HJ 4652 H31 1917 ■ The original of this book is in the Cornell University Library. There are no known copyright restrictions in the United States on the use of the text. http://www.archive.org/details/cu31924030220580 HJ4652 C HT 1 e "l91 l r 8i,y "*""* lnco iKiiiiili;«ii3)(?ii,,.?,RS!y s,s and comment. olin 3 1924 030 220 580 Harris, Forbes & Co Pine Street, Cor. William, New York Government, Municipal Railroad, Public Utility Bonds for Investment Harris, Forbes & Co., Inc., - Boston Harris Trust & Savings Bank, Chicago Income Tax Law Analysis and Comment Fourth Edition Harris, ,Forbes & Co Pine Street Corner \yilliam New York u A+koq 13 Copyright, 1917, by Harris, Forbes & Co. Jj:iiM!o;i ■ ■Y'fiAim'u Foreword After the enactment of the Income Tax Law in 1913 we prepared and distributed in two editions a general analysis of the statute with comments thereon. Those editions proved of interest and ap- parently of help to our clients at a time when there was general unfamiliarity with income tax legisla- tion. Along similar lines we prepared and dis- tributed a third edition after the enactment of the 1916 Law and now present the fourth edition which relates to the statute as at present in effect, includ- ing both the 1916 Law as amended and the new War Income Tax Law. Because investors are now familiar with the general operation of an income tax law, many provisions of the present statute are men- tioned in this edition only briefly if at alj. Added opportunity is thus afforded to emphasize recent changes especially in their practical aspects. As in previous editions, the comments herein are in no sense intended as a legal treatise and are made in the expectation that later rulings by the Treasury Department and decisions by the courts will affect the law's interpretation and application. Harris, Forbes & Co October Twenty-second Nineteen Hundred and Seventeen Table of Contents An Alphabetical Index of the Analysis and Comment, and Tables and Charts, will be found at the end of this booklet. Foreword Chart A — Highest and average rates on taxable in- comes from $2,000 to $125,000 16 Chart B — Highest and average rates on taxable in- comes from $2,000 to $2,500,000 17 Table No. I — Rates of tax applying to citizens or residents 23 Table No,. II — Amounts of tax to be paid by citizens or residents 24 Table No. Ill — Example of computing tax of citizens or residents 26 Table No. IV — Comparative values of Liberty 3^s and 4s 35 Table No. V — Comparative values of taxable and tax- exempt securities in general 36 Table No. VI — Rates of tax applying to non-resident aliens 51 Table No. VII — Example of computing tax of non- resident aliens 52 Analysis and Comment Previous law and constitutionality 19 War Revenue Law enacted October 3, 1917 19 Levies "War Income Tax" — Amends 1916 Law Individual Tax Individuals subject to tax 20 Rates of tax — Normal and surtax under each law .... 20 Application of graduated rates of tax 21 Table of Contents (continued) "Normal" and "basic" tax rates 27 Personal exemption not allowed non-resident aliens . . 28 Personal exemption allowed: 28 Citizens or residents Husband and wife "Head of a family" Dependent children Estates and trusts on behalf of beneficiaries In computing normal tax only Exemption allowed so-called income 31 Proceeds of life insurance policies Dividends on insurance contracts Property acquired by gift or bequest Compensation of Federal officials Compensation of State officials Interest on "Municipal bonds" exempt 32 Constitutional phase of "Municipal bond" exemption. . 32 "Political subdivision'' defined 32 Certificates not required in collecting "Municipal bond" interest 32 Federal Farm Loan bonds exempt 33 Federal obligations 33 Issued previous to September, 1917, exempt Subsequent issues, when exempt Liberty 3^s and 4s of 1917 Net income 38 Defined From what sources derived Basis of computing profits 'from sales "Accrued interest" on bonds — how computed Accounting systems for individuals 33 Dividends 39 When taxable Earnings of corporations organized to escape tax 40 Estates and trusts — how taxed 41 Table of Contents (continued) Deductions allowed citizens or residents 42 Necessary- business expenses Interest on indebtedness Taxes Losses in taxpayer's business Losses from casualty or theft Worthless debts Depreciation Losses outside taxpayer's business Contributions to benevolent organizations Recent changes regarding deductions 43 Indebtedness incurred for purchase of exempt securities Income tax paid; example Interest on Liberty 4s 43 Basis of computing losses on sales 45 "Losses in trade" decisions — 1913 Law 45 Amount allowed under existing law Treasury decisions regarding deductions 46 Worthless debts Premiums on life insurance Rental value of premises owned Partnerships 47 Not taxed as such — Members taxed individually Credit for prior payments on undistributed profits Deductions enumerated by statute "Municipal bond" interest Dividends Excess profits tax paid Returns filed on order of Government Rates applying for partnership's fiscal year Non-resident aliens — Certain special points 49 Income subject to tax Not liable to new normal tax of two per cent. Personal exemption no longer allowed Deductions allowed respecting interests in United States Losses outside taxpayer's business Taxes paid Charitable contributions not deductible Filing of returns necessary to receive deductions Agents may act for non-resident aliens Tax-free Covenants in corporate bonds 54 Status under 1913 Act Status under present law Table of Contents (continued) "Deduction'' and "Information" at the source 56 "Deduction" abolished in large part "Information" inaugurated Deduction at Source — Non-resident aliens 56 Applies to practically all American income Does not apply to dividends Amount of tax deducted Benefit of tax-free covenant — When received Deduction at Source — Foreign corporations 57 When system applies Amount of tax deducted Deduction at Source — Foreign partnerships 57 Deduction at Source — Citizens or residents 58 Applies only to bonds containing tax-free covenant What tax deducted— 1917, 1918 Deduction at Source — Not applied to domestic cor- porations 59 Information at Source 60 Applied to interest on domestic corporation stcuatu.-. When applied to interest on foreign securities Applied to payments of income of $800 or more Treasury Department may require: Brokers' records Stockholders' lists and dividend records Certain taxes "deducted" in 1917 to be repaid 61 License for collection of foreign payments 62 "Deduction" and "Information" systems — When in effect 62 Annual return of income 62 Persons required to make return Citizens or residents ' Non-resident aliens — When required Guardians' and other fiduciaries' returns Husband and wife — When separate returns required Agents may make returns Period covered When filed Where filed Extension of time for filing Table of Contents (continued) Assessment and payment of tax 65 Claiming benefit of personal exemption 65 Corporation Tax Former laws taxing corporate net income 67 Taxes now imposed 67 Under 1916 Law Under War Income Tax Law Basis of calculating tax 67 Organizations subject to tax 68 Domestic and foreign Partnerships not taxable as such Limited partnerships taxable as corporations Organizations not subject to tax 69 Undistributed net income liable to an additional tax . . 70 Exempt income 71 Interest on so-called Municipal bonds Liberty Loan 4s in hands of corporations Securities issued under Federal Farm Loan Act Income from public utilities — When exempt Computing profits or losses from sales 72 Dividends received by corporations 73 Deductions allowed domestic organizations 73 Expenses and rentals Losses and depreciation Interest on corporate indebtedness Interest on debt incurred in purchasing exempt securities Taxes Interest on Liberty Bonds Salary paid employee in Army 74 Miscellaneous provisions regarding interest deductions 74 Special deductions allowed insurance companies 75 Deductions allowed foreign organizations 76 Basis of computing deductions Table of Contents (continued) Deduction at Source 77 As applied to foreign organizations Amount of tax deducted at source "Tax-free"covenants in corporate bonds 79 Certain foreign organizations may receive benefit Domestic organizations receive no benefit Accounting systems for corporations 80 Corporation's fiscal year its tax year 80 Annual return of income 80 When filed Where filed Extension of time for filing Made by receivers, trustees and assignees Preliminary returns Assessment and payment of tax 82 General Provisions "Excess Profits Tax" — on salaries, etc., over $6,000.. 83 What domestic dividends are subject to tax 83 Under 1913 Law Under 1916 Law as originally passed Under present law Received by domestic corporations Stock dividends defined 85 Dividends paid in Liberty Bonds 86 Foreign Governments exempt on certain income .... 86 Insurance on lives of employees and others 87 Advance payment of tax optional 87 May be made in installments Interest allowed on such payments Penalties for failure to meet installments Optional methods of payment 88 Uncertified checks now acceptable Certain United States certificates of indebtedness Table of Contents (continued) Returns may be inspected — Under what conditions . . 89 Secrecy regarding returns 90 Application of law to Porto Rico and Philippines 90 Text of War Income Tax Law Persons subject to new normal tax 91 Persons subject to new surtax 91 Surtax rates 91 Basis of computing individual tax 93 Personal exemption 93 Deduction at source — how applied 93 Tax on corporations 93 Basis of computing corporation tax 94 Does not apply to Porto Rico and Philippines 94 Text of 1916 Law (As amended and in effect October 4, 1917) Regarding Individuals Individuals subject to tax 95 Rates of tax, normal and surtax 95 Income defined 97 Income exempt from tax 99 Deductions allowed citizens or residents 100 Credits allowed in calculating normal tax 102 Deductions allowed non-resident aliens 102 Table of Contents (continued) Personal exemption 105 Returns 106 Assessment and collection of tax 109 Deduction at source as to non-resident aliens 109 Deduction at source as to tax-free bonds 110 Collection of foreign payments Ill Regarding Corporations Organizations subject to tax 112 Rate of tax 112 Tax year 112 Determining gain or loss on dealings in property 113 Tax on undistributed net earnings 113 Non-taxable organizations 114 Certain income from public utilities exempt 116 Deductions allowed domestic organizations 117 Deductions allowed foreign organizations 120 Returns 123 Keeping corporation accounts 124 Deduction at source as to foreign organizations 125 Assessment and payment of tax 126 Returns open to inspection — Under what conditions . . 127 General Provisions Definitions 128 Information in returns secret 128 Table of Contents (continued) Extension of time for making returns 132 General penalties 132 Application to Porto Rico and Philippines 134 Law of 1913 repealed 135 Stockholders' lists and dividend records available to Government 136 Brokers' records available to Government 136 "Information at Source" system in general 136 "Excess Profits Tax" deductible 138 Foreign governments exempt on certain income 138 Dividends defined 138 What dividends are taxable 138 Insurance premiums not deductible 139 Certain taxes "deducted" during 1917 repaid 139 Optional payment of taxes in advance 140 Optional means of payment 140 Law became effective October 4, 1917 141 Collection Districts with Names and Addresses of Col- lectors of Internal Revenue . 142 Index of Analysis and Comment 146 Chart Indicating Highest and Average Rates of Tax On Incomes from $2,000 to $125,000 Chart A r- r -J i TAXABLE INCOMES Sj m, from $2,000 to $125,000 ^ 1 35% 30% 25% •20% 15% 10% 5% ooooo ooooooooooooooooooooo oooo ooooooooooooooooooooo o^oo^o^ o^o^o^o^o^o^oooooo o oooo ooo o io d io d w d io o" io" o" w d w d id o" w o" io" o" io" o" >o o" io t-h .-i CM Mnm^^lOifltOONNMMOJOlOOHHNM €© i-H >-( H i-l .-I i-l EXPLANATION indicates the rise of the tax on an individual's taxable income between various amounts, as shown in the chart; it therefore indicates the "highest rate of tax" at any given level of income. indicates the "average rate of tax," which is a calculation of the rate at which the income as a whole is taxed. [16] Chart Indicating Highest and Average Rates of Tax On Incomes from $2,000 to $2,500,000 Chart B 1 J I jj TAXABLE INCOMES i from $2,000 to $2,500,000 ' - X ^ 67% 60% 55% 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% oeoe © ooooooooooooooooo ©.© o © ooo o ooooooooooooooooooooo o^o^o^ o^ o^o^o^o^o^oo ooo oo oooo o ooo o o" d o" o~ d d d d d d d d d o" d d d 6 s o" o o" o" d o" d ooo o ooooooooooooooooooooo rH n $2,000 $ 2% on: t 2,000 (Amt. exceeding $ 2,000 not exceeding 1 . 4,000) . 40 4% on 1,000 ( " 4,000 " " 6,000) . 40 6% on 2,600 ( " 6,000 " " 7,600) . 126 6% on 2,600 ( " 7,600 " 10,000) . 160 7% on 2,600 ( " 10,000 " " 12,600). 176 8% on 2,600 ( " 12,600 " " 16,000) . 200 9% on 6,000 ( " 16,000 " " 20,000) . 460 12% on 20,000 ( " 20,000 " " 40,000) . 2,400 16% on 20,000 ( " 40,000 " " 60,000) . 3,200 21% on 20,000 ( " 60,000 " " 80,000). 4,200 26% on 20,000 ( " 80,000 " " 100,000) . 6,200 31% on 60,000 ( " 100,000 " " 160,000) . 16,600 36% on 26,000 ( " 160,000 but not exceeding 200,000). Total Amount of Tax 8,760 $40,430 [26] Basic" Tax Rates ANALYSIS AND COMMENT With the two laws in operation, the 1916 Law and ., Normal , the War Income Tax Law, there is a total so-called and normal tax of four per cent., — the old "normal" of two per cent, levied by the former statute and the new "normal" of two per cent, levied by the latter. In originally designating any rate of tax as the "nor- mal," the theory was presumably that that rate was the basic tax which applied to all forms of taxable income. Exemptions were allowed in certain cases ; but disregarding all allowances, the rate of the "nor- mal" tax was the basic rate levied against all taxable income, whether in one form or another, and whether it accrued to an individual, to a corpora- tion, or to any other entity. Thus, income derived through the medium of corporate dividends, inter- est on corporate bonds, rents, dealings in securities, etc., were all alike subject to the basic tax. With the enactment of the War Income Tax Law, however, the term "normal" loses its origi- nal significance. Income in the form of corporate dividends is now subject to a six per cent, basic tax ; (the corporation itself pays the six per cent, tax on its earnings), whereas other forms of income are in reality subject to only a two per cent, basic tax. As has been stated previously, the non-resident alien is not liable for the new two per cent, normal tax levied by the War Income Tax Law, so his basic rate is two per cent. ; and because the personal ex- emptions differ in amount under the two laws, it works out that $2,000 of income accruing to a citizen [27] ANALYSIS AND COMMENT Personal Exemption Non-resident Aliens Citizens or Residents 1916 Law Husband and Wife "Head of a Family" or resident is subject only to the new normal tax of two per cent. If there can be said to be any "basic" tax at present, therefore, it is two per cent, rather than four per cent., even though the latter rate is nominally the normal tax. This point is stressed because of its bearing upon other subjects discussed hereinafter, especially, "Deduction at the Source." Since the enactment of the 1913 Law the matter of a personal exemption being allowed a non-resi- dent alien has been in constant change. As the law now stands he is not entitled to any such exemp- tion. Further references to this subject therefore relate only to citizens or residents of the United States. As a practical matter, however, a non-resi- dent alien, with an income above only a moderate sum, would seem to be actually favored as com- pared with the resident or citizen inasmuch as the non-resident alien is not subject to the new two per cent, normal tax. A personal exemption is allowed under both stat- utes; but the amount allowed under each is different. The 1916 Law allows a personal exemp- tion of $3,000, plus an additional $1,000, or a total of $4,000, if the taxpayer be either a married person living with husband or wife, or is otherwise the head of a family. Not more than a total of $4,000 may be claimed by husband and wife living to- gether ; and by inference, a total of $6,000, or $3,000 each, may be claimed by husband and wife when [28] ANALYSIS AND COMMENT they are separated and living permanently apart. In the event both husband and wife make a separate return of income, the total exemption of $4,000 may all be used by one or the other, or may be divided between themselves in any proportion they wish. The expression, "Head of a Family," is not de- fined by statute, but the Treasury Department ruled some months ago, in respect to the 1916 Law, that this means "a person who actually supports and maintains one or more individuals who are closely connected with him by blood relationship, relation- ship by marriage or by adoption and whose right to exercise family control and provide for these de- pendent individuals is based upon some moral or legal obligation." In addition to the exemption of either $3,000 or $4,000 allowed by the 1916 Act there is now granted for the first time, by amendment of that law, a further exemption of $200 for each dependent child, if under 18 years of age, or if incapable of self-sup- port because mentally or physically defective. This provision, of course, operates in the case of only one parent in the same family. There may be some uncertainty as to the amount of exemption to be claimed by the "head of a family" who is not a married person living with husband or wife but who, nevertheless, has dependent children for whom ordinarily an exemption of $200 each may be claimed. Under the present Treasury defi- nition of "head of a family," it would appear that, "Head of Family" Defined Dependent Children [29] ANALYSIS AND COMMENT Estates and Trusts Personal Exemption Under War Income Tax Law Citizens or Residents technically at least, a widow with two children de- pendent upon her would be entitled to the $4,000 exemption under the 1916 Act plus $200 for each of the two children, making a total of $4,400 exemption under that Act; (under the War Income Tax Law, $2,400). Such a favorable construction may not have been the intention of Congress. The subject is likely to be fully covered by later Treasury regu- lations. Guardians or trustees are permitted to take advan- tage of the personal exemption on behalf of each ward or beneficiary. Estates of deceased citizens or residents of the United States, during the period of administration or settlement, and trusts or estates of the same classes of persons, the income of which is not distributed annually or regularly, are allowed a personal exemption of $3,000. However, it appears that this $3,000 shall include the ordinary deductions allowed by the statute such as taxes, interest paid, losses, etc. Obviously, it is not the intention of the statute to limit such estates and trusts to total deductions of $3,000. Under the War Income Tax Law, personal ex- emptions are smaller. There is allowed an exemp- tion of $1,000, plus an additional $1,000 if the tax- payer be either a married person living with hus- band or wife, or is otherwise the head of a family. This personal exemption of $1,000 or $2,000 figures in the calculation of the new two per cent, normal tax levied by the War Income Tax Law in the same way as the $3,000 or $4,000 exemption figures in the [30] ANALYSIS AND COMMENT calculation of the old two per cent, normal tax levied by the 1916 Law. The statute leaves a slight uncertainty as to whether the $200 exemption for each dependent child applies under the War Income Tax Law as well as under the 1916 Law. It seems a fair infer- ence, however, that it does apply, and the Treasury Department is understood to take this view. As- suming the allowance of the $200 exemption under the War Income Tax Law, the total personal ex- emption in the case of any citizen or resident in- dividual will be exactly $2,000 less under that Law than under the 1916 Law. The personal exemption is considered only in com- puting the normal tax. Surtaxes are levied on amounts of taxable income between certain ranges fixed by the statute without regard to personal exemption. The statute provides that certain so-called in- come shall be exempt from tax. This includes, among items more fully discussed hereinafter: Proceeds of life insurance policies paid to individual beneficiaries upon the death of the insured; Retiirn premiums, commonly called "dividends", previously paid by the insured under life insurance, endowment, or annuity contracts; (It should be re- marked here that "dividends" from paid up policies are considered income and should be regarded and reported as ordinary dividends;) Value of property acquired by gift, bequest, devise or descent; (the income from such property is not exempt) ; Compensation of the President of the United States during the remainder of his present term, and of the How Computed Exempt Income [31] ANALYSIS AND COMMENT Interest on So-called Municipal Bonds "Political Subdivision" Defined Interest Not Reported Certificates Not Required Judges of the Federal Courts in office on the date of the law's enactment; The compensation of all officers and employees of a State or any political subdivision thereof, except insofar as such compensation is paid by the Federal Government. Interest derived from so-called Municipal bonds, including obligations of States and their subdivi- sions, and of the possessions of the United States, is exempt from all income tax, surtax as well as normal. It is assumed that Congress has allowed this exemption primarily for constitutional reasons, there being many decisions which indicate, if indeed they do not hold, that the taxation of municipal bonds is a burden on the municipality itself and thus repugnant to the provisions of the Constitution. The practically unanimous opinion of counsel emi- nent in matters of constitutional law, who have ex- pressed their views on the point, is to this effect. It is noted in this connection that, according to Treasury ruling, "political subdivision" includes special assessment districts or divisions of a State created by proper State authority for a purpose of a public nature such as street improvements, public highways, sewerage, gas and light, and the reclama- tion, drainage or irrigation of public lands. In this view, interest on the obligations of the above public districts are not subject to income tax. According to the present regulation of the Treas- ury Department, municipal bonds of the various classes exempt hereunder need not be mentioned in the individual's annual return of income, and the [32] ANALYSIS AND COMMENT usual income tax certificates are not required for the collection of interest thereon. An informal ruling by the Department since October 4, 1917 is to the effect that this regulation will be continued. Al- though the new Liberty 4s of 1917 are liable to sur- tax hereunder, (except only as to $5,000 par value of the bonds), it is stipulated in the law that the "information at the source" provisions, under which certificates might be required, shall not apply in this case. The Federal Farm Loan Act, approved July 17, 1916, "to provide capital for agricultural develop- ment," etc., authorized and made provision for Fed- eral Land Banks, joint-stock land banks, and other allied agencies, and also for the issuance of Fed- eral Farm Loan bonds. These bonds, although not the obligations of the Federal Government, are de- clared to be "instrumentalities of the United States" and thus exempt from all income tax. Heretofore, interest upon all the obligations of the United States has been declared to be exempt from tax. By recent amendment, however, ex- emption in the case of such obligations issued after September 1, 1917, is allowed only if and to the ex- tent provided by the law authorizing each particular issue. The Liberty 3^s, dated June 15, 1917, are exempt from all income tax, surtax as well as normal. But Liberty 4% bonds, which bear interest from No- vember 15, 1917, come within the present statutory provision as to exemption applying only if and to Federal Farm Loan Bonds Federal Obligations Liberty 3%% and 4% bonds of 1917 [33] ANALYSIS AND COMMENT Exempt and Taxable Bonds Compared the extent especially provided in the statute author- izing the issue. Interest derived from the Liberty 4s is free from the entire normal tax but subject to surtax on all amounts of these bonds exceeding $5,000 par value. In other words, the income tax to be paid on Liberty 4% bond interest is the surtax on any such interest in excess of $200, (i. e., the in- terest on $5,000 par value of the bonds). Whether a taxpayer finds it advantageous to hold the Liberty 3^s or 4s depends upon the surtax to which he is liable. Table No. IV, appearing on the opposite page indicates the relative advantage in holding one or the other of these securities. Such minor considerations as the difference in the maturity of these bonds is not considered. There also appear hereinafter, in Table No. V, (pages 36 and 37), the comparative values of taxable and tax-exempt securities in general. {Text continued on page 38) r 34] TABLE NO. IV Comparative Values 'of Liberty 3y 2 % and 4% Bonds of 1917 Range of Taxable Income Net return of LIBERTY 4a as compared »ith3.50 ■o w t- ■ T|l * rt o H IO eel *S o ■o G p Td •*-» ■-I « #. o o V ■^O>Cl6oi6HNeO^t>t>o6 a o HWQiOrtOOT))iOiO«3«t-«DM050CCHHCOI> IOI010LOIOU3COOOCOt»t*o6a»OTHiHCQkOCOCD S K 2 5 2 rt 3 3 jj a ■s - a S iooioiaioioioioioa)©t-t-i»e)OON^^io Tji^t>^ti^jiTji^jiT|iioioiocpcoecc— coocnoc^con ■>!