furnish articles, materials, or supplies to such foreign government, if such contract provides for advance payment and for repayment by the vendor of any part of such advance payment upon cancellation of the contract by such foreign government, the amount which would be required to be so repaid if cancellation occurred at the beginning of such day, but no amount shall be considered as borrowed capital under this paragraph which has been includible in gross income. "(b) BORROWED INVESTED CAPITAL.-The borrowed invested capital for any day of any taxable year shall be determined as of the beginning of such day and shall be an amount equal to 50 per centum of the borrowed capital for such day. "SEC. 720. ADMISSIBLE AND INADMISSIBLE ASSETS. "(a) DEFINITIONS.-For the purposes of this subchapter— "(1) The term 'inadmissible assets' means "(A) Stock in corporations except stock in a foreign personal-holding company; and "(B) Except as provided in subsection (d), obligations described in section 22 (b) (4) any part of the interest from which is excludible from gross income or allowable as a credit against net income. "(2) The term 'admissible assets' means all assets other than inadmissible assets. Ratio of inadmis Ante, p. 982. "(b) RATIO OF INADMISSIBLES TO TOTAL ASSETS. The amount by sibles to total assets. which the average invested capital for any taxable year shall be reduced as provided in section 715 shall be an amount which is the same percentage of such average invested capital as the percentage which the total of the inadmissible assets is of the total of admissible and inadmissible assets. For such purposes, the amount attributable to each asset held at any time during such taxable year shall be determined by ascertaining the adjusted basis thereof (or, in the case of money, the amount thereof) for each day of such taxable year so held and adding such daily amounts. The determination of such daily amounts shall be made under regulations prescribed by the Commissioner with the approval of the Secretary. The adjusted basis shall be the adjusted basis for determining loss upon sale or exchange as determined under section 113. "(c) COMPUTATION IF SHORT-TERM CAPITAL GAIN.-If during the taxable year there has been a short-term capital gain with respect to an inadmissible asset, then so much of the amount attributable to such inadmissible asset under subsection (b) as bears the same ratio thereto as such gain bears to the sum of such gain plus the dividends and interest on such asset for such year, shall, for the purpose of determining the ratio of inadmissible assets to the total of admissible and inadmissible assets, be added to the total of admissible assets and subtracted from the total of inadmissible assets. "(d) TREATMENT OF GOVERNMENT OBLIGATIONS AS ADMISSIBLE ASSETS.-If the excess profits credit for any taxable year is computed under section 714, the taxpayer may in its return for such year elect to increase its normal-tax net income for such taxable year by an amount equal to the amount of the interest on all obligations held during the taxable year which are described in section 22 (b) (4) any part of the interest from which is excludible from gross income or allowable as a credit against net income. In such case, for the purposes of this section, the term 'admissible assets' includes such obligations, and the term 'inadmissible assets' does not include such obligations. 53 Stat. 40. 26 U. S. C., Supp. V, § 113. Computation if short-term capital gain. Government obligaas admissible tions Ante, p. 981. 53 Stat. 10. 26 U. 8. O., Supp. V, § 22 (b) (4). Abnormalities in in come. Determination of equity invested capital. Ante, p. 982 "SEC. 721. ABNORMALITIES IN INCOME IN TAXABLE PERIOD. "If there is includible in the gross income of the taxpayer for any taxable year an item of income of any one or more of the following classes: "(a) Arising out of a claim, award, judgment, or decree, or interest on any of the foregoing; or 66 (b) Constituting an amount payable under a contract the performance of which required more than 12 months; or "(c) Resulting from exploration, discovery, prospecting, research, or development of tangible property, patents, formulae, or processes, or any combination of the foregoing, extending over a period of more than 12 months; or "(d) Includible in gross income for the taxable year rather than for a different taxable year by reason of a change in the taxpayer's accounting period or method of accounting; or "(e) In the case of a lessor of real property, amounts included in gross income for the taxable year by reason of the termination of the lease; or "(f) Dividends on stock of foreign corporations, except foreign personal holding companies; and, in the light of the taxpayer's business, it is abnormal for the taxpayer to derive income of such class, or, if the taxpayer normally derives income of such class, the item includible in the gross income of the taxable year is grossly disproportionate to the gross income of the same class in the four previous taxable years, then: (1) the amount of such item attributable to any previous taxable year or years shall be determined under rules and regulations prescribed by the Commissioner with the approval of the Secretary; (2) the amount of such item attributable to any future taxable year or years shall be determined under rules and regulations prescribed by the Commissioner with the approval of the Secretary and shall, for the