<"u m 4 e 5 a 1919 I lljii' ill * 11 liflijililf m Jili! 'i.'.!^^^- ■ Cornell University Library HJ 4652.A42 1919 ,„eome tax prin!^^i;:fr^^:JS!iS^,M!«" 3 1924 013 783 984 At (Hatntll IniuerBitH ffiihrary TREASURY DEPARTMENT UNITED STATES INTERNAL REVENUE INCOME TAX PRIMER (REVISED MARCH I, 1919) PREPARED BY THE BUREAU OF INTERNAL REVENUE FOR THE INFORMATION AND ASSISTANCE OF TAXPAYERS PRELIMINARY EDITION WASHINGTON GOVERNMENT PRINTING OFFICE 1919 The original of tiiis book is in tine Cornell University Library. There are no known copyright restrictions in the United States on the use of the text. http://www.archive.org/details/cu31 92401 3783984 INCOME-TAX PRIMER. (Eevised March 1, 1919.) RETURNS. 1. Am I required to render a personal income-tax return for 1918? Yes; if unmarried, or if married and not living with husband or wife, and your net income for that year equals, or exceeds $1,000, or if you were married and living with husband or wife and your net income equals or exceeds $2,000 for that year. If you act as the guardian of a minor or incompetent person, or as the administrator, executor, or trustee of an estate or trust, a return will be required of you for and in behalf of your ward, or ihe estate or trest for which you act, if the conditions outlined under the head of " Fiduciaries," as requiring a return, are present in your case. 8. What is meant by the taxable year 1918? The taxable year 1918 means the calendar year 1918 or any fiscal year ending during the calendar year 1918. 3. What do^ tke term " fiscal year " mean? The term " fiscal year " means an accounting period of 12 months ending on the last day of any month other than December. L 4. Upon what period of time shall my 1918 income-tax y-eturn be based? V. Upon the calendar year 1918, except as stated in the next answer. , 5. I have been computing my net income upon a calendar- f year, basis as required by the income-tax la^urs in force prior to the revenue act of 1918. May I change the basis of com- puting my net income to that of a fiscal year? If you have actually been keeping your books on the basis of an accounting period of twelve months ending on the last day of any month in the year 1918 other than December, you may make a return for such accounting period. The return should be made in the same way as a return for the calendar year 1918, and should include your entire income for the accoimting period of twelve months for which the return is made. An adjustment will be made for the income which was also included in the return for the calendar year 1917. If you have not been keeping your books on the basis of an accounting period ending in a mstock companies, etc.. are subject to the' tax im- posed upon the net income of corporations, dividends from such net earnings are not subject to the normal income tax in the hands of the shareholders receiving them, but they are to be returned for the surtax purposes, since they are subject to that tax. The rates of tax to be assessed against stock dividends received during the year 1918 8 INCOME TAX PRIMER. or any subsequent year are covered by the answers to questions 44 to 51 ; (A) If you own stock in a personal-service corporation, you should report your distributive share of the net income of such corporation tor 1918 in the same manner as outlined in paragraph (e) above. 23. If my salary for December, 1918, is not paid to me until some day in January, 1919, or later, is its amount to be reported in my 1918 return? No. unless as a matter of settled practice your books were kept on an accrual basis, in which event it should be returned by you for the year 1918, or unless credited and made a^vailable to you on December 31, although not actually drawn until later. 24. A is employed by a corporation at an annual salary of $3,000. The corporation, being in financial straits, paid A only $2,000 during each of tlie years 1916 and 1917. In 1918 A received his salary in full plus the balance of the salary due him for the two previous years. Must he include the full amount received in 1918 in his return for that year? Yes. Five thousand dollars should be returned for 1918, and that amount will be subject to income tax at the rates prescribed for the year 1918, unless A kept his books of account on a basis other than that of actual cash receipts and disbursements, and unless the $1,000 owing for each of the years 1916 and 1917 which was not received by A. during those years was credited to him by the corporation and treated by him as income for those years in his returns. 25. If an employer agrees to pay an employee a certain stipulated salary and furnish him -with room and board, are the latter items to be considered in coniputing income-tax liability? Yes. A fair rental value is to be placed upon the room and a fair value upon the meals furnished, and these amounts reported as in- come by the employee. 26. An employee receives a per diem allowance for ex- penses in addition to his regular salary. Is this amount to be included as income in his return? Yes. The entire amount of allowance received should be reported as income. 27. If I entered into a contract in 1918 which will not be completed until 1919, and which requires me to make ex- penditures for material and labor, provide for possible losses, etc., must I include the advance payments I receive in 1918 in my return for that year? It is optional with you to await the completion of the contract. As you are unalile to determine what amount of gain or profit you will derive from the contract until it is completed, the payments received thereon during 1918 need not be included in your return for that year, and in such case the expenses will not be charged until the comple- tion of the contract. When the contract is completed the net gain or profit derived therefrom should be reported under " gross income " in your return. rendered for the year 1919. 28. A tenant, under the terms of a lease, is required to pay a certain cash rental and in addition make certain improve- ments. Is the cost of these improvements held to be taxable income to the property owner? INCOME TAX PRIMER, 9 Report cash rental foi" year in which received. The value of the improvements at the expiration of the lease is income for that year to the owner. ' S9. Special payments, designated as " Bonuses," are often made to officers and employees of corporations, firms, and in- dividuals. Are such items of income subject to tax in the hands of recipients? Any bonus or other item of compensation paid to an employee in addition to his regular salary or wage under a contract, express or implied, as additional compensation for services rendered as a re- ward for past endeavors, or as a stimulus to further zeal and enthu- siasm in the discharge of his duties, is held to constitute taxable income which shoxild be reported under " Gross income " in the employee's return rendered for the year during which received. 30. Should an individual who conducts a grocery, dry- goods, clothing, or farm-implement business, or any other business which requires that a, stock be carried, take an in- ventory at the close of each taxable year and take such inventories into consideration in arriving at his net income from business? Yes. Section 203 of the Revenue Act of 1918 provides that when- ever in the opinion of the Commissioner the use of inventories is nec- essary in order clearly to determine the income of any taxpayer, inventories shall be taken by such taxpayer upon such basis as the Commissioner, with the approval of the Secretary, may approve or prescribe as conforming as nearly as may be to the best accovmting practice in the trade or business and as most clearly reflecting the income of the taxpayer. 31. How am I to determine the amount of gain or profit derived from a sale of property which is returnable for income-tax purposes? If you acquired the property sold prior to March 1, 1913, you should take its fair market price or value as of that date, add thereto all amounts subsequently expended in making permanent improvements, then deduct the depreciation sustained, and the differ- ence between the result thus obtained and the selling price is the amount to be reported under " Gross iiicome." If you purchased the property on or after March 1, 1913, the dif- ference between its cost, plus all amounts subsequently expended foi permanent improvements less depreciation sustained, and its selling price is to be returned. If the property came to you on or after March 1, 1913, as an inheritance, the difference between the appraised value placed upon it at that time, plus all amounts subsequently expended for per- manent improvements less depreciation sustained, and its selling price is to be returned. 32. How is the value as of March 1, 1913, of property sold determined? No method of determining this value can be stated which will ade- quately meet all- circumstances. What that value was is a question of fact to be established by any evidence which will reasonably or adequately make it appear. 33. . I owned property which I traded for other property during 1918. How am I to determine what amount of gain 106073°— 19 2 10 rucoMa tax pbimeb. or profit derived from tlie transaction is to be reported for income-tax purposes? The profit is to be determined in the same manner as if the prop- erty was sold for cash, except that the property received in exchange should be treated as the equivalent of cash to the amount of its fair market value at the time of the exchange. 34. A piano dealer sells an instrument under a contract which states that payment tlieref or is to be made in monthly installments. How is the latter to report the amount of profit derived from this transaction? It is held that every dollar received under such a contract repre- sents in part the return of a portion of the cost of the article to the dealer and a portion of the profit to be derived from the transaction, and that tihe amount of profit represented by all the payments dur- ing the tax year should be reported in the dealer's personal return rendered for that year. For example, a piano which cost the dealer $300 is transferred to another under a contract calling for 20 monthly payments of $20 each, a total of $400. Each monthly payment repre- sents a return of capital amounting to $15 and a profit amounting to $5, and multiplying this latter amount by the number of payments received during tihe year yields the amount to be returned as income for that year. If for any reason the purchaser defaults in his installment pay- ments and the dealer repossesses the property, the entire amount received on the installment payments less the profit originally re- turned will be income to the dealer to be so returned for the year in which the property was repossessed, and the property will be taken back into the inventory at its cost. 35. Are commissions on renew^al premiums on insurance policies subject to income tax? Yes ; such commissions received by insurance agents on account of business written are taxable income for the year in which received. 36. I purchased a 6 per cent $100 coupon bond at its face value, plus $1.50; that is, three months' accrued interest. Three months later I detached a coupon therefrom and col- lected $3 interest. Must the entire amount of interest re- ceived bs returned as income? No. Report only so much interest as accrued after the date of your purchase. It is the seller's duty to report the balance. 37. Do the pensions and retired pay of ex-officers and men of the United States military and naval forces not on active duty constitute items of taxable income? Yes. 88. I own stock in a bank which, under a State law, is required to pay the taxes assessed against such stock. How is this matter to be handled for income-tax purposes? The proportionate part of the entire amount of taxes so paid by the bank, which is properly chargeable against the number of shares held by you, should be reported, for surtax purposes, in your per- sonal return, as a dividend, and then claimed as a deduction under the heading of " Taxes." 39. In 1915 I purchased 10 shares of the preferred stock of a corporation and received 10 shares of common stock as a bonus. Has the value of this bonus a taxable status? INCOME TAX PEIMEK. 11 No ; but the total purchase price is to be fairly apportioned between the stock and securities received as a bonus, for the purpose of deter- mining the proportion of the consideration attributable to each class of stock. The cost of each class so determined will be the basis for determining profit or loss upon the subsequent sale of such stock. 40. Are amounts placed to the credit of a shareholder in a building and loan association subject to income tax? Any amount credited to a shareholder when the title to such credit passes to the latter at the time of the credit has a taxable status, and should be included in the return rendered for the year during which the credit is made. Where the amount of accumulations credited does not become avail- able to the shareholder until the m.aturity of a share it need not be reported as income, until maturity of the share, when the amount received in excess of the total amount actually paid in by the share- holder is to be returned, 41. I hold stock in a corporation which in 1918 increased its capital stock and gave me the right to subscribe for addi- tional stock at par. If I sell this '■'■ right," are the proceeds to be returned for tax purposes? Yes ; the entire proceeds from the sale of a " right " to purchase additional stock should be included in the return as income. 4S. Are payments of alimony to be returned for tax pur- poses by the recipient? Alimony is not held to be income to the recipient, nor is it held to be such an item as is allowable as a deduction to the person paying the same. 43. Where service is rendered for a stipulated price, wage, or salary, and paid with something other than money, shall consideration be given the transaction for income-tax pur- poses? Yes. Where services are paid for with something other than, money the fair market value of the thing taken in payment is the amount to be included as income. If the sen^ices were rendered at a stipulated price, in the absence of evidence to the contrary such price will be presumed to be the fair value of the compensation received. DIVIDENDS. 44. The net earnings of a corporation in which I held stock in the year 1917 amounted to $50,000, which amount was carried to a surplus account. Its net earnings from January 1 to October 31, 1918, amounted to $70,000, and on this latter date these last earnings were carried to surplus and a stock dividend of $50,000 declared and paid. What income taxes are to be assessed against this dividend? Section 201(d) of the revenue act of 1918 provides in part that if any stock dividend is received by a taxpayer between January 1 and November 1, 1918, both dates inclusive, or is during such period bona fide authorized or declared and entered on the books of the corporation and is received by a taxpayer after November 1, 1918, and before the expiration of 30 days after the passage of that act, then such dividend shall be taxed to the recipient at the rates pre- scribed by law for the years in which the corporation accumulated 12 INCOME TAX PEIMEE. the earnings or profits from which such dividend was paid, but the dividend shall be deemed to have been paid from the most recently- accumulated earnings or profits. . . . i * Paragraph (e) of the same section of the act provides m part that any distribution made by a corporation to its shareholders clunng the first 60 days of any taxable year shall be deemed to have been paid from earnings or profits accumulated during preceding taxable years ; but any distribution made during the remainder of the taxable year shall be deemed to have been made from earnings or profits accumu- lated between the close of the preceding taxable year and the date of distribution to the extent of such earnings or profits. Therefore, the dividend to which you refer is to be charged against the $70,000 earned during 1918 and carried to surplus on the day the dividend ^vas declared, and it will be subject to the surtax at the rates prescribed by the revenue act of 1918. 