<'J<*J"***H'>jiTHTjiioioiQcD?ot-t-aocnocqc3T|lt-rt ^^^^^^TH^^ioioiocdcoi>odc6a>T4iHoi t-ioaoNC90iacoc-nnc-concooHH uqqioo>'t~odoc>o untoomooHt-oioiaegootDONNt-oo OrHiHTHC^CNCOTiiiqooococqoiqoiqcoiqcqo nmnriramcqracQco^<^< ot-a«90 0b-C)0 0iaoHoiD qqrtrtrHH«Mniot;0>qn^qco»^ooq MC4e * a :i to oo oo oo tiTio » o •p oo oo oo oooooooooooooooooo-, oooooooooooooooooo? IO O IO o o o o o o o o o o o o o o o g t- O « IO O OO 0000 OOOOO O fe HrtNNMlOt- O IO O A OOOOOOOOOOOOOOOOOOO ooooooooooooooooooo OIOOIOOOOOOOOOOOOOOOO aVeWeiioooooodod'oooood' riHH«<4IIOODOieOiaOOISOOO «> HHnonisc-oiao o [37] ANALYSIS AND COMMENT Net Income Calculating Profits on Sales "Accrued Interest" Keeping Individual Accounts The net income of an individual citizen or resi- ent of the United States, disregarding of course the exemptions and deductions allowed by the statute, is stated to include gains, profits, and income de- rived from every source whatsoever, and specifically from: (a) Salaries, wages or compensation for personal service of every kind and in whatever form paid; (b) Professions, vocations, businesses, trade or com- merce; (c) Sales or dealings in property, real or personal, as well as income growing out of the ownership, use or interest in such property; and, (d) Interest, rent and dividends. In ascertaining the gain derived from the sale or other disposition of securities, real estate, or other property acquired before March 1, 1913, (the date from which the tax applied to income under the 1913 Law), the fair market price or value of such prop- erty as of that date shall be the basis for determin- ing the amount of the gain. It seems of practical value to note herein in respect to "accrued interest" on bonds that, according to Treasury ruling, the owner of bonds at the time the interest becomes due and payable should account in his return only for the interest which accrued after the bonds were purchased by him. The former owner should account in his return for the interest which accrued during his ownership of the bonds. The new Law grants considerable latitude to an individual in the keeping of his accounts. It is pro- vided that he may do this upon some other basis [38] ANALYSIS AND COMMENT than that of actual receipts and disbursements. Sub- ject to Treasury regulations, he may make his re- turn on the basis of his accounts as thus kept if they clearly reflect his income. The income of an individual in the form of divi- Dividends dends or net earnings of corporations or similar or- ganizations is treated accordingly as the organiza- tion is or is not taxable under the corporate sections of the law. In general, organizations are taxable if they are organized in the United States, no matter where they operate, or if they are organized in other countries but operate in or derive income from the United States. The dividends received from such taxable organizations are not liable to any normal tax in the hands of an individual, but are liable to the surtax. The dividends paid by foreign organi- zations, themselves not liable to tax under the cor- porate sections of the law, are liable to both normal and surtax rates. It is well understood that the reason dividends from organizations, themselves taxable, have not been liable to any normal tax in the hands of indi- viduals is that such organizations already have paid the corporation tax on that part of their net earn- ings distributed in the form of dividends. Hereto- fore, the tax on corporate net income has been at the same rate as the normal tax on individual net in- come. The same plan prevails, however, of not levy- ing any normal tax against dividends (and of hav- ing the corporation itself pay the tax — see last para- graph page 27) even though the corporate tax is [39] ANALYSIS AND COMMENT now six per cent, as compared with a normal tax against individuals of no more than four per cent. Dividends received from organizations taxable under the corporate sections of the law are free from normal tax when received by non-resident aliens the same as in the case of citizens or residents. Non- resident aliens, however, are not subject to tax on dividends received from foreign organizations which themselves do not come within the scope of the cor- porate provisions of the law. For a discussion of the various classes of taxable dividends, (depending, for instance, upon the time the corporation earned the particular income dis- tributed as dividends), reference is made to com- ments under "General Provisions" (page 83). Corporations The statute contemplates a corporation or asso- Organized ciation formed or fraudulently availed of to escape Tax ESape income tax by permitting the profits of such a corporation to accumulate instead of being divided or distributed. This is the same provision which has appeared heretofore and Congress has evidently kept in mind the growing popularity of incorporat- ing estates, individuals, etc. The fact that such a corporation or association is a mere holding com- pany or that its gains and profits are permitted to accumulate beyond the reasonable needs of the business is stated to be prima facie evidence of a fraudulent purpose to escape the tax. The proviso is added, however, that the mere fact of the gains [40] Estates ANALYSIS AND COMMENT and profits accumulating and becoming surplus shall not be construed as evidence of a purpose to escape the tax unless the Secretary of the Treasury shall consider such accumulation unreasonable for the purposes of the corporation. Upon request by the Commissioner or any Collector of Internal Rev- enue such a corporation or association shall file with the official requesting the same a statement of its profits, and the names and addresses of the indi- viduals entitled thereto. To the extent of any in- dividual's share therein, the profits of such a corpo- ration whether distributed or not are declared to be income subject to the surtax. The estate of a deceased person is treated as an entirety and is so taxed for the period of its admin- and Trusts istration or settlement. The income of estates or any kind of property held in trust appears to be like- wise taxable, including income accumulated in trust for the benefit of unborn or unascertained persons, or persons with contingent interests; also income held for future distribution under the terms of a will or trust. In many instances the practical effect of taxing an estate or trust in its entirety, rather than according to the several or individual shares therein, is to increase materially the income taxes on the estate because of the rapid progression of the sur- tax rates; however, income distributed to bene- ficiaries annually or regularly is subject only to the tax on the individual shares. Any income tax shall be levied against the representative of [41] ANALYSIS AND COMMENT Deductions Allowed Citizens or Residents the estate or trust unless return of such income is made by the beneficiary. In computing the net income of a citizen or resi- dent of the United States the following general de- ductions are authorized: (a) Necessary expenses actually paid in carrying on a business or trade, not including personal, living, or family expenses; (b) All interest paid on his indebtedness, except, how- //>ever, that no deduction may be made for in- * •' terest on indebtedness incurred "for the pur- t chase" of securities, the interest upon which is declared by the law to be tax exempt; (c) Taxes paid, such as are imposed by authority of the United States or its Territories or possessions, or by any State or taxing subdivision thereof, or by authority of any foreign country; assessments against local benefits are not allowable deduc- ____jipns^_By_J517__ainendnient_iiicome and excess profifsTaxes, areexcIOTe^asdedu^tieasr^ - sepa- rate section of the law, however, definitely pro- vides that in determining "net income" subject to income tax, the taxpayer may treat as a de- duction any excess profits tax paid during the same year; (d) Losses actually sustained during the year, incurred in the business or trade of the taxpayer or arising from fire, storm, or similar casualty, or from theft, when such losses are not compensated for by insurance or otherwise; (e) Debts due and actually ascertained to be worthless and charged off within the year; (f) A reasonable allowance for depreciation of prop- erty employed in business; oil and gas wells and mines are especially considered but the statute ' provides in that connection that no further allow- ance shall be made after the total amount deducted hereunder shall equal the capital originally in- vested therein, or in the case of purchase prior to March 1, 1913, the fair market value as of that date; the cost of new buildings, permanent im- [42] ANALYSIS AND COMMENT provements, etc., shall not be deducted, and no deduction shall be made for the expense of re- storing property on which an allowance is or has been made; (g) Losses sustained in transactions entered into for profit but not connected with the taxpayer's busi- ness or trade, such losses, however, not to ex- ceed the profits arising therefrom; (h) Contributions or gifts to corporations or asso- ciations organized and operated exclusively for religious, charitable, scientific or educational pur- poses, or to societies for the prevention of cruelty to children or animals, no part of the net income of which inures to the benefit of any private stock- holder or individual. This allowance, however, shall not be greater than fifteen per cent, of the taxpayer's net income subject to tax, "net in- come", for the purposes of this computation, to include such gifts or contributions. The law stipulates that such gifts or contributions shall be allowed only if "verified" under Treasury De- partment regulations. In addition to the allowance for gifts and contri- butions which may be made now, for the first time, there are two important changes in the matter of deductions which warrant special mention. Heretofore, an individual taxpayer has been al- lowed to deduct all interest on all his indebtedness ; but by recent amendment he may not now de- duct "indebtedness incurred for the purchase of obligations or securities the interest upon which is exempt from taxation as income", etc. Thus, indebtedness incurred "for the purchase" of so- called Municipal bonds will no longer be allowed as a deduction. Liberty 4s of 1917 are exempt only from the normal tax and from the surtax on $5,000 par value of the bonds and the question has Important Deduction Changes Certain Interest Not Deductible Liberty 4s [43] ANALYSIS AND COMMENT Income Tax Paid No Longer Deductible been raised as to what, if any, deduction would be allowed in this connection. Under date of Oc- tober 20, 1917, a ruling was handed down by the Department that in respect to individuals, "indebt- edness incurred for the purchase of Liberty 4s may be deducted in computing net income subject to income surtaxes", etc. It appears likely that the form of annual return blank used by an individ- ual taxpayer will be so arranged as to facilitate his work in computing and allowing this deduction. Domestic corporation bonds containing the so- called tax-free covenant are not regarded by the law as securities exempt from income tax; it seems clear, therefore, that interest on indebtedness in- curred in the purchase of such bonds will be al- lowed in full ^s has been the case heretofore. Until this year, credit has been given for income taxes paid. That this is no longer true is a mat- ter of real significance to an individual with a large taxable income. For example, assume that an individual will have a taxable income of $1,165,- 000 for each year, 1917 and 1918, which income, under the existing rates, will pay approximately a fifty per cent. tax. Thus, for the calendar year 1917, the amount of tax paid would be approximately $582,500, or one-half of the total income. Under the amended law, which does not permit income taxes to be deducted in arriving at "net income" sub- ject to tax, the 1918 tax would be the same, or ap- proximately $582,500. On the other hand, if in- [44] ANALYSIS AND COMMENT come taxes were allowed as a deduction, as has been the case under previous laws, the amount to be paid in 1918 would be very much less. From the income of $1,165,000 for the year 1918 would be de- ducted the $582,500 paid in income tax for the year 1917. That would leave $582,500 of income. The tax on $582,500 of taxable income at the present rates is approximately $237,250. In other words, this recent amendment, by which income taxes are no longer deductible, makes a difference of $345,250 against the taxpayer on his income tax for the year 1918. It will be observed, therefore, that income taxes will be relatively greater under the present law, not only by virtue of the increased rates, but because of the method of calculating "net income" subject to tax. As in the case of computing profit from the sale of real or personal property acquired before March Losses ' B 1, 1913, any loss therefrom shall be computed on the basis of the fair market value of such property as of that date. "Losses in trade" have been the subject of much _, . , , _ "Losses controversy. The interpretation by the Treasury in Trade" Department, under the 1913 Law, was that losses incurred in a business other than that of the tax- payer were not deductible in arriving at his net income even though the profits arising from simi- lar business dealings were required to be included as taxable income. That interpretation had a direct and in many cases an unfair application to dealings [45] ANALYSIS AND COMMENT Treasury Decisions Regarding Deductions in securities by persons not engaged in their pur- chase and sale as a regular business. The 1916 Act, however, which continues in effect, definitely contemplated security and similar transactions by an individual not engaged in such transactions as a matter of his regular business; those provisions continue to apply. The taxpayer, thus, is allowed to deduct .such losses as he may have in that con- nection provided the losses do not exceed the total amount of profits arising within the year from trans- actions "entered into for profit but not connected with his business or trade." On account of the more than usual practical im- portance of the subject of deductions allowed indi- viduals, there are included in these comments the general purport of several Treasury decisions: A bad or worthless debt as contemplate^ by the statute is a debt which has been actually ascertained to be worthless and charged off within the tax year; Premiums paid on life insurance by the insured do not constitute allowable deductions; An individual is not permitted to include as_ a de- duction the rental value of the property which he owns and occupies, nor is he permitted to deduct from his gross income the interest which the cap- ital invested or employed therein would earn were it otherwise invested. Income from rental of prop- erty is taxable, but in computing such incomes a deduction may be made for such items as premiums on fire insurance, and a reasonable allowance for de- k preciation. This allowance for depreciation cannot be made on property occupied by the owner as a dwelling. [46] ANALYSIS AND COMMENT The subject of partnerships was in somewhat of a maze from the enactment of the 1913 Act until Oc- tober 3, 1917. On that date the 1916 Act was so amended as, apparently, to clear up the remaining uncertainty as to how partnership income shall be calculated and treated under the law. Partnerships as such are not taxed, but the mem- bers thereof are liable individually for their share of the firm's profits for the year, whether divided or undivided, and are required to include such income in their individual returns. The Treasury Depart- ment undoubtedly will continue to allow partners to exclude from their return of income any of the firm's profits distributed to them in the current year upon which they have already paid a tax in the form of undistributed profits. The statute provides that from the net distri- butive interests of the several partners in a firm's profits there shall be excluded their proportionate shares of the following: (a) Interest upon so-called Municipal bonds._ includ- ing obligations of States and their subdivisions, and of the possessions of the United States; also interest upon the obligations of the United States, if and to the extent that such exemption be pro- vided by the law authorizing the particular issue of Federal securities; (b) In computing the normal tax, profits derived from dividends of corporations subject to tax under the Income Tax Law; (c) Excess profits tax for the same calendar or fiscal year. [47] Partnerships Only Members Taxable Special Deductions Allowed ANALYSIS AND COMMENT Partnership Return on Request Rates Applying to a Partner's Profits A partnership, upon request by the Commissioner of Internal Revenue or any district collector, shall render a return of its partnership income and the names and addresses of the individuals who would be entitled to the net earnings of the partnership if distributed. Such a return need not include in- come which is declared by the law to be tax-exempt as, for instance, interest upon so-called municipal bonds. A partnership now has the privilege, the same as a corporation, to fix its fiscal year as a pe- riod different from the calendar year. Any return which a partnership may be required to make may be calculated on this basis. If a partnership's fiscal year be not the calendar year, then the income for the fiscal year is prorated between the two calendar years in which the fiscal year falls. For example, if a partnership's fiscal year end April 30, 1917, eight months would lie within the calendar year 1916, and four months within the calendar year 1917. Thus, two-thirds of the partnership profits would be assumed to have been earned in 1916, and one-third in 1917. Under the statute, apparently, the partner receiving such income would pay income tax on that proportion of his partnership income, which had accrued dur- ing the calendar year at the rates prevailing during that year. He would pay income tax at the rates prevailing for the calendar year 1917 on that pro- portion of his partnership profits which had ac- crued during the calendar year 1917. [48] ANALYSIS AND COMMENT Non-resident Aliens Especially Regarding Non-resident Alien Individuals The basis of taxing individuals who are non-resi- dent aliens as to the United States has undergone frequent and substantial change since the enact- ment of the 1913 Law. Each statute has differed in this respect. Moreover, the non-resident alien's status was changed by ruling during the 1913 Law's operation, a Treasury decision declaring in March, 1916, that the income of a non-resident alien in the form of domestic corporation interest and divi- dends was taxable, beginning with the year 1916, by virtue of the 1913 Law. The Department stated that it had made this ruling by virtue of the Brus- haber decision, although it is not entirely clear from that decision that the Supreme Court had this point in mind. Without tracing these various steps, how- ever, the case of the non-resident alien individual under the present law will be generally stated. It is provided that a non-resident alien individ- ual shall be subject to tax on his entire net in- come received "from sources within the United States." With this limitation, the comments hereinbefore made as to the income which is taxable or tax-exempt in the hands of a resident or citizen of the United States generally apply in the case of a non-resident alien. Among other points of difference between the Certain case of the non-resident alien and the citizen or Differences resident of the United States, is the fact that the Income Subject to Tax [49] ANALYSIS AND COMMENT former is not subject to the new normal tax of two per cent, levied by the War Income Tax Law; and he no longer has the advantage of any per- sonal exemption. The rates of tax applying in his case and an example of the method of computing the tax are set forth in Tables VI and VII appear ing on the two following pages. (Text continued on page 53.) r so ] TABLE No. VI Individual Income Tax Rates (Applying to non-resident aliens) The table shows the rates of tax levied by the 1916 In- come Tax Law, (which continue to apply) ; also the rates levied by the War Income Tax Law. Such income of a non-resident alien as is declared by the statute to be tax- able is subject to rates levied by both statutes for the calendar year 1917. The aggregate of these rates appears in column (5) and applies to the corresponding range of taxable income as shown in columns (1) and (2). Each law levies both a normal tax and a graduated surtax; but the new two per cent, normal tax levied by the War In- come Tax Law does not apply to non-resident aliens and thus is not included in the rates appearing in this table. No personal exemption is allowed a non-resident alien. Tax rate on Tax rate on each range each range Total 1917 under 1916 under the tax rate Range of taxable income law (which War Income on each continues Tax Law range lio apply) (1) (2) (3) (4) (5) From $ to $ 2,000 2% 2% 2,000 4,000 2 2 4,000 6,000 2 2 5,000 7,500 2 i% 3 7,500 10,000 2 2 4 10,000 12,500 2 3 5 12,500 15,000 2 4 6 15,000 20,000 2 5 7 20,000 40,000 3 7 10 40,000 60,000 4 10 14 60,000 80,000 5 14 19 80,000 100,000 6 18 24 100,000 150,000 7 22 29 150,000 200,000 8 25 33 200,000 250,000 9 30 39 250,000 300,000 10 34 44 300,000 500,000 11 37 48 500,000 750,000 12 40 52 750,000 1,000,000 12 45 57 1,000,000 1,500,000 13 50 63 1,500,000 2,000,000 14 50 64 2,000,000 upward 15 50 65 [51] TABLE No. VII Example of Computing Individual Income Tax (Applying to non-resident aliens) The following indicates the manner of computing the tax for the calendar year 1917 on a taxable income of $175,000. For purposes of convenience, normal and sur- tax rates are combined. The new two per cent, normal tax levied by the War Income Tax Law does not apply to non-resident aliens, and no exemption is allowed under either statute. The arrangement of this example generally conforms to that of Form 1040, on which individual income tax re- turns have been made to the Government. Amount of Tax ( on each corresponding range) 2% on $ 5,000 (Amt. exceeding $ — not exceeding $ 5,000). $ 100 3% on 2,500 ( " 5,000 " 7,600) . 7 4% on 2,500 ( " 7,600 " 10,000) . 100 5% on 2,500 ( " 10,000 12,500) . 126 6% on 2,600 ( " 12,600 " 15,000) . 150 7% on 6,000 ( " 15,000 " 20,000) . 350 10% on 20,000 ( " 20,000 " 40,000) 2,000 14% on 20,000 ( " 40,000 " 60,000) . 2,800 19% on 20,000 ( " 60,000 " 80,000) . 3,800 24% on 20,000 ( " 80,000 " 100,000) . 4,800 29% on 60,000 ( " 100,000 150,000) . 14,500 33% on 25,000 ( " 150,000 but not exceeding 200,000) 8,250 Total Amount of Tax $37,050 [52] ANALYSIS AND COMMENT The statute provides a separate list of deductions for non-resident aliens in the calculation of their "net income" subject to tax. Most of these de- ductions are identical with those allowed citizens or residents except that the non-resident alien's de- ductions are only in respect to his business or in- terests in the United States. Such differences are not detailed herein. Certain exceptions, more or less, to the general basis of differences in allowing deductions as above mentioned are: A non-resident alien individual is allowed to deduct actual losses sustained in transactions entered into for profit and not connected with his business or trade up to the amount of "profits accruing therefrom in the United States"; He may deduct taxes paid, such as are imposed by authority of the United States or its Territories or possessions, or by any State or taxing subdivision thereof, but not taxes imposed by authority of any foreign country. As in the case of residents or citi- zens, assessments against local benefits are not allow- able deductions, and income and excess profits taxes may not be deducted. In assessing income tax, how- ever, any excess profits tax assessed against the tax- payer for the same year may be used as a deduction in calculating net income subject to income tax; A non-resident alien is not allowed as a deduction, gifts or contributions made to charitable, educational or similar organizations. In this he differs from a resident or citizen (page 43). In order to have the advantage of these deduc- tions and credits allowed by the statute, such as interest, taxes, etc., the non-resident alien must file with the Collector of Internal Revenue, at Bal- timore, Maryland, a return of his total income re- ceived from all sources within the United States. Deductions Allowed Non-resident Aliens [S3] ANALYSIS AND COMMENT Agents May Act for Non-resident Aliens Tax-Free Covenants Presumably, this course would need to be followed by such an individual in order to recover taxes deducted at the source in excess of his total tax liability under the law. Under rulings by the Treasury Department, prop- erly authorized agents within the United States may execute, on behalf of non-resident alien owners, the certificates required in the collection of bond in- terest. Such representatives need to observe care- fully any regulations by the Department as to the extent of their duties. In general, however, the De- partment facilitates the handling of non-resident aliens' affairs in this country by properly author- ized agents. Tax-Free Covenants A large proportion of the outstanding mortgages or other indentures of American corporations contain what is commonly known as the tax-free covenant. It is a provision in substance that the principal and interest of the bonds or other obliga- tions secured thereby shall be paid without deduc- tion for any tax or taxes which the company may be required (and in some cases, permitted) to pay or deduct therefrom under any present or future law of the United States. The weight of published opinion has been that this makes the corporation liable for the normal tax as imposed under the provisions of the 1913 and 1916 Laws, and for whatever reasons, legal or practical, corporations generally have paid the normal tax on presenta- [54] 913 Law ANALYSIS AND COMMENT tion of proper certificates. As the law now stands it would seem logical to expect corporations in gen- eral to continue to pay for the bondholder the amount of tax which the statute declares shall be deducted at the source. What the amount of this tax is, as applied to different classes of taxpayers, is referred to on the following pages. Pending the enactment of the Income Tax Law of Under 1913, there was some discussion of this matter of tax free covenants in corporate mortgages. The view prevailed in some quarters that corporations should be prohibited by law from making any new agree- ments of this sort. As then passed, the Law con- tained the provision of somewhat uncertain scope that "no contract entered into after this Act takes effect (shall) be valid in regard to any Federal in- come tax imposed upon a person liable to such pay- ment." There was some diversity of opinion as to whether the above quoted provision of the 1913 Law prevented corporations from including the tax-free covenant in any new mortgage or other indenture executed by them. As a consequence it has not been unusual for corporations, since the enactment of that law, to agree to pay the income tax subject to de- duction at the source as and to the extent that they might lawfully do so. The 1916 Law repealed the old statute, including Under the above quoted provision, and contained no pro- hibition against the inclusion of any tax-free cove- nant in corporate mortgages. That is the situation under the existing law. [55] Present Law ANALYSIS AND COMMENT Deduction at the Source Previous Laws Present System Non-resident Alien Individuals "Deduction" and "Information" at the Source The system of "deduction at the source" has been one of the fundamentals of this Government's in- come tax "machinery" since the enactment of the 1913 Law. The system served a dual purpose. First, it collected the normal or basic tax levied against certain income ; and secondly, it supplied in- formation desired by the Government. With the enactment of the War Revenue Law, October 3, 1917, this system has been substantially modified. Deduction at the source continues to ap- ply in certain cases, but in large part has been abol- ished. On the other hand, an elaborate system of information at the source has been inaugurated. This will supply the Government with all of the essential information it received under the old "de- duction at the source" plan, and much more. We thus now have the dual system of "deduction at the source," (which also supplies information), and "information at the source." This system applies differently to different classes of taxpayers as is set forth in the following paragraphs. In the case of a non-resident alien, deduction at the source applies to all domestic corporation bond interest and to all other forms of fixed or determin- able annual or periodical income subject to tax, except only dividends of domestic corporations. The system applies no matter what the amount of pay- ment may be. The amount of tax deducted is two per cent. (It will be recalled that the non-resident [56] ANALYSIS AND C O M M fc N T alien individual is not liable for the new normal tax of two per cent, levied by the War Income Tax Law. His basic tax therefore is two per cent. — the amount deducted at the source.) Parenthetically, it may be commented that a non- resident alien individual, who derives no more than $5,000 net income from sources within the United States, (and is thus subject to no surtax), will pay no American income tax upon the interest derived from bonds of American corporations which assume the payment of the tax. In fact, so far as he is con- cerned no tax will be deducted at the source, interest being paid in full by the corporation. Deduction at the source applies to domestic corp- oration bond interest paid to foreign corporations, joint-stock companies or associations, and insurance companies not engaged in business or trade withii: the United States and not having any office or place of business therein. According to informal ruling by the Commissioner of Internal Revenue, October 13, 1917, six per cent, tax shall be deducted at the source in such cases. The foreign organizations enumerated above are liable to a tax of six per cent. ; thus, the entire amount is collected at the source. The position of a non-resident alien partnership, which is not engaged in business in the United States and has no place of business therein, is somewhat confused in respect to deduction at the source. It was evidently the intention of Congress that this system should apply ; but obviously it does not. The Benefit of Tax-free Covenant Foreign Corporations and Others Foreign Partnerships [57] ANALYSIS AND COMMENT Treasury Department has so ruled in an informal decision, October 20, 1917. As now amended, the 1916 Law (subdivision [e], Section 13,) stipulates that all the provisions of the statute applying to deduction