purposes of this subchapter, be included in the gross income for the future year or years to which attributable; and (3) the tax under this subchapter for the taxable year (in which the whole of such item would, without regard to this section, be includible) shall not exceed the sum of: (A) The tax under this subchapter for such taxable year computed without the inclusion in gross income of the portion of such item which is attributable to any other taxable year, and "(B) The aggregate of the increase in the tax under this subchapter which would have resulted for each previous taxable year to which any portion of such item is attributable, computed as if an amount equal to such portion had been included in gross income for such previous taxable year. "SEC. 722. ADJUSTMENT OF ABNORMALITIES IN INCOME AND CAP. ITAL BY THE COMMISSIONER. "For the purposes of this subchapter, the Commissioner shall also have authority to make such adjustments as may be necessary to adjust abnormalities affecting income or capital, and his decision shall be subject to review by the United States Board of Tax Appeals. "SEC. 723. EQUITY INVESTED CAPITAL IN SPECIAL CASES. "Where the Commissioner determines that the equity invested capital as of the beginning of the taxpayer's first taxable year under this subchapter cannot be determined in accordance with section 718, the equity invested capital as of the beginning of such year shall be an amount equal to the sum of (a) the money plus (b) the aggregate of the adjusted basis of the assets of the taxpayer held by the taxpayer at such time, such sum being reduced by the indebtedness outstanding at such time. The amount of the money, assets, and indebtedness at such time shall be determined in accordance with rules and regulations prescribed by the Commissioner with the approval of the Secretary. In such case, the equity invested capital for each day after the beginning of the taxpayer's first taxable year under this subchapter shall be determined, in accordance with rules and regulations prescribed by the Commissioner with the approval of the Secretary, using as the basic figure the equity invested capital as so determined. Determination of in- "SEC. 724. FOREIGN CORPORATIONS AND CORPORATIONS ENTITLED "(a) GENERAL RULE.-The daily invested capital for any day of the taxable year shall be the aggregate of the adjusted basis of each United States asset held by the taxpayer on the beginning of such day. In the application of section 720 in reduction of the average invested capital (determined on the basis of such daily invested capital), the terms 'admissible assets' and 'inadmissible assets' shall include only United States assets; or "(b) EXCEPTION.-If the Commissioner determines that the United States assets of the taxpayer cannot satisfactorily be segregated from its other assets, the invested capital for the taxable year shall be an amount which is the same percentage of the aggregate of the adjusted basis of all assets held by the taxpayer as of the end of the last day of the taxable year which the net income for the taxable year from sources within the United States is of the total net income of the taxpayer for such year. 66 "(c) DEFINITION OF UNITED STATES ASSET.-As used in this subsection, the term 'United States asset' means an asset held by the taxpayer in the United States, determined in accordance with rules and regulations prescribed by the Commissioner with the approval of the Secretary. "SEC. 725. PERSONAL SERVICE CORPORATIONS. "(a) DEFINITION.-As used in this subchapter, the term 'personal service corporation' means a corporation whose income is to be ascribed primarily to the activities of shareholders who are regularly engaged in the active conduct of the affairs of the corporation and are the owners at all times during the taxable year of at least 70 per centum in value of each class of stock of the corporation, and in which capital is not a material income-producing factor; but does not include any foreign corporation, nor any corporation 50 per centum or more of whose gross income consists of gains, profits, or income derived from trading as a principal. For the purposes of this subsection, an individual shall be considered as owning, at any time, the stock owned at such time by his spouse or minor child or by any guardian or trustee representing them. 53 Stat. 79. 26 U.S. C., Supp. V, General rule. Ante, p. 985. Exception. "United States asset" defined. Definition. Election as to taxability. 53 Stat. 4. "(b) ELECTION AS TO TAXABILITY.-If a personal service corporation signifies, in its return under Chapter 1 for any taxable year, its 26 U. S. C., Supp. V, desire not to be subject to the tax imposed under this subchapter for ch. 1. such taxable year, it shall be exempt from such tax for such year, and the provisions of Supplement S of Chapter 1 shall apply to the shareholders in such corporation who were such shareholders on the last day of such taxable year of the corporation. "SEC. 726. CORPORATIONS COMPLETING CONTRACTS UNDER MERCHANT MARINE ACT, 1936. "(a) If the United States Maritime Commission certifies to the Commissioner that the taxpayer has completed within the taxable year any contracts or subcontracts which are subject to the provisions of section 505 (b) of the Merchant Marine Act of 1936, as amended, then the tax imposed by this subchapter for such taxable year shall be, in lieu of a tax computed under section 710, a tax computed under subsection (b) of this section, if, and only if, the tax computed under subsection (b) is less than the tax computed under section 710. 