45. Suppose that instead of declaring a stock dividend of $50,000, this corporation had, on October 31, 1918, declared a stock dividend of $100,000, payable December 31, 1918? If such had been the case, the entire amount of net earnings car- ried to surplus on October 31, 1918, would haA^e been subject to surtax at the same rates as the di\adend mentioned in your inquiry next above, and the balance, or $30,000, would have been held to have been paid from the 1917 earnings and would have been subject to surtax only at the rates prescribed in the act of October 3, 19l7. 46. Assuming that instead of paying this dividend in stock, the corporation paid it in cash. "Would this dividend be taxable? Yes. Under the provisions of sections 201 and 213 of the revenue act of 1918 cash dividends are to be returned for the taxable year in which received and are taxable at the rates for that year regardless out of what earnings they are paid, except that any earnings or pro- fits accumulated prior to March 1, 1913, may be distributed in cash or stock, exempt from the tax, after the earnings and profits accumu- lated since February 28, 1913, have been distributed. 47. In 1918 I received a dividend of $10,000 from, com- pany " A," which was paid in stock of company " B." Is this $10,000 to be considered a stock dividend within the meaning of the incom.e-tax law? No; a stock dividend is a distribution by a corporation to its stockholders of capital stock of the distributing corporation. A distribution of stock other than that of the distributing corporation is not a stock dividend but is the equivalent of a cash dividend and is taxable as such. 48. A corporation began business^ January 1, 191S. Its net earnings were as follows: Jan. 1, 1912, to Mar. 1, 1913 $10, 765 Mar. 1, 1913, to Jan. 1, 1914 5, 230 For tlie year 1914 7, 347 Por the year 1915 11, 000 I'or the year 1916 15,300 For the year 1917 27, 400 Jan. 1 to Oct. 31, 1918 30,000 Amount of surplus on hand Dec, 31, 1918 107, 032 INCOME TAX PKIMEE. 13 The corporation never paid a dividend until October 31, 1918, on which date it declared and paid a stock dividend of $107,033. How will this dividend be taxed? That portion of the dividend which represents the distribution of 1918 eainings, or $80,000, will be subject to the surtax at the rates prescribed in the revenue act of 1918 ; that portion which represents 1917 earnings, or $27,400, at the rates prescribed in the act of October 3, 1917 only; that portion w'hich represents 1916 earnings, or $15,300, at the rates of additional tax prescribed in the act of September 8, 1916, only; and that poi-tion which represents earnings which ac- crued from March 1, 1913, to January 1, 1916, at the rates prescribed in the act of October 3, 1913. The remainder, or $10,765, is exempt from tax under section 201 (b) of the revenue act of 1918. If the stock dividend had been declared after November 1, 1918, all except $10,765 is taxable at 1918 rates. 49. Will it be the taxpayer's duty to advise himself of what proportion of a stock dividend received by him is properly chargeable, under section SOI (d) of the revenue act of 1918, to the corporate earnings or profits for each tax year? Yes. 50. My net income for 1918 was $20,000, excepting that in addition to this $210,000 I received before November 1 a stock dividend of $65,000, which was paid out of corporate earnings, as follows: 1917 /. $20, 000 1916 20, 000 Mar. 1, 1913, to Dec. 31, 1915 15, 000 Jan. 1, 1912, to Mar. 1, 1913 10,000 Total ' 65,000 How would the tax on this $65,000 be computed? The tax on the $65,000 in question is to be computed as follows : Total net income for 1918 $20, 000 Dividends from 1917 earnings 20, 000 40, 000 Surtax at 1917 rate (8 per cent of $20,000, tlie amount of net income between $20,000 and $40,000) $1,600 Dividends from 1916 earnings 20, 000 60, 000 Surtax at 1916 rate (2 per cent of $20,000, tlie amount of net income between $40,000 and $60,000) 400 Dividends from earnings from Mar. 1, 1913, to Dec. 31, 1915 15, 000 75, 000 Surtax at rate fer 1913, 1914, and 1915 (2 per cent of $15,000, the amount of net income between $50,000 and $75,000) 300 Total 2, 300 The remaining $10,000 earned before March 1, 1913, is not subject to tax. 14 IHCOME TAX PBIMEB. 51. Assuming that a corporation had assets which had greatly appreciated in value and had carried the amount of that appreciation to its surplus account and- capitalized saiue, or that it capitalized its good will, and then issued, the new stock to its shareholders as a dividend, would this dividend be subject to tax? Stock dividends declared from surplus cheated by the revaluation of capital assets or by placing a value upon trade-marks, good will, etc., do not represent a distribution of earnings or profits subject to tax as a dividend in the hands of the recipient shareholder. When stock received in payment of such dividend, or stock in respect of vehich any such dividend was paid, is sold, the cost of each share of stock, whether old or new, for the purpose of ascertaining the gain or loss resulting from its sale, is the quotient of the cost of the old stock, if acquired on or after Itlarch 1, 1913, or its fair market value as of that date if acquired prior thereto, divided by the number of old and new shares added together. The profit so ascertained from the sale of such stock is income subject to both normal and surtax and shall be accounted for in the shareholder's return rendered for the year in which the sale is made. 52. Are dividends on paid-up life insurance policies sub- ject to income tax? Dividends on paid-up life insurance policies are not subject to normal tax but are subject to the surtax for the year in which received. DEDUCTIONS. 53. What items may I deduct in ascertaining my net in- come from all sources? In arriving at your net income from all sources you are entitled to deduct from gross income the following items : (a) All the ordinary and necessary expenses paid or incurred dur- ing the taxable year in carrying on any trade or business, including allowance for salaries or other personal services actually rendered, including rentals or other payments required to be made as a condi- tion to the continued use or possession for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity. (i) All interest paid or accrued within the taxable year on indebt- edness, except on indebtedness incurred or continued to purchase or carry obligations or securities (other than obligations of the United States issued after September 24, 1917) the interest upon which is wholly exempt from income tax. (c) Taxes paid or accrued within the taxable year imposed by the authority of the United States, except income, war-profits, and excess- profits taxes ; or by the authority of any of its possessions, except the amount of income, war-profits, and excess-profits taxes allowed as a credit under section 222 of the act ; or by the authority of any State or Territory, or any county, school district, municipality, or other taxing subdivision of any State or Territory, not including those assessed against local benefits of a kind tending to increase the value of the property assessed ; and by the authority of any foreign country, except the amount of income, war-profits, and excess-profits taxes allowed as a credit under section 222 of the act. ISOOME TAX PKIMEE. 15 {d) Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in trade or business. (e) Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in any transaction entered into for profit, though not connected with one's trade or business. (/) Losses sustained during the taxable year of property not con- nected with the trade or business, if arising from fires, storms, ship- wreck, or other casualty or from thefty and if not compensated for by insurance or otherwise. {g) Debts ascertained to be worthless and charged off during the taxable year. (A) A reasonable allowance for the exhaustion, wear, and tear of property used in trade or business, including a reasonable allowance for obsolescence. (?) A reasonable allowance for depletion in the case of mines, oil and gas wells, other natural deposits and timber. {j) Contributions or gifts made within the taxable year to cor- porations organized and operated exclusively for religious, chari- table, scientific, or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private stockholder or individual, or to the special fund for vocational rehabilitation authorized by section 7 of the vocational rehabilitation act, to an amount not in excess of 15 per cent of your net income from all sources as computed without the benefit of this paragraph. 54. Wliat constitutes an item. allo"wable as a deduction as a business expense? All amounts of expenses paid or incurred during the taxable year in the conduct of a business, trade, or profession. This includes all amounts paid by a farmer for labor in preparing his land for a crop and the cultivation, harvesting, and marketing of the crops, the cost of the seed and fertilizer used; the amounts €xpended far labor used in caring for live stock and the cost of the feed. The amounts actually paid in maldng repairs to farm build- ings, but not the dwelling house, repairs to fences, farm machinery, etc., the cost of materials for immediate use and farm tools which are used up in the course of a year or two, such as binding twine, stock powders, pitchforks, spades, etc. ; and the amount of rent paid for a farm may also be claimed. A merchant may claim as deductions the amounts paid for ad- vertising, hire of clerks and other employees; the cost of the light, fuel, water, telephones, etc., used in or at his place of business ; dray- age and freight bills; the cost of operating delivery wagons, trucks, and the repairs to same. A phj'sician may claim as deductions the cost of medicines and medical supplies used by him in the practice of his profession, ex- penses paid in the operation and repair of an automobile used in makijig professional calls, dues to medical societies and subscriptions to medical journals, the expenses of attending medical conventions, the rent paid for ofiiee rooms and the hire of office assistants, the cost of the fuel, light, water, telephone, etc., used in such office rooms. Amounts expended for books, medical supplies, and surgical in- struments of a permanent character are not allowable as deductions. 16 IlJfCOME TAX PRIMER. This in a general way outlines the ordinary and usual expenses incurred by a farmer, a merchant, or a professional man, which may be claimed as deductions, and the principles underlying these allow ances are equally applicable in the case of anyone engaged in a business, trade, or profession. In short, all expenses connected di- rectly and solely with the conduct of an income-producing business, trade, profession, or vocation are allowable. Items of personal expense or items connected in any way with -the support, maintenance, and well-being of a family are not al- lowed ; neither are the amounts paid for tools, implements, vehicles, machinery, or surgical instruments which are more or less perma- nent in character, nor the cost of medical, law, or other professional books, nor amounts expended in making permanent improvements or betterments of any kind whatsoever, allowable as deductions. These latter items are held to be investments of capital upon which depreciation may be claimed. No expenses or depreciation in connection with a taxpayer's per- sonal residence, or automobiles or other property used for pleasure can be properly deducted under the provisions pf the income-tax law, as such expenses and depreciation represent "personal living or family expenses." 55. If I employ a minor son or daughter to assist me in my business or trade and I pay a salary or wage for such assistance, may I claim the amount as a deduction? No. If, however, the son or daughter has attained his or her majority, the amount of compensation paid for his or her services may be so claimed. 56. Can a taxpayer claim a deduction for his own remun- eration? Wages or salary drawn by a taxpayer from his own business are more in the nature of a charge out of profits than a charge against profits. If such could be deducted they would merely be added to his income, the effect of which would be to take money out of one pocket and put it in another. Therefore no deduction can be claimed ,for income-tax purposes. 57. Can the amounts expended by a business man in entertaining out-of-town customers, or prospective custom- ers, be claimed as deductions? Yes. If the sole purpose of the business man in making such expenditures is to cultivate the good will of his customers and secure an increase in trade they may be so claimed. 58. A, who is employed in a city, has his home in a sub- urb. He pays car fare between his home and place of em- ployment and takes his noon lunch in the city. Can the amounts expended for car fare and lunch be claimed as a business expense? No ; such amounts are held to be items of personal expense. 59. Can a" salesman claim as deductions the amounts ex- pended for railroad fare, excess baggage, taxicab or street- car fare, show rooms, assistants, advertising, meals, and lodging? All amounts actually expended for necessary expenses, including necessary traveling expenses, by salesmen, actors, and others travel- INCOME TAX PRIMER, 17 ing in the course of employment or business, except amounts paid for expense incident to service rendered which are reimbursable, and excepting expenditures for meals and lodging not paid from per diem allowances received in lieu of subsistence while under traveling orders, constitute allowable deductions in returns of in- come under the provisions of the income-tax law. Amounts paid out for expenses for meals and lodgings by indi- viduals traveling in the course of employment are properly deduct- ible from gross income only when such amounts are ]Daid from per diem allowances received in lieu of subsistence while under traveling orders. All per diem allowances should be included in gross income. When under the terms of employment no part of the per diem allowance is given specifically to cover meals and lodging, the total amount spent for meals and lodgings while traveling not exceeding for any year the total amount of allowances received, may be deducted. Amounts paid out for expenses incident to services rendered, which are reimbursable, are not deductible as expenses nor are they to be returned as income when received in reimbursements. 