at the source in the case of non-resident alien individuals shall apply to the collection of the two per cent, tax levied by Section 10 against in- come accruing to certain foreign corporations, for- eign partnerships, etc. But, Section 10 does not levy a tax against foreign partnerships. The details of this point are set forth because of the possibility that this technical error in the wording of the stat- ute may be corrected by subsequent legislation. citizens or In so far as citizens or residents of the United States are concerned, deduction at the source applies only in the case of interest on obligations containing the "tax-free" covenant. The statute provides that this system shall apply "if such bonds, mortgages, or other obligations contain a contract or provision by which the obligor agrees to pay any portion of the tax imposed by this title upon the obligee or to reimburse the obligee for any portion of the tax or to pay the interest without deduction for any tax which the obligor may be required or permitted to pay thereon or to retain therefrom under any law of the United States." (This would seem to be a recognition by Congress of the exist- ence of the much-used "tax-free" covenant.) In this case, two per cent, is deducted at the source. Until the end of the calendar year 1917 the two per cent. [58] ANALYSIS AND COMMENT tax to be deducted shall continue to be the normal tax provided by the 1916 Law. On and after Janu- ary 1, 1918, the new two per cent, normal tax levied by the War Income Tax Law will be deducted. As a general declaration, the statute provides that after January 1, 1918, only one two per cent, normal tax shall be deducted at the source and that any further normal tax for which the taxpayer may be liable shall be paid directly by personal return at the end of the year. It has been pointed out heretofore (page 27) that in reality two per cent, is the basic tax levied against an individual citizen or resident, $2,000 of his income being liable to only two per cent. tax. Thus two per cent., the basic tax, is the amount deducted at the source. In respect to obligations containing the tax-free covenant, it seems that the system of deduction at the source will apply even though the corporation should decline to recognize its covenant to pay the tax. In such a case, apparently, the paying agent would be required to withhold the two per cent, tax from the interest paid the bondholder. What- ever recourse the bondholder would have would seem to be against the debtor corporation which had declined to recognize its covenant. Deduction at the source does not apply to any Domestic , Corporations income paid domestic corporations, nor, it seems, to any classes of income or taxpayers other than those mentioned above. T59] ANALYSIS AND C O M M E N Information at the Source Brokers' Records "Information at the source", as a more or less independent part of the income tax administrative "machinery", is now inaugurated for the first time. Regardless of the amount of payment, this system applies: First, to interest on obligations of domes- tic corporations, and, secondly, to interest upon bonds of foreign countries and interest or dividends upon the obligations or stock of foreign corpora- tions. [The second classification would seem to ap- ply, however, only "in the case of collections of items (not payable in the United States)."] Infor- mation at the source also applies to payments of $800 and more, in any taxable year, of interest, rent, salaries, wages, premiums, annuities, compensation or other fixed or determinable income. The statute provides that all persons, corporations, partnerships, associations and insurance companies, no matter in what capacity they may act, — including lessees or mortgagors of real or personal property, trustees, executors, administrators, receivers and employers, .making any payments of such a character of $800 or over in a year to any other person, corporation or other organization, — are called upon to report the amount of such income and the name and ad- dress of the recipient. When so required by the Commissioner of In- ternal Revenue, any broker on any exchange or board of trade, whether operating as an individual, as a co-partnership or otherwise, shall report the names of customers for whom business has been [60] ANALYSIS AND COMMENT transacted; the broker also shall report such de- tails as to the profits, losses or other information which the Commissioner may require in respect to each of such customers. This is to enable the Com- missioner to determine, so the statute says, whether all income tax has been paid on the profits of such customers. The Commissioner of Internal Revenue may re- quire any corporation, joint-stock company or as- sociation, or insurance company, subject to tax here- under, to make a return of its payments of divi- dends, whether made in cash or in stock, the names and addresses of its stockholders, and the number of shares owned by each, and "the tax years and the applicable amounts in which such dividends were earned." Much of the tax deducted at the source during 1917 until the fourth of October must now be re- paid by the withholding agents. Such amounts as have been withheld from citizens or residents of the United States, and which would not now be re- quired to be withheld, as the law is amended, must be paid back to such individuals by the corpora- tions, and others who have withheld the tax at the source. For example, taxes deducted on salaries must now be repaid; and withholding agents must pay back to citizens or residents any taxes deducted from interest on bonds which do not contain the tax-free covenant. Stockholders' Lists and Dividend Records Repayment of Taxes Deducted During 1917 [61] ANALYSIS AND COMMENT License for Foreign Collections Time of Application Annual Return of Income Individuals Citizens or Residents Under penalty of fine or imprisonment or both, all persons, firms, or corporations, undertaking as a matter of business or for profit the collection of for- eign payments of interest or dividends, shall obtain a license from the Commissioner of Internal Rev- enue and shall be subject to regulations enabling the Government to obtain the information required under the law. The provisions relating to information at the source, and, except as otherwise stated, the pro- visions relating to deduction at the source, became effective October 4, 1917. Returns, Assessment and Payment Under the 1916 Law, as originally passed, the an- nual return of income was required of individuals having a net income of $3,000 or over. That is now changed. A return is now required if the net income be $1,000 or over in the case of "unmar- ried persons," or $2,000 or over in the case of "mar- ried persons." Apparently, the statute intends the distinction to be on the basis of "married" or "un- married," and not as to whether the person be en- titled to $1,000 or $2,000 personal exemption, (and thus taxable above that amount, by the War In- come Tax Law). There appears to be a possibility of confusion in this situation as it is recalled that personal exemption is not necessarily determined by the "married" status of the individual. It does not appear impossible, under a technical construction of the statute for instance, that a "married person" [62] ANALYSIS AND COMMENT would be taxable on income above $1,000, but would not be required to make a return because his income did not reach $2,000. Presumably, a non-resident alien individual is re- quired to make a return only if his net income from sources within the United States reach $1,000 or $2,000, depending upon whether he be "unmarried" or "married," whereas it is recalled that such an individual is now taxable on all net income received from sources within the United States. All of the normal tax of two per cent, levied against non-resi- dent alien income from the United States will not be deducted at the source, (and thus collected re- gardless of return and assessment) because collec- tion at the source even in the case of non-resident aliens does not apply to income in most instances unless of a "fixed or determinable annual or period- ical" character. Perhaps the broad intent of the statute is sufficient to require returns in such cases. If the views expressed in the two preceding para- graphs regarding returns be correct, later Treasury Regulations will be likely to cover the situation. Guardians, executors, and all other persons, cor- porate or otherwise, acting in a fiduciary capacity, are required to make a return of the income of a person, trust, or estate for whom or which they act, and are generally subject to the statute's provi- sions relating to individuals. The fiduciary filing such a return shall make oath that he has sufficient knowledge of the affairs of the person, trust, or es- Return of Non-resident Aliens Guardians and Other Fiduciaries [63] ANALYSIS AND COMMENT Husband and Wife Returns by Agents Period Covered tate on whose behalf he acts to enable him to make the return, and further, that such return is true and correct to the best of his knowledge and be- lief. In this connection it is required that a return be filed by only one of two or more joint fiduciaries. Return by a fiduciary on behalf of an individual apparently shall be made if the net income reach $1,000 or $2,000, depending upon the "married" status of the beneficiary. But it appears in respect to other returns made by fiduciaries that the partic- ular net income reported shall exceed $3,000. Under the 1916 Law, as originally in force, the Treasury Department ruled that the separate in- comes of husband and wife should not be combined in a return of income for the purpose of assessing the surtax. Presumably that ruling will continue in eJEeet^ii^to~income subject to the surtax under le law as it stands today. A person who is unable to make his annual return of income on account of illness, absence, or non-resi- dence, may have such return made by an agent on his behalf, but the agent must assume all responsi- bilities in reference thereto, including the penalties provided for erroneous, false or fraudulent return. , The net income of an individual and his in- come tax are computed on the basis of the calendar year. On or before March 1st of the year there- [64] ANALYSIS AND COMMENT after, a return shall be made in form prescribed by the Commissioner of Internal Revenue. (Form 1040 has been used for this purpose.) The return shall be filed with the Collector of In- ternal Revenue for the district in which such person has his legal residence or his principal place of busi- ness, or if he have no legal residence or place of business in the United States, then with the Col- lector of Internal Revenue at Baltimore, Maryland. The Commissioner of Internal Revenue is given authority in meritorious cases to grant a reasonable extension of time for filing returns by persons re- siding or traveling abroad. The 1913 Statute lim- ited this extension to thirty days, which, seemingly, may now be extended in the discretion of the Com- missioner. A Collector of Internal Revenue may also allow an extension not to exceed thirty days in the filing of a return on account of sickness or ab- sence. On account of disturbed conditions due to the war, the extensions, in many cases, have been very liberal. Assessments shall be made by the Commissioner of Internal Revenue and all persons shall be noti- fied of their tax liability on or before June first, fol- lowing the tax year. Such taxes shall be paid on or before June fifteenth. A citizen or resident, on or before February first following the tax year, may claim the benefit of the personal exemption allowed him by filing an appro- When Filed Where Filed Extension of Time for Returns Assessment and Payment Claiming Personal Exemption [65] ANALYSIS AND COMMENT priate statement with the so-called withholding agent who has paid to him interest on domestic cor- poration bonds which contain the tax-free covenant. (In the case of a citizen or resident, this is the only class of income on which the tax is subject to de- duction at the source.) Undoubtedly, this may be accomplished by filing a certificate with the with- holding agent at the time bond interest is paid. In this way the taxpayer, if he wish, may give the debtor corporation the benefit of his personal ex- emption; otherwise, no certificate would be filed and the personal exemption would be availed of on the taxpayer's annual return of income. It seems no more than fair that the taxpayer give the debtor corporation the benefit of this personal exemption to the extent, if any, that he does not need it as an offset against other income. [66] ANALYSIS AND COMMENT Corporate Income Tax Corporate net income in the United States has been subject to tax continuously since the enact- ment of the so-called Corporation Excise Tax Law of 1909. In its effect that Statute levied a one per cent, tax on corporate net income, after allowing an exemption of $5,000. The Income Tax Law of 1913 also levied a one per cent, tax on such net in- come, but did not allow the $5,000 exemption. (It is well understood, of course, that corporate income is not liable to the surtaxes, or so-called additional tax rates, imposed upon individual income by the 1913 Act and each of the later statutes.) The Act passed September 8, 1916, increased the tax on corporate income to two per cent. That rate applied to income for the year 1916. As has been explained previously in these comments, this 1916 Act continues in effect. It continues to levy a two per cent, tax on corporate income. In addition, there is now levied by the War Income Tax Law, enacted October 3, 1917, a further tax of four per cent. This makes an aggregate rate of six per cent, which, beginning with the calendar year 1917, is levied against corporate net income. The basis upon which the tax is calculated under the two acts is not identical in that the new four per cent, rate levied by the War Income Tax Law does not have to be paid on that part of the "net income" which is derived from dividends or net earnings received from corporations, associations or Former Corporate Income Tax Laws Present Statutes 1916 Law and War Income Tax Law Rates Basis of Calculating Tax [67] ANALYSIS AND COMMENT Organizations Taxable Limited Partnerships insurance companies which are themselves taxable under the income tax law. The old two per cent, tax, however, continues to be levied on "net in- come," including such dividends. The method of arriving at "net income" subject to tax, and a dis- cussion of dividends which are free of all income tax, are referred to in some detail hereinafter. In all comments relative to corporate tax herein, it may be assumed as was true in the discussion of the individual tax that the 1916 Law and the War Income Tax Law just enacted have identical ap- plication unless noted to the contrary. The organizations taxable hereunder are divided into two classes: (a) Corporations, joint-stock companies or associa- tions, or insurance companies, organized in the United States, (generally referred to in these com- ments as domestic organizations) ; (b) Similar organizations authorized, organized or ex- isting, under the laws of any foreign country, (gen- erally referred to as foreign organizations). Generally speaking, domestic organizations are taxable upon their net income derived from every source within and without the United States, where- as foreign organizations are taxable only as to their net income derived from sources within the United States. Partnerships are not taxable as such. Limited partnerships, however, in the view of the Treasury Department, are subject to tax as corporations. The distributed profits of a limited partnership are treated as corporate dividends. [68] ANALYSIS AND COMMENT The following organizations are declared to be Non-taxabie , , Organizations non-taxable under the law. (a) Labor, agricultural, or horticultural; (b) Mutual savings bank not having a capital stock represented by shares; (c) Fraternal benefit society operating under the lodge system, which provides payment of benefits to its members, or is operated for the exclusive benefit of the members of a similar society; (d) Domestic building and loan association or co-oper- ative bank without capital stock, organized and op- erated for mutual purposes and without profit; (e) Mutual benefit cemetery association; (f) Farmers' or other mutual or hail, cyclone, or fire in- surance company; mutual ditch or irrigation com- pany; mutual co-operative telephone company; or like organization of a purely local character the in- come of which consists solely of members' contri- butions for the sole purpose of meeting expenses; (g) Farmers', fruit growers', or like association, act- ing as sales agent in marketing the products of its members; (h) Corporation or association organized exclusively to hold title to property, collect income therefrom, and to turn over the entire amount thereof, less ex- penses, to an organization exempt from tax here- under; (i) Federal Land Bank or national farm-loan association as authorized by Act of July 17, 1916; or, joint- stock land bank authorized under the same law, in respect to income derived from bonds or deben- tures of other joint stock land banks or any Fed- eral Land Bank; (j) Civic league operated exclusively for the promotion of social welfare and not for profit. The following additional organizations are de- clared to be non-taxable if no part of their net in- come accrues to an individual: (k) Exclusively religious, charitable, scientific or educa- tional corporation or association; [69] ANALYSIS AND COMMENT (1) Business league, chamber of commerce, or board of trade, not organized for profit; (m) Pleasure, recreation, or other club of non-profit- able purpose. Tax on It has been suggested from time to time that the Undistributed high rates of tax now imposed upon income might ncome encourage corporations to accumulate a surplus and defer the distribution of dividends until a later date in the expectation that the rates would then be lower. To meet this situation, corporations, asso- ciations, and insurance companies, may become liable for an additional tax of ten per cent, upon net income received during the fiscal year which re- mains undistributed six months after the close of such year. This tax of ten per cent, will apply un- less the income not distributed is actually invested and employed in the business, or is retained for em- ployment in the reasonable requirements of the business, or is invested in the United States Gov- ernment obligations issued after September 1, 1917. Should the Secretary of the Treasury find that any portion of undistributed income retained for em- ployment in the business is not actually so employed or is not "reasonably required" in the business, then the tax on such undistributed net income shall be fifteen instead of ten per cent. Any tax on undistributed net income will be levied on the basis of "net income" as defined by the 1916 Act, which, as noted above, includes divi- dends and net earnings received from other organi- zations subject to tax. These provisions apply for the calendar year 1917. [70] A N A L Y I S AND COMMENT Interest upon so-called Municipal bonds, includ- ing obligations of States and their political subdi- visions, and of the possessions of the United States, is exempt from tax in the hands of all organizations, foreign and domestic, as well as in the hands of in- dividuals. (Comment upon the constitutional phase of this exemption is at page 32 hereinbefore.) Like- wise, this exemption extends to interest upon all obligations of the Federal Government excepting, however, that any such obligation issued after Sep- tember 1, 1917, shall be exempt only if and to the extent provided by the law authorizing the issue. It will be recalled that the interest on the Liberty 4s is subject to the surtax in the hands of individ- uals, except only as to $5,000 par value of the bonds. The interest upon these bonds is exempt from all corporation income tax, so the Treasury Depart- ment ruled on October 20, 1917, provided the total interest deductions made by the corporation in computing its net income do not exceed the limits prescribed by the law. [See hereinafter on pages 73 and 74, subdivisions (1) and (2) paragraph (c).] Corporations may also have the benefit of other exemptions provided by the statute, in so far as they may be appropriate to a corporation, as, for in- stance, interest upon any securities issued under the provisions of the Federal Farm Loan Act. The an- nual return blank heretofore used by corporations has required the inclusion of all such exempt in- come outlined above but apparently this is only for Exempt Income Interest on Liberty 4s [71] ANALYSIS AND COMMENT Public Utility Income Computing Profit or Loss on Sales statistical purposes, inasmuch as it has not been considered in the computation of net income sub- ject to tax. A recent informal ruling by the Com- missioner of Internal Revenue indicates that even this mention of exempt income, in the form of so- called Municipal bond interest, may not be included on the revised blanks for corporation returns. No tax hereunder shall be levied on income de- rived from any public utility or from the exercise of any essential governmental function which accrues to the District of Columbia or to any State or Terri- tory, to the Philippine Islands or Porto Rico, or to any political subdivision of the foregoing. This ex- emption is made broad enough to apply to that por- tion of the income of public utilities to which any of the above-named governmental agencies may be en- titled under any contract, entered into in good faith on or before September 8, 1916, for the acquisition, construction, operation or maintenance of such pub- lic utility. It seems that this would cover New York City's interest in the subway operation. Obviously, this exemption does not extend to the income of the person or corporation making such a contract with the governmental agency. Profits accruing to a corporation from the sale or other disposition of any kind of property acquired before March 1, 1913, shall be calculated on the basis of the fair market value of such property as of that date. Losses resulting from similar transac- tions shall be calculated on the same basis. [72] ANALYSIS AND COMMENT The taxation of dividends is now treated at some length in the statute as amended as well as in Treasury Regulations and court decisions. The comments thereon, in large part, apply to individ- uals as well as to corporations and therefore are in- cluded hereinafter under "General Provisions" (page 83). The handling of dividends has a direct bearing, of course, on the calculation of "net income." It is "net income," as that term is de- fined by the statute, upon which the tax is levied. A domestic organization shall be allowed the fol- lowing general deductions in the computation of its net income subject to tax : (a) Ordinary and necessary expense of maintenance and operation of business and properties, including ne- cessary rentals or other payments for property to which the corporation has no title, etc., and in which it has no equity; (b) Losses actually sustained and charged off and not compensated for by insurance or otherwise, includ- ing a reasonable allowance for the exhaustion, wear and tear of property arising out of its use in the business or trade; oil and gas wells and mines are especially considered, but in this connection the statute provides that no further allowance shall be made after the total amount deducted hereunder shall equal the capital originally invested therein, or in the case of purchase prior to March 1, 1913, the fair market value as of that date; the cost of new buildings, permanent improvements, etc., shall not be deducted, nor shall there be any reduction for the expense of restoring property on which allow- ance is or has been made; (c) Amount of interest paid on its indebtedness, ex- cept, however, it is not allowable to deduct in- terest on indebtedness which has been incurred for the purchase of securities the interest upon which is exempt from income tax. Furthermore, the Dividends Deductions Allowed Domestic Organizations [73] A N A L Y S I AND COMMENT Salary Paid Employee in Army Miscellaneous Provisions Regarding Interest Deductions amount of indebtedness in respect to which the in- terest may be deducted hereunder shall not be in excess of the sum of: (1) The entire amount of paid-up capital outstand- ing at close of year, or if no capital stock, the entire amount of capital employed in business at close of year; and (2) One-half of its interest-bearing indebtedness then outstanding. (In respect to capital stock issued without par value, the amount of paid-up capital stock as understood in this connection will be the amount of cash, or its equivalent, paid or transferred to the corporation as a consideration for such shares.) (d) Taxes paid, such as are imposed by authority of the United States or its territories or possessions, or any State or taxing subdivision thereof or by au- thority of any foreign country. Assessments against local benefits are not allowable deductions. By 1917 amendment, income and excess profits taxes are excluded as deductions. A separate section of the law, however, definitely provides that in determining "net income" subject to tax, the taxpayer may treat as a deduction any excess profits tax paid during the same year. By informal ruling, October 4, 1917, the Treasury Department has held that in case a corporation con- tinues to pay an employe his salary or a part thereof during his service "in the United States Army," this amount may be considered a necessary expense of the business and as such will be allowed as a de- duction in computing the corporation's net income subject to tax. In respect particularly to the deduction of inter- est in computing corporate net income, the statute provides that preferred stock shall not be considered interest-bearing indebtedness. [74] ANALYSIS AND COMMENT Deduction of the entire amount of interest is al- lowed in the case of indebtedness which is wholly secured by collateral, subject to sale or hypotheca- tion by a corporation or other organization which is "a dealer only in the property constituting such collateral." This provision is of benefit to a dealer in securities who is thus allowed to deduct all of his interest charges incurred in "carrying" securi- ties at his bank. In such a case, interest shall not be deducted on an amount of indebtedness in ex- cess of the actual value of the collateral. The law does not allow any deduction to a cor- poration for any tax paid pursuant to a guarantee that the interest on bonds or other indebtedness shall be free from taxation, as, for instance, under the so-called tax-free covenant in corporate mort- gages. A bank, loan, or trust company shall be allowed, as a deduction, interest paid on deposits or moneys received for investment and secured by the interest- bearing certificates of indebtedness issued by such bank, loan, or trust company. Insurance companies are allowed to deduct their net addition to reserve funds required by law and "sums other than dividends paid within the year on policy and annuity contracts." (For a discussion of the subject of "reserve funds," for which there is not sufficient space in these comments, reference is made to the case of Maryland Casualty Co. v. United States, Court of Claims of the United States, Special Deductions Allowed Insurance Companies [75] ANALYSIS AND COMMENT Deductions Allowed Foreign Organizations decided February 12, 1917; also the case of Mc- Coach, Collector, v. Insurance Co. of North Amer- ica, Supreme Court of the United States, October Term, 1916, decided June 11, 1917.) The statute recites a number of provisions which apply espe- cially to mutual fire, mutual employers' liability, mutual workmen's compensation, mutual casualty, and mutual marine insurance companies. Especially Regarding Foreign Organizations The Statute provides a separate list of deductions for foreign organizations authorized, organized, or existing, under the laws of any foreign country. Generally speaking, the difference between the de- ductions allowed foreign organizations and those granted to similar domestic organizations as above discussed is that foreign organizations shall deduct only those items which have arisen in respect