(allowing in such computation only the same proportionate part of the war-profits credit and excess-profits credit allowed), and the tax upon the second part will be the same percentage thereof as the tax so computed upon the first part is of such first part. In other words, the tax upon the income produced by capital is first to be ascertained, and the same rate of tax on such income is to be applied in taxing the remainder of the income of the business.

AMOUNT OF TAX.

Q. What are the rates of the War-profits and Excessprofits Tax for 1919?

A. For the year 1919 the tax is levied under two (2) brackets as follows:

First Bracket.

20% of the net income over the Excess-Profits Credit and under 20% of the Invested Capital.

Second Bracket.

40% of the net income over 20% of the Invested Capital.

A corporation, however, which derives in such year a net income of more than $10,000 from any government contract or contracts made between April 6, 1917 and November 11, 1918, both dates inclusive, is subject to a tax on its entire net income equal to the sum of such a portion of a tax, computed at the 1918 rates, as the amount of the net income attributable to such government contracts bears to the entire net income, and such a portion of a tax, computed at the 1919 rates, as the amount of the net income not attributable to such government contracts bears to the entire net income.

Q. How do the rates of the War-Profits and ExcessProfits Tax for 1919 differ from the rates for 1918?

A. The tax for 1918 was levied under three (3) brackets as follows:

First Bracket.

30% of the net income over the Excess-Profits Credit and under 20% of the Invested Capital.

Second Bracket.

65% of the net income over 20% of the Invested Capital.

Third Bracket.

The sum, if any, of which 80% of the amount of the net income in excess of the War-Profits Credit exceeds the amount of the tax computed under the first and second brackets.

Q. What is the Excess-Profits Credit?

A. A specific exemption of $3,000 plus 8% of the Invested Capital for the taxable year.

Q. If our corporation's Excess-Profits Credit is in excess of 20% of its Invested Capital can we apply the remainder of such credit against income in the second bracket?

A. Yes.

Q. Our corporation's return covers a period less than 12 months. Will it be allowed the full specific exemption

of $3,000?

A. No, the $3,000 exemption must be reduced to an amount which is the same proportion of $3,000 as the number of months in the period is of 12 months.

Q. What is the War-Profits Credit referred to under the rates applicable to the year 1918?

A.

The War-Profits Credit consists of the sum of:

(1) A specific exemption of $3,000.

(2) An amount equal to the average net income for the corporation for the pre-war period (1911, 1912 and 1913) plus or minus, as the case may be, 10% of the difference between the average Invested Capital of the pre-war period and the Invested Capital for the taxable year. If the tax is computed for a period of less than 12 months, such amount must be reduced to the same proportion thereof as the number of months in the period is of 12 months.

If a corporation has no net income for the pre-war period, or if the pre-war income as computed under (2) is less than 10% of its Invested Capital for the taxable year, then the War-Profits Credit consists of (1) $3,000 and (2)

an amount equal to 10% of the Invested Capital for the taxable year.

Q. What is the pre-war period?

A. The calendar years 1911, 1912 and 1913 or if the corporation was not in existence during the whole of such period then as many of such years during the whole of which the corporation was in existence.

Q. Our corporation in 1919 derived more than $10,000 net income from government contracts made between April 6, 1917 and November 11, 1918. It was not in existence in the pre-war period. What will the War-Profits Credit be in determining a tax on that part of its net income derived from government contracts to be computed at the 1918 rates?

A. If the corporation was not in existence during the whole of at least one calendar year during the pre-war period, then the War-Profits Credit consists of (1) $3,000 and (2) an amount equal to the same percentage of the invested capital of the taxpayer for the taxable year as the average percentage of the net income to invested capital for the pre-war period of corporations engaged in a business of the same general class as that conducted by the taxpayer, but such amount will in no case be less than 10% of the invested capital of the taxpayer for the taxable year. 10% will be used pending the determination of such average percentage by the Commissioner of Internal Revenue. If, however, a majority of its stock at any time during the taxable year is owned or controlled, directly or indirectly, by a corporation which was in existence during the whole of at least one calendar year during the pre-war period, or if 50 per centum or more of its gross income (as computed for income tax purposes) consists of gains, profits, commissions or other income derived from a government contract or contracts made between April 6, 1917 and November 11, 1918, both dates inclusive, then the war-profits credit shall consist of (1) $3,000 and (2) an amount equal to 10% of the invested capital for the taxable year.

Q. Our corporation's fiscal year ended Oct. 31, 1919.

In view of the difference between the rates for the years 1918 and 1919, how is the tax to be computed?

A. Since one-sixth of the fiscal year falls in 1918 and fivesixths in 1919 the tax will be the sum of one-sixth of a tax computed on its entire net income for the full fiscal year at the 1918 rates and five-sixths of a tax on its entire net income for the full fiscal year computed at the 1919 rates.

Q. The capital of our corporation is small which will result in its being subject to a very high tax. Has any provision been made for a maximum tax in such cases?

A. Yes. The War-Profits and Excess-Profits Tax for 1919 will in no case be more than 20% of the amount of the net income in excess of $3,000 and not in excess of $20,000 plus 40% of the amount of the net income in excess of $20,000.

This provision does not apply where the tax figured in the regular way is less.

REPRESENTATIVE CORPORATIONS

Q. In what cases will the tax be determined on the basis of the rates of tax paid by representative corporations in the same business or trade?

A. In the following cases, viz:

(a) Where the Commissioner is unable to determine the invested capital:

(b) In the case of a foreign corporation;

(c) Where a mixed aggregate of tangible property and intangible property has been paid in for stock or for stock and bonds and the Commissioner is unable satisfactorily to determine the respective values of the several classes of property at the time of payment, or to distinguish the classes of property paid in for stock and for bonds, respectively;

(d) Where upon application by the corporation, the Commissioner finds and so declares of record that the tax if determined without benefit of this section would, owing to abnormal conditions affecting the capital or income of the corporation, work upon the corporation an exceptional

hardship evidenced by gross disproportion between the tax computed without benefit of this section and the tax computed by reference to the representative corporations specified in Section 328. This subdivision shall not apply to any case (1) in which the tax (computed without benefit of this section) is high merely because the corporation earned within the taxable year a high rate of profits upon a normal invested capital, nor (2) in which 50 per centum or more of the gross income of the corporation for the taxable year (computed for income tax purposes) consists of gains, profits, commissions or other income derived on a cost-plus basis from a government contract or contracts made between April 6, 1917, and November 11, 1918, both dates inclusive.

In all such cases the tax will be the amount, which bears the same ratio to the net income of the taxpayer (in excess of the specific exemption of $3,000) for the taxable year as the average tax of representative corporations engaged in a similar business bears to their average net income (in excess of specific exemption of $3,000) for such year. In the case of a foreign corporation, the tax shall be computed without deducting the specific exemption of $3,000 either for the taxpayer or the representative corporations. In computing the tax in such cases, the Commissioner must compare the taxpayer only with representative corporations whose invested capital can be satisfactorily determined under Section 326 and which are as nearly as may be similarly circumstanced with respect to gross income, net income, profits per unit of business transacted and capital employed, the amount and rate of war profits or excess profits and all other relevant facts and circumstances.

If the tax is computed as above the provision regarding the payment of the tax in instalments is somewhat modified. See heading "Payment of Tax" below.

INVESTED CAPITAL

Q. What is meant by invested capital?

A. Section 326 of the Act defines Invested Capital as follows: