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into the profit and loss account in order that the book net income might be adjusted to correspond with the net taxable income as defined by the 1916 law, amended by the 1917 law.

It was important to analyze the invested capital and net income of the pre-war period whenever the rate of profit as shown by the books appeared to be less than 9 per cent.

For suggestions as to adjustments and procedure required to secure a higher rate of deduction than that shown by the books, see page 805.

SALARIES AND INTEREST.

REGULATION. If, in computing net income for purposes of the excess profits tax, a partnership makes a deduction as allowed by article 32 for salaries paid to partners during the taxable year, it must also in computing net income for the pre-war period make a corresponding deduction; and if it makes such a deduction as allowed by article 33 for interest paid to partners, it must also in computing the net income for the pre-war period make a corresponding deduction for any such interest actually paid during that period. (Reg. No. 41, 1918, ¶ 78.)

REGULATION. The net income of a partnership for each of the calendar years 1911, 1912, and 1913 shall be determined in the same manner as the net income for the taxable year, except that dividends upon the stock or from the net earnings of corporations, joint-stock companies or associations, or insurance companies, subject to the tax imposed by Section 38 of the act of August 5, 1909, or by Section II of the act of October 3, 1913, shall be deducted (article 30). (Reg. No. 41, 1918, ¶ 72.)

RETURNS FOR FISCAL YEAR ACCEPTABLE.—

RULING. Receipt is acknowledged of your letter of February 7, 1918, which reads as follows: "A firm of New York stock brokers have adopted a fiscal year ending May 1, and propose to render their excess profits tax return on the basis of such fiscal year. May this firm, in ascertaining the profits for the pre-war period, use the fiscal years ending May 1, 1911, May 1, 1912, and May 1, 1913, or the fiscal years ending May 1, 1912, May 1, 1913, and May 1, 1914? Unless they are permitted to do this, it will practically require a reconstruction of their books."

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In reply you are advised that under article 6, Regulations No. 41, relative to the excess profits tax imposed by the war revenue act, approved October 3, 1917, the pre-war period means the calendar years 1911, 1912 and 1913.

However, in those cases where the taxpayer had established a fiscal year in effect during the pre-war period, it will be permissible in ascertaining the amount of the capital invested and the percentage of profit, to prorate the amounts pertaining to the respective fiscal years in arriving at the amounts applicable to the calendar years. For example, where the fiscal year terminated on April 30, 1911, as in the above case, the amount of invested capital and percentage of profit would be four-twelfths of the amount for the fiscal year ending on that date, and eight-twelfths of the amount for the succeeding fiscal year, and the same method should be continued to cover the entire pre-war period. (Letter to Wollman & Wollman, New York, N. Y., signed by Deputy Commissioner L. F. Speer, and dated February 26, 1918.)

Nominal Capital-The 8 Per Cent Rate of Tax

In view of the similarity of personal service corporations as defined under the 1918 law and business with "nominal” capital as dealt with under the 1917 law, the regulations and rulings applicable to the latter are reproduced here more extensively than if the question were one of former procedure only.

Computation of tax when there is no capital or nominal capital merely.

1917 LAW. Section 209. That in the case of a trade or business having no invested capital or not more than a nominal capital there shall be levied, assessed, collected and paid, in addition to the taxes under existing law and under this act, in lieu of the tax imposed by section two hundred and one, a tax equivalent to eight per centum of the net income of such trade or business in excess of the following deductions: In the case of a domestic corporation $3,000, and in the case of a domestic partnership or a citizen or resident of the United States $6,000; in the case of all other trades or business, no deduction.

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Application of Section 209.

REGULATIONS. Section 209 (article 15) applies primarily to occupations, professions, trades, and businesses engaged principally in rendering personal service in which the employment of capital is not necessary and the earnings of which are to be ascribed primarily to the activities of the owners.

In determining whether a trade or business is taxable under article 15 no weight will be given to the fact that it is carried on by means of personal service unless the principal owners are regularly engaged in the active conduct of the trade or business.

Application of Section 209 not to be affected by mere size of capital, form of organization, etc.—

Business concerns which render professional or personal service and are of the class normally taxable under article 15 shall not be taken out of that class merely because of the size of the capital if the employment of such capital is necessitated by delay and irregularity in the receipt of fees, etc., or if such capital is wholly or mainly used as a fund from which to advance salaries, wages, etc., or to provide office furniture, accommodations, and equipment, nor because of the form of organization, whether corporation or partnership, nor in the case of a partnership because of the number of partners.