to their business or interests in the United States. A foreign organization shall compute the amount of interest paid on its indebtedness along the same lines as laid down in respect to domestic organiza- tions, but the foreign organization is allowed de- duction of only such a proportion of that interest as the gross amount of its income on business trans- acted and capital invested within the United States bears to the gross amount of its income derived from all sources within and without the United States. It may be noted also that no provision has been made in the case of foreign organizations, as was made for domestic organizations, for the deduc- [76] ANALYSIS AND COMMENT tion of the entire amount of interest in the case of indebtedness wholly secured by collateral which is the subject of sale or hypothecation by an organiza- tion dealing only in the property constituting such collateral. Under the 1916 Act, for the first time, the system of "deduction at the source" was applied to certain income accruing in the United States to foreign or- ganizations "not engaged in business or trade with- in the United States and not having any office or place of business therein." That system continues to apply and operates in respect — first, to interest on all bonds and similar obligations of domestic corpo- rations, and secondly, to dividends of domestic cor- porations. The foreign organizations to which this system of deduction at the source applies are clas- sified differently, depending upon whether the in- come is in the form of interest or dividends. The tax shall be deducted from interest on the bonds and similar obligations of domestic corporations paid to "non-resident alien firms, co-partnerships, com- panies, corporations, joint-stock companies or asso- ciations, and insurance companies." Deduction at the source applies to domestic dividends paid to "non-resident alien companies, corporations, joint- stock companies or associations, and insurance com- panies." (Respecting foreign partnerships, see page 57, hereinbefore.) It will be recalled that "deduction at the source" does not apply to all corporate bond interest paid Deduction at Source Applies to Foreign Organizations [77] ANALYSIS AND COMMENT to citizens or residents of the United States. If the particular bond on which interest is paid contains the so-called tax-free covenant, deduction at the source applies; otherwise it does not. But in the case of non-resident alien individuals, and foreign organizations not engaged in business in this coun- try and having no place of business therein, deduc- tion at the source applies regardless of the tax- free covenant. (Subject discussed hereinbefore at page 56.) Rate of Tax There may be some slight uncertainty as to how Subject to , J . ~ ' Deduction much tax Congress intended should be deducted at the source from domestic corporation interest paid to the foreign organizations mentioned in the pre- ceding paragraphs. A very brief amendment of the 1916 Act (sub-division [e], Section 13) indicates that it may have been intended to deduct only the old two per cent, tax imposed by that statute. On the other hand, the War Income Tax Law seems clearly to provide that the further four per cent, tax shall be deducted at the source. This is the view taken by the Commissioner of Internal Revenue in an in- formal decision of October 13, 1917. Two per cent, tax is deducted at the source from domestic divi- dends paid such foreign organizations. This withholding provision as to six per cent, has been in effect since October 4, 1917, and, presum- ably, paying agents who have deducted on and since that date only two per cent, tax from interest on the bonds of domestic corporations will be respon- ds] ANALYSIS AND COMMENT sible to the Government for the remaining four per cent. In this situation, foreign organizations (except Benefit of foreign partnerships) which are not engaged in busi- Tax-free ness within the United States and have no office c ° venant therein, may have the benefit of the "tax-free" covenant appearing in the usual bond of a domestic corporation (pages 57, 77) . In other words, any one of such foreign organizations, upon filing proper certificates may receive the interest in full from such American corporation bonds as contain the tax-free covenant, each American corporation itself agreeing to pay whatever tax is required to be de- ducted at the source. If for any reason, at a later date, the total six per cent, tax against corporate net income should not be deducted at the source, but only two per cent., then the remaining four per cent, tax would need to be paid directly at the end of the tax year by the foreign organization. It seems worth repeating that deduction at the source does not apply to all foreign organizations. It applies only to those "not engaged in business or trade within the United States and not having any office or place of business therein." The "tax-free" covenant, therefore, is of value only to the former class inasmuch as the American debtor corporation under the usual tax-free covenant agrees to pay only such tax as may be subject to deduction at the source. Deduction at the source does not apply to any other foreign organizations, nor does it [79] ANALYSIS AND COMMENT Basis of Corporation Accounts Fiscal Year Corporate Return When Filed apply to domestic organizations. Thus, the tax- free covenant does not benefit organizations of the United States which hold domestic corporation bonds containing such provisions. Corporations and other organizations are given wide latitude in the keeping of their accounts, the law definitely providing that the corporation's books may be kept on some other basis than that of actual receipts and disbursements. The Commis- sioner of Internal Revenue is given wide discretion in deciding whether or not the basis used clearly re- flects the corporation's net income. The calendar year is made the tax year for corpo- rations as well as for individuals, but a corporation is authorized to designate the last day of any month as the close of its fiscal year, which shall then be considered its tax year. A corporation which has a fiscal year different from the calendar year shall pay the six per cent, tax on the proportion of its net income which the period between January first and the end of its fiscal year bears to an entire year. Every corporation or other organization subject to tax hereunder shall file its return on or before March first following the calendar year in respect to which the tax is to be paid. Should the corpora- tion have a fiscal year other than the calendar year, its return shall be filed within sixty days after the close of its fiscal year as chosen. The return shall be sworn to by the President, Vice-President, or other principal officer, and by the Treasurer or As- [80] ANALYSIS AND COMMENT sistant Treasurer, and shall be filed with the Col- lector of the district in which is located the princi- pal office of the organization. In the case of a for- eign organization, its return shall be filed with the Collector of the district in which its principal place of business is located in the United States ; or if it have no such place of business or agency in the United States, then with the Collector of Internal Revenue at Baltimore, Maryland. The Commissioner of Internal Revenue is given authority to grant a reasonable extension of time for the filing of returns of corporations in such cases as appear to him to be meritorious. The Commis- sioner has been particularly lenient recently on ac- count of the disturbed conditions due to the war. An extension of several months has been authorized in many cases. It has been held by the Treasury Department that upon proper application, in the case of illness or absence of an officer whose signa- ture to a return is required, the Collector of Inter- nal Revenue may grant an extension of time, not exceeding thirty days, for filing the return. The Treasury Department has also ruled that in cases where foreign corporations, or domestic cor- porations doing business in foreign countries, are unable to assemble their data in time to make their returns of annual income within the prescribed time, it is permissible for such corporations, upon the showing of this fact, to file with the Collector of Internal Revenue a tentative return in which there Where Filed Extension of Time for Filing Return Preliminary Return [81] ANALYSIS AND COMMENT Returns by Receivers and Others Assessment and Payment of Tax Advance Payment of Tax shall be approximated as nearly as possible the ac- tual business transacted during the year. In place of this tentative return, a true and accurate return shall be substituted as soon as the necessary data to make the same shall be available. Receivers, trustees in bankruptcy, or assignees operating the property or business of organizations subject to tax hereunder, shall make returns in the usual form for the properties of which they have custody or control. Except in the case of corporations or other or- ganizations having a fiscal year different from the calendar year, assessments shall be made and the notice thereof shall be given on or before June first following the tax year, and such tax shall be paid on or before June fifteenth. Corporations whose fiscal years are different from the calendar year shall pay their taxes within one hundred and sixty-five days after the close of such fiscal years. By recent amendment, the Secretary of the Treasury shall permit payments of tax in advance on which interest of not more than three per cent, per annum may be allowed. Inasmuch as this pro- vision applies to individuals as well as to corpora- tions, the details thereof are included under "Gen- eral Provisions," hereinafter (page 87). [82] ANALYSIS AND COMMENT General Provisions The "War Excess Profits Tax," which is levied War Excess by the Revenue Act of October 3, 1917, is not con- Profits Tax sidered in these comments. It is appropriate to re- mark, however, that Section 209 of that law levies, so it is now believed, an eight per cent, extra tax on the net income es Dividends to a partnership or citizen or resident oi States, from its or his profession or occupation. Ap- parently, taxation of a salary is contemplated by this section. It is not a legislative impossibility, however, that this provision will be changed before it becomes actually effective. The general subject of dividends of domestic cor- porations has developed into one of more than usual scope and complexity. Each law since the 1913 Act has been different in this respect, and there have been a number of court decisions and Treasury regulations of importance. Under the 1913 Act, dividends, if taxable at all, is« Law were taxed regardless of the time of accrual to the corporation of the profits or earnings from which such dividends were paid. A United States District Court decision, June, 1917, makes reference to this point and holds that stock dividends resulting from capitalization of surplus earned prior to the year 1913 were taxable under the 1913 Law. The 1916 Law changed this situation. It defined 1916 Law dividends as including any distribution made or or- dered to be made by a corporation or association [83] ANALYSIS AND COMMENT out of its earnings or profits which had accrued since March 1, 1913, (the date as of which the tax applied under the 1913 Law). The converse of this statement was said to be true by the Treasury De- partment, namely, that dividends were not taxable if paid out of earnings which accrued before March, 1913. It was held to be immaterial to the Depart- ment whether a corporation declared dividends out of current earnings or out of surplus which had been acquired prior to March 1, 1913. The Department added, however, in connection with the 1916 Law as originally passed, that the divi- dends should be reported by the taxpayer unless the taxpayer receive a statement from the company that all or a certain portion of such dividend or stock dividend was paid out of surplus or undivided profits accumulated prior to March 1, 1913. Present Apparently, the above comments as to the opera- statute t i on Q £ ^g 1Q16 L aw as originally passed apply to any distribution of corporate earnings made prior to August 6, 1917. In respect to any distribution made on or after that date, the 1916 Law as now amended declares that such dividend shall be deemed to have been made from the most recently accumulated undivided profits or surplus of the cor- poration and shall constitute a part of the annual income of the person receiving the same for the year in which it is received. The statute further provides that such dividends shall, be taxed at the rates prescribed by law for the years in which such [84] ANALYSIS AND COMMENT profits or surplus were accumulated by the corpo- ration distributing the dividend. Dividends paid out of undivided surplus or profits earned prior to March 1, 1913, continue to be free of income tax under this provision. (The date, August 6, 1917, is apparently chosen because on that day the Financ/j Committee made its second report on the Revenue J to the Senate, and in that report the provision "..reinabove re- ferred to was included for the first tinv.) Dividends received by an individual, as is well understood, have at no time been subject to the nor- mal tax. Corporations, however, have been re- quired to pay the regular corporation tax thereon. In this way corporate earnings were frequently sub- ject to tax two, three or even more times. This was felt particularly in the case of so-called Holding Companies. Under the 1916 Act, (as originally passed and as it now stands), corporations pay the two per cent, tax on such dividends; but the War Income Tax Law, which levies the additional four per cent, tax on corporate earnings, allows the cor- poration to deduct dividends received by it from the amount pf its "net income" subject to the four per per cent. tax. Thus, corporations will now pay only a tax of two per cent, on dividends which they receive. The statute now declares that stock dividends shall be considered income "to the amount of the earnings or profits so distributed." This definition Dividends Received by Corporations Stock Dividends Defined £85] ANALYSIS AND COMMENT Dividends Paid in Liberty Bonds Foreign Governments Exempt differs slightly from that included in the 1916 Law as originally passed, but it seems likely that a Treas- ury ruling of October, 1916, is nevertheless still in point. To illustrate the method of estimating the value of a stock dividend, the ruling cites this in- stance : "In a case where a corporation has issued 1,000 shares of stock-of the par value of $100 and distributes 500 additional shares in payment of a dividend declared from net earnings, profits or surplus amounting to $50,000, an individual who holds ten shares of the original stock and receives five shares of the new stock as his pro rata share of the dividend, should, on account of their receipt, include $500 in his personal return." So many inquiries were made on the subject of dividends paid in Liberty Loan bonds that refer- ence is here made to an opinion of the Attorney General of the United States which held, in effect, that dividends paid in these bonds constitute income precisely as though the dividends were paid in cash. The Statute provides that foreign governments shall not be liable for tax on the income derived from bank deposits, or from domestic stocks, bonds or other securities which they may hold; and fur- ther, that nothing in either the 1913 Income Tax Law or the 1916 Law shall be construed as taxing such income accruing to a foreign government. It is possible that the exact application of this provi- sion will not be known until ruling is made by the Treasury Department. By Treasury decision ren- dered under the 1916 Act, as originally passed, it was declared that income in the form of domestic T86] ANALYSIS AND COMMENT corporation dividends or bond interest accruing to a foreign government was subject to two per cent, tax beginning as of January 1, 1916. The infer- ence may be drawn from the present statute that any taxes paid by foreign governments under the original 1916 Act may now be recovered by them. It is assumed that foreign governments are simi- larly exempt in respect to the four per cent, tax imposed by the War Income Tax Law. Since the enactment of the 1913 Income Tax Law there have been a variety of ways of treating pre- miums paid by a corporation on insurance policies issued in their favor on the lives of officers or other persons. For a considerable time these premiums were considered as proper deductions in computing the corporation's net income subject to tax; but under the 1916 Act as now amended, premiums paid by individuals, corporations, and other organiza- tions on life insurance policies issued on the lives of officers, employees and those financially interested in any trade or business conducted by such an in- dividual, corporation or other organization, shall not be deducted in computing the net income of the taxpayer. Under regulations to be issued by the Treasury Department, any individual, corporation or other person liable for the payment of income tax, may make advance payment of that tax, either in instal- ments or in whole. The amount paid shall not be in excess of the estimated taxes which will be due. Life Insurance in Favor of Corporations and Others Advance Payment of Tax Optional [87] ANALYSIS AND COMMENT Optional Means of Payment After determination of the actual amount of tax due, any excess shall be refunded. If the advance payment of such tax be made in instalments, at least one-fourth of such estimated tax shall be paid with- in thirty days after the close of the tax year; at least an additional one-fourth within "two months" after the close of the tax year ; at least an additional one-fourth within "four months"; and the re- mainder of the tax on or before the time now fixed for payment. This regular date of payment, it will be recalled, is June 15th, except in the case of an or- ganization which is allowed to fix its own fiscal year. On any such advance payment or payments made within four and one-half months after the close of the tax year, the Secretary of the Treasury may allow interest of not exceeding three per cent, per annum figured up to June 15th, the date on or before which payment must be made. (This date will be different, of course, in the case of a corpora- tion which fixes its own fiscal year under the terms of the statute.) Interest shall not be allowed on any amount of advance payment which exceeds the actual amount of tax ascertained to be due. It should also be noted in this connection that if the taxpayer elect to pay in advance by instalments, the failure to meet any instalments as outlined above will subject it or him to the usual penalties for failure to pay a tax when due. Aside from the usual means of paying a tax, which has been accomplished ordinarily by certified check, the statute now provides that Collectors of Internal [88] ANALYSIS AND COMMENT Revenue may receive uncertified checks under regu- lations to be issued later by the Treasury Depart- ment. Collectors may also receive in payment of any taxes, at par and accrued interest, certificates of indebtedness of the United States issued under the Act of April 24, 1917, entitled "An Act to authorize an issue of bonds to meet expenditures for the na- tional security and defense, and, for the purpose of assisting in the prosecution of the war, to extend credit to foreign governments," etc.; also certifi- cates of the United States issued under any "subse- quent Act or Acts." Annual returns shall be filed in the office of the r ~" Possible Commissioner of Internal Revenue and shall con- inspection stitute public records and shall be open to inspec- ° f Returns tion as such, but "only on the order of the Presi- dent" and under regulations by the Secretary of the Treasury, etc. This language of the statute indi- cates its application to both individual and corpo- rate returns. It is worthy of note, however, that the provision is inserted in that portion of the law entitled and relating to corporations; and, further, that the context is in relation to the returns of cor- porations. In respect to the annual returns it is also provided by the statute that in accordance with the regulation of the Secretary of the Treasury, the Governor of a State imposing a general income tax may have access to the returns or an abstract there- of showing the name and income of each corpora- tion, joint-stock company or association, or insur- ance company. [89] A N A L Y S I AND COMMENT Secrecy of Returns Porto Rico and Philippines All Collectors of Internal Revenue and all other officers or employees of the United States are pro- hibited from making known any particular or fact disclosed in any income tax return, and any offence against this provision shall be a misdemeanor and shall be punishable by fine, or imprisonment, or both, and the offender shall be dismissed from of- fice or discharged from the Government service. The 1916 Income Tax Law, as now amended, ap- plies to Porto Rico and the Philippine Islands, and provides that all revenues collected by these juris- dictions shall accrue intact to the general govern- ment of each respectively. The War Income Tax Law does not apply to these island possessions and in that statute the Porto Rican or Philippine Legis- lature is given the power to amend or repeal the "in- come tax laws in force in Porto Rico or the Philip- pine Islands, respectively." [90] War Income Tax Law Being Title I of The War Revenue Act of 1917 Entitled "An Act to provide revenue to defray war expenses, and for other purposes." Be it enacted, etc: Section 1. That in addition to the normal tax imposed by subdivision (a) of section one of the Act entitled "An Act to increase the revenue, and for other purposes," ap- proved September eighth, nineteen hundred and sixteen, there shall be levied, assessed, collected, and paid a like normal tax of two per centum upon the income of every individual, a citizen or resident of the United States, re- ceived in the calendar year nineteen hundred and seventeen and every calendar year thereafter. Sec. 2. That in addition to the additional tax imposed by subdivision (b) of section one of such Act of Septem- ber eighth, nineteen hundred and sixteen, there shall be levied, assessed, collected, and paid a like additional tax upon the income of every individual received in the calen- dar year nineteen hundred and seventeen and every cal- endar year thereafter, as follows: One per centum per annum upon the amount by which the total net income exceeds $5,000 and does not exceed $7,500; Two per centum per annum upon the amount by which the total net income exceeds $7,500 and does not exceed $10,000; Three per centum per annum upon the amount by which the total net income exceeds $10,000 and does not exceed $12,500; Four per centum per annum upon the amount by which the total net income exceeds $12,500 and does not exceed $15,000; [91] Persons Liable to Normal Tax Rate Persons Liable to Surtax Surtax Rates THE INCOME TAX LAW Five per centum per annum upon the amount by which the total net income exceeds $15,000 and does not exceed $20,000; Seven per centum per annum upon the amount by which the total net income exceeds $20,000 and does not exceed $40,000; Ten per centum per annum upon the amount by which the total net income exceeds $40,000 and does not exceed $60,000; Fourteen per centum per annum upon the amount by which the total net income exceeds $60,000 and does not exceed $80,000; Eighteen per centum per annum upon the amount by which the total net income exceeds $80,000 and does not exceed $100,000; Twenty-two per centum per annum upon the amount by which the total net income exceeds $100,000 and does not exceed $150,000; Twenty-five per centum per annum upon the amount by which the total net income exceeds $150,000 and does not exceed $200,000; Thirty per centum per annum upon the amount by which the total net income exceeds $200,000 and does not exceed $250,000; Thirty-four per centum per annum upon the amount by which the total net income exceeds $250,000 and does not exceed $300,000; Thirty-seven per centum per annum upon the amount by which the total net income exceeds $300,000 and does not exceed $500,000; Forty per centum per annum upon the amount by which the total net income exceeds $500,000 and does not exceed $750,000; [92] THE INCOME TAX LAW Forty-five per centum per annum upon the amount by which the total net income exceeds $750,000 and does not exceed $1,000,000; Fifty per centum per annum upon the amount by which the total net income exceeds $1,000,000. Sec. 3. That the taxes imposed by sections one and two of this Act shall be computed, levied, assessed, col- lected, and paid upon the same basis and in the same man- ner as the similar taxes imposed by section one of such Act of September eighth, nineteen hundred and sixteen, except that in the case of the tax imposed by section one of this Act (a) the exemptions of $3,000 and $4,000 provided in section seven of such Act of September eighth, nineteen hundred and sixteen, as amended by this Act, shall be, respectively, $1,000 and $2,000, and (b) the returns required under subdivisions (b) and (c) of section eight of such Act, as amended by this Act, shall be required in the case of net incomes of $1,000 or over, in the case of unmarried persons, and $2,000 or over in the case of married persons, instead of $3,000 or over, as therein provided, and (c) the provisions of subdivision (c) of section nine of such Act, as amended by this Act, requiring the normal tax of in- dividuals on income derived from interest to be deducted and withheld at the source of the income shall not apply to the new two per centum normal tax prescribed in sec- tion one of this Act until on and after January first, nine- teen hundred and eighteen, and thereafter only one two per centum normal tax shall be deducted and withheld at the source under the provisions of such subdivision (c), and any further normal tax for which the recipient of such income is liable under this Act or such Act of September eighth, nineteen hundred and sixteen, as amended by this Act, shall be paid by such recipient. Sec. 4. That in addition to the tax imposed by sub- division (a) of section ten of such Act of September eighth, nineteen hundred and sixteen, as amended by this Act, Computing Tax Personal Exemption Returns How Deduction at Source Applies Corporation Tax [93] THE INCOME TAX LAW there shall be levied, assessed, collected, and paid a like tax of four per centum upon the income received in the calendar year nineteen hundred and seventeen and every calendar year thereafter, by every corporation, joint-stock company or association, or insurance company, subject to the tax imposed by that subdivision of that section, except that if it has fixed its own fiscal year, the tax im- posed by this section for the fiscal year ending during the calendar year nineteen hundred and seventeen shall be levied, assessed, collected, and paid only on that propor- tion of its income for such fiscal year which the period between January first, nineteen hundred and seventeen, and the end of such fiscal year bears to the whole of such fiscal year. Basts of Computing Tax The tax imposed by this section shall be computed, levied, assessed, collected, and paid upon the same incomes and in the same manner as the tax imposed by sub- division (a) of section ten of such Act of September eighth, nineteen hundred and sixteen, as amended by this Act, except that for the purpose of the tax imposed by this section the income embraced in a return of a corpora- tion, joint-stock company or association, or insurance company, shall be credited with the amount received as dividends upon the stock or from the net earnings of any other corporation, joint-stock company or association, or insurance company, which is taxable upon its net income as provided in this title. Regarding Porto Rico and the Philippines Sec. 5. That the provisions of this title shall not extend to Porto Rico or the Philippine Islands, and the Porto Rican or Philippine Legislature shall have power by due enactment to amend, alter, modify, or repeal the income tax laws in force in Porto Rico or the Philippine Islands, respectively. Approved October 3, 1917. [94] 1916 Income Tax Law As amended and in effect October 4th, 1917 (Originally became law September 8, 1916; amended by the War Revenue Act, enacted October 3, 1917; also amended by the Revenue Act. enacted March 3. 