COMMENTARY ON GENERAL RELIEF UNDER THE EXCESS PROFITS TAX ACT OF 1950

Analysis of an excess profits tax involves inquiries which are essentially foreign to the concepts of ordinary income taxation. The question of excess profits arises only after taxable income has been defined and characterized, its recipients determined and the time of receipt established. The problem is to divide taxable income into two components, one representing the corporation's normal profits, which it is permitted to enjoy free of the penalty tax, and the balance which is deemed to be "profits due to the outbreak of hostilities and to large military expenditures." Under the Excess Profits Tax Act of 1950, as was the case under its World War II predecessor, the division is accomplished by the determination of a "credit" which stands for the "normal" component of the taxpayer's income. The taxpayer is given an election between two basic alternative methods of computing the credit.

One method permits the corporation to earn a stated minimum return on invested capital without becoming subject to the excess profits rates. The second method, the one with which· we are concerned here, is based on the taxpayer's average earnings for a ''base period," 1946 through 1949.