(2) The tax upon the second or personal service part of the net income (i. e., $60,000 derived from engineering) is the same percentage of such part of the net income (i. e., 38.62 per cent of $60,000) or $23.172.

(3) The total tax is the sum of $11,586 (the tax upon the first part of the net income derived from contracting) and $23,172 (the tax upon the second part of the net income derived from engineering) or $34,758.

EXEMPTIONS.

SEC. 304. (a) That the corporations enumerated in section 231 shall, to the extent that they are exempt from income tax under Title II, be exempt from taxation under this title.

(b) Any corporation whose net income for the taxable year is less than $3,000 shall be exempt from taxation under this title.

(c) In the case of any corporation engaged in the mining of gold, the portion of the net income derived from the mining of gold shall be exempt from the tax imposed by this title, and the tax on the remaining portion of the net income shall be the proportion of a tax computed without the benefit of this subdivision which such remaining portion of the net income bears to the entire net income,

ART. 751. Corporations exempt from tax.-A corporation whose net income for a full taxable year of twelve months is less than $3,000 is exempt from the tax. If the taxable period is less than twelve months the corporation is exempt from the tax if its net income for the period is less than the same proportion of $3.000 as the number of months in the period is of twelve months, any fractional part of a month being counted as the number of days in such part of a month divided by 30. Certain classes of corporations, including personal service corporations, named in section 231 of the statute are also exempt. See articles 511-522.

ART. 752. Net income exempt from tax.-If a corporation is engaged in the mining of gold, the portion of its net income derived from that source is exempt from tax. The tax on the remaining portion of its net income is the proportion of the tax that would have been payable, had the entire net income been derived from other sources than the mining of gold, which such remaining portion of the net income bears to the entire net income. For the method of determining the net income derived from the mining of gold see article 715. ART. 753. Illustration of computation of tax where net income from gold mining.

In the case of the corporation used as an illustration in article 716 let it be assumed that it is engaged in the mining both of gold and of other rare metals; that the Commissioner finds under article 715 that $35,000 of its gross income is properly attributable to the mining of gold; and that $20.000 of the deductions allowed are properly applicable to the gross income from that source. The portion of the net income attributable to the mining of gold and exempt from tax would be $15,000. The remaining portion of the net income is $25,000 and the tax thereon is the same proportion of the tax computed on the entire net income without the benefit of the exemption (i. e., a tax of $17,600) which 22700°-21- -13

the remaining portion of the net income ($25,000) bears to the entire net income ($40,000). The tax will therefore be 5/8 of the tax of $17,600 computed without the benefit of the exemption, or $11,000.

APPORTIONMENT OF SPECIFIC EXEMPTION.

SEC. 305. That if a tax is computed under this title for a period of less than twelve months, the specific exemption of $3,000, wherever referred to in this title, shall be reduced to an amount which is the same proportion of $3,000 as the number of months in the period is of twelve months.

ART. 761. Apportionment of specific exemption. The specific exemption of $3,000 is apportioned only in the case where a return is made covering a period of less than twelve months. In such a case the specific exemption is the same proportion of $3,000 as the number of months in the period is of twelve months, any fractional part of a month being counted as the number of days in such part of a month divided by 30. Thus, in the case of a corporation organized May 12, 1918, and making a return for the period ending December 31, 1918, the exemption is $1,916.67, that is, the same proportion of $3,000 as 78 months is of 12 months. This provision is inapplicable where the return is made for a full fiscal year beginning prior to January 1, 1918, and ending after that date, even though the income for such fiscal year is not subject to full taxation under the present statute.

PREWAR PERIOD.

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SEC. 310. That as used in this title the term prewar period" means the calendar years 1911, 1912, and 1913, or, if a 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.

ART. 771. Prewar period. The prewar period in the case of each corporation covers so many of the calendar years 1911, 1912, and 1913 during the whole of which it, or a predecessor trade or business, was in existence. See section 330 of the statute and articles 931-934. If a new enterprise was launched in corporate form in June, 1912, its prewar period would accordingly be the calendar year 1913. The prewar period when mentioned without reference to any particular corporation means the calendar years 1911, 1912, and 1913.

WAR PROFITS CREDIT.

SEC. 311. (a) That the war-profits credit shall consist of the sum of: (1) A specific exemption of $3.000; and

(2) An amount equal to the average net income of the corporation for the prewar period, plus or minus, as the case may be, 10 per centum of the difference between the average invested capital for the prewar period and the invested capital for the taxable year. If the tax is computed for a period of less than twelve months such amount shall be

reduced to the same proportion thereof as the number of months in the period is of twelve months.

(b) If the corporation had no net income for the prewar period, or if the amount computed under paragraph (2) of subdivision (a) is less than 10 per centum of its invested capital for the taxable year, then the war-profits credit shall be the sum of:

(1) A specific exemption of $3,000; and

(2) An amount equal to 10 per centum of the invested capital for the taxable year.

(c) If the corporation was not in existence during the whole of at least one calendar year during the prewar period, then, except as provided in subdivision (d), the war-profits credit shall be the sum of:

(1) A specific exemption of $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 net income to invested capital, for the prewar period, of corporations engaged in a trade or business of the same general class as that conducted by the taxpayer; but such amount shall in no case be less than 10 per centum of the invested capital of the taxpayer for the taxable year. Such average percentage shall be determined by the Commissioner on the basis of data contained in returns made under Title II of the Revenue Act of 1917, and the average known as the median shall be used. If such average percentage has not been determined and published at least 30 days prior to the time when the return of the taxpayer is due, then for purposes of such return 10 per centum shail be used in lieu thereof; but such average percentage when determined shall be used for the purposes of section 250 in determining the correct amount of the tax.