1917) Part I — On Individuals Be it enacted, etc: Sec. 1. (a) That there shall be levied, assessed, col- lected, and paid annually upon the entire net income re- ceived in the preceding calendar year from all sources by every individual, a citizen or resident of the United States, a tax of two per centum upon such income; and a like tax shall be levied, assessed, collected, and paid annually upon the entire net income received in the preceding calen- dar year from all sources within the United States by every individual, a non-resident alien, including interest on bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise. (b) In addition to the income tax imposed by sub- division (a) of this section (herein referred to as the normal tax) there shall be levied, assessed, collected, and paid upon the total net income of every individual, or, in the case of a non-resident alien, the total net income received from all sources within the United States, an additional income tax (herein referred to as the additional tax) of one per centum per annum upon the amount by which such total net income exceeds $20,000 and does not exceed $40,000, two per centum per annum upon the amount by which such total net income exceeds $40,000, and does not exceed $60,000, three per centum per annum upon the amount by which such total net income NOTE: It will be observed that the subdivisions of certain sec- tions of the law are not consecutively lettered or numbered. This is due to the fact that the War Revenue Act, which repeals a number of subdivisions of the 1916 Law, does not provide for the renumbering or relettering of the remaining subdivisions of the section. Persons Liable Normal Tax Rates of Surtax [95] THE INCOME TAX LAW Dividends Subject to Surtax exceeds $60,000 and does not exceed $80,000, four per centum per annum upon the amount by which such total net income exceeds $80,000 and does not exceed $100,000, five per centum per annum upon the amount by which such total net income exceeds $100,000 and does not exceed $150,000, six per centum per annum upon the amount by which such total net income exceeds $150,000 and does not exceed $200,000, seven per centum per annum upon the amount by which such total net income exceeds $200,000 and does not exceed $250,000, eight per centum per annum upon the amount by which such total net in- come exceeds $250,000 and does hot exceed $300,000, nine per centum per annum upon the amount by which such total net income exceeds $300,000 and does not exceed $500,000, ten per centum per annum upon the amount by which such total net income exceeds $500,000, and does not exceed $1,000,000, eleven per centum per an- num upon the amount by which such total net income exceeds $1,000,000 and does not exceed $1,500,000, twelve per centum per annum upon the amount by which such total net income exceeds $1,500,000 and does not exceed $2,000,000, and thirteen per centum per annum upon the amount by which such total net income exceeds $2,000,000. For the purpose of the additional tax there shall be included as income the income derived from dividends on the capital stock or from the net earnings of any corporation, joint-stock company or association, or in- surance company, except that in the case of non-resident aliens such income derived from sources without the United States shall not be included. AH the provisions of this title relating to the normal tax on individuals, so far as they are applicable and are not inconsistent with this subdivision and section three, shall apply to the imposition, levy, assessment, and col- lection of the additional tax imposed under this sub- division. [96] THE INCOME TAX LAW (c) The foregoing normal and additional tax rates shall apply to the entire net income, except as hereinafter pro- vided, received by every taxable person in the calendar year nineteen hundred and sixteen and in each calendar year thereafter. Income Defined Sec. 2. (a) That, subject only to such exemptions and deductions as are hereinafter allowed, the net income of a taxable person shall include gains, profits, and income, derived from salaries, wages, or compensation for per- sonal service of whatever kind and in whatever form paid, or from professions, vocations, businesses, trade, com- merce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or in- terest in real or personal property, also from interest, rent, dividends, securities, or the transaction of any busi- ness carried on for gain or profit, or gains or profits and income derived from any source whatever. (b) Income received by estates of deceased persons during the period of administration or settlement of the estate, shall be subject to the normal and additional tax and taxed to their estates, and also such income of estates or any kind of property held in trust including such income accumulated in trust for the benefit of un- born or unascertained persons, or persons with con- tingent interests, and income held for future distribution under the terms of the will or trust shall be likewise taxed, the tax in each instance, except when the income is returned for the purpose of the tax by the beneficiary, to be assessed to the executor, administrator, or trustee, as the case may be: Provided, That where the income is to be distributed annually or regularly between existing heirs or legatees, or beneficiaries the rate of tax and method of computing the same shall be based in each case upon the amount of the individual share to be dis- tributed. Taxable Income' Estates and Trusts [97] THE INCOME TAX LAW Profit from Sale of Property Dividends Such trustees, executors, administrators, and other fidu- ciaries are hereby indemnified against the claims or de- mands of every beneficiary for all payments of taxes which they shall be required to make under the provisions of this title, and they shall have credit for the amount of such payments against the beneficiary or principal in any accounting which they make as such trustees or other fiduciaries. (c) For the purpose of ascertaining the gain derived from the sale or other disposition of property, real, per- sonal, or mixed, acquired before March first, nineteen hundred and thirteen, the fair market price or value of such property as of March first, nineteen hundred and thirteen, shall be the basis for determining the amount of such gain derived. Surtax Levied Against Undistributed Profits Sec. 3. For the purpose of the additional tax, the tax- able income of any individual shall include the share to which he would be entitled of the gains and profits, if divided or distributed, whether divided or distributed or not, of all corporations, joint-stock companies or associa- tions, or insurance companies, however created or or- ganized, formed or fraudulently availed of for the purpose of preventing the imposition of such tax through the medium of permitting such gains and profits to accumu- late instead of being divided or distributed; and the fact that any such corporation, joint-stock company, or associa- tion, or insurance company, is a mere holding company, or that the gains and profits are permitted to accumulate beyond the reasonable needs of the business, shall be prima facie evidence of a fraudulent purpose to escape such tax; but the fact that the gains and profits are in any case permitted to accumulate and become surplus shall not be construed as evidence of a purpose to escape the said tax in such case unless the Secretary of the Treasury shall certify that in his opinion such accumula- [98] THE INCOME TAX LAW tion is unreasonable for the purposes of the business. When requested by the Commissioner of Internal Reve- nue, or any district collector of internal revenue, such corporation, joint-stock company or association, or in- surance company, shall forward to him a correct state- ment of such gains and profits and the names and addresses of the individuals or shareholders who would be entitled to the same if divided or distributed. Stockholders' Lists Income Exempt Under Law Sec. 4. The following income shall be exempt from the provisions of this title: The proceeds of life insurance policies paid to individual beneficiaries upon the death of the insured; the amount received by the insured, as a return of premium or premiums paid by him under life insurance, endowment, or annuity contracts, either during the term or at the maturity of the term mentioned in the contract or upon surrender of the contract; the value of property acquired by gift, bequest, devise, or descent (but the income from such property shall be included as income); interest upon the obligations of a State or any political subdivision thereof or upon the obligations of the United States (but, in the case of obligations of the United States issued after September first, nineteen hundred and seventeen, only if and to the extent provided in the Act authorizing the issue thereof) or its possessions or securities issued under the provisions of the Federal Farm Loan Act of July seventeenth, nineteen hundred and sixteen; the com- pensation of the present President of the United States during the term for which he has been elected and the judges of the supreme and inferior courts cf the United States now in office, and the compensation of all officers and employees of a State, or any political subdivision thereof, except when such compensation is paid by the United States Government. Exempt Income Government and "Municipal Bonds*' [99] THE INCOME TAX LAW Deductions Allowed Citizens or Residents Deductions Allowed Sec. 5. That ia computing net income in the case of a citizen or resident of the United States — (a) For the purpose of the tax there shall be allowed as deductions — First. The necessary expenses actually paid in carrying on any business or trade, not including personal, living, or family expenses; Second. All interest paid within the year on his in- debtedness except on indebtedness incurred for the pur- chase of obligations or securities the interest upon which is exempt from taxation as income under this title; Third. Taxes paid within the year imposed by the authority of the United States (except income and excess profits taxes) or of its Territories, or possessions, or any foreign country, or by the authority of any State, county, school district, or municipality, or other taxing subdivision of any State, not including those assessed against local benefits; Fourth. Losses actually sustained during the year, in- curred in his business or trade, or arising from fires, storms, shipwreck, or other casualty, and from theft, when such losses are not compensated for by insurance or otherwise: Provided, That for the purpose of ascertain- ing the loss sustained from the sale or other disposition of property, real, personal, or mixed, acquired before March first, nineteen hundred and thirteen, the fair mar- ket price or value of such property as of March first, nineteen hundred and thirteen, shall be the basis for determining the amount of such loss sustained; Fifth. In transactions entered into for profit, but not connected with his business or trade, the losses actually sustained therein during the year to an amount not ex- ceeding the profits arising therefrom; [100] THE INCOME TAX LAW Sixth. Debts due to the taxpayer actually ascertained to be worthless and charged off within the year; Seventh. A reasonable allowance for the exhaustion, wear and tear of property arising out of its use or employment in the business or trade; Eighth, (a) In the case of oil and gas wells a reason- able allowance for actual reduction in flow and production to be ascertained not by the flush flow, but by the settled production or regular flow; (b) in the case of mines a reasonable allowance for depletion thereof not to exceed the market value in the mine of the product thereof, which has been mined and sold during the year for which the return and computation are made, such reasonable allowance to be made in the case of both (a) and (b) under rules and regulations to be prescribed by the Secretary of the Treasury: Provided, That when the allowances authorized in (a) and (b) shall equal the capital originally invested, or in the case of pur- chase made prior to March first, nineteen hundred and thirteen, the fair market value as of that date, no further allowance shall be made. No deduction shall be allowed for any amount paid out for new buildings, permanent improvements, or betterments, made to increase the value of any property or estate, and no deduction shall be made for any amount of expense of restoring property or making good the exhaustion thereof for which an allowance is or has been made. Ninth. Contributions or gifts actually made within the year to corporations or associations organized and op- erated exclusively for religious, charitable, scientific, or educational purposes, or to societies for the prevention of cruelty to children or animals, no part of the net income of which inures to the benefit of any private stockholder or individual, to an amount not in excess of fifteen per [101] THE I N C O M TAX LAW Dividends Income Taxed at Source Deductions Allowed Non-resident Aliens centum of the taxpayer's taxable net income as com- puted without the benefit of this paragraph. Such con- tributions or gifts shall be allowable as deductions only if verified under rules and regulations prescribed by the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury. Credits Allowed (b) For the purpose of the normal tax only, the income embraced in a personal return shall be credited with the amount received as dividends upon the stock or from the net earnings of any corporation, joint-stock company or association, trustee, or insurance company, which is taxable upon its net income as hereinafter provided; (c) A like credit shall be allowed as to the amount of income, the normal tax upon which has been paid or withheld for payment at the source of the income under the provisions of this title. Non-resident Aliens Sec. 6. That in computing net income in the case of a non-resident alien — (a) For the purpose of the tax there shall be allowed as deductions — First. The necessary expenses actually paid in carrying on any business or trade conducted by him within the United States, not including personal, living, or family expenses; Second. The proportion of all interest paid within the year by such person on his indebtedness (except on in- debtedness incurred for the purchase of obligations or securities the interest upon which is exempt from taxation as income under this title) which the gross amount of his income for the year derived from sources within the United States bears to the gross amount of his in- [102] THE INCOME TAX LAW come for the year derived from all sources within and without the United States, but this deduction shall be allowed only if such person includes in the return re- quired by section eight all the information necessary for its calculation; Third. Taxes paid within the year imposed by the authority of the United States (except income and excess profits taxes), or of its Territories, or possessions, or by the authority of any State, county, school district, or municipality, or other taxing subdivision of any State, paid within the United States, not including those assessed against local benefits; Fourth. Losses actually sustained during the year, in- curred in business or trade conducted by him within the United States, and losses of property within the United States arising from fires, storms, shipwreck, or other casualty, and from theft, when such losses are not com- pensated for by insurance or otherwise: Provided, That for the purpose of ascertaining the amount of such loss or losses sustained in trade, or speculative transactions not in trade, from the same or any kind of property ac- quired before March first, nineteen hundred and thirteen, the fair market price or value of such property as of March first, nineteen hundred and thirteen, shall be the basis for determining the amount of such loss or losses sustained; Fifth. In transactions entered into for profit but not con- nected with his business or trade, the losses actually sus- tained therein during the year to an amount not exceeding the profits arising therefrom in the United States; Sixth. Debts arising in the course of business or trade conducted by him within the United States due to the taxpayer actually ascertained to be worthless and charged off within the year; [103] THE INCOME TAX LAW Seventh. A reasonable allowance for the exhaustion, wear and tear of property within the United States arising out of its use or employment in the business or trade; (a) in the case of oil and gas wells a reasonable allowance for actual reduction in flow and production to be ascer- tained not by the flush flow, but by the settled production or regular flow; (b) in the case of mines a reasonable allowance for depletion thereof not to exceed the mar- ket value in the mine of the product thereof which has been mined and sold during the year for which the return and computation are made, such reasonable allow- ance to be made in the case of both (a) and (b) under rules and regulations to be prescribed by the Secretary of the Treasury: Provided, That when the allowance authorized in (a) and (b) shall equal the capital origi- nally invested, or in case of purchase made prior to March first, nineteen hundred and thirteen, the fair market value as of that date, no further allowance shall be made. No deduction shall be allowed for any amount paid out for new buildings, permanent improvements, or betterments, made to increase the value of any property or estate, and no deduction shall be made for any amount of ex- pense of restoring property or making good the exhaustion thereof for which an allowance is or has been made. (b) There shall also be allowed the credits specified by subdivisions (b) and (c) of section five. (c) A non-resident alien individual shall receive the benefit of the deductions and credits provided for in this section only by filing or causing to be filed with the collector of internal revenue a true and accurate return of his total income, received from all sources, corporate or otherwise, in the United States, in the manner prescribed by this title; and in case of his failure to file such return the collector shall collect the tax on such income, and all property belonging to such non-resident alien individual shall be liable to distraint for the tax. [104] THE INCOME TAX LAW Personal Exemption Sec. 7. That for the purpose of the normal tax only, there shall be allowed as an exemption in the nature of a deduction from the amount of the net income of each citizen or resident of the United States ascertained as provided herein, the sum of $3,000, plus $1,000 additional if the person making the return be a head of a family or a married man with a wife living with him, or plus the sum of $1,000 additional if the person making the re- turn be a married woman with a husband living with her; but in no event shall this additional exemption of $1,000 be deducted by both a husband and a wife: Provided, That only one deduction of $4,000 shall be made from the aggregate income of both husband and wife when living together: Provided further, That if the person making the return is the head of a family there shall be an additional exemption of $200 for each child de- pendent upon such person, if under eighteen years of age, or if incapable of self-support because mentally or physically defective, but this provision shall operate only in the case of one parent in the same family: Provided further, That guardians or trustees shall be allowed to make this personal exemption as to income derived from the property of which such guardian or trustee has charge in favor of each ward or cestui que trust: Provided further, That in no event shall a ward or cestui que trust be allowed a greater personal exemption than as provided in this section, from the amount of net income received from all sources. There shall also be allowed an ex- emption from the amount of the net income of estates of deceased citizens or residents of the United States during the period of administration or settlement, and of trust or other estates of citizens or residents of the United States, the income of which is not distributed annually or regularly under the provisions of subdivision (b) of Personal Exemption Husband and Wife "Head of a Family" Dependent Children Guardians and Trustees [105] THE INCOME TAX LAW Tax Year Returns Due March 1st Where Filed Extension of Time section two, the sum of $3,000, including such deductions as are allowed under section five. Returns Sec. 8. (a) The tax shall be computed upon the net income, as thus ascertained, of each person subject thereto, received in each preceding calendar year ended December thirty-first. (b) On or before the first day of March, nineteen hundred and seventeen, and the first day of March in each year thereafter, a true and accurate return under oath shall be made by each person of lawful age, except as hereinafter provided, having a net income of $3,000 or over for the taxable year to the collector of internal revenue for the district in which such person has his legal residence or principal place of business, or if there be no legal residence or place of business in the United States, then with the collector of internal revenue at Baltimore, Maryland, in such form as the Commis- sioner of Internal Revenue, with the approval of the Secretary of the Treasury, shall prescribe, setting forth specifically the gross amount of income from all separate sources, and from the total thereof deducting the aggre- gate items of allowances herein authorized: Provided, That the Commissioner of Internal Revenue shall have authority to grant a reasonable extension of time, in meritorious cases, for filing returns of income by persons residing or traveling abroad who are required to make and file returns of income and who are unable to file said returns on or before March first of each year: Provided further, That the aforesaid return may be made by an agent when by reason of illness, absence, or non- residence the person liable for said return is unable to make and render the same, the agent assuming the responsibility of making the return and incurring penalties provided for erroneous, false, or fraudulent return. [106] THE INCOME TAX LAW (c) Guardians, trustees, executors, administrators, re- Fiduciaries ceivers, conservators, and all persons, corporations, or associations, acting in any fiduciary capacity, shall make and render a return of the income of the person, trust, or estate for whom or which they act, and be subject to all the provisions of this title which apply to individuals. Such fiduciary shall make oath that he has sufficient knowl- edge of the affairs of such person, trust, or estate to enable him to make such return and that the same is, to the best of his knowledge and belief, true and cor- rect, and be subject to all the provisions of this title which apply to individuals : Provided, That a return made by one of two or more joint fiduciaries filed in the dis- trict where such fiduciary resides, under such regulations as the Secretary of the Treasury may prescribe, shall be a sufficient compliance with the requirements of this paragraph: Provided further, That no return of income not exceeding $3,000 shall be required except as in this title otherwise provided. (e) Persons carrying on business in partnership shall Partnerships be liable for income tax only in their individual capacity, and the share of the profits of the partnership to which any taxable partner would be entitled if the same were divided, whether divided or otherwise, shall be returned for taxation and the tax paid under the provisions of this title: Provided, That from the net distributive in- terests on which the individual members shall be liable for tax, normal and additional, there shall be excluded their proportionate shares received from interest on the obligations of a State or any political or taxing sub- division thereof, and upon the obligations of the United States (if and to the extent that it is provided in the Act authorizing the issue of such obligations of the United States that they are exempt from taxation), and its possessions, and that for the purpose of computing the normal tax there shall be allowed a credit, as provided by [107] THE INCOME TAX LAW Dividends Keeping of Accounts section five, subdivision (b), for their proportionate share of the profits derived from dividends. Such partnership, when requested by the Commissioner of Internal Revenue or any district collector, shall render a correct return of the earnings, profits, and income of the partnership, except income exempt under section four of this Act, setting forth the item of the gross income and the de- ductions and credits allowed by this title, and the names and addresses of the individuals who would be entitled to the net earnings, profits, and income, if distributed. A partnership shall have the same privilege of fixing and making returns upon the basis of its own fiscal year as is accorded to corporations under this title. If a fiscal year ends during nineteen hundred and sixteen or a sub- sequent calendar year for which there is a rate of tax different from the rate for the preceding calendar year, then (1) the rate for such preceding calendar year shall apply to an amount of each partner's share of such partnership profits equal to the proportion which the part of such fiscal year falling within such calendar year bears to the full fiscal year, and (2) the rate for the calendar year during which such fiscal year ends shall apply to the remainder. (f) In every return shall be included the income de- rived from dividends on the capital stock or from the net earnings of any corporation, joint-stock company or association, or insurance company, except that in the case of non-resident aliens such income derived from sources without the United States shall not be included. (g) An individual keeping accounts upon any basis other than that of actual receipts and disbursements, unless such other basis does not clearly reflect his income, may, subject to regulations made by the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury, make his return upon the basis upon which his accounts are kept, in which case the tax shall be computed upon his income as so returned. [108] THE INCOME TAX LAW Assessment and Administration Sec. 9. (a) That all assessments shall be made by the Commissioner of Internal Revenue and all persons shall be notified of the amount for which they are respectively liable on or before the first day of June of each successive year, and said amounts shall be paid on or before the fifteenth day of June, except in cases of refusal or neglect to make such return and in cases of erroneous, false, or fraudulent returns, in which cases the Commissioner of Internal Revenue shall, upon the discovery thereof, at any time within three years after said return is due, or has been made, make a return upon information obtained as provided for in this title or by existing law, or require the necessary corrections to be made, and the assessment made by the Commissioner of Internal Revenue thereon shall be paid by such person or persons immediately upon notification of the amount of such assessment; and to any sum or sums due and unpaid after the fifteenth day of June in any year, and for ten days after notice and demand thereof by the collector, there shall be added the sum of five per centum on the amount of tax unpaid, and interest at the rate of one per centum per month upon said tax from the time the same became due, except from the estates of insane, deceased, or insolvent persons. (b) All persons, corporations, partnerships, associations, and insurance companies, in whatever capacity acting, including lessees or mortgagors of real or personal prop- erty, trustees acting in any trust capacity, executors, administrators, receivers, conservators, employers, and all officers and employees of the United States, having the control, receipt, custody, disposal, or payment of interest, rent, salaries, wages, premiums, annuities, compensation, remuneration, emoluments, or other fixed or determinable annual or periodical gains, profits, and income of