60. Are the items of expense incurred and paid by me dur- ing the taxable year in connection with a farm which I lease to another on a cash or crop-share rental basis, such as re- pairs to fences, farm, buildings, etc., allowable as deductions? Yes. 61. Can the amount of life insurance premiums and pre- miums paid for insurance on my residence be claimed as deductions? No; these are held to be items of personal expense. If, how- ever, a farmer pays premiums on insurance policies covering farm buildings, other than your dwelling house, or on any property used for business purposes, these premiums are allowable as deductions. 63. An individual or a partnership insures the life of one or more employees or members. Can the premiums paid for such insurance be considered a business expense and claimed as a deduction? Section 215 of the revenue act of 1918 specifically provides that no deduction shall be allowed for premiums paid on any life insurance policy covering the life of any officer or employee, or of any person financially interested in any trade or business carried on by the taxpayer, when the taxpayer is directly or indirectly a beneficiary under such policy. 63. A tenant, under the terms of a lease, is obligated to pay a certain cash rental on property used for business pur- poses and all taxes assessed against the property and to keep it insured. May he claim as a business- expense the aggregate amount of rental, taxes, and insurance premiums paid? Yes; if the property is used by the tenant for business or trade purposes and not as a home, the aggregate amount may be claimed as a deduction for the year during which actually paid. 64. I own stock in a corporation which, in 1918, assessed each of its stockholders $50 on each share held. Can the amount paid by me be claimed as a deduction? 106073°— 19 3 18 INCOME TAX PEIMEE. No. Assessments made by a corporation on its capital stock are regarded as further investments of capital and do not constitute an allowable deduction in the return of the individual. 65. You say that assessments made against corporation stockholders can not be claimed as deductions. In California and other States fruit growers, ranc'ners, and farmers are shareholders in irrigation companie4 which are mutual in character, and they are often assessed in proportion to their holdings of stock, for sufficient amounts to make repairs to the irrigation system, cleaning out of pipes, laterals, etc. Can such assessments not be claimed as deductions under the head of business expenses? Yes. Where the purpose of the assessment is merely to raise funds to keep the irrigation system in usable condition and not to make extensions or betterments, the amount assessed against each share- holder may be so claimed. 66. If a physician or other professional or business man rents a home and uses a portion of it for professional or busi- ness purposes, may any portion of the rent paid for that home be claimed as a business expense? Yes. The proportion of the rent paid which is properly charge- able to the number of rooms used for professional or business pur- poses may be claimed as a deduction. 67. In 1918 I purchased a property, the title to which proved defective, and in order to straighten the m.atter out I employed an attorney and resorted to court proceedings. Can I claim a deduction to cover the fee paid the attorney and the court cost? No. Such items are held to be a part of the cost of the property and therefore not allowable as deductions. 68. If I employ an architect to prepare plans for a build- ing to be used for business purposes, may the fee paid to the architect be claimed as a business expense? No. Amounts expended for an architect's services are held to be a part of the cost of the building and not such items as may be claimed as deductions. 69. Can a business or professional man who keeps a set of books and enters thereon as income sales of goods on credit, or fees earned but not paid, and charges to expense account items which have not been paid by him, report his net income for the yeai* as shown by his books when they are balanced at the end of the taxable year? Yes. Section 212 of tlie revenue act of 1918 provides that net income shall be computed in accordance with the method of account- ing regularly employed in keeping the taxpayer's books. The method employed must, of course, clearly reflect the taxpayer's net income. 70. If I have a certain sum of money invested in a farm or business, may I claim as a deduction, under the head of interest, an estimated amount of interest which might have accrued to me had that money been deposited in a bank or invested in interest-paying securities? No. INCOME TAX PRIMER. 19 71. What forms of taxes are not deductible on account of being taxes assessed against local benefits? Taxes assessed against an indi\idual on property owned by Mm to p;iy for the paving of a street contiguous to liis propert_y, the construction of a sewer, sidewalk, etc., or the construction of ditches to drain property o^^•ned by him, can not be claimed as deductions. In short, taxes as are not general in nature and are levied on account of some work or privilege the benefit of which accrues to a limited number of property owners, of which the taxpayer is one, are not allowable deductions. 72. If I pay any amount of Federal personal income tax for the year 1917, may I claim that amount as a deduction for the year 191 8. p No. The income-tax law states that income taxes are not allow- able as deductions. Under this provision income tax paid in 1918 on income received in 1917 or anj^ previous year can not be deducted. State income taxes are deductible. 73. In 1917 I bougM certain stocks and bonds for S5,000, and in 1918 the value of tliese securities dropped to $4,000. May I claim tlie difference of $1,000 as a loss in computing my income-tax liability? No. Under the provisions of section 214 of the revenue act of 1918 ojilj such losses as ha^-e been sustained during the taxable jvar can be cfeimeii ; that is, the loss must have resulted from a completed and closed transaction. In your case you still own the securities. They may go up in value during 1919, and until they are sold or otherwise disposed of you are unable to determine whether you will suJffer a loss or derive a gain from the investment. In other words, no account is to be taken for income-tax purposes, of fluctuations in the market value, or arbitrary changes in the book value of securities or other propeiiy. (Note. — This nding has been modified hi the case of securities oioned hy dealers in securities. See T. D. 2609 mid T. D. t6])9.') 74- Jolin Doe, while driving an automobile for pleasure, ran doivn and injured another person. He either paid over a certain sum or paid a judgment rendered against him in settlement of the injury doiie. Can lie claim the amount so paid as a loss? No. It was not a loss which was incurred in the conduct of his - business or trade, or which resulted from a transaction entered into for pi'ofit. 75. How am I to determine what amount of loss, resulting from a sale of property, is allowable as a deduction? The same method of computation should be followed as is outlined in tlie answer to the thirty-first question. 76. A professional man or a merchant owns and opera.tes a " fancy stock farm " for recreation or pleasure. The ex- penses of operation exceed the gross receipts. Can th.e dif- ference be claimed as a deduction under th.a hiead of "losses"? No. It is held tliat where a farm is operated for purpQses of rec- reation or pleasure and not for gain or profit and the expenses of op- eration exceed the gross receipts, that farm is not to be classed as a commercial enterpi'ise, and it does not form a part of its owner's 20 INCOME TAX PRIMEK. business or trade. The gross receipts are not to be reported under " Gross Income " and the expenses are not to be claimed as a deduc- tion. This ruling, of course, precludes the claiming of the difference between the two amounts as a loss. 77. Suppose I buy a farm which is much run down with the intention of making it a profit-paying property; that is, I intend to operate it for profit and not for recreation or pleasure. To do this I am obliged to expend large amounts for labor in plowing and cultivating the land, for fertilizer, lime, etc., and for several years the expenses will greatly exceed the gross receipts. Can the excess of expenses over receipts for each year be claimed as a loss? It is held that all such necessary expenses as contemplated by the income-tax law, of cultivating, operating, or managing a farm on a basis embodying the recognized principles of conmiercial farming, for the purpose of gain or profit and not for recreation or pleasure, may be claimed as deductions in returns of income, even though these expenses exceed the income from the farm and the result is a continual loss, provided the farm is continued to be operated on a strictly commercial basis. 78.' I own a tract of timber which was partially destroyed by fire during 1918. Is this loss allowable as a deduction? The actual amount of capital invested in standing timber, if acquired on or after March 1, 1913, and later destroyed by fire, lAay be claimed as a deduction if not reimbursed by insurance or other- wise. If the timber was acquired prior to March 1, 1913, its fair market price or value as of that date may be claimed. To illustrate the method to be employed in computing the amount of loss allow- able as a deduction, the following is submitted : A tract of land w^s acquired prior to March 1, 1913, and the estimated amount of timber standing on that tract on that date was 1,000,000 feet, board measitre, the fair market price or value per 1,000 feet established by the cur- rent prices prevailing in the locality of the tract in question as of March 1, 1913, being $4. During the year 1918, 400,000 feet of this timber was destroyed by fire. In this case $1,600 is the amount which may be claimed as a deduction. 79. If a crop which is ready to be harvested, but has not been gathered, or a crop which has been harvested, but has not been sold, is destroyed by storm, flood, or fire, can the value of that crop be claimed as a deduction? No ; unless the value has been repoi'ted as income. It is understood, of course, that the actual cost of producing _or harvesting a crop which has been so destroyed may be claimed as a deduction under the head of business expense. 80. What conditions are necessary in order that a debt may be claimed as a deduction? It must be (a) a bona fide debt, (&) definitely ascertained to be worthless and uncollectible during the year for which the deduction is made, and (c) if boobs are kept it must be charged off within the year for which the deduction is claimed and no longer considered an asset or carried as such on the books. 81. In 1918 a corporation or a firm to which I had loaned money since March 1, 1913, became bankrupt. Can this debt INCOME TAX PRIMER. 21 be considered absolutely wortbless and claimed as a deduc- tion for 1918P Yes; if it is definitely known that nothing can be collected from the debtor itself or any person connected with it. 82. Is it absolutely necessary that the debtor corporation or firm mentioned in the preceding inquiry be declared a bankrupt and its receiver discharged before I can claim a deduction on account of the debt in question? No. If the debtor corporation lias no assets whatsoever available for application to the debt in question, and it is definitely laiown that nothing whatsoever can be collected from debtor itself or any person connected with it, a creditor need not go to the expense of instituting bankruptcy proceedings in order to establish his right to claim the worthless debt as a deduction. 83. "A" indorses a note for " B." The latter has since departed for parts unknown, and the note became due in 1918, and " A " was required to make good his indorseraent. Can he now claim as a deduction the amount paid by Mm to the creditor? Yes. 84. If, on account of friendship or relationship, I advanced a certain sum to assist a needy friend or relative, and at the time such advance was made I had little or no reason to expect that the amount so advanced would ever be returned, may I now claim a deduction to cover such advance? jNo. Such an advance is regarded as a gift and is not held to con- stitute a bona fide debt. 85. In rendering my 1915 return I claimed a deduction to cover a debt I then believed to be absolutely worthless. In 1918 the debtor has discharged a part of his obligations. How should I treat this payment for income-tax purposes? Consider it as an item of income and include the amount in your 1918 return. 86. A professional man earned a fee in 1917. As he keeps no books, he reports his income for tax purposes on a cash- receipt basis. As this fee has never been reported as income, can it be claimed as a deduction if collection can not be made? No ; never having been returned as income, it can not be claimed as a deduction. 87. ''A" loaned '^ B " $10,000, the debt being secured by a mortgage on a farm. Foreclosure proceedings were re- sorted to, and "A," to protect his interests, purchased the farm for $8,000. Can the difference between these two amounts be claimed as a deduction? Where, under foreclosure, the mortgagee buys in the mortgaged property, the difference between the purchase price and the debt will not be allowed as a deduction. The property which was security for the debt being in the possession and ownership of the mortgagee, is, for purposes of the income tax, held to be sufficient to justify the dis- allowance of a claim for bad debts. Where the purchaser of the property upon foreclosure is another than the mortgagee, the latter may deduct as a loss the difference between the amount of the debt anci the net amount received by the mortgagee. 22 INCOME TAX PRIMER. DEPRECIATION. 88. At what rates may depreciation be claimed and under what conditions? The deduction for depreciation in income-tax returns is a means ■whereby exemption from the tax may be secured upon the amount of capital invested in physical property (or in case of property ac- quired by gift or bequest the value of such property) which is sub- ject to exhaustion through wear and tear arising out of its use or employment in business or trade or on account of obsolescence. Therefore, the annual allowance for depreciation should be based upon the life of the property ; that is, the cost of the property or the value of the same where acquired by gift or" bequest or its fair market price or value as of March 1, 1913, if acquired prior thereto, should be ratably spread over its life. For instance, the rate of de- preciation to be deducted on buildings used for business purposes, the probable life of which is 50 years, would be 2 per cent. The probable life means, of course, the number of years the property would be usable in business from the date of acquisition or in case of property acquired prior to March 1, 1913, the number of years the property would be usable from March 1, 1913. In the case of property acquired by gift or bequest, the "cost" of such property for depreciation purposes is the appraised value at the time the prop- erty was acquired. If property in respect of which depreciation, is claimed was acquired prior to March 1, 1913, the fair market value as of that date will be assumed to be in the absence of proof to the contrary the cost of the property less depreciation up to that date. In claiming depreciation the following fundamental principles must be taken into consideration: (a) Only such depreciation as results from exhaustion, wear and tear of property, arising out of its use or employment in business or trade, or on account of obsolescence, can be claimed. Depreciation in the value of a home or any article of property, such as automobiles used for personal pleasure or convenience, can not be claimed; the property must be vised for the purpose of producing income. Depreciation in the value of land, whether improved or unim- proved, due to ordinary erosion, exhaustion, or any other cause, can not be claimed. Where, in the course of years, the owner of property has claimed its full cost as depreciation in his income-tax returns, no further claim will be allowed. The value to be cared for by depreciation is the actual amount in- vested in the property and not the value which may be arbitrarily or otherwise fixed. (Note. — For information relative to deduction for obsolescence see Kegulations 45.) 