Evening star. [volume] (Washington, D.C.) 1854-1972, 1940-09-04
Use of Invested Capital Basis
Encouraged in Profit Tax Bill
Payments in Many instances Less
Than Under Average Earnings Plan

corporations will be allowed an ex-
emption of per cent of their new
capital Those using the invested
capital method will be allowed 10
per cent on new capital up to
$500 900, and per cent above that
amount. New capital is defined as
that which is obtained after the
beginning Of the tax period.
Inclusion Of Borrowed Capital.
Depending on the amount of the
latter, the. bill provides for the
inclusion of borrowed capital In in
vested capital under a graduated
limitation at varying percentages,
from 100 to 33hs. To illustrate, If
the equity invested capital of a cor
poration is 100000, it may include
$40 1000 Of its borrowed capital at
100 per cent, 100000 at 6625 per
cent, and all the remaining Dor
rowed capital at 1913 per cent.
Equity capital. as set forth in the
bill, includes the following items:
First, money paid in for stock, as
paid-in surplus, or as a contribution
to capital; second, property paid in
for stock, or as addition to capital;
third, taxable stock dividends, and,
fourth, accumulated earnings and
profits, as of the beginning of the
taxable year. All these four items
must be reduced by the amounts
distributed out of capital during
prior taxable years.
Fluctuations in the earnings and
profits account for the taxable year
have no effect upon the invested
capital for the taxable year." the
House committee said in its report.
Deficits in the earnings and profits
account, moreover, do not reduce the
invested capital. Nevertheless def
cts in the earnings and profits
account must be made good out of
earnings and profits before any in
crease in invested capital results
from the earnings and profits
account"
In any given year. a personal
service company, if it SO elect, may
be exempted from the excess profits
tax. To secure this exemption the
shareholders will be required to in
clude the undistributed income of
the corporation in their gross in
come, which is then subject to the
sources outside the United States.
for sirlines with Government mail
an airline will be subject TO the
regular normal and surtax rates. A
personal service corporation is de-
fined as a corporation whose income
is primarily to be ascribed to the
activities Of shareholders who are
regularly engaged in the active
conduct of its affairs, and are the
owners of at least 80 per cent in
value of all the stock of the cor
poration.
I Relief Provisions Included.
To place American corporations
on an equal competitive basis with
foreign corporations located abroad,
the House committee wrote into the
bill a provision allowing a credit
against the excess profits tax for
income and profit taxes paid during
the taxable year by domestic COR
porations to any foreign country, or
any possession of the United States.
This credit, however, will be subject
to the same limitations which apply
to the credits allowed for this pur-
pose on the normal corporate income
tax. This will prevent the credit
from reducing the tax on any excess
profits tax net income derived from
American sources. BY reason of this