any non-resident alien individual, other than income derived from dividends on capital stock, or from the net earnings Assessment and Payment of Tax Deduction at Source as to Non- resident Aliens [109] THE INCOME TAX LAW Deduction at Source as to Bond Interest of a corporation, joint-stock company or association, or insurance company, which is taxable upon its net income as provided in this title, are hereby authorized and required to deduct and withhold from such annual or periodical gains, profits, and income such sum as will be sufficient to pay the normal tax imposed thereon by this title, and shall make return thereof on or before March first of each year and, on or before the time fixed by law for the payment of the tax, shall pay the amount withheld to the officer of the United States Government authorized to receive the same; and they are each hereby made personally liable for such tax, and they are each hereby indemnified against every person, corporation, partnership, association, or insurance company, or demand whatsoever for all payments which they shall make in pursuance and by virtue of this title. (c) The amount of the normal tax hereinbefore imposed shall also be deducted and withheld from fixed or deter- minable annual or periodical gains, profits and income de- rived from interest upon bonds and mortgages, or deeds of trust or other similar obligations of corporations, joint- stock companies, associations, and insurance companies, (if such bonds, mortgages, or other obligations contain a contract or provision by which the obligor agrees to pay any portion of the tax imposed by this title upon the obligee or to reimburse the obligee for any portion of the tax or to pay the interest without deduction for any tax which the obligor may be required or permitted to pay thereon or to retain therefrom under any law of the United States) whether payable annually or at shorter or longer periods and whether such interest is payable to a non-resident alien individual or to an individual citizen or resident of the United States, subject to the provisions of the foregoing subdivision (b) of this section requiring the tax to be withheld at the source and deducted from annual income and returned and paid to the Government, unless the person entitled to receive such interest shall [110] THE INCOME TAX LAW file with the withholding agent on or before February first, a signed notice in writing claiming the benefit of an exemption under section seven of this Title. (f) All persons, corporations, partnerships, or associa- tions, undertaking as a matter of business or for profit the collection of foreign payments of interest or dividends by means of coupons, checks, or bills of exchange shall obtain a license from the Commissioner of Internal Reve- nue, and shall be subject to such regulations enabling the Government to obtain the information required under this title, as the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury, shall pre- scribe; and whoever knowingly undertakes to collect such payments as aforesaid without having obtained a license therefor, or without complying with such regula- tions, shall be deemed guilty of a misdemeanor and for each offense be fined in a sum not exceeding $5,000, or imprisoned for a term not exceeding one year, or both, in the discretion of the court. (g) The tax herein imposed upon gains, profits, and incomes not falling under the foregoing and not returned and paid by virtue of the foregoing or as otherwise pro- vided by law shall be assessed by personal return under rules and regulations to be prescribed by the Commis- sioner of Internal Revenue and approved by the Secretary of the Treasury. The intent and purpose of this title is that all gains, profits, and income of a taxable class, as defined by this title, shall be charged and assessed with the corresponding tax, normal and additional, prescribed by this title, and said tax shall be paid by the owner of such income, or the proper representative having the receipt, custody, control, or disposal of the same. For the purpose of this title ownership or liability shall be determined as of the year for which a return is required to be rendered. Collection of Foreign Payments Assessment by Personal Return [HI] THE INCOME TAX LAW The provisions of this section, except subdivision (c), relating to the deduction and payment of the tax at the source of income shall only apply to the normal tax hereinbefore imposed upon non-resident alien individuals. Part II — On Corporations Organizations gee. 10. (a) That there shall be levied, assessed, col- la _, e lected, and paid annually upon the total net income re- ceived in the preceding calendar year from all sources by every corporation, joint-stock company or association, or insurance company, organized in the United States, no matter how created or organized, but not including partnerships, a tax of two per centum upon such income; and a like tax shall be levied, assessed, collected, and paid annually upon the total net income received in the pre- ceding calendar year from all sources within the United States by every corporation, joint-stock company or as- sociation, or insurance company, organized, authorized, or existing under the laws of any foreign country, including interest on bonds, notes, or other interest-bearing obliga- tions of residents, corporate or otherwise, and including the income derived from dividends on capital stock or from net earnings of resident corporations, joint-stock companies or associations, or insurance companies, whose net income is taxable under this title. Tax Year The foregoing tax rate shall apply to the total net income received by every taxable corporation, joint-stock com- pany or association, or insurance company in the calendar year nineteen hundred and sixteen and in each year there- after, except that if it has fixed its own fiscal year under the provisions of existing law, the foregoing rate shall apply to the proportion of the total net income returned for the fiscal year ending prior to December thirty-first, nineteen hundred and sixteen, which the period between January first, nineteen hundred and sixteen, and the end of such fiscal year bears to the whole of such fiscal year, and the rate fixed in Section II of the Act approved Octo- [112] THE INCOME TAX LAW ber third, nineteen hundred and thirteen, entitled "An Act to reduce tariff duties and to provide revenue for the Government, and for other purposes," shall apply to the remaining portion of the total net income returned for such fiscal year. For the purpose of ascertaining the gain derived or loss sustained from the sale or other disposition by a cor- poration, joint-stock company or association, or insurance company, of property, real, personal, or mixed, acquired before March first, nineteen hundred and thirteen, the fair market price or value of such property as of March first, nineteen hundred and thirteen, shall be the basis for determining the amount of such gain derived or loss sustained. (b) In addition to the income tax imposed by sub- division (a) of this section there shall be levied, assessed, collected, and paid annually an additional tax of ten per centum upon the amount, remaining undistributed six month after the end of each calendar or fiscal year, of the total net income of every corporation, joint-stock company or association, or insurance company, received during the year, as determined for the purposes of the tax imposed by such subdivision (a), but not including the amount of any income taxes paid by it within the year imposed by the authority of the United States. The tax imposed by this subdivision shall not apply to that portion of such undistributed net income which is actually invested and employed in the business or is retained for employment in the reasonable requirements of the business or is invested in obligations of the United States issued after September first, nineteen hundred and seventeen: Provided, That if the Secretary of the Treas- ury ascertains and finds that any portion of such amount so retained at any time for employment in the business is not so employed or is not reasonably required in the Determining Gain or Loss Tax on Undistributed Net Income [113] THE INCOME TAX LAW business a tax of fifteen per centum shall be levied, as- sessed, collected, and paid thereon. The foregoing tax rates shall apply to the undistributed net income received by every taxable corporation, joint- stock company or association, or insurance company in the calendar year nineteen hundred and seventeen and in each year thereafter, except that if it has fixed its own fiscal year under the provisions of existing law, the fore- going rates shall apply to the proportion of the taxable undistributed net income returned for the fiscal year ending prior to December thirty-first, nineteen hundred and seventeen, which the period between January first, nineteen hundred and seventeen, and the end of such fiscal year bears to the whole of such fiscal year. Conditional and Other Exemptions Non-taxable Sec. 11. (a) That there shall not be taxed under this Organizations t i t i e any mc0 me received by any — First. Labor, agricultural, or horticultural organization; Second. Mutual savings bank not having a capital stock represented by shares; Third. Fraternal beneficiary society, order, or associa- tion, operating under the lodge system or for the exclu- sive benefit of the members of a fraternity itself operating under the lodge system, and providing for the payment of life, sick, accident, or other benefits to the members of such society, order, or association or their dependents; Fourth. Domestic building and loan association and co- operative banks without capital stock organized and op- erated for mutual purposes and without profit; Fifth. Cemetery company owned and operated exclu- sively for the benefit of its members; Sixth. Corporation or association organized and operated exclusively for religious, charitable, scientific, or educa- [114] THE INCOME TAX LAW tional purposes, no part of the net income of which inures to the benefit of any private stockholder or individual; Seventh. Business league, chamber of commerce, or board of trade, not organized for profit and no part of the net income of which inures to the benefit of any private stockholder or individual; Eighth. Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare ; Ninth. Club organized and operated exclusively for pleasure, recreation, and other non-profitable purposes, no part of the net income of which inures to the benefit of any private stockholder or member; Tenth. Farmers' or other mutual hail, cyclone, or fire insurance company, mutual ditch or irrigation company, mutual or co-operative telephone company, or like organi- zation of a purely local character, the income of which consists solely of assessments, dues, and fees collected from members for the sole purpose of meeting its ex- penses; -Eleventh. Farmers', fruit growers', or like association, organized and operated as a sales agent for the purpose of marketing the products of its members and turning back to them the proceeds of sales, less the necessary selling expenses, on the basis of the quantity of produce furnished by them; Twelfth. Corporation or association organized for the exclusive purpose of holding title to property, collecting income therefrom, and turning over the entire amount thereof, less expenses, to an organization which itself is exempt from the tax imposed by this title; or Thirteenth. Federal land banks and national farm-loan associations as provided in section twenty-six of the Act approved July seventeenth, nineteen hundred and sixteen, [115] THE INCOME TAX LAW Income from Public Utilities When Non-taxable entitled "An Act to provide capital for agricultural de- velopment, to create standard forms of investment based upon farm mortgage, to equalize rates of interest upon farm loans, to furnish a market for United States bonds, to create Government depositaries and financial agents for the United States, and for other purposes." Fourteenth. Joint-stock land banks as to income derived from bonds or debentures of other joint-stock land banks or any Federal land bank belonging to such joint-stock land bank. (b) There shall not be taxed under this title any income derived from any public utility or from the exercise of any essential governmental function accruing to any State, Territory, or the District of Columbia, or any political subdivision of a State or Territory, nor any income ac- cruing to the Government of the Philippine Islands or Porto Rico, or of any political subdivision of the Philip- pine Islands or Porto Rico ; Provided, That whenever any State, Territory, or the District of Columbia, or any politi- cal subdivision of a State or Territory, has, prior to the passage of this title, entered in good faith into a contract with any person or corporation, the object and purpose of which is to acquire, construct, operate, or maintain a public utility, no tax shall be levied under the provisions of this title upon the income derived from the operation of such public utility, so far as the payment thereof will impose a loss or burden upon such State, Territory, or the District of Columbia, or a political subdivision of a State or Territory; but this provision is not intended to confer upon such person or corporation any financial gain or exemption or to relieve such person or corpora- tion from the payment of a tax as provided for in this title upon the part or portion of the said income to which such person or corporation shall be entitled under such contract. [116] THE INCOME TAX LAW Sec. Deductions 12. (a) In the case of a corporation, joint-stock Deductions Allowed Domestic Organizations company or association, or insurance company, organized in the United States, such net income shall be ascertained by deducting from the gross amount of its income received within the year from all sources — First. All the ordinary and necessary expenses paid Expenses within the year in the maintenance and operation of its business and properties, including rentals or other pay- ments required to be made as a condition to the continued use or possession of property to which the corporation has not taken or is not taking title, or in which it has no equity. Second. All losses actually sustained and charged off Losses within the year and not compensated by insurance or other- wise, including a reasonable allowance for the exhaustion, wear and tear of property arising out of its use or em- ployment in the business or trade; (a) in the case of oil and gas wells a reasonable allowance for actual reduction in flow and production to be as ascertained not by the flush flow, but by the settled production or regular flow; (b) in the case of mines a reasonable allowance for deple- tion thereof not to exceed the market value in the mine of the product thereof which has been mined and sold during the year for which the return and computation are made such reasonable allowance to be made in the case of both (a) and (b) under rules and regulations to be prescribed by the Secretary of the Treasury: Provided, That when the allowance authorized in (a) and (b) shall equal the capital originally invested, or in case of purchase made prior to March first, nineteen hundred and thirteen, the fair market value as of that date, no further allow- ance shall be made; and (c) in the case of insurance com- panies, the net addition, if any, required by law to be made within the year to reserve funds and the sums other than dividends paid within the year on policy and annuity con- [117] THE INCOME TAX LAW Regarding Insurance Companies tracts: Provided, That no deduction shall be allowed for any amount paid out for new buildings, permanent improvements, or betterments made to increase the value of any property or estate, and no deduction shall be made for any amount of expense of restoring property or mak- ing good the exhaustion thereof for which an allowance is or has been made: Provided further, That mutual fire and mutual employers' liability and mutual workmen's compensation and mutual casualty insurance companies requiring their members to make premium deposits to provide for losses and expenses shall not return as income any portion of the premium deposits returned to their policyholders, but shall return as taxable income all in- come received by them from all other sources plus such portions of the premium deposits as are retained by the companies for purposes other than the payment of losses and expenses and reinsurance reserves: Provided further, That mutual marine insurance companies shall include in their return of gross income gross premiums collected and received by them less amounts paid for rein- surance, but shall be entitled to include in deductions from gross income amounts repaid to policyholders on account of premiums previously paid by them and interest paid upon such amounts between the ascertainment thereof and the payment thereof, and life insurance companies shall not include as income in any year such portion of any actual premium received from any individual policy- holder as shall have been paid back or credited to such individual policyholder, or treated as an abatement of premium of such individual policyholder, within such year; interest Third. The amount of interest paid within the year on its indebtedness (except on indebtedness incurred for the purchase of obligations or securities the interest upon which is exempt from taxation as income under this title) to an amount of such indebtedness not in excess of the sum of (a) the entire amount of the paid-up capital stock [118] THE INCOME TAX LAW outstanding at the close of the year, or, if no capital stock, the entire amount of capital employed in the business at the close of the year, and (b) one-half of its interest- bearing indebtedness then outstanding: Provided, That for the purpose of this title preferred capital stock shall not be considered interest-bearing indebtedness, and in- terest or dividends paid upon this stock shall not be de- ductible from gross income: Provided further, That in cases wherein shares of capital stock are issued with- out par or nominal value, the amount of paid-up capital stock, within the meaning of this section, as represented by such shares, will be the amount of cash, or its equiva- lent, paid or transferred to the corporation as a considera- tion for such shares: Provided further, That in the case of indebtedness wholly secured by property collateral, tangible or intangible, the subject of sale or hypothecation in the ordinary business of such corporation, joint-stock company or association as a dealer only in the property constituting such collateral, or in loaning the funds there- by procured, the total interest paid by such corporation, company, or association within the year on any such in- debtedness may be deducted as a part of its expenses of doing business, but interest on such indebtedness shall only be deductible on an amount of such indebtedness not in excess of the actual value of such property collateral: Provided further, That in the case of bonds or other indebtedness, which have been issued with a guaranty that the interest payable thereon shall be free from taxation, no deduction for the payment of the tax herein imposed, or any other tax paid pursuant to such guaranty, shall be allowed; and in the case of a bank, banking association, loan or trust company, interest paid within the year on deposits or on moneys received for investment and se- cured by interest-bearing certificates of indebtedness is- sued by such bank, banking association, loan or trust com- pany shall be deducted; [119] THE INCOME TAX LAW Deductions Allowed Foreign Organizations Expenses Taxes Fourth. Taxes paid within the year imposed by the authority of the United States (except income and excess profits taxes), or of its Territories, or possessions, or any foreign country, or by the authority of any State, county, school district, or municipality, or other taxing sub- division of any State, not including those assessed against local benefits. (b) In the case of a corporation, joint-stock company or association, or insurance company, organized, author- ized, or existing under the laws of any foreign country, such net income shall be ascertained by deducting from the gross amount of its income received within the year from all sources within the United States — First. All the ordinary and necessary expenses actually paid within the year out of earnings in the maintenance and operation of its business and property within the United States, including rentals or other payments re- quired to be made as a condition to the continued use or possession of property to which the corporation has not taken or is not taking title, or in which it has no equity. Losses Second. All losses actually sustained within the year in business or trade conducted by it within the United States and not compensated by insurance or otherwise, including a reasonable allowance for the exhaustion, wear and tear of property arising out of its use or employment in the business or trade; (a) and in the case (a) of oil and gas wells a reasonable allowance for actual reduction in flow and production to be ascertained not by the flush flow, but by the settled production or regular flow; (b) in the case of mines a reasonable allowance for depletion thereof not to exceed the market value in the mine of the product thereof which has been mined and sold during the year for which the return and computation are made, such reasonable allowance to be made in the case of both (a) and (b) under rules and regulations to be prescribed by [120] THE INCOME TAX LAW the Secretary of the Treasury; Provided, That when the allowance authorized in (a) and (b) shall equal the capital originally invested, or in case of purchase made prior to March first, nineteen hundred and thirteen, the fair mar- ket value as of that date, no further allowance shall be made; and (c) in the case of insurance companies, the net addition, if any, required by law to be made within the year to reserve funds and the sums other than dividends paid within the year on policy and annuity contracts: Provided, That no deduction shall be allowed for any amount paid out for new buildings, permanent improve- ments, or betterments, made to increase the value of any property or estate, and no deduction shall be made for any amount of expense of restoring property or making good the exhaustion thereof for which an allowance is or has been made: Provided further, That mutual fire and mutual employers' liability and mutual workmen's com- pensation and mutual casualty insurance companies requir- ing their members to make premium deposits to provide for losses and expenses shall not return as income any portion of the premium deposits returned to their policy- holders, but shall return as taxable income all income re- ceived by them from all other sources plus such portions of the premium deposits as are retained by the companies for purposes other than the payment of losses and expenses and reinsurance reserves: Provided further, That mutual marine insurance companies shall include in their return of gross income gross premiums collected and received by them less amounts paid for reinsurance, but shall be en- titled to include in deductions from gross income amounts repaid to policyholders on account of premiums previously paid by them, and interest paid upon such amounts between the ascertainment thereof and the payment thereof, and life insurance companies shall not include as income in any year such portion of any actual premium received from any individual policyholder as shall have been paid Regarding Insurance Companies [121] THE INCOME TAX LAW back or credited to such individual policyholder, or treated as an abatement of premium of such individual policy- holder, within such year; interest Third. The amount of interest paid within the year on its indebtedness (except on indebtedness incurred for the purchase of obligations or securities the interest upon which is exempt from taxation as income under this title) to an amount of such indebtedness not in excess of the proportion of the sum of (a) the entire amount of the paid- up capital stock outstanding at the close of the year, or, if no capital stock, the entire amount of the capital em- ployed in the business at the close of the year, and (b) one-half of its interest-bearing indebtedness then outstand- ing, which the gross amount of its income for the year from business transacted and capital invested within the United States bears to the gross amount of its income de- rived from all sources within and without the United States: Provided, That in the case of bonds or other indebtedness which have been issued with a guaranty that the interest payable thereon shall be free from taxation, no deduction for the payment of the tax herein imposed or any other tax paid pursuant to such guaranty shall be allowed; and in case of a bank, banking association, loan or trust company, or branch thereof, interest paid within the year on deposits by or on moneys received for invest- ment from either citizens or residents of the United States and secured by interest-bearing certificates of indebtedness issued by such bank, banking association, loan or trust company, or branch thereof; Taxes Fourth. Taxes paid within the year imposed by the authority of the United States (except income and excess profits taxes), or of its Territories, or possessions, or by the authority of any State, county, school district, or municipality, or other taxing subdivision of any State, paid within the United States, not including those assessed against local benefits. [122] THE INCOME TAX LAW (c) In the case of assessment insurance companies, whether domestic or foreign, the actual deposit of sums with State or Territorial officers, pursuant to law, as addi- tions to guarantee or reserve funds shall be treated as be- ing payments required by law to reserve funds. Returns Sec. 13. (a) The tax shall be computed upon the net income, as thus ascertained, received within each pre- ceding calendar year ending December thirty-first: Provided, That any corporation, joint-stock company or association, or insurance company, subject to this tax, may designate the last day of any month in the year as the day of the closing of its fiscal year and shall be entitled to have the tax payable by it computed upon the basis of the net income ascertained as herein provided for the year ending on the day so designated in the year preceding the date of assessment instead of upon the basis of the net income for the calendar year preceding the date of assess- ment; and it shall give notice of the day it has thus desig- nated as the closing of its fiscal year to the collector of the district in which its principal business office is located at any time not less than thirty days prior to the first day of March of the year in which its return would be filed if made upon the basis of the calendar year; (b) Every corporation, joint-stock company or associa- tion, or insurance company, subject to the tax herein im- posed, shall, on or before the first day of March, nineteen hundred and seventeen, and the first day of March in each year thereafter, or, if it has designated a fiscal year for the computation of its tax, then within sixty days after the close of such fiscal year ending prior to December thirty- first, nineteen hundred and sixteen, and the close of each such fiscal year thereafter, render a true and accurate re- turn of its annual net income in the manner and form to be prescribed by the Commissioner of Internal Revenue, Insurance Companies' Deposits Optional Tax Year Returns When Due [123] THE INCOME TAX LAW Where Filed Trustees and Others Keeping of Accounts with the approval of the Secretary of the Treasury, and containing such facts, data, and information as are ap- propriate and in the opinion of the commissioner necessary to determine the correctness of the net income returned and to carry out the provisions of this title. The return shall be sworn to by the president, vice-president, or other principal officer, and by the treasurer or assistant treas- urer. The return shall be made to the collector of the district in which is located the principal office of the cor- poration, company, or association, where are kept its books of account and other data from which the