(d) The war-profits credit shall be determined in the manner provided in subdivision (b) instead of in the manner provided in subdivision (c), in the case of any corporation which was not in existence during the whole of at least one calendar year during the prewar period, if (1) 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 prewar period, or if (2) 50 per centum or more of its gross income (as computed under section 233 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.

(e) A foreign corporation shall not be entitled to a specific exemption of $3,000.

ART. 781. War profits credit.-Ordinarily the war profits credit consists of the sum of the specific exemption of $3,000 and an amount equal to the average net income of the corporation for the prewar period, plus 10 per cent of the excess of the invested capital for the taxable year over the average invested capital for the prewar period, or minus 10 per cent of the excess of the average invested capital for the prewar period over the invested capital for the taxable year. If a return is made for a period of less than twelve months, the amount equal to the average net income for the prewar period plus

or minus 10 per cent of the difference between the average invested capital for the prewar period and the invested capital for the taxable year shall be reduced to the same proportion thereof as the number of months in the period is of twelve months. See section 305 of the statute and article 761. If at the time a return is made the net income for the prewar period or the difference between the average invested capital for the prewar period and the invested capital for the taxable year can not be determined, the war profits credit shall be computed in the first instance as provided in the following article. If either of these amounts can not eventually be determined, the war profits credit shall be finally determined as provided in the following article. See also section 327 and articles 716-720, 743, and 901.

ART. 782. War profits credit where meager prewar net income.—If a corporation had no net income for the prewar period, or if the war profits credit as ordinarily computed (exclusive of the specific exemption of $3,000) is less than 10 per cent of its invested capital for the taxable year, then the war profits credit consists of the sum of the specific exemption of $3,000 and an amount equal to 10 per cent of the corporation's invested capital for the taxable year. See article 720.

ART. 783. War profits credit where no prewar period.-If a corporation had no prewar period, then the war profits credit consists of the sum of the specific exemption of $3,000 and an amount equal to the same percentage of the invested capital for the taxable year as the average percentage of net income to invested capital for the prewar period of corporations engaged in a trade or business of the same general class as that conducted by the taxpayer, but not less than 10 per cent of its invested capital for the taxable year. The war profits credit shall be computed in the first instance on the basis of 10 per cent of the invested capital, and when the average percentage of corporations engaged in the same general class of trade or business has been determined the amount of the tax will if necessary be recomputed. See section 250 of the statute and articles 784 and 1001.

ART. 784. War profits credit where no prewar period in special circumstances. If a corporation had no prewar period, but (a) if a majority of its stock at any time during the taxable year was owned or controlled by a corporation which was in existence during the whole of at least one calendar year during the prewar period, or (b) if 50 per cent or more of its gross income consisted of income derived from Government contracts made after April 5, 1917, and before November 12, 1918, then the war profits credit is to be determined as provided in article 782 instead of in the manner provided in article 783. See section 1 of the statute and article 1510.

ART. 785. War profits credit in the case of affiliated corporations.—In the case of affiliated corporations making a consolidated return only

one specific exemption of $3,000 is allowed. See also sections 240 and 305 of the statute and article 761.

EXCESS PROFITS CREDIT.

SEC. 312. That the excess-profits credit shall consist of a specific exemption of $3,000 plus an amount equal to 8 per centum of the invested capital for the taxable year.

A foreign corporation shall not be entitled to the specific exemption of $3,000.

ART. 791. Excess profits credit.-The excess profits credit consists of the specific exemption of $3,000 plus an amount equal to 8 per cent. of the invested capital for the taxable year. In the case of affiliated corporations making a consolidated return only one specific exemption of $3,000 is allowed. See also sections 240 and 305 of the statute and articles 716-720, 743, and 761.

NET INCOME.

SEC. 320. (a) That for the purpose of this title the net income of a corporation shall be ascertained and returned—

(1) For the calendar years 1911 and 1912 upon the same basis and in the same manner as provided in section 38 of the Act entitled "An Act to provide revenue, equalize duties, and encourage the industries of the United States, and for other purposes," approved August 5, 1909, except that taxes imposed by such section and paid by the corporation within the year shall be included;

(2) For the calendar year 1913 upon the same basis and in the same manner as provided in Section II of the Act entitled "An Act to reduce tariff duties and to provide revenue for the Government, and for other purposes," approved October 3, 1913, except that taxes imposed by section 38 of such Act of August 5, 1909, and paid by the corporation within the year shall be included, and except that the amounts received by it as dividends upon the stock or from the net earnings of other corporations subject to the tax imposed by Section II of such Act of October 3, 1913, shall be deducted; and

(3) For the taxable year upon the same basis and in the same manner as provided for income tax purposes in Title II of this Act.

(b) The average net income for the prewar period shall be determined by dividing the number of years within that period during the whole of which the corporation was in existence into the sum of the net income for such years, even though there may have been no net income for one or more of such years.

ART. 801. Net income. The net income of a corporation for the purpose of the imposition of the war profits and excess profits tax is the same net income as determined for the purpose of the income tax. See section 232 of the statute and article 531. For the prewar period, however, the net income of a corporation is to be ascertained in the case of the calendar years 1911 and 1912 as provided in section 38 of the Act of August 5, 1909, and in the case of