Evening star., 1940-10-07
(Second OF a Series.)
By OLIVER MCKEE.

BY OLIVER MCNEE.
Under the House bill, the base
period earnings of a corporation de-
termined. within certain limits. its
invested capital credit for any tax
able year.
This credit consisted of an amount
representing the base period rate OF
return. but not less than 7 per cent,
or more than 10 per cent on the first
s50O.COO of invested capital, and not
less than 5. or more than 10 per cent
on the remainder The Senate
eliminated the base period expert
ence of a corporation in computing
its invested capital credit, and fixed
the normal profit allowance for tax
payers choosing the invested capital
method, at per cent, without
regard to earnings during the base
years. The conference accepted the
Senate provision.
The provisions relating to bor-
rowed invested capital differ, in sew.
eral respects, from those contained
In the House bill. Borrowed capital
that is, Indebtedness evidenced by
bond, note, bill of exchange, deben-
ture. certificate of indebtedness. or
deed of trust-Was included in invest
ed capital by the House version under
q graduated limitation of varying
percentages, depending on the size
of the individual corporation. The
Senate amendment permitted all
corporations, irrespective of size, to
include so per cent of their bor-
rowed capital in computing their in
vested capital base. In addition to
the types of Indebtedness set forth
in the House bill. the Senate deflni-
ton of borrowed capital includes
advance payments received from
contracts with a foreign government
for materials and supplies, if the
amounts thus received are repayable
should the foreign government cam
eel the contract. The bill as en-
acted, contains the Senate provision
The House bill permitted a per-
sonal service corporation to have
its income taxed in the hands of
its shareholders. instead of paying
an excess profits tax. A personal
service corporation was defined as
one whose income is attributable
primarily to the activities of share
holders who are regularly engaged
In the conduct of its affairs. and
who are the owners, through the
taxable year, of at least 80 per cent
OF its stock. The House definition
specifically excluded foreign cor
porations and any corporation so
per cent or more of whose gross
income consists of gains, or profits,
from trading as a principal.
Two Alternative Definitions.
IN addition to that contained in
the House bill, the Senate pro-
vision offered two alternative defini-
tions of a personal service corpora
ton. One of these eliminated the
House requirement that the corpora
tion's income must come primarily
from the activities of its sharehold-
ers. The second permitted the in
clusion of corporations with silent
partners owning more than 20 per
cent OF tIleT STOCK.
The bill as finally approved de-
fines personal service corpora
ton as one whose income comes
mainly from the activities of share
holders engaged in its management.
and who own at least 70 per cent
of its stock. Foreign corporations
are excluded, as are companies that
derive half or more of their gross
income from trading as a principal
The Senate added to the House
bill provision permitting the fl
ing of consolidated returns by af-
filiated groups of corporations under
certain conditions. one of which was
that members of the affiliated group
must consent to regulations pre-
scribed by the commissioner of in
ternal revenue. The term affiliated
group was defined as those con-
nected through stock ownership
with common parent corporation.
The Senate provision excluded for
eign corporations, except 100 per
cent owned foreign subsidiaries of
domestic corporations. corporations
organized under the China Trade
Act. and certain companies obtain
ing income from United States pos
sessions.
Changes in Senate Amendment.
The conference made some
changes in the Senate amendment
relating to the filing of consolidated
returns and expanded the class of
corporations excluded from men,
bership in an affiliated group In
its final form the bill does not per-
init subsidiary corporations to file
consolidated returns as an affiliated
group unless the parent corpora
tion is a member of the group For
example the Treasury will not rec
ognize as an affiliated group two
industrial corporations whose COM
mon parent is an insurance or a
personal holding company.
The conference wrote into the bill
q provision permitting corporations