SEC. 9. PROCEDURAL PROVISIONS. Part 1 of subchapter E of chapter 2 of the Internal Revenue Code is amended by inserting at the end thereof the following new section: "SEC. 732. REVIEW OF ABNORMALITIES BY BOARD OF TAX APPEALS. "(a) PETITION TO THE BOARD.-If a claim for refund of tax under this subchapter for any taxable year is disallowed in whole or in part by the Commissioner, and the disallowance relates to the application of section 711 (b) (1) (H), (I), (J), or (K), section 721, or section 722, relating to abnormalities, the Commissioner shall send notice of such disallowance to the taxpayer by registered mail. Within ninety days after such notice is mailed (not counting Sunday or a legal holiday in the District of Columbia as the ninetieth day) the taxpayer may file a petition with the Board of Tax Appeals for a redetermination of the tax under this subchapter. If such petition is so filed, such notice of disallowance shall be deemed to be a notice of deficiency for all purposes relating to the assessment and collection of taxes or the refund or credit of overpayments. "(b) DEFICIENCY FOUND BY BOARD IN CASE OF CLAIM.-If the Board finds that there is no overpayment of tax in respect of any taxable year in respect of which the Commissioner has disallowed, in whole or in part, a claim for refund described in subsection (a) and the Board further finds that there is a deficiency for such year, the Board shall have jurisdiction to determine the amount of such deficiency and such amount shall, when the decision of the Board becomes final, be assessed and shall be paid upon notice and demand from the collector. "(c) FINALITY OF DETERMINATION.-If in the determination of the tax liability under this subchapter the determination of any question is necessary solely by reason of section 711 (b) (1) (H), (I), Ante, pp. 18, 21, 23. (J), or (K), section 721, or section 722, the determination of such question shall not be reviewed or redetermined by any court or agency except the Board." 54 Stat. 975, 991. SEC. 10. CAPITALIZATION OF ADVERTISING, ETC., EXPENDITURES. (a) Part 1 of subchapter E of chapter 2 of the Internal Revenue Code is amended by inserting at the end thereof the following new section: "SEC. 733. CAPITALIZATION OF ADVERTISING, ETC., EXPENDITURES. "(a) ELECTION TO CHARGE TO CAPITAL ACCOUNT.-For the purpose of computing the excess profits credit, a taxpayer may elect, within six months after the date prescribed by law for filing its return for its first taxable year under this subchapter, to charge to capital account so much of the deductions for taxable years in its applicable base period on account of expenditures for advertising or the promotion of good will, as, under rules and regulations prescribed by the Commissioner with the approval of the Secretary, may be regarded as capital investments. Such election must be the same for all such taxable years, and must be for the total amount of such expenditures which may be so regarded as capital investments. In computing the excess profits credit, no amount on account of such expenditures shall be charged to capital account: "(1) For taxable years in the base period unless the election authorized in subsection (a) is exercised, or "(2) For any taxable year prior to the beginning of the base period. "(b) EFFECT OF ELECTION.-If the taxpayer exercises the election authorized under subsection (a) "(1) The net income for each taxable year in the base period shall be considered to be the net income computed with such deductions disallowed, and such deductions shall not be considered as having diminished earnings and profits. This paragraph shall be retroactively applied as if it were a part of the law applicable to each taxable year in the base period; and "(2) The treatment of such expenditures as deductions for a taxable year in the base period shall, for the purposes of section 734 (b) (2), be considered treatment which was not correct under the law applicable to such year." (b) AMENDMENT TO CHAPTER 1.-Section 23 (a) of the Internal Revenue Code is amended by adding at the end thereof a new paragraph, applicable to taxable years beginning after December 31, 1939, reading as follows: "(3) EXPENDITURES FOR ADVERTISING AND GOOD WILL.-If a corporation has, for the purpose of computing its excess profits credit under chapter 2E, claimed the benefits of the election provided in section 733, no deduction shall be allowable under paragraph (1) to such corporation for expenditures for advertising or the promotion of good will which, under the rules and regulations prescribed under section 733 (a), may be regarded as capital investments." SEC. 11. ADJUSTMENT IN CASE OF INCONSISTENT POSITION. Part 1 of subchapter E of chapter 2 of the Internal Revenue Code is amended by inserting at the end thereof the following new section: “SEC. 734. ADJUSTMENT IN CASE OF POSITION INCONSISTENT WITH PRIOR INCOME TAX LIABILITY. 66 "(a) DEFINITIONS.-For the purposes of this section "(1) TAXPAYER.-The term 'taxpayer' means any person subject to a tax under the applicable revenue Act. "(2) INCOME TAX.-The term 'income tax' means an income tax imposed by chapter 1 or chapter 2A of this title; Title I and Title IA of the Revenue Acts of 1938, 1936, and 1934; Title I of the Revenue Acts of 1932 and 1928; Title II of the Revenue Acts of 1926 and 1924; Title II of the Revenue Acts of 1921 and 1918; Title I of the Revenue Act of 1917; Title I of the Revenue Act of 1916; or section II of the Act of October 3, 1913; a war profits or excess profits tax imposed by Title III of the Revenue Acts of 1921 and 1918; or Title II of the Revenue Act of 1917; or an income, war profits, or excess profits tax imposed by any of the foregoing provisions, as amended or supplemented. (3) PRIOR TAXABLE YEAR-A taxable year beginning after December 31, 1939, shall not be considered a prior taxable year. (b) CIRCUMSTANCES OF ADJUSTMENT.— "(1) If "(A) in determining at any time the tax of a taxpayer under this subchapter an item affecting the determination of the excess profits credit is treated in a manner inconsistent with the treatment accorded such item in the determination of the income-tax liability of such taxpayer or a predecessor for a prior taxable year or years, and "(B) the treatment of such item in the prior taxable year or years consistently with the determination under this sub Post, p. 28. 53 Stat. 12. 54 Stat. 975. 54 Stat. 975, 991. 53 Stat. 4, 104. |