Corporate Readjustments and the Excess Profits Credit

Abstract

The readjustment of corporate structures abounds in excess profits tax consequences. The inheritance of an incorporated enterprise by a successor company, whether a new or pre-existing entity, and whether by merger or by sale of assets; the split-up of an enterprise into successor companies, or into a parent-subsidiary pattern; the amalgamation of separately incorporated businesses, or elements thereof having economic unity, via mergers, consolidations, and liquidations; and the readjustment of the capital structure exclusively within the existing corporation-these are transactions the excess profits tax implications of which have been given extensive legislative recognition. These implications will and, indeed, already have taken a ranking position in the tax world. The problems are manifold, and they reach into virtually all phases of the excess profits tax. Among others, there are involved the availability of excess profits credits to the extent unused by one or more of the companies in other taxable years; the redistribution of equity invested capital among the several taxpayers as their number and relationships are disturbed; changes effected in the status of borrowed -invested capital; the drawing together, without duplication, of the aggregate base period income experience reflected in the rearranged corporate family; the effect on aggregate excess profits net income as hitherto separate loss and profit operations are brought into balance; the effect of short taxable years as corporate existences are terminated; and the uncertain reach of the adjustment for inconsistency with positions previously taken by the predecessor companies. In all these, the effect upon the excess profits credit, whether based on income or invested capital, is normally the dominant consideration. In addition, the task of analyzing the statute is most acute with respect to this phase of the problem. Accordingly, this article will attempt a discussion of the problem of the excess profits credit involved in such corporate readjustments; and will approach the problem through an analysis of the controlling legislation as to both types of credit, and the results achieved thereunder.