his competitors, as it is obvious that in his case his personal services were the controlling factors in earning an abnormal percentage of profit on capital.

The law further provides that the Commissioner shall determine the ratios between the average tax and the average net income of representative corporations.

LAW. Section 328. .

(b) For the purposes of subdivision (a) the ratios between the average tax and the average net income of representative corporations shall be determined by the Commissioner in accordance with regulations prescribed by him with the approval of the Secretary.

No relief possible unless earnings of representative concerns show lower ratio of earnings. After a taxpayer's claim for consideration under Section 327 has been granted it does not follow that the tax as computed under the relief sections will be any lower than if computed under the other sections.

LAW. Section 328. (a) ... . In computing the tax under this section the Commissioner shall compare the taxpayer only with representative corporation's 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.

It will be noted that in order to qualify under Section 327 the Commissioner must find other corporations whose net capital can be ascertained, and, having found them, the required points of similarity to the claimant are so numerous that many taxpayers seeking relief will find none, because other corporations in the same line of business have earned the same or a greater ratio of profits to capital. There is, however, a saving clause in the words "as nearly as may be." Corporations apparently may be very similar but if not exactly so the section would seem to extend wide discretion to the Commissioner.

'Section 326 defines invested capital.

Special record to be kept of all corporations whose tax is computed under the relief section.

LAW. Section 328. . . . . (c) The Commissioner shall keep a record of all cases in which the tax is determined in the manner prescribed in subdivision (a), containing the name and address of each taxpayer, the business in which engaged, the amount of invested capital and net income shown by the return, and the amount of invested capital as determined under such subdivision. The Commissioner shall furnish a copy of such record and other detailed information with respect to such cases when required by resolution of either House of Congress, without regard to the restrictions contained in section 257.

'See page 103. Refers to returns as public records, but with specific restrictions on their being made public.

CHAPTER XXXVI

EXCESS AND WAR PROFITS TAXES-FORMER PROCEDURE

The 1917 law imposed the excess profits tax upon individuals and partnerships as well as upon corporations. The procedure under the 1917 law has necessarily been greatly modified by the 1918 law which affects corporations only. In view of the extent of the regulations issued under the 1917 law it was not deemed practicable to incorporate all the former procedure relating to the 1917 law throughout the preceding four chapters. Such part as has not been included there will be found in the following pages.

Individuals in "trade or business" were subject to the graduated rates of tax. Individuals deriving their income from professions, salaries and other personal services were subject to a rate of 8 per cent (Section 209).

REGULATION. 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. (Reg. No. 41, 1918, ¶¶ 8, 9.)

There have been many rulings defining “trade or business."

[Former Procedure]

Transactions which were obviously isolated were held not to be subject to the tax. On the other hand the tax has been imposed in cases which the law was not intended to cover.

Taxpayers should bear in mind that when an assessment has been made which does not appear to conform to the regulations, an appeal to the Commissioner is always permissible.

Profits which were not subject to excess profits tax.Under the 1918 law little difficulty will be experienced in deciding whether or not profits are subject to the excess profits tax, because individuals and partnerships are not subject to the 1918 law and corporations (exclusive of personal service corporations) must pay on all profits.

one.

Under the 1917 law, however, the question was a very live The law did not intend that the tax should be imposed on any but business profits, but there are many transactions resulting in profits which are on the border line between investment profits and business profits.

Investment profits in turn must have been isolated or unusual to escape the tax, because if one individual had a number of transactions resulting in profits and losses there would be reasonable ground for claiming that he was in the business in which such transactions occurred, and the burden of proof might be thrown on him to prove that he was not a dealer in securities.

The mere number of transactions would not be sufficient evidence to prove that an individual was in business during 1917, because any large investor might buy or sell stocks or bonds or real estate frequently throughout the year, and each transaction might in itself be regarded as an isolated transaction.

The rulings of the Department on the subject of isolated transactions are as follows:

[Former Procedure]

RULING. A school teacher buys a farm upon which oil is discovered, and sells the farm at a large profit. Is such profit subject to excess profits tax?

Not unless the teacher is also a farmer or buys and sells real estate with sufficient frequency to make the latter one of his occupations. The teacher may have an occupation or business other than teaching the profits from which would be taxable, but if he buys a farm simply as an isolated investment and does not run it, the profits from its sale would not be subject to the tax.

A landlord renting a large farm on shares, which requires considerable attention, employs an agent to look after his interest, see that the farm buildings are kept in good repair, collect and market his share of the crops, etc. Is the rental taxable?

Yes; at the graduated rates. The landlord is engaged in business with respect to the farm and the fact that he employs an agent to look after his business does not relieve him from the tax nor entitle him to the 8 per cent rate.

A manufacturer who has been in business for many years sells his factory at a considerable profit. Is such profit subject to excess profits tax?

Yes; because the profit in this and similar cases is a normal result of winding up the business; it is part of the business. On the other hand, if the manufacturer had. bought a farm and sold it at a profit, the profit would not-if the transaction were isolated-be taxable. Profit from an isolated transaction outside of his business is not taxable. Profit from an isolated transaction connected with his business is taxable. (Excess Profits Tax Primer, 1918, questions 6, 11, 12.)

Returns

Individuals. Excess profits tax returns were not required from individuals unless they were subject to the graduated rates of tax and had a net income in excess of $6,000. If subject to the 8 per cent tax an individual's excess profits tax was determined by and included in form 1040.

If subject to the graduated rates form 1101 was used. If it was not possible to ascertain the invested capital, form 1101 was to be used as the basis for subsequent claim to assessment under Section 210.