89. I bought a patent for $5,000 which, under the patent laws of the United States, had five yeai^s yet to run. As the value of this patent depreciates each year on accotint of the exhaustion of the patent period, may a deduction be claimed? Yes. The cost of the paitent divided by the number of years it has yet to run yields an amount which may be claimed each year as de- preciation. In your case this amount is $1,000. IHCOME TAX PEIMEE. 23 80. I understand that depreciation in the value of articles for personal use can not be claimed as a deduction. Hov/- ever, as actors and actresses are often required to furnish their own wardrobes, does not the depreciation in the value of such property constitute an allowable deduction? If costumes piu'chased by members of the theatrical profession are used exelusiieh- for the production of a play and are not adapted for occasional personal use, and are not so used, a deduction may be claimed on account of such depreciation in their value as occurs dur- ing the year- on account of wear and tear arising from their use in the production of the play or from their becoming obsolete at the close of the production. In such case the cost of the wardrobes in the first instance must not have been claimed as an expense. DEPLETION. 91. Under what conditions and at what rates may deple- tion due to the removal of a natural product from oil or gas wells, mines, quarries, etc., be elainaed? Section 214, paragraph 10, of the revenue act of 1918, states' how the amount of depletion allowable as a deduction is to be ascertained, but as so many factors are to be considered in computing depletion, an answer which will be applicable in all cases where depletion occurs can not here be given. Such factors are covered in consider- able detail by the regulations, copies of which may be obtained from the collector of internal revenue for yoiu" district, aiid where these regulations do not afford all the information necessary in your par- ticular case a detailed statement covering all the facts and figures in your case should be forwarded to the collector with a request for a ruling. CONTRIBUTIONS AND GIFTS TO RELIGIOUS, CHARITABLE, AND SCIENTIFIC ORGANIZATIONS, ETC. 82. With reference to the eleventh paragraph of section 214 of the act, how am I to determine to what extent con- tributions or gifts made to corporations, organized and oper- ated exclusively for rellglods, charitable, scientific, or edu- cational purposes or for the prevention of cruelty to chil- dren or animals or to the special fund for vocational re- habilitation, may be claimed as a deduction? You should first ascertain what your taxable net income would be were you not entitled to a deduction on account of such contributions or gifts, and then if the aggregate of your contributions and gifts made duiing the year to such organizations does not exceed 15 per cent of your taxable net income so computed their aggregate amount may be entered in the space provided therefor under " General de- ductions " on a personal return form. If such aggregate amount ex: ceeds 15 per cent of your taxable net income so computed, the excess can not be claimed. For example: Your total taxable net income amounts to $20,000. Dm-ing the year you have contributed to the American Eed Cross $1,000, to the Young Mcii's Christian Association $1,000, toward the construction of a new church $1,000, and to ^e Associated Charities 24 INCOME TAX EEIMEE. of your home city $500, a total of $3,500. Fifteen per cent of your total net income amounts to $3,000. Therefore this latter amount may be claimed as a deduction and the balance of your contributions and gifts may not be claimed. In claiming a deduction on account of such contributions or gifts there should be shown on the return of income (a) the name and address of each organization to which a contribution or gift was made and (i) the date and amount of each such contribution or gift. Where the contribution or gift was other than money the basis for calculation of its value shall be the fair market value of the property given at the time of contribution or gift. 93. During 1918 I contributed $100 toward the support of a needy family. May this contribution be claimed as a deduction? Contributions or gifts made to individuals do not constitute allow- able deductions. RATE OF TAX. 94. Upon what is the surtax based? The surtax imposed by section 211 of the act is based upon the total amount of net income from all sources in excess of $5,000. 95. A prospector discovers a mine, which he sells at a large profit. Is the entire profit derived from the sale of the mine subject to the surtax imposed by section S 1 1 ? Section 211 of the act provides that in the case of a bona fide 'Sale of mines, oil or gas wells, or any interest therein, where the principal value of the property has been demonstrated by prospecting or ex- ploration and discovery work done by the taxpayer, the portion of the surtax attributable to such sale shall not exceed 20 per cent of the gelling price of such property. 96. In computing my income subject to normal tax, to what credits against my net income from all sources am I entitled? For the purpose of the normal tax only you are entitled to the fol- lowing credits: (a) The amount received as dividends from corporations which are taxable upon their net income and amounts received as divi- dends from personal-service corporations out of earnings or profits upon which income tax has been imposed. (&) The amount received as interest upon obligations of the United States and bonds issued by the War Finance Corporation which has been included in gross income. '((?) The amount of pereonal exemption specified in the answer to question 17. (Note. — For information in regard to further credits see section 222 of the act.) 97. What is the rate of normal tax imposed by section 310 of the act for the taxable year 1918? Section 210 of the act provides that there shall be levied, collected, and paid upon the net income of each individual for 1918 a normal tax of 12 per cent of the amount of the net income in excess of the credits specified in the answer to c^uestion 96, except that in the case of a citizen or resident of the United States the rate upon the first $4,000 of such excess amount is 6 per cent. INCOME TAX PRIMER. 25 PARTNERSHIPS. 98. Are partnerships subject as such to the Federal income tax and required to render annual income-tax returns? Section 224 of the act provides that every partnership shall make a return for each taxable year, stating specifically the items of its gross income and the deductions allowed by this title, and shall in- clude in the return the names and addresses of the individuals who would be entitled to share in the net income if distributed and the amou.nt of the distributive share of each individual. The return shall be sworn to by any one of the partners. Section 218 of the act provides that individuals carrying on busi- ness in partnership shall be liable for income tax only in their in- dividual capacity. There, shall be included in comiDuting the net income of each partner his distributive share, whether distributed or not, of the net income of the partnership for the taxable year, or, if his net income for such taxable year is computed upon the basis of a period different from that upon the basis of which the net in- come of the partnership is computed, then his distributive share of the net income of the partnership for any accounting period of the partnership ending ■^^ ithin the fiscal or calendar year upon the basis of which the partner's net income is computed. This section of the law also provides that a partner shall, for the purpose of the normal tax, be allowed as credits, in addition to the credits specified in the answer to question 96, his proportionate share of such amoimts specified in paragTaphs (a) and (&) of that an- swer as are received by the partnership. Section 218 further pro- vides that if a fiscal year of a partnership ends during a calendar year for which the rates of tax differ from those for the preceding calendar year, then (1) the rates for such preceding calendar year shall apply to an amount of each partner's share of such partnership net income 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 rates for the calendar year during which such fiscal year ends shall apply to the remainder. In the case of an individual member of a partnership which makes return for a fiscal year beginning in 1917 and ending in 1918, his proportionate share of any excess-profits tax imposed upon the part- nership under the revenue act of 1917 with respect to that part of such fiscal year falling in 1917, shall, for the purpose of determining the tax imposed by this title, be credited against that portion of the net income embraced in his personal return for the taxable year 1918 to which the rates for 1917 apply. The net income of the partnership is to be computed in the same manner and upon the same basis as provided for individuals except the deduction referred to in paragi-aph (/) of the answer to ques- tion 63 is not allowable. FIDUCIARIES. 99. Who are classed as fiduciaries? The term " fiduciary " is one that applies to all persons or corpora- tions that occupy positions of peculiar confidence toward others, such as trustees, executors, or administrators, and a fiduciary for 26 INCOME TAX PRIMEE. income-tax purposes is any person or corporation that holds in trust an estate of another person or persons. ThK'e may be a fiduciary relationship between an agent and the principal, but the word "agent" does not denote a "fiduciary" "within the meaning of the income-tax law. A fiduciary relationship for the purposes of the income tax can not be created by a power of attorney. An agent having entire charge of property, without authority to effect and execute teases with tenants entirely on his own responsibility, and without consult- ing principal, paying taxes and expenses, and all other charges in con- nection with the property out of funds in his hands from collections of rents, merely turning over the net profits from the property period- ically to his principal by A-irtue of authority conferred upon liim by power of attorney, is not a " fiduciary " within the meaning of the income-tax law. In all cases where no legal trust has been created in th© estate controlled by the agent and attorney the liability under the law rests with the principal. 100. Is the duly appointed guardian of a minor or the conservator of an estate of an incompetent person required to render personal returns for and in behalf of his ■wrard.P Yes ; under the same conditions as would the ward if competent to act for himself, and in so doing the personal exemption to which the ward is entitled may be claimed. 101. Is the duly appointed administrator of an estate of a deceased person "w^ho died during the tax year required to Tender a personal retiim for and in behalf of the deceased, and also his estate? If the net income of the deceased from January 1 of the year dur- ing which he died to the date of his death equaled or exceeded $1,000 in the case of an unmarried person or $2,000 in the case of a married person, the administrator should file a personal return, executed on Form 1040, for and in behalf of the deceased and a return executed on the same form will also be required of him for and in behalf of the estate, if it remains in process of administration and its net in- come from the date of the decedent's death to December 31 not prop- erly paid or cTedited to any beneficiary equals or exceeds $1,000. The administrator will be required to pay and will be held liable for any amount of tax which may be assessed against any such re- turn rendered Ijv him. If the amount of net income properly paid or credited to any beneficiary equals or exceeds $1,000, a separate return on Form 1041 should be made covering such payments. If any portion of the net income of an estate during the process of adrnmistrotion is paid or credited to a nonresident alien bene- ficiary, a return is required, and the normal income tax of 8 per cent is to be deducted and withheld from so' much of the amount paid or credited to such beneficiaries as was not derived from dividends from corporations subject to tax or which has been subject to with- holding of the normal tax at the source. A separate return on Form 1040 is also required for each nonresident alien beneficiary of such estates. 102. Is the trustee having charge of a trust estate, the net iiieorue of which is periodically distributed among the benefi- ciaries, required to render a return? INCOME TAX PKIMEE. 27 Every fiduciary, or at least one of joint fiduciaries, must make a return (a) for the individual whose income is in his charge, if the net income of such individual is $2,000 or over, if married and living with husband or wife, or is $1,000 or over in other cases, or (h) for the estate or trust for which he acts, if the net income of such estate or trust is $1,000 or over or if any beneficiary of such estate or trust is a nonresident alien. The return in case (a) and also in case (b) if the tax is payable by the fiduciary shall be on Form 1040 (revised), except that it may be on short Form 1040 A (revised) where the net income does not exceed $5,000. The return shall be on Form 1041 (revised) in case (h) if the tax is payable by the beneficiaries. If the net income of a decedent from the beginning of the taxable year to the date of his death was $1,000, if unmarried, or $2,000, if married, the executor or administrator shall make a return for such decedant. 103. For the purpose of the normal tax, wliat credits are allowed estates in the process of administration and estates held in trust for the accumulation of income? In such cases the estate or trust is allowed the same credits as arei allowed to single persons. (See answer to the 96th question.) 