return is pre- pared, or in the case of a foreign corporation, company, or association, to the collector of the district in which is located its principal place of business in the United States, or if it have no principal place of business, office, or agency in the United States, then to the collector of internal revenue at Baltimore, Maryland. All such returns shall as received be transmitted forthwith by the collector to the Commissioner of Internal Revenue; (c) In cases wherein receivers, trustees in bankruptcy, or assignees are operating the property or business of corporations, joint-stock companies or associations, or in- surance companies, subject to tax imposed by this title, such receivers, trustees, or assignees shall make returns of net income as and for such corporations, joint-stock companies or associations, and insurance companies, in the same manner and form as such organizations are here- inbefore required to make returns, and any income tax due on the basis of such returns made by receivers, trustees, or assignees shall be assessed and collected in the same manner as if assessed directly against the organizations of whose businesses or properties they have custody and control; (d) A corporation, joint-stock company or association, or insurance company, keeping accounts upon any basis other than that of actual receipts and disbursements, unless [124] THE INCOME TAX LAW such other basis does not clearly reflect its income, may, subject to regulations made by the Commissioner of In- ternal Revenue, with the approval of the Secretary of the Treasury, make its return upon the basis upon which its accounts are kept, in which case the tax shall be computed upon its income as so returned; (e) All the provisions of this title relating to the tax authorized and required to be deducted and withheld and paid to the officer of the United States Government authorized to receive the same from the income of non- resident alien individuals from sources within the United States shall be made applicable to the tax imposed by subdivision (a) of section ten upon incomes derived from interest upon bonds and mortgages or deeds of trust or similar obligations of domestic or other resident corpora- tions, joint-stock companies or associations, and insurance companies by non-resident alien firms, copartnerships, companies, corporations, joint-stock companies or associa- tions, and insurance companies, not engaged in business or trade within the United States and not having any office or place of business therein; Deduction at Source as to Foreign Organizations (f) Likewise, all the provisions of this title relating to the tax authorized and required to be deducted and with- held and paid to the officer of the United States Govern- ment authorized to receive the same from the income of non-resident alien individuals from sources within the United States shall be made applicable to income derived from dividends upon the capital stock or from the net earnings of domestic or other resident corporations, joint- stock companies or associations, and insurance companies by non-resident alien companies, corporations, joint-stock companies or associations, and insurance companies not engaged in business or trade within the United States and not having any office or place of business therein. [125] THE INCOME TAX LAW Assessment and Payment of Tax Assessment and Administration Sec. 14 (a) All assessments shall be made and the several corporations, joint-stock companies or associations, and insurance companies shall be notified of the amount for which they are respectively liable on or before the first day of June of each successive year, and said assessment shall be paid on or before the fifteenth day of June: Provided, That every corporation, joint-stock company or association, and insurance company, computing taxes upon the income of the fiscal year which it may designate in the manner hereinbefore provided, shall pay the taxes due under its assessment within one hundred and five days after the date upon which it is required to file its list or return of income for assessment; except in cases of refusal or neglect to make such return, and in cases of erroneous, false, or fraudulent returns, in which cases the Com- missioner of Internal Revenue shall, upon the discovery thereof, at any time within three years after said return is due, make a return upon information obtained as provided for in this title or by existing law; and the assessment made by the Commissioner of Internal Revenue thereon shall be paid by such corporation, joint-stock company or association, or insurance company immediately upon noti- fication of the amount of such assessment; and to any sum or sums due and unpaid after the fifteenth day of June in any year, or after one hundred and five days from the date on which the return of income is required to be made by the taxpayer, and after ten days' notice and demand thereof by the collector, there shall be added the sum of five per centum on the amount of tax unpaid and interest at the rate of one per centum per month upon said tax from the time the same becomes due; Provided, That upon the examination of any return of income made pursuant to this title, the Act of August fifth, nineteen hundred and nine, entitled, "An Act to provide revenue, equalize duties and encourage the industries of the United States, and for other purposes," and the Act of October [126] THE INCOME TAX LAW third, nineteen hundred and thirteen, entitled, "An Act to reduce tariff duties and to provide revenue for the Govern- ment, and for other purposes," if it shall appear that amounts of tax have been paid in excess of those properly due, the taxpayer shall be permitted to present a claim for refund thereof notwithstanding the provisions of section thirty-two hundred and twenty-eight of the Revised Statutes; (b) When the assessment shall be made, as provided in this title, the returns, together with any corrections thereof which may have been made by the commissioner, shall be filed in the office of the Commissioner of Internal Revenue and shall constitute public records and be open to inspection as such: Provided, That any and all such returns shall be open to inspection only upon the order of the President, under rules and regulations to be prescribed by the Secretary of the Treasury and approved by the President: Provided further, That the proper officers of any State imposing a general income tax may, upon the request of the governor thereof, have access to said returns or to an abstract thereof, showing the name and income of each such corporation, joint-stock company or association, or insurance company, at such times and in such manner as the Secretary of the Treasury may prescribe; (c) If any of the corporations, joint-stock companies or associations, or insurance companies aforesaid shall refuse or neglect to make a return at the time or times herein- before specified in each year, or shall render a false or fraudulent return, such corporation, joint-stock company or association, or insurance company shall be liable to a penalty of not exceeding $10,000: Provided, That the Com- missioner of Internal Revenue shall have authority, in the case of either corporations or individuals, to grant a reasonable extension of time in meritorious cases, as he may deem proper; Returns Open to Inspection Conditions Penalty [127] THE INCOME TAX LAW (d) That section thirty-two hundred and twenty-five of the Revised Statutes of the United States be, and the same is hereby, amended so as to read as follows: "Sec. 3225. When a second assessment is made in case of any list, statement, or return, which in the opinion of the collector or deputy collector was false or fraudulent, or contained any understatement or undervaluation, no tax collected under such assessment shall be recovered by any suit unless it is proved that the said list, statement, or return was not false nor fraudulent and did not contain any understatement or undervaluation; but this section shall not apply to statements or returns made or to be made in good faith under the laws of the United States regarding annual depreciation of oil or gas wells and Definitions Information Not to Be Disclosed PART III — General Administrative Provisions Sec. IS. That the word "State" or "United States" when used in this title shall be construed to include any Terri- tory, the District of Columbia, Porto Rico, and the Philippine Islands, when such construction is necessary to carry out its provisions. Sec. 16. That sections thirty-one hundred and sixty- seven, thirty-one hundred and seventy-two, thirty-one hundred and seventy-three, and thirty-one hundred and seventy-six of the Revised Statutes of the United States as amended are hereby amended so as to read as follows: "Sec. 3167. It shall be unlawful for any collector, deputy collector, agent, clerk, or other officer or employee of the United States to divulge or to make known in any manner whatever not provided by law to any person the opera- tions, style of work, or apparatus of any manufacturer or producer visited by him in the discharge of his official duties, or the amount or source of income, profits, losses, expenditures, or any particular thereof, set forth or dis- [128] THE INCOME TAX LAW closed in any income return, or to permit any income return or copy thereof or any book containing any abstract or particulars thereof to be seen or examined by any person except as provided by law; and it shall be unlawful for any person to print or publish in any manner what- ever not provided by law any income return or any part thereof or source of income, profits, losses, or expenditures appearing in any income return; and any offense against the foregoing provision shall be a misdemeanor and be punished by a fine not exceeding $1,000 or by imprison- ment not exceeding one year, or both, at the discretion of the court; and if the offender be an officer or employee of the United States he shall be dismissed from office or discharged from employment. "Sec. 3172. Every collector shall, from time to time, cause his deputies to proceed through every part of his district and inquire after and concerning all persons therein who are liable to pay any internal-revenue tax, and all persons owning or having the care and management of any objects liable to pay any tax, and to make a list of such persons and enumerate said objects. "Sec. 3173. It shall be the duty of any person, partner- ship, firm, association, or corporation, made liable to any duty, special tax, or other tax imposed by law, when not otherwise provided for, (1) in case of a special tax, on or before the thirty-first day of July in each year, (2) in case of income tax on or before the first day of March in each year, or on or before the last day of the sixty-day period next following the closing date of the fiscal year for which it makes a return of its income, and (3) in other cases before the day on which the taxes accrue, to make a list or return, verified by oath, to the collector or a deputy collector of the district where located, of the articles or objects, including the amount of annual income charged with a duty or tax, the quantity of goods, wares, and merchandise, made or sold and charged with a tax, General Administrative Provisions [129] THE INCOME TAX LAW the several rates and aggregate amount, according to the forms and regulations to be prescribed by the Com- missioner of Internal Revenue, with the approval of the Secretary of the Treasury, for which such person, partnership, firm, association, or corporation is liable: Provided, That if any person liable to pay any duty or tax, or owning, possessing, or having the care or manage- ment of property, goods, wares, and merchandise, articles or objects liable to pay any duty, tax, or license, shall fail to make and exhibit a list or return required by law, but shall consent to disclose the particulars of any and all the property, goods, wares, and merchandise, articles, and objects liable to pay any duty or tax; or any business or occupation liable to pay any tax as aforesaid, then, and in that case, it shall be the duty of the collector or deputy collector to make such list or return, which, being distinctly read, consented to, and signed and verified by oath by the person so owning, possessing, or having the care and management as aforesaid, may be received as the list of such person: Provided further, That in case no annual list or return has been rendered by such person to the collector or deputy collector as required by law, and the person shall be absent from his or her residence or place of business at the time the collector or a deputy collector shall call for the annual list or return, it shall be the duty of such collector or deputy collector to leave at such place of residence or business, with some one of suitable age and discretion, if such be present, otherwise to deposit in the nearest post office, a note or memorandum addressed to such person, requiring him or her to render to such collector or deputy collector the list or return required by law within ten days from the date of such note or memorandum, verified by oath. And if any person, on being notified or required as aforesaid, shall refuse or neglect to render such list or return within the time require as aforesaid, or whenever any person who is required to deliver a monthly or other return of objects [130] THE INCOME TAX LAW subject to tax fails to do so at the time required, or Return delivers any return which, in the opinion of the collector, fe y Collector is erroneous, false, or fraudulent, or contains any under- valuation or understatement, or refuses to allow any regularly authorized Government officer to examine the books of such person, firm, or corporation, it shall be law- ful for the collector to summon such person, or any other person having possession, custody, or care of books of account containing entries relating to the business of such person, or any other person he may deem proper, to appear before him and produce such books at a time and place named in the summons, and to give testimony or answer interrogatories, under oath, respecting any objects or income liable to tax or the returns thereof. The collector may summon any person residing or found within the State or Territory in which his district lies; and when the person intended to be summoned does not reside and cannot be found within such State or Territory, he may enter any collection district where such person may be found and there make the examination herein authorized. And to this end he may there exercise all the authority which he might lawfully exercise in the district for which he was commissioned: Provided, That 'person,' as used in this section, shall be construed to include any corpora- tion, joint-stock company or association, or insurance company when such construction is necessary to carry out its provisions. "Sec. 3176. If any person, corporation, company, or association fails to make and file a return or list at the time prescribed by law, or makes, wilfully or otherwise, a false or fraudulent return or list, the collector or deputy collector shall make the return or list from his own knowledge and from such information as he can obtain through testimony or otherwise. Any return or list so made and subscribed by a collector or deputy collector shall be prima facie good and sufficient for all legal purposes. [131] T H INCOME TAX LAW Extension of Time Penalties Receipt for Taxes "If the failure to file a return or list is due to sickness or absence the collector may allow such further time, not exceeding thirty days, for making and filing the return or list as he deems proper. "The Commissioner of Internal Revenue shall assess all taxes, other than stamp taxes, as to which returns or lists are so made by a collector or deputy collector. In case of any failure to make and file a return or list within the time prescribed by law or by the collector, the Com- missioner of Internal Revenue shall add to the tax fifty per centum of its amount except that, when a return is voluntarily and without notice from the collector filed after such time and it is shown that the failure to file it was due to a reasonable cause and not to wilful neglect, no such addition shall be made to the tax. In case a false or fraudulent return or list is wilfully made, the Commissioner of Internal Revenue shall add to the tax one hundred per centum of its amount. "The amount so added to any tax shall be collected at the same time and in the same manner and as part of the tax unless the tax has been paid before the discovery of the neglect, falsity, or fraud, in which case the amount so added shall be collected in the same manner as the tax." Sec. 17. That it shall be the duty of every collector of internal revenue, to whom any payment of any taxes is made under the provisions of this title, to give to the person making such payment a full written or printed receipt, expressing the amount paid and the particular account for which such payment was made; and whenever such payment is made such collector shall, if required, give a separate receipt for each tax paid by any debtor, on account of payments made to or to be made by him to separate creditors in such form that such debtor can conveniently produce the same separately to his several creditors in satisfaction of their respective demands to the amounts specified in such receipts; and such receipts [132] THE INCOME TAX LAW shall be sufficient evidence in favor of such debtor to jus- tify him in withholding the amount therein expressed from his next payment to his creditor; but such creditor may, upon giving to his debtor a full written receipt, acknowl- edging the payment to him of whatever sum may be actu- ally paid, and accepting the amount of tax paid as afore- said (specifying the same) as a further satisfaction of the debt to that amount, require the surrender to him of such collector's receipt. Sec. 18. That any person, corporation, partnership, association, or insurance company, liable to pay the tax, to make a return or to supply information required under this title, who refuses or neglects to pay such tax, to make such return or to supply such information at the time or times herein specified in each year, shall be liable, except as otherwise specially provided in this title, to a penalty of not less than $20 nor more than $1,000. Any individual or any officer of any corporation, partnership, association, or insurance company, required by law to make, render, sign, or verify any return or to supply any information, who makes any false or fraudulent return or statement with intent to defeat or evade the assessment required by this title to be made, shall be guilty of a misdemeanor, and shall be fined not exceeding $2,000 or be imprisoned not exceeding one year, or both, in the dis- cretion of the court, with the costs of prosecution: Provided, That where any tax heretofore due and payable has been duly paid by the taxpayer, it shall not be re- collected from any withholding agent required to retain it at its source, nor shall any penalty be imposed or collected in such cases from the taxpayer, or such withholding agent whose duty it was to retain it, for failure to return or pay the same, unless such failure was fraudulent and for the purpose of evading payment. Sec. 19. The collector or deputy collector shall require every return to be verified by the oath of the party rendering it. If the collector or deputy collector have Penalties Return Verified by Oath [133] THE INCOME TAX LAW Appeal - Jurisdiction Statistics Published This Law Applies to Porto Rico and Philippines reason to believe that the amount of any income returned is understated, he shall give due notice to the person making the return to show cause why the amount of the return should not be increased, and upon proof of the amount understated may increase the same accordingly. Such person may furnish sworn testimony to prove any relevant facts, and, if dissatified with the decision of the collector, may appeal to the Commissioner of Internal Revenue for his decision under such rules of procedure as may be prescribed by regulation. Sec. 20. That jurisdiction is hereby conferred upon the district courts of the United States for the district within which any person summoned under this title to appear to testify or to produce books shall reside, to compel such attendance, production of books, and testimony by appro- priate process. Sec. 21. That the preparation and publication of statistics reasonably available with respect to the operation of the income tax law and containing classifications of taxpayers and of income, the amounts allowed as deductions and exemptions, and any other facts deemed pertinent and valuable, shall be made annually by the Commissioner of Internal Revenue with the approval of the Secretary of the Treasury. Sec. 22. That all administrative, special, and general provisions of law, including the laws in relation to the assessment, remission, collection, and refund of internal- revenue taxes not heretofore specificially repealed and not inconsistent with the provisions of this title, are hereby extended and made applicable to all the provisions of this title and to the tax herein imposed. Sec. 23. That the provisions of this title shall extend to Porto Rico and the Philippine Island: Provided, That the administration of the law and the collection of the taxes imposed in Porto Rico and the Philippine Islands shall be by the appropriate internal-revenue officers of [134] THE INCOME TAX LAW those governments, and all revenues collected in Porto Rico and the Philippine Islands thereunder shall accrue intact to the general governments thereof, respectively: Provided further, That the jurisdiction in this title conferred upon the district courts of the United States shall, so far as the Philippine Islands are concerned, be vested in the courts of the first instance of said islands: And provided further, That nothing in this title shall be held to exclude from the computation of the net income the compensation paid any official by the governments of the District of Columbia, Porto Rico, and the Philippine Islands, or the political subdivisions thereof. Sec. 24. That Section II of the Act approved October third, nineteen hundred and thirteen, entitled, "An Act to reduce tariff duties and to provide revenue for the Govern- ment, and for other purposes," is hereby repealed, except as herein otherwise provided, and except that it shall remain in force for the assessment and collection of all taxes which have accrued thereunder, and for the im- position and collection of all penalties or forfeitures which have accrued or may accrue in relation to any of such taxes, and except that the unexpended balance of any appropriation heretofore made and now available for the administration of such section or any provision thereof shall be available for the administration of this title or the corresponding provision thereof. Sec. 25. That income on which has been assessed the tax imposed by Section II of the Act entitled, "An Act to reduce tariff duties and to provide revenue for the Government, and for other purposes," approved October third, nineteen hundred and thirteen, shall not be con- sidered as income within the meaning of this title: Provided, That this section shall not conflict with that portion of section ten, of this title, under which a tax- payer has fixed its own fiscal year. Previous Law Repealed [135] THE INCOME TAX LAW Lists of Stockholders and Dividends Information from Brokers Regarding Customers Information at Source Sec. 26. Every corporation, joint-stock company or asso- ciation, or insurance company subject to the tax herein imposed, when required by the Commissioner of Internal Revenue, shall render a correct return, duly verified under oath, of its payments of dividends, whether made in cash or its equivalent or in stock, including the names and addresses of stockholders and the number of shares owned by each, and the tax years and the applicable amounts in which such dividends were earned, in such form and manner as may be prescribed by the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury. Sec. 27. That every person, corporation, partnership, or association, doing business as a broker on any exchange or board of trade or other similar place of business shall, when required by the Commissioner of Internal Revenue, render a correct return duly verified under oath, under such rules and regulations as the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury, may prescribe, showing the names of customers for whom such person, corporation, partnership, or asso- ciation has transacted any business, with such details as to the profits, losses, or other information which the commissioner may require, as to each of such customers, as will enable the Commissioner of Internal Revenue to determine whether all income tax due on profits or gains of such customers has been paid. Sec. 28. That all persons, corporations, partnerships, as- sociations, and insurance companies, in whatever capacity acting, including lessees or mortgagors of real or personal property, trustees acting in any trust capacity, executors, administrators, receivers, conservators, and employers, making payment to another person, corporation, partner- ship, association, or insurance company, of interest, rent, salaries, wages, premiums, annuities, compensation, re- muneration, emoluments, or other fixed or determinable [136] THE INCOME TAX LAW gains, profits, and income (other than payments described in sections twenty-six and twenty-seven), of $800 or more in any taxable year, or, in the case of such payments made by the United States, the officers or employees of the United States having information as to such payments and required to make returns in regard thereto by the regula- tions hereinafter provided for, are hereby authorized and required to render a true and accurate return to the Com- missioner of Internal Revenue, under such rules and regulations and in such form and manner as may be pre- scribed by him, with the approval of the Secretary of the Treasury, setting forth the amount of such gains, profits, and income, and the name and address of the recipient of such payment: Provided, That such returns shall be re- quired, regardless of amounts, in the case of payments of interest upon bonds and mortgages or deeds of trust or other similar obligations of corporations, joint-stock companies, associations, and insurance companies, and in the case of collections of items (not payable in the United States) of interest upon the bonds of foreign countries and interest from the bonds and dividends from the stock of foreign corporations by persons, corporations, partner- ships, or associations, undertaking as a matter of business or for profit the collection of foreign payments of such interest or dividends by means of coupons, checks, or bills of exchange. When necessary to make effective the provisions of this section the name and address of the recipient of income shall be furnished upon demand of the person, corporation, partnership, association, or insurance company paying the income. The provisions of this section shall apply to the calendar year nineteen hundred and seventeen and each calendar year thereafter, but shall not apply to the payment of interest on obligations of the United States. [137] T H I N C O M TAX LAW Excess Profits Tax Deductible Foreign Governments Not Taxed Dividends Defined When Dividends Taxable Sec. 29. That in assessing income tax the net income embraced in the return shall also be credited with the amount of any excess profits tax imposed by Act of Congress and assessed for the same calendar or fiscal year upon the taxpayer, and, in' the case of a member of a partnership, with his proportionate share of such excess profits tax imposed upon the partnership. Sec. 30. That nothing in Section II of the Act approved October third, nineteen hundred and thirteen, entitled, "An Act to reduce tariff duties and to provide revenue for the Government, and for other purposes," or in this title, shall be construed as taxing the income of foreign governments received from investments in the United States in stocks, bonds, or other domestic securities, owned by such foreign governments, or from interest on deposits in banks in the United States of moneys belonging to foreign governments. Sec. 31. (a) That