8 "(b) The tax computed under this subsection shall be the excess of "(1) A tentative tax computed under section 710 with the normal-tax net income increased by the amount of any payments made, or to be made, to the United States Maritime Commission with respect to such contracts or subcontracts; over "(2) The amount of such payments. "SEC. 727. EXEMPT CORPORATIONS. "The following corporations shall be exempt from the tax imposed by this subchapter: "(a) Corporations exempt under section 101 from the tax imposed by Chapter 1. "(b) Foreign personal-holding companies, as defined in section 331. "(c) Mutual investment companies, as defined in section 361. "(d) Investment companies which under the Investment Company Act of 1940 are registered as diversified companies at all times during the taxable year. For the purposes of this subsection, if a company is so registered before July 1, 1941, it shall be considered as so registered at all times prior to the date of such registration. "(e) Personal-holding companies, as defined in section 501. "(f) Foreign corporations not engaged in trade or business within the United States and not having an office or place of business therein. "(g) Domestic corporations satisfying the following conditions: "(1) If 95 per centum or more of the gross income of such domestic corporation for the three-year period immediately preceding the close of the taxable year (or for such part of such period during which the corporation was in existence) was derived from sources other than sources within the United States; and (2) If 50 per centum or more of its gross income for such period or such part thereof was derived from the active conduct of a trade or business. "(h) Any corporation subject to the provisions of Title IV of the Civil Aeronautics Act of 1938, in the gross income of which for any taxable year beginning after December 31, 1939, there is includible compensation received from the United States for the transportation of mail by aircraft if, after excluding from its gross income such compensation, its adjusted excess profits net income for such year is zero or less. "SEC. 728. MEANING OF TERMS USED. "The terms used in this subchapter shall have the same meaning as when used in Chapter 1. "SEC. 729. LAWS APPLICABLE. "(a) GENERAL RULE.-All provisions of law (including penalties) applicable in respect of the taxes imposed by Chapter 1, shall, insofar as not inconsistent with this subchapter, be applicable in respect of the tax imposed by this subchapter. (b) RETURNS.-Notwithstanding subsection (a), no return under section 52 (a) shall be required to be filed by any taxpayer under this subchapter for any taxable year for which its excess profits net income, computed with the adjustments provided in section 711 (a) (2) and placed on an annual basis as provided in section 711 (a) (3), is not greater than $5,000. "(c) FOREIGN TAXES PAID.-In the application of section 131 for the purposes of this subchapter the tax paid or accrued to any country shall be deemed to be the amount of such tax reduced by the amount of the credit allowed with respect to such tax against the tax imposed by Chapter 1. "(d) LIMITATIONS ON AMOUNT OF FOREIGN TAX CREDIT.-The amount of the credit taken under this section shall be subject to each of the following limitations: "(1) The amount of the credit in respect of the tax paid or accrued to any country shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer's excess profits net income from sources within such country bears to its entire excess profits net income for the same taxable year; and "(2) The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer's excess profits net income from sources without the United States bears to its entire excess profits net income for the same taxable year. "SEC. 730. CONSOLIDATED RETURNS. Affiliated group of corporations. "(a) PRIVILEGE TO FILE CONSOLIDATED RETURNS.-An affiliated group of corporations shall, subject to the provisions of this section, have the privilege of making a consolidated return for the taxable year in lieu of separate returns. The making of a consolidated return. shall be upon the condition that all the corporations which have been members of the affiliated group at any time during the taxable year for which the return is made consent to all the regulations under subsection (b) prescribed prior to the last day prescribed by law for the filing of such return; and the making of a consolidated return shall be considered as such consent. In the case of a corporation which is a member of the affiliated group for a fractional part of the year the consolidated return shall include the income of such corporation for such part of the year as it is a member of the affiliated group. "(b) REGULATIONS.-The Commissioner, with the approval of the Regulations. Secretary, shall prescribe such regulations as he may deem necessary in order that the tax liability of any affiliated group of corporations making a consolidated return and of each corporation in the group, both during and after the period of affiliation, may be returned, determined, computed, assessed, collected, and adjusted, in such manner as clearly to reflect the excess profits tax liability and the various factors necessary for the determination of such liability, and in order to prevent avoidance of such tax liability. |