104. How is the net income of estates and trusts to be computed? The net income of estates or trusts is to be computed in the sam6 manner and on the same basis as provided for individuals, ea3ept that in lieu of the deduction for " contributions " specified in para- graph J of the answer to the 53d question, there is to be allowed as a deduction any part of the gross income which, pursuant to the terms of the will or deed creating the trust, is during the taxable year paid to or permanently set aside for the United States, any State, Territory, or any political subdivision thei-eof, or the District of Columbia, or any corporation organized and operated exclusively for religious, charitable, scientific, or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private stockholder, and in cases of income which is to be distributed to the beneficiaries periodically and in cases of income collected by a guardian of an infant to be held or distributed as the court may direct, the fiduciary should include in this return a statement of each beneficiary's dis- tributive share of such net income, whether or not distributed before the close of the taxable year for which the return is made. 105. In a case where an estate is in process of administra- tion and the fiduciary renders returns covering- the income and deductions of the estate, and pays the amount of normal and additional tax assessed thereon, will the net income be subject to tax in the hands of the beneficiaries when re- ceived by them? No. The taxes having once been paid, such income is exempt from tax in the hands of the beneficiaries who receive the same. 106. Is any other than a return of income required of a fiduciary? Yes. Fiduciaries come within the provisions of section 256, of the revenue act of 1918, and will be required to render to the Com- missioner of Internal Revenue a return of information, if, during the taxable year, any income has been paid to an individual, partner- 28 INCOME TAX PKIMEK. ship, corporation, joint stock company, etc., equal to, or in excess of $1,000. " ■ 107. Is a fiduciary required to deduct and withhold at the source any amount of normal income tax? Yes. If any distribution or payment of fixed or determinable gain, profit, or income other than dividends or interest on tax-free bonds is inade to a nonresident alien individual 8 per cent is to be deducted and withheld. 108. Is an ancillary administrator required to render in- come-tax returns covering income received by him? An ancillary administrator is held to be merely the agent of the domiciliary administrator. The former should transmit to the latter all information as to income received hj him in order that the domiciliary administrator may make a return covering the entire income of the estate. 109. Have the beneficiaries of an estate or trust a right to inspect income-tax returns rendered by a fiduciary V;overing the income of the estate or trust in which they are interested? Beneficiaries are not entitled, as such, to an inspection of returns of income filed by such a fiduciary. 110. Who is liable for payment of the tax assessed against the net income of an estate or trust? Liability for payment of the income tax attaches to the person of the fiduciary up to and including the date of his discharge. 111. I act as trustee of a trust estate. A part of the net income which accrues to the trust is retained and becomes a part of the corpus of the trust estate. Am I required to render a return for and in behalf of the trust other than the fiduciary return required of rae? If the trust itself is named as a beneficiary and the amount of net income which accrues to it as a beneficiary equals or exceeds $1,000, a return executed on Form 1040, for and in behalf of the trust, in addi- tion to the return executed on Form 1041, is required. lis. May an executor or administrator render his fiduci- ary returns prior to the close of the calendar year in a case where the estate is finally distributed and he is discharged from and relieved of his trust during that year? An administrator or executor may, immediately after his discharge upon final accounting, file with the proper collector of internal reve- nue a return covering the income and deductions of the estate for the l^eriod January 1 to the date of his discharge. To such a return there should be attached a certificate, under seal, setting forth the fact of the final accounting and discharge of the administrator or executor, and the tax assessed against that return may be paid immediately after receipt from the collector of a notice of the amount assessed and a demand therefor. lis. Where, in the case of more than one trust, the creator in each instance is the same person, and the trustee in each instance is the same, how will the trustee account for the income of the several trusts? The trustee should make a single return on Form 1041 for all the trusts in his hands, notwithstanding the fact that they arise from dif- ferent instruments. When a trustee holds trusts created by different persons for the benefit of the same beneficiary he should make return INCOME TAX PRIMER. 29 for each fnist separately on Form 1041. This ruling is based on the identity of the trustee of the various trusts and not upon the identity of the beneficiary. 114. May the expenses of administation of an estate be claimed by the administrator as deductions in com.puting the estate's liability for income tax? Expenses of administration, such as court costs, attorneys' fees, executor's commissions, etc., are chargeable against the corpus of the estate and are not allowable as deductions to the estate or the beneficiaries thereof. 115. May a fidticiary claim as a deduction the amount of depreciation estimated to have occurred in the value of prop- erty owned by the estate? In the case of a trust estate, where the terms of the will or trust or the decree of a court of competent jurisdiction provides for keep- ing the corpus of the estate intact, and where physical property forming a part of the corpus of such estate has suffered deprecia- tion through its employment in business, a deduction from gross income for the purpose of caring for this depreciation, where the deduction is applied or held by the fiduciary for malring good such depreciation, may be claimed by the fiduciary in his return of income. Fiduciaries when making such a claim should set forth, in connec- tion with their returns, the provisions of law, trust, or decree requir- ing such depreciation deduction where any exists, or when actual de- preciation occurs, the amount thereof, and that the same has been or will be preserved and applied as such. All amounts paid by fiduciaries to beneficiaries of trust estates from income of such trust estates, whether froln reserves or otherwise, are held to be distribu- tions of income, and will be treated, for income-tax purposes in accordance with the provision^ of law and regulations applicable to the income of such beneficiaries. 116. What returns are required from a fiduciary in the United States where the beneficiaries of the trust are non- resident alien individuals? Where a fiduciary in the United States is the recipient of trust income for which there is but one beneficiary, and that beneficiary a nonresident alien, the fiduciary will be required to make full and complete return on income-tax Form KMOB for this trust income, on behalf of the nonresident alien, and pay any and all tax shown by such return to be due. Where there are two or more beneficiaries, one or all of whom are nonresident aliens, the fiduciary shall render a return on Form 1041 for and in behalf of the trust estate and a personal return on Form 1040B for each nonresident alien beneficiary. In addition to the forms described above the fiduciary is required to file withholding return, Form 1042, revised, accompanied by cer- tificate 1098, revised. WITHHOLDING OF TAX. 117. At what rates and from what income is the normal income tax now to be deducted and withheld at the source? All individuals, corporations, and partnerships, in whatever ca- pacity acting, including lessees or mortgagors of real or personal 30 INCOME TAX PRIMER. property, fiduciaries, employers, and all officers and employees of the United States having the control, receipt, custody, disposal, or pay- ment of interest, rent, salaries, wages, premiums, annuities, compensa- tions, remunerations, emoluments, or other fixed or determinable annual or periodical gains, profits, and income of any nonresident alien individual, other than income received as dividends from a corporation wliich is taxable upon its net income, are required to deduct and withhold normal tax at the rate of 8 per cent from such income of nonresident alien individixals. All individuals, corporations, and partnerships, in whatever ca- pacity acting, including lessees or mortgagors of real or personal property, fiduciaries, employers, and all officers and employees of the United States having the control, receipt, custody, disposal, or pay- ment of interest, rent, salaries, wages, premiums, annuities, compen- sations, remunerations, emoluments, or other fixed or determined an- nual or periodical gains, profits, and income of any foreign corpora- tion subject to the income taX and not engaged in trade or business within the United States and not having any office or place of busi- ness therein, are required to deduct and withhold normal tax at the rate of 10 per cent from such income of foreign corporations. When interest upon bonds, mortgages, or deeds of trust or other similar obligations of a corporation which contain a so-called tax- free or no-deduction clause is paid to nonresident alien individuals or to foreign corporations having no office or place of business in the United States, normal tax at the rate of 2 per cent is to be withheld. The normal income tax is not to be deducted and withheld from any payment of income to an individual citizen or resident of the United States or to a partnership except when derived from interest on a bond, mortgage, or other obligation issued by a domestic or resident corporation which contains a contract or provision by which the obligor agrees to pay any portion of the tax imposed by the Fed- eral income-tax law upon the obligee or to reimburse the obligee for any portion of the tax which the obligor may be required or per- mitted to pay thereon, or to retain therefrom, under any law of the United States. That is, if interest is paid upon any obligation of a domestic or resident corporation which contains a so-called tax- free or no-deduction clause to a citizen or resident of the United States or to a partnership, normal tax at the rate of 2 per cent is to be withheld, unless personal exemption is claimed in the case of a citizen or resident of the United States, and then only from the amount of income in excess of the exemption claimed. 118. Is a corporation required actually to deduct and with- hold the normal income tax from the amounts of interest it pays on bonds which contain a so-called tax-free or no- deduction clause; or may it pay that interest in full and hold itself liable for payment of the tax from its own funds? The stipulation in the bonds of a corporation whereby the tax which may be assessed against them, or the income therefrom, is guaranteed, is held not to release any party otherwise liable for the tax. The debtor corporation will be held liable for the amount of tax due whether that tax is actually deducted and withheld, or the interest paid in full and responsibility for payment of the tax as- sumed by the corporation. ISFCOME TAX PRIMEE. 31 119. How may a citizen or resident of the United States secure the benefit of personal exemption to which he is enti- tled when receiving a payment of interest on bonds contain- ing a so-called tax-free or no-deduction clause? By attaching to the interest coupons an income-tax exemption cer- tificate, Form 1001, revised. If exemption is not desired, Form 1000, i"evised, should be used. RETURN AND PAYMENT OP TAX WITHHELD AT THE SOURCE. 120. How is tax withheld at the source to be returned and paid? Tax withheld from income other than interest on corporate obli- gations shall be reported to the Collector of Internal Revenue for your district on income tax Form 1042, revised, accompanied by certificate 1098, revised, covering each item in the return, on or before March 1 of the year next succeeding the year during which the with- holding occurred. Tax withheld n-om interest on corporate obliga- tions shall be reported to the collector on Form 1012, revised, within 20 days after the close of the month during which the withholding occurred, and suramary of such monthly returns shall be made to the collector on or before March 1 on Form 1013, revised. Payment of the amount of tax assessed against a withholding return shall be made to the collector of internal revenue in whose district the withholding agent is located. Such payment is to be made on or before June 15 of the year in which the withholding return is required to be filed. The time for filing withholding returns for 1918 has been extended by Treasury Decision 2796 to May 15, 1919. 121. What should a withholding return show? The name and address of the withholding agent, character of in- come, and the name and address of the recipient, amount of income, •exemption claimed, if any, and the amoimt of tax withheld. RETURNS OF INFORMATION. 122. Erom whom are returns of information required? Section 254 of the revenue act of 1918 provides that every corpora- tion subject to the Federal income tax upon its own income and every personal-service corporation shall, when required by the commis- sioner, render a correct return, duly verified under oath, of its pay- ments of dividends, stating the name and address of each stockholder, the number of shares owned by him, and the amount of dividends paid to him. Section 255 of the same act provides that every individual, corpora- tion, or partnership doing business as a broker (210) shall, when reqxrired by the commissioner, render a correct return, duly verified tinder oath, under such rules and regulations as the commissioner, with the approval of the Secretary, may prescribe, showing the names of customers for whom such individual, corporation, or partnership 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 to determine whether all income tax due on profits or gains of such customers has been paid. 32 INGOMB TAX PBIMEK. Under the provisions of section 256 of the same act all individuals, corporations, and partnerships, in whatever capacity acting, includ- ing lessees or mortgagees or real or personal property and employers, making payment to another individual, corporation, or partnership, of interest, rent, salaries, )vages, premiums, annuities, compensa- tions, remunerations, emoluments, or other fixed or determinable gains, profits, and income (other than payments described in sections 254 and 255 of the act) of or at the rate of $1,000 or more in any taxable year shall render a correct return duly verified under oath. Under this section returns of information are required, regard- less of amounts, in the case of payments of interest upon bonds, mortgages, deeds of trust, or other similar obligations of corpora- tions and in the case of collections of items (not payable in the United States) of interest upon the bonds of foreign countries and interest upon the bonds of and dividends from foreign corporations by individuals, corporations, or partnerships, undertaking as a mat- ter of business or for profit the collector of foreign payments of such interest or di'vddends by means of coupons, checks, or bills of exchange. 123. Upon what forms are the returns of information re- quired by section S56 of the act to be rendered, and with whom are such returns to be filed? Returns of information should be filed on Form 1099 (revised) and should be filed with the Commissioner of Internal Revenue on or before March 15 of each year, accompanied by a letter of transmittal, vinder oath on Form 1096 (revised). 124. Where a person receives a cash compensation for serv- ices rendered, and in addition thereto commissions, living expenses, or other allowances, is the aggregate amount of cash plus the value to such person of the allowance to be returned? Yes. A return is required in each case where the cash compensa- tion plus the value of the allowances equals or exceeds $1,000 for the taxable year. PAYMENT, ABATEMENT, AND REFUND OF TAX ASSESSED. 