Rev. Rul. 55-376

Advice has been requested whether an adjustment should be made for interest on borrowed capital under section 433(a)(1)(N) or (O) of the Internal Revenue Code of 1939 in those cases where (1) the total of the excess profits credit (allowed under section 434) and the unused excess profits credit adjustment (allowed under section 432) is less than $25,000 and therefore, such sum is, pursuant to section 431, increased to $25,000; and (2) where the taxpayer is a new corporation whose tax liability, computed under the alternative method set forth in section 430(e)(1), is less than under the other computations provided for in section 430.

Section 430(a) imposes a tax upon the adjusted excess profits net income of every corporation. This adjusted excess profits net income is defined by section 431 as the excess profits net income (as defined in section 433(a)) minus the sum of the excess profits credit (allowed under section 434) and the unused excess profits credit adjustment (allowed under section 432); if the sum of the excess profits credit and the unused excess profits credit adjustment should be less than $25,000, section 431 provides that such sum is to be increased to $25,000. This contemplates an increase in the excess profits credit and the unused excess profits credit adjustment, and not a substitution of a new credit. Therefore, a corporation will, in each instance, have a credit allowed under section 434. Section 434 provides for an excess profits credit based on income (section 435) or a credit based on invested capital (section 436).

As indicated above, excess profits net income is computed under section 433(a). That section provides that excess profits net income is normal tax net income plus or minus certain adjustments set forth therein. Among these adjustments, is an adjustment for interest on borrowed capital; the adjustment is made under section 433(a)(1)(N) if the excess profits credit is based on invested capital and under section 433(a)(1)(O) if the excess profits credit is based on income.

Section 430(a), in imposing a tax upon the adjusted excess profits net income of a corporation, provides for certain alternative computations. One of these, section 430(a)(1) is a computation based upon adjusted excess profits net income; the others, sections 430(a)(2)(A), (B) and (C), and section 430(a)(3), the later of which incorporates by reference any computation under section 430(e) with respect to a new corporation using a computation based upon excess profits net income. The question presented here is whether a corporation whose adjusted excess profits net income is being subjected to tax, in making the alternative computation of tax under section 430(a)(2) or (3), upon its excess profits net income, or in computing its tax under any part of section 430(a), after subtracting the minimum of $25,000 allowed under section 431, must utilize the same excess profits net income that was used in computing the adjusted excess profits net income under section 431. It seems quite clear that it must. As stated above, section 430(a) imposes a tax upon adjusted excess profits net income , which must reflect an excess profits credit allowed under section 434 and hence an adjustment for interest on borrowed capital. It is then evident, that those alternative computations thereunder which are based upon excess profits net income are utilizing the same income subject to tax under the general rule enunciated therein but without any reduction as provided for in section 431.

Accordingly, it is held that an adjustment shall be made for interest on borrowed capital under section 433(a)(1)(N) or (O) of the Internal Revenue Code of 1939 in those cases where (1) the total of the excess profits credit (allowed under section 434) and the unused excess profits credit adjustment (allowed under section 432) is less than $25,000 and therefore, such sum is, pursuant to section 431, increased to $25,000 and; (2) where the taxpayer is a new corporation whose tax liability, computed under the alternative method set forth in section 430(e)(1), is less than under the other computations provided for in section 430