Agents and brokers.

Agents and brokers requiring and using no capital or merely a nominal capital in their business are taxable under article 15, but commission houses regularly employing a substantial amount of capital, whether to lend to principals or to carry goods on their own account, are not deemed to be agents or brokers and are taxable under the provisions of article 16.

Meaning of “nominal capital"; businesses which will not be deemed to have nominal capital.—

The term "nominal capital" as used in Section 209 means in general a small or negligible capital whose use in a particular trade or business is incidental. The following will not be construed as businesses having a nominal capital for purposes of excess profits tax:

(a) A business which because of conditions arising from the war or exceptional opportunities for profits earns a disproportionately high rate of profit during the taxable year, if it belongs to a class which necessarily and customarily requires capital for its operation.

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In the determination of doubtful cases stress will be laid upon the normal relation of net income to capital during pre-war years;

(b) Corporations which, although their capitalization is nominal, employ a substantial amount of capital in their business;

(c) A business having a substantial capital, but whose invested capital within the meaning of Section 207 is reduced to a nominal amount by the operation of the restrictive clauses of that section, e.g., where the capital, consisting originally of a small amount of cash paid in, has since appreciated in value, or where the capital is largely covered by indebtedness or consists principally of tax-free securities or of intangible assets built up or developed by expenditures which have been regularly deducted as items of current expense. (Reg. No. 41, 1918, ¶¶¶ 170-177.)

Individual members of partnership.—

REGULATIONS. Inasmuch as a partner in his individual capacity is not considered to be engaged in trade or business with respect to his share in the profits of the partnership, he is not subject to excess profits tax thereon. Consequently, in computing his net income for purposes of the excess profits tax he need not include his share of the partnership profits.

He shall, however, in computing his net income of class A under article 35, include any salary or compensation from the partnership for personal services (including any amount allowed to the partnership as a deduction on his account for the period prior to March 1, 1918, in accordance with article 32.) (Reg. No. 41, 1918, ¶¶ 91, 92.)

Individuals-determination of net income where there is no invested capital or only nominal capital.

REGULATION. The net income which is derived from a trade or business having no invested capital or not more than a nominal capital, including salaries, wages, fees or other compensations (constituting net income of class A as defined in article 14) shall be determined for the taxable year by adding the total net income from all such sources (or in the case of a non-resident alien individual the total net income from all such sources within the United States) as reported for income tax purposes for the same year. (Reg. No. 41, 1918, ¶ 79.)

Barbers.

RULING. . . . . if the principal stockholders of the corporation are actively engaged as barbers, etc., in the various shops, the cor

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poration would be taxed at the 8 per cent rate under Section 209, even though other barbers, etc., are employed, but if the principal stockholders are not so actively engaged, the corporation would be taxed at the graduated rates under Section 201. (Letter to Ivins, Wolff & Hoguet, New York, N. Y., signed by Commissioner Daniel C. Roper, and dated March 25, 1918.) (T. D. 2689.)

Photographers.—

RULING. If an individual or partnership engages in the photograph business and owners devote their time to the business so that the income may be clearly ascribed to their personal services, such income will be taxable under Section 209, but in determining whether the business is taxable under Section 209 no weight will be given to the fact that it is carried on by means of personal services unless the owners are regularly engaged in the active conduct of the trade or business.

This condition would scarcely obtain in the case of a corporation which conducts "a number of photographic studios." The business would no doubt be carried on by employees other than the owners and would necessitate the use and employment of a substantial capital to the use of which the income would be ascribed. Indeed, the very purpose of the corporation would be to secure a return upon the capital invested in the business. There is, therefore, an actual presumption that "a corporation conducting a number of photograph studios" does not come within the purview of Section 209 but is taxable under Section 201 of title II of the act of October 3, 1917. It should make its return accordingly submitting therewith any explanatory statement tending to support the contention that it is engaged in rendering personal services to which the income to the corporation may be ascribed. (Letter to Gallert & Heilborn, New York, N. Y., signed by Deputy Commissioner L. F. Speer, and dated April 8, 1918.)

Vaudeville theatres.

RULING. It is the opinion of this office that the vaudeville theatre business, almost without exception, is a business which ordinarily and necessarily requires for its operation and conduct, invested capital. The income which it receives and upon which it is taxable cannot be primarily ascribed to personal services and is a direct result of the capital used and employed in the business.

It is held therefore that unless otherwise conclusively shown, the profits arising from the business or trade, namely, the operation