125. To whom is an assessment of income tax to be paid? To the collector of internal revenue with whom your return is filed. 126. When does payment of income tax assessed on indi- viduals become due and payable? The tax is to be paid in four installments, each consisting of one- fourth of the total amount of the tax. If return was made on a calendar year basis, the first installment is to be paid on March 15 of the year following the taxable year, the second installment is to be paid on the 15th day of June of that year, the third installment on the 15th day of September of that year, and the fourth installment on the 15th day of December of that year. Where an extension of time for filing a return is granted, the time for payment of the first installment is to be postponed until the date of the expiration of the period of the extension, but the time for pay- ment of the other installments is not to be postponed vmless the com- missioner so provides in granting the extension. However, in any case in which the time for the payment of any installment is, at the INCOMji; TAX PKIMEE. 33 request of the taxpayer, postponed because of an extension of time for filing the return, there is to be added as part of such installment, interest thereon at the rate of one-half of 1 per cent per month from the time it would have been due had no extension been granted until paid. If any installment is not paid when due, the whole amount of the tax unpaid becomes due and payable upon notice and demand by the collector. If any tax remains due and unpaid for 10 days after notice and demand by the collector, or, in the case of the first install- ment as computed by the taxpayer, remains due and unpaid for 10 clays, interest at the rate of 12 per cent per annum from the due date and a penalty of 5 per cent are added, except in certain cases referred to in the regulations. 1S7. May tlie income tax due from a taxpayer be paid in a single payment instead of in installments? Yes. Section 250 of the act provides that the tax may, at the option of the taxpayer, be paid in a single payment, in which case the total amount is to be paid on or before the time fixed by law for filing the return, or, if an extension of time for filing the return has Been granted, on or before the expiration of the period of such extension. 128. What recourse has a taxpayer when he feels that he has been assessed with income tax in excess of his true tax liability? He may exercise his right to file with the collector of internal revenue for his district a claim for abatement executed on Form 47, copies of which may be obtained from the collector. The filing of such a claim prior to the expiration of 10 days from date of notice • and demand by the collector acts as a stay to the collection of the 5 per cent penalty for delinquency in payment, provided in case of rejection of the claim the tax due is paid Avithin 10 clays from the date of notice of such rejection. However, in case of rejection, interest at the rate of one-half of 1 per cent per month will run from the time the amount was due until, the claim is decided. It should be understood, however, that the filing of a claim for abatement of tax alleged to have been erroneously assessed does not necessarily operate as a suspension of the collection of the tax. If the collector feels that the suspension of collection will jeopardize the. interests of the Government, he may collect the tax and leave the taxpayer to his remedy by a claim for refund. 129. On my 1917 return I was assessed with income tax in excess of my true tax liability and same was paid. How may I secure a refund? By filing with the commissioner a claim for refund, executed on Form 46, copies of which may be obtained from the collector for your district. 130. In 1918 I paid $50 income tax in excess of my true tax liability for the year 1917. Can this excess payment be applied in payment of a later assessment of tax? Yes. The excess payment, if claim has been allowed by the Com- missioner, is to be credited against any income, war-profits or excess- profits taxes, or installment thereof, due from the taxpayer at the time of the discovery of the overpayment for the prior year, and any balance of such excess is to be I'ef unded to the taxpayer. INDEX. A. Accounting : Questions. Change of period 5 ' Receipts and disbursements 86 Keturns on basis of 69 Administrator, returns by 108, 112 Advance payments on contracts 27 Agent : Acting for nonresident alien individual 15 Returns filed by 10 Aliens : Fiduciary making returns for 116 Nonresident, agent for 15 Alimony, payments of 42 Allowances, commutation of quarters 124 Assessments : For shares of stock 64 Mutual improvement associations, etc 65 Of income tax 125 B. Bank stocks, taxes on 38 Blank forms for returns 16 Bonuses : Inclusion in gross income 29 Stock received as . 39 Building and loan associations, income from 40 C. Children, minor, wages paid to- 55 Claims for refund of tax 129 Commissions, accounting for 35 Commutation of quartere 124 Compensation : In lieu of cash 25, 43 Per diem allowances^ 26 Contracts, advance payments on 27 Contributions to charitable organizations 92 Credits in computing income subject to normal tax 96 D. y Damages, sums paid for 74 Debts : Bad and worthless 80, 81, 82, S3, 84 Collection of bad, charged off 85 Payment by surety 83 Deductions ; ' „„ „ „„ Bad debts 80, 81, 82, 83 Business expenses 1 54, 60, 63 From gross income 53 Gifts to charitable organizations 92 35 36 INDEX, Questions. Depletion, oil and gas ■wells, mines, etc . 91 Depreciation : Basis of computing 88 Costumes of actors and actresses 00 In estates 115 Patent rights 89 Dividends : Cash 46 Computation of tax on 50 On paid-up life insurance policies 52 Stock dividends 44. 4,5, 47 Taxability determined 48, 49 K. Exchanges of property 33 Expenses, sums paid for damages 74 Estate : Credits allowed 103 Deductions for depreciation 135 Expenses of administration ]]4 Net income 104,105 Return by administrator 101, 112 Trust, return for 102 Exemption : Income exempt 18 Interest on liberty bonds .. 19 Personal 17, 96 Salaries of State officers, etc 20 Expenses : Business 54, 57 Of estate administration 114 Of traveling salesmen 59 Personal 58 Extension of time for filing return 9 F. Pees, architectural C8 Fiduciaries : Defined 09 Liability of 110 Returns required of 306 Returns for nonresident aliens 116 Withholding by 107 Fiscal year, defined 3 G. Gifts : Individuals 93 Receipt of 18 To charitalile organizations 92 Goodwill, capitalization of 51 Gross income : Items to be included in 22, 29 Deductions from 1 53 I. Improvements made under terms of lease 28 Income : Credits allowable 96 Exchange of property 33 Exempt from tax 18 Gross, items included in 22 Net defined 21 Other than money , 124 Pay of retired Army officers 37 INDEX. 37 QuestloBS. Installment payments of tax 34,126 127 Insurance : ' Dlviclends on paid-up life 52 Life, on member of partnership 62 Premiums paid on life and property 61 Interest : Corporiition bonds 36 On liberty bonds 19 Tax-free bonds ~ ^^q Inventory, to be taken 30 L. Lease : Rentals and improvements under 28 Taxes paid as part of rental " 63 Liberty bonds, interest on 18, 19 Losses : By fire, flood, storm, etc 78, 79 Decrease in stock valuation ^ '73 Determination of, from sale of property 31^75 Fiirms operated 'for pleasure or profit 76,"^ 77 _*— -J2)aj)s 84 Jlortgaged property bought 87 On notes 83 M. Minor child, return for 100 Minor children, wages earned by 55 N. Net income, riefined 21 Nonresident alien individual 15 Fiduciary's return for , 116 Normal tax : Credits against 96 Rate of 97 Notes, losses on 83 O. Officers, State, county, etc., exempt 20 P- Tartnerships, taxability of 98 Payment of Income tax 126, 127, 128, 129, 130 Patents, depreciation of " 89 Payment, tax withheld at source 120, 121 Penalties : Delinquency in payment 126 Failure to file return 8 False or fraudulent return 11 Pensions 37 Property, determination of value 32 R. Rents, deductible, pro rata 66 Return : Accounting period changed ' 5 Blank forms for 16 Extensiim of time for filing 9 Failure to file 8 False or fraudulent 11 Filed by agent 10, Inspection of return by beneficiary 109 38 INDEX. Ketlim — Continued. Questions. Of husband .nnd wife 12,13,14 Of information 122, 123 Period to be covered 4 i Place for filing __. 6 Tax with-held at source 120 Time for filing 7 When required 1 S. Salaries: Bonuses, etc 29 Compensation other than cash 25, 43 Earned In preceding year 24 Paid to minor children 55 Paid to self „ 56 Per diem allowances 26 State and county officials 20 Sales : Of mines, oil, or gas wells 95 Of property J 31, 75, 73 Of rights to subscribe to capital stocks 41 Salesmen, traveling expenses of 59 Stoclis : Assessments on 64 Bank stock taxable 38 Dividends — 44,45 Surtax : On individuals 94 Profits from sales 95 Tax withheld at source 120 Taxable year, defined 2 Taxes : Assessed for local improvements 71 Federal income, State income 72 Liability of fiduciary for 110 Trust estate: Credits allowed , 103 Net Income of 104 Return by trustee < 102,111 Two or more 113 Withholding : ^- ^ At source 120, 121 By fiduciaries 107 On tax-free bonds 118 Bates to be applied 117 I®"- ■' '--J ■' <' TREASURY DEPARTMENT unit£d states internal revenue if INCOME TAX PRIMER FOR FARMERS I" REVISED) PREPARED BY THE BUREAU OF INTERNAL REVENUE FOR THE INFORMATION AND ASSISTANCE OF TAXPAYERS ^ i "V. r FEBRUARY, 1920 a__ WASHINGTON GOVERNMENT PRINTiNt; OFHCE 1920 INCOME TAX PRIMER FOR FARMERS. EETTJHNS. 1. Who is a farmer? ^ The term " farmer " as used in this primer embraces per- sons operating stock, dairy, poultry, fruit, or truck farms, plantations, ranches, or any land used for fruit raising or agricultural puivposes. 2. I am a farmer. Am I required to make a personal income-tax return for 1919? '^ ' • . Yes; if . your total net income for the taxable year was $1,000 or over, unless you were rnanS'ied and living with your husband or wife on the last day of your taxable year, in which case you should file a return in the event your total net income equaled or exceeded $2,000. 3. To what personal exemptions am I entitled ! If on the last day of your taxable j^ar you were a single person you are entitled to an exemption of $1,000; if you were married and living with your wife or husband, 'or were the head of a family, you are entitled to an exemption of $2,000. You are also entitled to a further exemption, whether single or married or the head of a family, of $200 for each person (other than husband or wife) dependent upon and receiving his chief support from you, if such dependent per- son is under 18 years of age, or, regardless of age, if incapable of self-support because mentally or physically defective. i. Wife dies July 1, 1919, leaving no children. Is the man entitled *to a ^2,000 or $1,500 deduction as heflTd of a family? He is entitled to $1,000 personal exemption as a single man. 'The joint personal exemption may not be claimed on account of husband or wife who dies during the taxable year. The status of the taxpayer on the last day of his taxable year determines his right to an additional exemption and to a credit for dependents. If then he is the head of a family or is married and living with his wife, the personal exemption of $2,000 may he taken. If then he is the chief support of a dependent who is under 18 years of age, or incapable of self- support because mentally or physically; defectiv^, the credit of $200 may be taken. Otherwise he is only entitled Tto a personal exemption of $1,000. 5. The child dies July 1, 1919. Is the head of a family entitled to a $200 or $100 deduction on that child? . The head of the family is entitled to no credit for this child in his income-tax return. See answer to question No. i. 3 A INCOME TAX PEIMBE TOB PASMBES. 6. On October 10, 1919, 1 married a widow with one dependent child 3 years old, both of whom I have supported since -inarriagei.. To what exempption am I entitled^' To an exemption of $2,000 for yourself and wife and an additional amount of $200 tor the child., 7. A widower having a child under 18 years of age payS boatd in a private family 'for himself and child. Is he entitled to a personal exemption of $2,200, as the head of a family .with one minor child ? If not, what e;x:empf ion/is he erititle.d to ? Ex- plain what is the head, of a family. , "'.,- (a) A widower with a child undfer 18 years of a^e, paying^' board in a' private family for himself and child, is entitled ' to the exemption of $2,000' as the head of a family and also to the additional exemption "of $200 for such dependent childi^ (&) A "head of a family" is a person ^ who actually sup-": ports and maintains in one household one or more individuals ' who are closely connected with him by blood relationship, , relationship by marriage, or by adoption, and whose righV to exercise family control and provide for, these dependent in- dividuals is based upon some moral or legal obligation. 8. A child under 18 years of agS has an, independent income; should this child make an individual report or must the income be included in the parent's, return ? . . * This case-is governed by section 223 of the Revenue Act of 1918, and Article 403 of Regulations 45. The rule 13 that a minor is required to "render a return of incom© if he has a net income of $1,000 or over, for the taxable y6ar. In case the -- aggregate net income of , the minor frgm any property he ' possesses and from any funds held in trust for him t)y a trustee or guardian and from any earnings for his own use , is at least $1,000, a return as in the case of any other individ- ual must be made by him, of by his guardian, or some other, person charged with the care of this person or property for him. An exception is made in case of a minor having an„ income who is dependent upon his parent, and the parent ' appropriates or may appropriate his earnings. In such a, case eamiags are income of the parent and not of the minor. It should be borne in mind, however, that in the absence of proof to the contrary, a parent will be assumed not to have emancipated his minor child and must include in his return any earnings of the minor. 9. What is meant by the taxable year 1919 ? The calendar year 1919 or any fiscal year ending during the calendar year 1919. 10. What does the term fiscal year mean ? An accounting period of 12 months ending on the last day of any month other than December. 11. Upon what period of time shall my 1919 income-tax return be based? Upon the calendar year 1919, unless you have an established accounting period which is a fiscal year as defined in the answer to question 10. IWOOME TAX PRIMER FOR FABMBBS. O 12. My principal crop is tobacco. I keep books of account which accurately show my true gains and profits, take annual in- ventories, and close my books on March 31. My tax return for 1918 covered the calendar year 1918. Upon what period Shall I make a return for 1919 ? Since your annual accounting period is the fiscal year end- ing March 31, you should make a return showing your true^ net income from April 1, 1918, to March 31, 1919. As this return should have been filed not later than June 15, 1919, you should attach an aiRdavit to it stating the reasons why it was not filed on time. If you were keeping your books on this basis during 1917 and 1918 an amended return covering -^ the period April. 