the term "dividends" as used in this title shall be held to mean any distribution made or ordered to be made by a corporation, joint-stock company, association, or insurance company, out of its earnings or profits accrued since March first, nineteen hundred and thirteen, and payable to its shareholders, whether in cash or in stock of the corporation, joint-stock company, asso- ciation, or insurance company, which stock dividend shall be considered income, to the amount of the earnings or profits so distributed. (b) Any distribution made to the shareholders or members of a corporation, joint-stock company, or asso- ciation, or insurance company, in the year nineteen hundred and seventeen, or subsequent tax years, shall be deemed to have been made from the most recently accumu- lated undivided profits or surplus, and shall constitute a part of the annual income of the distributee for the year in which received, and shall be taxed to the distributee at the rates prescribed by law for the years in which such [138] THE INCOME TAX LAW profits or surplus were accumulated by the corporation, joint-stock company, association, or insurance company, but nothing herein shall be construed as taxing any earn- ings or profits accrued prior to March first, nineteen hundred and thirteen, but such earnings or profits may be distributed in stock dividends or otherwise, exempt from the tax, after the distribution of earnings and profits accrued since March first, nineteen hundred and thirteen, has been made. This subdivision shall not apply to any distribution made prior to August sixth, nineteen hundred and seventeen, out of earnings or profits accrued prior to March first, nineteen hundred and thirteen. Sec. 32. That premiums paid on life insurance policies covering the lives of officers, employees, or those finan- cially interested in any trade or business conducted by an individual, partnership, corporation, joint-stock company or association, or insurance company, shall not be deducted in computing the net income of such individual, corpora- tion, joint-stock company or association, or insurance company, or in computing the profits of such partnership for the purposes of subdivision (e) of section nine. {Note: This reference presumably is to subdivision [e] of section eight.) Note : The remaining sections are from the War Revenue Actpassed October 3, 1917, and are numbered as inthat law. Sec. 1212. That any amount heretofore withheld by any withholding agent as required by Title I of such Act of September eighth, nineteen hundred and sixteen, on ac- count of the tax imposed upon the income of any individ- ual, a citizen or resident of the United States, for the calendar year nineteen hundred and seventeen, except in the cases covered by subdivision (c) of section nine of such Act, as amended by this Act, shall be released and paid over to such individual, and the entire tax upon the income of such individual for such year shall be assessed and collected in the manner prescribed by such Act as amended by this Act. [139] Insurance Premiums Not Deductible Certain Taxes Refunded THE INCOME TAX LAW Taxes May Be Paid In Advance Optional Means of Payment Administrative Provisions Sec. 1009. That the Secretary of the Treasury, under rules and regulations prescribed by him, shall permit tax- payers liable to income and excess profits taxes to make payments in advance in instalments or in -whole of an amount not in excess of the estimated taxes which will be due from them, and upon determination of the taxes actually due any amount paid in excess shall be refunded as taxes erroneously collected: Provided, That when pay- ment is made in instalments at least one-fourth of such estimated tax shall be paid before the expiration of thirty days after the close of the taxable year, at least an addi- tional one-fourth within two months after the close of the taxable year, at least an additional one-fourth within four months after the close of the taxable year, and the re- mainder of the tax due on or before the time now fixed by law for such payment: Provided further, That the Secretary of the Treasury, under rules and regulations prescribed by him, may allow credit against such taxes so paid in advance of an amount not exceeding three per centum per annum calculated upon the amount so paid from the date of such payment to the date now fixed by law for such payment; but no such credit shall be allowed on payments in excess of taxes determined to be due, nor on payments made after the expiration of four and one-half months after the close of the taxable year. All penalties provided by existing law for failure to pay tax when due are hereby made applicable to any failure to pay the tax at the time or times required in this section. Sec. 1010. That under rules and regulations prescribed by the Secretary of the Treasury, collectors of internal revenue may receive, at par and accrued interest, cer- tificates of indebtedness issued under section six of the Act entitled "An Act to authorize an issue of bonds to meet expenditures for the national security and defense, and, for the purpose of assisting in the prosecution of the war, [140] THE INCOME TAX LAW to extend credit to foreign governments, and for other purposes," approved April twenty-fourth, nineteen hun- dred and seventeen, and any subsequent Act or Acts, and uncertified checks in payment of income and excess profits taxes, during such time and under such regulations as the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury, shall prescribe; but if a check so received is not paid by the bank on which it is drawn the person by whom such check has been tendered shall remain liable for the payment of the tax and for all legal penalties and additions the same as if such check had not been tendered. General Provisions Sec. 1300. That if any clause, sentence, paragraph, or part of this Act shall for any reason be adjudged by any court of competent jurisdiction to be invalid, such judg- ment shall not affect, impair, or invalidate the remainder of said Act, but shall be confined in its operation to the clause, sentence, paragraph, or part thereof directly in- volved in the controversy in which such judgment shall have been rendered. Sec. 1302. That unless otherwise herein specially pro- vided, this Act shall take effect on the day following its passage. Approved October 3, 1917. [141] Collection Districts with the Names and Addresses of Collectors of Internal Revenue Revised to October 3, 1917. ALABAMA (Includes Mississippi) John D. McNeel, Birmingham. ALASKA (See Washington) ARIZONA (See New Mexico) ARKANSAS Jack Walker, Little Rock. CALIFORNIA (First District includes Nevada) First District — Justus S. Wardell, San Francisco. Sixth District — John P. Carter, Los Angeles. COLORADO (Includes Wyoming) Mark A. Skinner, Denver. CONNECTICUT (Includes Rhode Island) James J. Walsh, Hartford. DELAWARE (See Maryland) FLORIDA James M. Cathcart, Jacksonville. GEORGIA Aaron O. Blalock, Atlanta. HAWAII R. S. Johnstone, Honolulu (Acting) IDAHO (See Montana) ILLINOIS First District — Julius F. Smietanka, Chicago. Fifth District — Edward D. McCabe, Peoria. Eighth District — John L. Pickering, Springfield. Thirteenth District— John M. Rapp, E. St. Louis. [142] COLLECTION DISTRICTS INDIANA Sixth District — Peter J. Kruyer, Indianapolis. Seventh District — Isaac R. Strouse, Terre Haute. IOWA Louis Murphy, Dubuque. KANSAS William H. L. Pepperell, Wichita. KENTUCKY Second District — Josh T. Griffith, Owensboro. Fifth District — Thomas S. Mayes, Louisville. Sixth District — Charlton B. Thompson, Covington. Seventh District — William P. D. Haly, Lexington. Eighth District — John W. Hughes, Danville. LOUISIANA John Y. Fauntleroy, New Orleans. MAINE (See New Hampshire) MARYLAND Joshua W. Miles, Baltimore. District of Maryland consists of the following named territory: The States of Maryland and Delaware, the District of Columbia, and the counties of Accomac and Northampton of the State of Virginia. MASSACHUSETTS John F. Malley, Boston. MICHIGAN First District — James J. Brady, Detroit. Fourth District — Emanuel J. Doyle, Grand Rapids. MINNESOTA Edward J. Lynch, St. Paul. MISSISSIPPI (See Alabama) MISSOURI First District — George H. Moore, St. Louis. Sixth District — Edgar M. Harber, Kansas City. [143] COLLECTION DISTRICTS MONTANA (Includes Utah and Idaho) William C. Whaley, Helena. NEBRASKA George L. Loomis, Omaha. NEVADA (See First District, California) NEW HAMPSHIRE (Includes Maine and Vermont) Seth W. Jones, Portsmouth. NEW JERSEY First District — Samuel Iredell, Camden. Fifth District— Charles V. Duffy, Newark. NEW MEXICO (Includes Arizona) Lewis T. Carpenter, Phoenix. NEW YORK First District — Henry P. Keith, Brooklyn. Second District — William H. Edwards, Custom House, New York. Third District — Mark Eisner, 1150 Broadway, New York. Fourteenth District — Roscoe Irwin, Albany. Twenty-first District — Neal Brewster, Syracuse. Twenty-eighth District — Vincent H. Riordan, Buffalo. NORTH CAROLINA Fourth District — Josiah W. Bailey, Raleigh. Fifth District— Alston D. Watts, Statesville. NORTH AND SOUTH DAKOTA James Coffey, Aberdeen, So. Dakota. OHIO First District — Andrew C. Gilligan, Cincinnati. Tenth District— Frank B. Niles, Toledo. Eleventh District — Beriah E. Williamson, Columbus. Eighteenth District — Harry H. Weiss, Cleveland. OKLAHOMA Hubert L. Bolen, Oklahoma City. [144] COLLECTION DISTRICTS OREGON Milton A. Miller, Portland. PENNSYLVANIA First District — Ephraim Lederer, Philadelphia. Ninth District — Benjamin F. Davis, Lancaster. Twelfth District— Fred C. Kirkendall, Scranton. Twenty-third District — C. Gregg Lewellyn, Pittsburgh. RHODE ISLAND (See Connecticut) SOUTH CAROLINA Duncan C. Heyward, Columbia. SOUTH DAKOTA (See North and South Dakota) TENNESSEE Edward B. Craig, Nashville. TEXAS Alexander S. Walker, Austin. UTAH (See Montana) VERMONT (See New Hampshire) VIRGINIA Second District — Richard C. L. Moncure, Richmond. Sixth District — John M. Hart, Roanoke. WASHINGTON (Includes Alaska) David J. Williams, Tacoma. WEST VIRGINIA Samuel A. Hays, Parkersburg. WISCONSIN First District — Paul A. Hemmy, Milwaukee. Second District — Burt Williams, Madison. WYOMING (See Colorado) [145] Index of Analysis and Comment Accounting systems Corporations. .80 Individuals. .38 "Accrued interest" on bonds, tax paid by whom.. 38 Administrators (see note under Fiduciaries) Advance payment of tax, optional.. 87 Interest allowed. .87-88 May be made in installments. .87-88 Penalties for failure to meet installments. .87-88 Agents, may make returns.. 64 May act for non-resident aliens.. 54 Aliens (see Non-resident aliens) Amounts of tax paid by citizens or residents, Table No. II.. 25 Annual return (see Return of income) Assessment and payment of tax Corporations. .82 Individuals. .65 Assignees make return of income.. 82 "Average rate of tax" paid by citizens or residents On incomes from $2,000 to $125,000 Chart A.. 16 On incomes from $2,000 to $2,500,000 Chart B . . 17 "Basic" and "'normal" tax rates. .27 Beneficiaries of estates and trusts (see note "Fiduciaries") Benevolent organizations, contributions to (see Contri- butions) Bequest, exemption of property acquired by. .31 Benefit of tax-free covenant (see "Tax-free" covenant) Brokers' records — required by Treasury Department. .60 Casualty, losses from, deductible. .42 Certificates of indebtedness of U. S. for payment of tax.. 88-89 Certificates used in collecting bond interest Not required in case of "Municipal bonds" . . 32 Not required in case of Liberty 4s of 1917 or other Federal bonds.. 32-33 Charitable contributions (see Contributions to benevolent organizations) NOTE: T. D. ia used as an abbreviation of "Treasury Decision." [146] INDEX Chart A — Highest and average rates of tax on taxable in- comes from $2,000 to $125,000.. 16 Chart B — Highest and average rates of tax on taxable in- comes from $2,000 to $2,500,000.-17 Children, dependent, personal exemption allowed for.. 29-30-31 Citizens or residents — The provisions applying to individ- uals generally apply to citizens or residents of the U. S. Provisions on which information is desired should be sought in this index under the appro- priate heads applying to individuals. Claiming benefit of personal exemption. .65 Computing tax, method of, Table No. III. .26 Constitutional phase of "Municipal Bond" exemption .. 32 Constitutionality of 1913 Law.. 19 Contributions to benevolent organizations Made by individual citizens or residents. .42-43 Made by non-resident aliens.. 53 Corporations — The income tax law relates in general to either individuals or corporations. Special provisions applying to corporations therefore should be sought under their appropriate heads. That portion of "An- alysis and Comment" relating to corporations is in- cluded in pages 67 to 82. Corporation's fiscal year its tax year. .80 Corporations organized to escape tax, dividends of.. 40 Debts, worthless, deduction allowed for. .42 Deduction at source Abolished in large part.. 56 As applied to citizens or residents. .58 Applied only to bonds containing tax-free cove- nant. .58 Amount of tax deducted. .58, 59 As applied to foreign organizations . . 57, 58, 77 Amount of tax deducted. .57, 58 When applied.. 57, 58, 77 As applied to foreign partnerships. .57 As applied to non-resident aliens.. 56 Amount of tax deducted.. 56 Applied to what income. .56-57 Benefit of tax-free covenant, when received.. 57 Not applied to dividends. .56 [147] INDEX Deduction at source (continued) As applied to non-resident aliens (continued) Certain taxes deducted in 1917 to be repaid. .61 Not applied in case of domestic corporations. .59 When in effect. .62 Deductions allowed domestic organizations Expenses. .73 Depreciation. .73 Interest, miscellaneous provisions. .74-75 Interest on corporate indebtedness. .73, 74-75 Interest on debt incurred in purchasing exempt se- curities, not allowed. .73 Interest on Liberty bonds.. 71 Losses. .73 Rentals.. 73 Salary paid to employee in Army (T. D.) . . 74 Taxes.. 73-74 Deductions allowed foreign organizations Basis of. .76 In general, the same as allowed domestic organiza- tions. .76 Deductions allowed individual citizens or residents . . 42 Charitable contributions. .42-43 Debts, worthless. .42 Debts, worthless (T. D.)..46 Depreciation. .42 Expense of operating business.. 42 Interest on indebtedness.. 42, 43 Interest on Liberty 3y£s..33 Interest on Liberty 4s.. 33, 43 Losses from casualty or theft.. 42 Losses in taxpayer's business.. 42 Losses outside taxpayer's business. .42-43 Premiums on life insurance (T. D.)..46 Rental value of premises owned (T. D.)..46 Taxes.. 42 Deductions allowed non-resident aliens. .53 Basis of. .53 Contributions not deductible. .53 Losses outside taxpayer's business . . 53 Taxes paid. .53 To have benefit of, must file annual return.. 53 Deductions allowed Insurance Companies . . 75 Deductions allowed partnerships (see Partnerships) [148] INDEX Dependent children, personal exemption allowed for. . 29-30-31 Depreciation, deduction allowed for (see under general headings of Deductions) Dividend records may be required by Treasury Depart- ment. .61 Dividends Corporations organized to escape income tax, divi- dends of. .40 Domestic corporation dividends, when subject to tax. .39, 83 Under 1913 Law.. 83 Under 1916 Law.. 83 Under present statute.. 84 Domestic corporations, received by.. 85 Foreign corporation dividends, when taxable . . 39 Paid in Liberty Bonds.. 86 Partnerships may deduct in computing net income. .47 Received by individuals, when taxable.. 39 Dividends on insurance contracts — exempt income.. 31 Domestic corporations (see note under Corporations) Domestic dividends (see Dividends) Domestic organizations (see note under Corporations) Employees insured, premiums not deductible. .87 Estates Taxed as an entirety . . 30 Personal exemption allowed estates of deceased citi- zens or residents. .30 Estates in general are subject to the provisions re- lating to individuals and any particular provision on which information is desired should be sought under the appropriate heads of this index applying to in- dividuals. Excess profits tax Allowed as deduction in respect to income tax Corporations. .73-74 Individuals. .42 Paid by partnerships, deductible. .47 On salaries, etc., over $6,000. .83 Executors (see note under Fiduciaries) Exempt from tax, foreign governments. .86 [149] INDEX Exempt income in form of interest Federal farm loan bonds Corporations. .71 Individuals. .33 Federal obligations issued on or before Sept. 1, 1917.. 33 Liberty 3V 2 s of 1917.. 33, 35 Liberty 4s of 1917, to what extent exempt.. "Municipal bonds'' Certificates not required.. 32 Constitutional phase of exemption. .32 Corporations owning. .71 Individuals owning. .32 Partnerships owning. .47 Return of corporation's income includes interest therefrom. .71 Return of individual's income does not include interest therefrom. .32 Exempt income, other than interest on exempt obligations Compensation of certain Federal officials. .31-32 Compensation of certain State officials. .31-32 Proceeds of life insurance policies.. 31 Property acquired by gift or bequest.. 31 Public utility income accruing to Governmental agency . . 72 Exempt organizations. .69 Exemption, personal (see Personal exemption) Expense of operating business deductible Domestic organizations.. 73 Foreign organizations, basis of deduction. .76 Individuals. .42 Extension of time for filing returns (see Return of in- come) Federal Farm Loan Bonds exempt (see Exempt income in form of interest) Federal officials, compensation exempt in certain cases. . 31-32 Federal obligations (see Exempt income in form of in- terest) Fiduciaries — In general, the same provisions of the law apply to fiduciaries, estates and trusts as apply to in- dividuals. Therefore any particular provision on which information is desired should be sought under [150] INDEX the appropriate heads of this index applying to in- dividuals. Filing annual return of income (see Return of income) Fiscal year Corporation may choose its fiscal year as tax year. .80 Partnership's fiscal year, rates applying. .48 Foreign collections, license for making. .62 Foreign corporations (see note under Foreign organiza- tions) Foreign dividends (see Dividends) Foreign governments exempt on specified income.. 86 Foreign organizations — The provisions applying to cor- porations and other organizations in general also ap- ply in most instances to foreign organizations. Cer- tain special provisions have been treated in pages 76 to 80. Other provisions on which information is de- sired should be sought under the appropriate heads of this index applying to corporations. Foreign partnerships (see note under Foreign organiza- tions) Gift, exemption of property acquired by.. 31 Gift or contribution (see Contributions to benevolent or- ganizations) Graduated rates of tax, application of. .21 Guardians (see note under Fiduciaries) "Head of family" (see Personal exemption) "Holding companies," dividends received by. .85 Husband and wife (see Personal exemption) When separate return of income required.. 64 Income exempt from tax (see Exempt income) Income subject to tax; accruing to Individuals, general classification Citizens or residents. .20 Non-resident aliens.. 20, 49 Corporations and other organizations Domestic. .68 Foreign. .68, 76 Income (see also Net income) Indebtedness, interest on (see Interest on indebtedness) Income tax (see note under Tax) [151] INDEX Income tax paid, no longer deductible in computing net income Corporations . . 73-74 Individuals. .42, 44 Income Tax Law 1913 Law.. 19 Constitutionality upheld. . 19 1916 Law.. 19 1916 Law amended Oct. 3, 1917.. 19 War Income Tax Law enacted Oct. 3, 1917.. 19 Individuals — The Income Tax Law relates in general to either individuals or corporations. Special provisions applying to individuals therefore should be sought un- der their appropriate heads. That portion of "Analysis and Comment" relating to individuals is included in pages 19 to 66. Individuals subject to tax.. 20 "Information at source". .60 Applied to interest on domestic corporations' se- curities. .60 Applied to payments of income of $800 or more. .60 As applied to interest on foreign securities. .60 Inaugurated by 1917 Law.. 56, 60 Treasury Department may require: Brokers' records.. 60 List of stockholders and dividend records.. 61 When in effect. .62 Inspection of returns, (corporate), when authorized. .89 Installment system of paying tax in advance optional. .87 Penalties for failure to meet.. 87-88 Insurance companies, special deductions allowed.. 75 (Provisions generally relating thereto are indexed under appropriate heads applying to Corporations) Insurance contracts, dividends exempt. .31 Insurance on lives of employees and others.. 87 Insurance premiums on life policies not deductible (T. D.) ..46 Interest accrued on bonds, tax paid by whom . . 38 Interest deductions, miscellaneous provisions regarding. . 73 Interest on indebtedness in general deducted by: Domestic corporations . .73 Citizens or residents. .42 [152] INDEX Interest on indebtedness incurred in purchasing exempt securities In general Corporations. .73 Individuals. .42, 43 Regarding Liberty 4s of 1917 Corporations . . 71 Individuals. .43-44 Interest on "Municipal bonds" (see Exempt income in form of interest) Law (see Income Tax Law) Liberty 3J^% bonds of 1917 (see Exempt income in form of interest) Liberty 4% bonds of 1917 (see Exempt income in form of interest) Liberty Bonds, comparative values of, Table IV. .35 Liberty Bonds, dividends paid in.. 86 License for making foreign collections.. 62 Life insurance companies (see Insurance companies) Life insurance premiums not deductible (T. D.)..46, 87 Limited partnerships taxable as corporations. .68 Losses Deductible by corporations and other organizations. . 73 From casualty or theft, deductible. .42 From dealings in securities. .45-46 In taxpayer's business, deductible. .42 Outside taxpayer's business, when deductible Citizens or residents. .42-43 Non-resident aliens.. 53 "In trade".. 45 Amount of deduction allowed under existing law. . 45-46 Decisions, 1913 Law.. 45 On sales computed by Corporations. .72 Individuals. .45 Members of partnerships taxed individually. .47 Method of computing tax, Table No. III. .26 "Municipal Bonds" (see Exempt income in form of in- terest) [153] INDEX "Net income'' Corporate. .67 Individual. .38 Net income (see also Income subject to tax) Non-resident aliens — The provisions applying to individ- uals in general also apply in most instances to non- resident aliens. Certain special provisions have been treated in pages 49 to 54. Other provisions on which information is desired should be sought in this index under the appropriate heads applying to individuals.. "Normal" and "Basic" tax rates.. 20, 27 Normal and surtax rates.. 20, 27 Non-resident aliens liable to new 2% normal.. 49, 51 Optional methods of payment (see Payment of tax, op- tional methods, etc.) Optional payment of tax in advance (see Advance pay- ment of tax, optional) Organizations (for general subject of, see Corporations) Organizations not subject to tax. .69 Organizations subject to tax Domestic and foreign in general.. 68 Limited partnerships. .68 Partnerships Credit to partners for prior payments on undistributed profits. .47 Deductions especially enumerated by statute.. 47 Dividends. .47 Excess profits tax paid.. 47 "Municipal bond" interest. .47 Limited partnerships . . 68 Members taxed individually. .47 Not taxable as a partnership. .47, 68 Rates applying for fiscal year. .48 Return filed on order of Government. .48 Paying agents — Attention is called especially to the fol- lowing general heads in this index which affect pay- ing agents: Deduction at source.. 56 Information at source.. 56 Foreign collections, license for making. .62 Payment of tax By individuals. .65 By corporations. .82 [154] INDEX Payment of tax (continued) In advance (see Advance payment of tax, etc.) Optional methods of payment now authorized. .88 Certain U. S. Certificates of indebtedness. .88-89 Uncertified checks acceptable. .88-89 Personal exemption allowed citizens or residents Dependent children, on account of. .29, 31 Estates and trusts on behalf of beneficiaries. .30 "Head of a family". .28, 29 Husband and wife.. 28, 30 In computing normal tax only.. 31 Married person.. 28, 30 Unmarried person.. 28, 30 Personal exemption, claiming benefit of.. 65 Personal exemption not allowed non-resident aliens. .28, 49 Philippines, application of law to.. 90 "Political subdivision" defined.. 32 Porto Rico, application of law to.. 90 Preliminary returns of income by corporations. .81 Premises owned, deduction of rental value not allowed (T. D.)..46 Premiums on life insurance policy not deductible. .46, 87 Profits from sales computed by: Corporations. .72 Individuals. .38 Public officials, what compensation exempt.. 31, 32 Public utility income, when exempt to Governmental agen- cies . . 72 Rates of tax Applying to citizens or residents, Table No. 1..20, 23 Applying to non-resident aliens, Table No. VI.. 21, 51 Graduated application of . .20 Highest and average, on taxable incomes from $2,000 to $125,000 Chart A.. 16 Highest and average, on taxable incomes from $2,000 to $2,500,000 Chart B..17 New normal of 2% does not apply to non-resident aliens.. 49-50 "Normal" and "basic". .27 Normal and surtax. .20-21 Receiver makes return of income.. 82 Relative values of Liberty 3^s and 4s, Table No. IV. .35 [155] INDEX Relative values of taxable and tax-exempt securities in general, Table No. V. .36 Rental of domestic organizations, deductible. .73 Rental values of premises owned, not deductible (T. D.). . 46 Repayment of certain taxes deducted at source in 1917. .61 Residents (see Citizens or residents) Return of income Assignees required to make.. 82 Corporations required to make.. 80 Extension of time for filing. .81 Inspection of returns, when authorized. .89 Preliminary return permitted. .81 When filed.. 80 Where filed.. 80-81 Guardians and other fiduciaries.. 64 Individuals. .62 Agents may execute. .64 Citizens or residents. .62 Extension of time for filing. .65 Husband and wife, when separate return required. . 64 Non-resident aliens, required to make return to obtain benefit of deductions. .S3, 63 Period covered. .64 When filed.. 64 Where filed.. 65 Partnerships may be required to make return on or- der of Government. .48 Receivers required to make.. 82 Trustees in bankruptcy required to make.. 82 Returns of income, secrecy regarding. .90 Salary paid employee in army, deductible . . 74 Sales Losses on (see Losses) Profits on (see Profits) Secrecy regarding returns of income.. 90 Securities, taxable and non-taxable, values compared, Table No. V..36 State officials, compensation, when exempt. .31-32 "Stock dividends" defined. .85 Stockholders' lists may be required by Treasury Depart- ment. .61 [156] INDEX Subject to tax Individuals.. 20 Organizations (see Organizations subject to tax) Surtax rates (see Normal and surtax rates) Tables No. I — Rates of tax applying to citizens or resi- dents.. 23 No. II — Amounts of tax to be paid by citizens or residents on incomes from $2*000 to $10,000,000. .25 No. Ill — Example of computing tax of citizens or residents.. 26 No. IV — Relative values of Liberty 3j4s and 4s. .35 No. V — Relative values of taxable and tax-exempt securities. .36 No. VI — Rates of tax applying to non-resident aliens. .51 No. VII — Example of computing tax of non-resident aliens. .52 Tax — As_ the entire index refers to income tax, special provisions on which information is desired should be sought under appropriate heads. Tax (see Amount of tax) Tax rates (see Rates of tax) Taxable and tax-exempt securities, values compared, Table No. V.. 36 "Tax free" covenants in corporate bonds Citizen or resident receives benefit.. 58 Domestic organizations receive no benefit. .79-80 Certain foreign organizations receive benefit.. 79 Status under 1913 Act.. 55 Status under present law.. 55 When benefit received by non-resident aliens. .57 Theft, losses from, deductible. .42 Trustees (see note under Fiduciaries) Trusts (see Estates) Uncertified checks may now be used in payment of tax. . 88-89 Undistributed net income of corporations liable to an ad- ditional tax . . 70 Wife When return required separately from husband's. .64 Exemption allowed. .28, 30 Withholding agents (see Paying agents) Worthless debts allowed as deduction . . 42 [157] .':■:■::"'■<■■. i, . :