For a number of years corporations were regarded as a source of revenue solely for state purposes. More recently, however, the Federal government has begun to use the corporate form of organization as a source of revenue. The introduction of the excess profits tax is a familiar example of this situation which arose because of the Great War. This aspect of the tax will be noted in a later chapter. Even before the war, however, Congress decided to tap this source of revenue, and in 1909 placed a tax on the net earnings of corporations.

Law of 1909. - The law of 1909 grew out of a discussion of the Payne-Aldrich Tariff Act, as a part of which many Senators favored enacting an income tax. The fear of unconstitutionality of the income measure led to the substitution of the so-called excise tax on corporations in proportion to their income, which is a part of the Tariff Act of 1909. The law provides that every corporation, joint stock company, or association, organized for profit and having a capital stock represented by shares, and every insurance company now in existence or afterward organized in the United States, or in any foreign country, and doing business in the United States, shall be subject to pay annually a special excise tax with respect to the carrying on or doing business by such corporation, joint stock company, or association, or insurance company, equivalent to 1 per cent upon the entire net income over and above five thousand dollars received by it from all sources during the year.

The law goes into detail in specifying the deductions which are allowed in calculating the net income. The statement of the nature of the tax - a special excise tax equivalent to 1 per cent upon the entire net income - was evidently an attempt to get around the constitutional limitations as to the levy of direct taxes by the Federal government. The Supreme Court later acquiesced in this interpretation, by holding that such a tax is not a direct tax within the meaning of the Constitution, and that it is within the power of Congress to indicate the method by which an excise tax shall be measured.1