1, 1917, to March 31, 1918, must also be filed, accompanied with an affidavit. Your returns in future should theu/be filed for your full fiscal year, and the one covering - period April 1, 1919, to March 31, 1920, must be filed n9t later than June 15, 1920. Permission to change your accounting period for income-tax purposes may be obtained througli the collector for your district, if such request is made not later than 30, days prior to the date on which a return for your new accounting period would be due and also 30 days prior to the due date of your return on the present basis on which your accounts are kept. 13. Can a return be made foi- a period of more than 12 rai)nths ? No. - , 14. Where should my personal return for the year' 1919 be filed? With the collector of internal revenue for the district in which you have your legal residence or principal place of business. If your legal residence is located in one collection district and your principal place of business in another, it is optional with which collector your returii shall be filed; but for administrative reasons the Commissioner of Internal Rev- enue desires that it be filed with the collector of the district in which your legal residence is located. 15. When should my return ipr calendar year 1919 be filed with a, collector of internal revenue? On any day after December 31, 1919^ but not later than March 15, 1920. ' 16. Will failure to file my return within the time prescribed by law render me liable to any penalty ? Yes. You w'ould be liable to a penalty of 25 per cent of the amount of the tax due from you, unless your failure to file the return on time is satisfactorily shown to be due to a reason- able cause. You would also be liable to an additional penalty of not to exceed $1,000, unless you refused to make a return when called up»n to do so, in which case you would be liable to a penalty of not to exceed $10,000, and imprisonment for not more than one yeai:, or both, together with the costs of prosecution. 17. May an extension of time beyond March 15, 1920, be obtained . for the filing of my 1919 return ? •■ Yes. If, on account of illness or absence from home y^u are unable to file your return within the time prescribed by 6 INCOME TAX PBIMBB TOE rABMEKS, law, you may obtain an extension of 30 days if. a request there- for -is made to the collector of your district within the period covered by the extension asked for. In this request you must state the reason why the return can not be filed within the time prescribed by law. _ ^ 18. Would a personal return made by an agent for and in my behalf be accepted? If, by reason of illness, absence, or nonresidence a taxpayer is unable personally to make his return he may appoint an agent to act for him and the return executed by the agent will be accepted if he makes affidavit that he has sufficient knowledge to make a complete and accurate return for his principal. Such agent assumes responsibility for making the return properly, and the penalties provided for a delinquent, erroneous, false, or fraudulent return are applicable to him. 19. Mfy a husband and wife living together make separate returns? Yes. They should in every case make separate returns where the wife has a separate income and the aggregate net income of both husband and wife is $5,000 or over. Hus- band and wife living together are entitled to a personal ex- emption of not to exceed $2,000 against their aggregate net income. If separate returns are made the personal exemption of $2,000 may be taken by either or divided between them. 20. Where can I get a blank form upon which to make my return? From the collector of internal revenue for your district. Tlie collector will endeavor to have such forms sent to you, but failure to receive one will not excuse you from making a return. If you do not receive one, it is your duty to requests the collector to furnish you with a blank form, ' KATE OF TAX. 21. What personal income taxes are imposed upon income received during the calendar year 1919? The normal income tax on the income of every individual citizen or resident of the United States is at the rate of 4 per cent upon the first $4,000 of the net income in excess of credits allowed (see question 111), and 8 per cent upon the excess over that amount. A person receiving a net income in excess of $5,000 is liable to a surtax of 1 per cent upon income from $5,000 to $6,000 ; 2 per cent upon income from $6,000 to $8,000 ; 3 per cent upon income from $8,000 to $10,000, etc. Assuming that a man's net income for 1919 was $9,000 and that he was entitled to $2,800 credits, his tax would be computed as fol- lows: NOEMAL TAX. Income from $2,800 to $6,800, at 4 per cent__* _ $i60 Income from $6300 to $9,000, at 8 per cent 17C _ STIBTAX. Income from $5,000 to $6,000, at 1 per cent ___ _ • lo Income from $6,000 to $8,000, at 2 per cent ~ 40 Income from $8,000 to $9,000, at 3 per cent 30 Total tax . , 416 IirCOMB TAX PRIMER FOR FARMBRS. I BXEMPl" ITEMS. 22. What income of an individual is exempt from income tax? (a) The proceeds of life insurance policies"paid upon the death of the insured to individual beneficiaries or to the estate of the insured ; ^^ ,. (6) The amount received by the insured as a return of prfemium or premiums paid- by him under life insurance, en- dowment, or annuity contratCts, either during the term or at tjie inaturity of the term mentioned in the conflract or upon . surrender of the contract ; (c) The value of the, property acquired by gift, bequest, deAdse, or descent (but the income from such property shall be included in gro*s income) ; - '" (d) Interest upon (1) the obligations of .^ State, Territory, ^- or any political subdivision thereof, or the Districtof 'Colum- bia; or (2) securities issued under the provisions of the Federal 'farm loan act of «Tuly 17, 1916; or (3) the obligations, of the United States or it's possessions, except as follows : In , the case of obligations of the United States issued after Sep- tember 1,-1917, the interest shall be exempt o'nfy if anji to the extent provided in the respective acts authorizing the issue , thereof as amended and supplemented, and shall be excluded from gross income only if and to the extent it is wholly exempt from taxation to the taxpayer; (e) Amounts receiyed, through accidieht or health insur- ^ ance or under workmen's compensation acts, as compensation for personal injuries or sickniess, plus the amount of any damages received, whether by suit or agreement on account of such injuries or sickness; ^ (/) So much of the amount received during the present war by a person in the military or naval forces of the United- States as salary or compensation in any form from the United States for active services in such forces, as does not exceed $3,500. 23. Am I required to make, any return of income wholly exempt from income tax ? The law requires that every person owning any of the obli- gations, securities, dr bonds enumerated in clauses (1), (2), and (3) of paragraph (d) above shall submit a statement showing the number and amount of such obligations, securi- ties, and bonds owned by hini and the income received there- from. There, is a place on the return form for showing such information.' NET INCOME. 24. .What is meant by the term " net income " ? Net income means your total gross incomje, not including income exempt from the tax by law, less the general Reduc- tions allowed by law. > 25. What is the |)roper basis for coniputing net income, of farmers? ' Approved standard methods of accounting will ordinarily be regarded as clearly reflecting income. The statute pro- vides that the net income ^all be computed in accordance 8 rNCOMB TAX PBIMEK FOH FABMEKS. with the method of accounting regulfirly employed in keep- ing the books of the taxpayer, but if the method employed does not clearly reflect the income, the computation shall be made upon such basis and in sucK manner as in the opinion of the Commissioner does clearly reflect the income. 26. Is the inventory basis of figuring the income of farmers to be used for the 1919 business? The merchant, the blacksmith, and the baker have always ilsed this basis, and why can not the farmey figure his business that, way ? . . While it is the desire of the department that iriyeiiteries be used by farmers as well as by others, in computing net in- come from a business involving purchase and sales, it is also recognized that inventories can not be -properly used fexcept in connection with a well-maintained set of books, and tha,t in most cases farmers who .do not keep accurate books of aQcount will find it most, satisfactory, both- to themselves -and the Gdvei^iment, to report their income on the basis of cash . receipts and disbursements. > . ' . However, farmers who regularly keep books of account upon an accrual basis, which clearly reflect their net income, should make their returns upon the basis-of such books of ac- count. The rule with regard to inventories is that inventories shall be -taken on the basis" of "(a) cost, or (&) cost or market, whichever is lower.'' (Eegjilation 45, art. 1582.) It is recognized that insurmountable difficulties attend any attempt by farmers to take inventories at a cost basis. There fore, in such' cases, inventories may be valued according *o the farm-price method, which is in wide use among farmers keep- ing books of account upon an accrual basis. This method con- templates valuation of inventories at market less cost of mar- keting. GKOSS INCOME. 27. What is included in "gross income"? Gross income '.includes gains, profits, and income derived from every source whatever, unj^s wholly exempt from in- come tax. 28. What items must I report in my return in figuring my income- tax, liability? All gains or profits, and income derived from the sale or exchange of property of any description, including farm prod- ucts and live stock. The gain or profit derived from sale of animals purchased and used solely for- draft or work pur- poses, or solely for breeding purposes, should be reported as income. There must also be included in gross income airiourits received for board of persons, board and pasturage of animals, labor of men and teams, and hire or use of machinery. 29. I raised a large crop of wheat in 1919, but did not, sell it until after the close of the year. Should I include the proceeds from the sale of this wheat in my return for 1919? No; unless you keep your books upon an accrual basis, in which case the wheat would be reported in your closirie in- ventory for 1919. IiraOME TAX PRIMER FOR FARMERS. 9 30. I have always kept my accounts upon the basis of caph receipts and disbursements. In 1919 I sold wheat which was raised in 1916, 1917, and 1918. May I deduct the expense of raiding this wheat in computing my profits, or must I include in gross income the total amount received for my wheat? Where the cost of stock or farm products purchased in pre- vious years for resale or the expense of raising stock or prod- ucts bn the farm has been claimed as a deduction or taken into consideration in ascertaining the farmer's liability to income tax for some year prior to 1919, the entire proceeds of the sale are to be returned as income for the year in which the sale was made, for the "reason that the farmer liaving once received, the benefit of the deduction is not again entitled to it. If, however, such cost or expense has not been claimed as a deduction or has not been taken into consideration in ascer- taining the farmer's liability to income tax for a previous year, by reason of the income of the farmer for the previous year not being of sufficient amount to permit of the deduction of such expense or of its being so takep. into consideration, the a;mount of such co^ or expense may be deducted fro^n the selling price of the stock or farm products and the difference only returned as gross income. 31. I rent a farm on shares. When is my share of thje crops and stock to be taken into consideration m making Up* my return? In the year in which they are sold or converted into cash or the equivalent, unless your books are kept oi\ an accrual basis and inventories are taken. 32. How am I to determine the amount of gain or profit derived from sale of property which is returnable for income-tax purposes ? If you acquired the property sold prior to March 1, 1913, you should take its fair market price or value of that date, add thereto all amounts subsequently expended in making im- provements, deduct therefrom depreciation sustayied between March 1, 1913, and date of sale, and the difference between the result obtained and the selling price is the amount to be re- ported undei' gross income. If you purchased the property dn or after. March 1, 1913, the difference between its cost plus al>|^ amounts subsequently . expfended for permanent improvements less depreciation sus- tained for y4ars prior to 1919 and its selling price is to be returned. If the property came to you on or after March 1, 1913, as aif inheritance the difference between the apprakal value placed upon it at the d^te of the death of the testator plus all amounts subsequently expended for permanent improve- ments less depreciation as above indicated and its selling price is to be returned. 38. How is the value as of March 1, 1913, of property sold in 1919 to be determined? ^ No method of determining this value can be stated which will adequately meet all circumstances. What that value was is a question of f aqt to be established py any evidence which will reasonably or adequately make it appear.- ■iaei76*— 20 — -2 10 INCOME TAX TEIMEB FOB FABMEBS. 34. Plea^ advise what report should be made on a farm sale made by contract in 1919 on which $1,000 was paid and the balance of purchase money to be paid March 1, 1920 ; after January 1, 1920, a mutual agreement was entered into whereby the con- , tract was canceled by the return of the $1,000 and a further consideration of $1,000 paid by the seller for the cancellation of the contract. Would this be considered a repurchase of the farm, or would it be considered a loss of $1,000 paid for can- cellation of the contract in the 1920 income? (a) Assuming that the original payment of $1,000 was made by the purchaser merely as a pledge for good faith in per- formance of the contract, the transaction is considered incom- plete and as not affecting income during 1919. (&) The $1,000 which the seller paid in 1920 to be relieved from the terms of the original contractus a capital investment and should be treated as additional cost of the farm. 35. A man in 1919 entere'd into a contract for the sale of his farm, the contract price being $40,000; His profit was $10,000. He received $800 down on contract, and was to receive $10,000 on March 1, 1920, $10,000 on March 1, 1921, and $9,200 on March 1, 1922, the deferred payments being secured by a mortgage on the land; deed and possession were to be given on March 1, 1930. How should the profit be returned for income-tax purposes? ^ This 1;ransaction is a contract for sale in the future as dis- tinguished from a -present sale, as only a small cash payment w.as inade and the deed and possession were not to be delivered until March 1, 1920. The $800 is held to be a return of capital, no part of which is taxable income for 1919. Inasmuch as the sale will be consummated on March 1, 1920, the entire profit from the transaction should be reported as income for the year 1920. Taxable income will be received to the extent that the contract price of $40,000, plus the amount of any depreciation sustaiaied oii the buildings upon the land (exclusive of the tax- payer's residence) , since March 1, 1913, exceMs the cost of the farm (or its fair market value as of March 1, 1913, if it was acquired prior to that date) , plus the cost of any permanent improvements made by the seller sine© March 1, 1913, and not claimed by him in any return of income. ^ 36. An individual buys a section of Canada land under cohtract dur- - ing the prewar period. During 1919 he forfeited one-half section to the Canadian Government suffering loss of all pay- ments which had been made on the land upon returning the land. After this the party sells ^ut under contract, nis right to the other half section, receiving a cash payment on the land. Would the amount for which the half section of lafid sold • imder contract be a profit? The individual who purchased-a section of Canadian land during the prewar period and during 1919 forfeited one-half section to the Canadian Government, thereby suffering loss of all payments which had been made on this half section maj' deduct as a loss for the year in which the property was for- feited, the cost or fair value as of March 1, 1913, if acquired prior thereto. Upon the sale by him of the other half section lUrCOME TAX PRIMER FOR FARMERS. H he should report as income the excess of the selling price over the cost to him o:^ such ha,li section or its fair market value as of March 1, 1913, if acquired prior thereto. 37.^ A contract to sell a, farm was made in 1919, payment of $1,000 down, balance to be paid in 1920, upon possession and deliv- erj of deed. What part of cash payment goes in 1919 return ? None. Profit on the sale should bg returned as income for 1920. However, if the sale is not completed and the $1,000^ 'is forfeited, the seller should return that as income-. 38. In 1914, Aiought 160 acres of land at $175 an acre. Eecently B bought 160 acres for $375 an acre with the idea of putting the same on the market at once. There are no buildings on either parcel of land. B finds upon investigation thg,t if he had A's 160 acres of land he could sell the same. Accord- ingly he takes up the matter with A. It so happens that the land owned by B is in a territory where A had formerly lived and for that reateon he accepts the proposition of B's " trading even up." In the contract which is made l^y A and B it is specified that they are trading the land on a basis of $425 an acre, which is assumed to be its actual market value. In the whole transaction A does not receive a cent in cash and in fact will be at some expense because of having to move. Should A have to pay an income tax on this transaction ? Yes. The difference between the cost to A of the land origi- nally held by him ($175 per acre) and the value of the land received in, exchange ($425 pfer acre) represents profit to A and is subject to income tax. The difference between the cost to B of the Iknd originally held by him^ ($375 per acre) and the value of the land received in exchange ($425 per acre) represents profit to B and is sub- ject to income tax. 39. On August 1, 1919, A sells his farm to B on contract, complete payment to be made,^eed and possession to be delivered on March 1, 1920. On December 1, 1919, A buys his own farm back giving B a profit of $5,000 and destroys the original con- tract. No deed is ever executed. Is A liable to an income tax on the pront he had made in the original deal ? If not, then is the $5,000 he''paid to get the contract released loss than can be deducted in computing his income for the year? ' A made no profit on the original transaction. . The contract was clearly executory at that time, since its completion was contingent upon the conveyance of title and deliverance of property on March 1, 1920. The $5,000 payment by A, over , and above the consideration named in the first contract, was, in fact, an amount paid by A to be relieved from the terms of the contract,' anjJ is additional cost of the prpperty and should ♦ be treated as a capital investment. ' 40. A sells his farm to B in August, 1919, for $10,000, receiving a pash payment of $2,500, balance to be paid March 1, 1920, when deed is to be delivered. Is any part of the tax on profits fn this, deal to be included in A's return for 1919? Or is it all to be included in his return for 1920? 12 INCOME TAX PEIMEE FOR FARMERS. The profit on the entire transaction should be reported by A a^ income for 1920. If the contract is canceled and the $2,500 is forfeited that amount is taxable income to A. 41. A and B are operating a farm in partnership and for that pur- pose sell the pergonal property at public sale. A buys the most of the property, in which he already owns a half interest. Must ah income tax be paid by the partnership on the total amount of the sale in view of the fact that A already owned a half interest in the property ? For the purpose of ascertaining the gain or loss from the ' sale of property the partnership should report the difference between the cost of the property or its fair market value as of March 1, 1913, if acquired prior thereto, and the sale price. The fact that one of the partners purchased the property from the partnership would not affect J;he profit or loss to be re- ported by the partnership on Form 1065. Under the Revenue Act of 1918 partnerships as such ar4 not subject to income or profits tax. 42. Two neighbors own farms and wish to exchange, without any money consideration except the land traded, it simply being a matter of location suiting each patrty better. Would this be considered a sale by each party, suDJect to profits' based on 1913 values? Yes. Such transaction is considered a sale by each party and the basis for computing the profit on each sale is the cost of the farm or the fair market value as of March 1, 1913, if acquired prior thereto. Propej" adjustment should be made for any depreciation sustained- on buildings which are on the farms, and the cost of any improvements. 43. A and B each owned an 80-acre farm. A wanted to buy a 67- acre farm which was adjoining the 80 acres owned - by B so they traded one 80 for the other 80 and neither party re- ceived any cash consideration, having made an even trade. Should this trade be included in the returns of either A or B, and if so, how should it be computed? In the exchange of properties having the same market value, gain or loss is realized by each owner to the amount of the difference between the fair market value at the time of the exchange of the property received and the cost or fair market value as of March 1, 1913, if acquired prior thereto, of the property exchanged plus the cost of any permanent improvements and less any depreciation sustained. 44. A exchanges farms wi±h B as follows:' A gives farm as first pay- ment of $40,000, same having been acquired after March 1, 1913, for $20,000. Possession given on contract to run for five years at whicl^time the balance due which is $60,000, is paid and deed given. When and how should return be madel * A has made a profit of $20,000. B is held to have received cash and property equal, to the value of $100,000 in exchange for his farm and he is required to setum as taxable profit for the year in which the exchange was made the excess of the amount received for his fann, over the fair market value of the farm as of March 1, 1913, if INCOME TAX PEIMBE FOR FARMERS. 13 acquired prior thereto, or its cost if acquired on or after that date. Proper* adjustment must be made for depreciation sus- tained and also for the^ost of any improvements. 4«. A farmer sells his farm for $15,000, received $10,000 cash and a city property which will not sell for more than $3,000, that amount being the most offered for it. The fair market) value of the farnx on March 1, 1913, was $15,000, and he acquired it prior to that date. How will he treat this transaction in his i'e- port, as a sale for $13,000, or a sale for $15,000 ? . • This is in effect a modification of' the original contract of sale, by which seller agrees to accept a consideration of $13,000, instead of the stipulated price of $15,000. The farmer there- fore suffers a loss of $2,000. 46. In April, 1919, A agreed to sell B Jiis farm for $10,000, payment in full to be made in June, when B was to receive title and take possession. A died in May, Sale was completed hj executor. Should the pjofit or loss be reported in the return for decedent or the return for the estate ? The executor should account for the profit or loss in the return for the estate covering the period from the date of death to the close of the taxable year. 47. A sells a farm on contract in 1919 for $25,000, deed and posses- sion to be given March 1, 1920; $2,000 is received by A during 1919 on this contract as first payment; is this $2,000 income for 1919 or 1920? The contract is executory during 1919, hence no part of the $2,000 is taxable in A's hands ipr that year if it does not exceed the cost or fair market value as of March 1,, 1913, if acqui'red prior thereto. If the contract is canceled and the $2,000 is forfeited, that amount is taxable income to the seller. That portion of tjie $2,000 representing a profit on the transaction should be reported (with the balance of the profit , realized) by A as tp,xable income for the year 1920; 48. Where two persons own property in undivided interests and wish to divide said property by each taking his own share, would this be considered a sale of property and subject to income tax based on 1913 values? ' , No. ■ _ ; ■ ■ X 49. An endowment insurance policy; issued by a certain company has no cash value until the end of the third year. If such k policy were issued in the year 1911 (and therefore having no value March. 1, 1913), could the insured deduct the premium paid in the years 1911 and 1912 from the amount, received from the policy when it matured as an endowment, or must he deduct only the premiums paid since March, 1913? The aggregate amount of the premiums paid during the lifetime of the policy may be deducted from the amount re- ceived from the proc<*eds when it matured, and the difference between these two amounts represents income to be reportedly for the year in which the proceeds of the policy are received. r>e. A deeds his farm to his son B: The consideration in the deed recites that B shall pay $5,000 to his brothers and sisters and 14 INCOME TAX PEIMKB J-OB FABMEB& - $400 per year to the father during Ms life. Shall this $400 be cortsidered payment on the purchase price? The sum of $5,0OO paid to the brothers and sisters and the $400 paid annually to the father in accordance with the con- sideration in the deed transferring the title to the farm from the father to the son should ie treated as payuaents on the par chase pricg.of the farm, no portion of which is deductible by the son. 51. An estate, after debts have been paid, goes to the widow. Execu- tor sells property, both real and personal, and after debts are paid widow has about $2^000 left, total proceeds from property was $4,400. Does executor have to file income-tax report on said sale for estate, and does widow pay on her $2,0001 Where an executor sells the property of an estate for more than its value at the death of the decedent, the excess is income to the estEite and, if with other income of the estate, the amount _ equals or exceeds $1,000, a return ^should be filed and any tax ^ shown to be due thereby should be paid. by the executor.- The estate, is entitled to an exemption of $1,000. The amount of money or the value of the property received by an individual under a will or under the. statutes of descent and distribution is exempt from tax. Therefore, the amount received by tlie widow from the eState of her husband is ^ exempt from tax. 52. A widow acting as administ]?atrix for the estate of her husband was, during the period of administration, forced by circum- stances to sell at public auction ajl stock ajid implements on the farm. The stock had been raised by the deceased husband. Everything on the place had been appraised by three disin-, terested appraiser^, , as required by the law governing the settlement of estates. Would the widow be allowed to dediict from the proceeds of the sal& the amomit at which the ap- praisers had valued the stock ? Would she not be justified in considering it as capital in place of income? The profit or loss for purposes of income tax on the sale of property of the estate sold by the administratrix will be the difference between the selling price and* the va;lue of ther property as of the date of the husband's death, not the value appraised for the purpose of the sale, unless the sale takes place immediately following the death of the husband. The appraised value for the purpose of the Federal-estate tax ov the State-inheritance tax may be considered as the value of - the property at the date^jf the death of the husband, for the purpose of determining the prQfit realized from the sale. 53. Can a farmer deduct the cost of breeding stock from the proceeds of his public sale if he has not taken his depreciation on said breeding stock in previous years? - - A farmer is required to report as income the excess of the selling price over the cost of breeding stock, less depreciation sustained thereon, irrespective of whether the depreciation was actually claimed in previous returns.. 64. A farmer was awarded $4,000 damages by the appraisers on ac- count of the passage of a drainage dilch through his farm. The amount being approximately $l00 per acre for the land IWOOME TAX PEIMBB FOR FARMERS. 15 destroyed. The value of the land was at least $250 per acre. Since the amount was awarded on the showing that his farm was depreciated in value to the amount of $4,000, should the amount received be shown as income in the 1919 return ; and if so, should credit in the amount be given elsewhere as a " property value depreciation " ? ;May ne deduct $6,000 as damages, the same being the difference between the fair market value and the amount received ? In this case the damage is not limited to tlie removal of the dirt and the passage of the drainage ditch, but involves dam- ages to the farm as a whole. The profit or loss from the trans- action should be reported for the year during which the farm is sold or otherwise disposed of. The basis for the profit or loss is the cost of the farm if acquired subsequent to March 1, 1918, or the fair market value as of that date if acquired prior to March 1, 1913, due allowance being given to per- manent improvements and depreciation. 55. 'What part of a public sale goes m subject to income tax? Must machinery be valued at a depreciated figure in arriving at the taxable income, though depreciation had never been taken? In the case of property sold at a public sale, the profit to be returned for income tax purposes.is the amount by which the selling price plus the amount of any depreciation sus- tained on the property since March 1, 1913, exceeds the cost of the property (or its fair market value as of Mar. 1, 1913, if it was acquired prior to that date) , plus the cost-pf any per- manent improvements made by the seller since March 1, 1913, and not claimed as a deduction by him in any return of income. In computing the profit on depreciable property, the amount of depreciation sustained since March 1, 1913, must be con- sidered, whether jQT not such depreciation has been claimed as deduction from gross income in former returha 56. I sold some shares of bank stock in 1919 for $5,000. This stock was purchased by me in 1914 for $3,000. I have paid $400 interest in past years upon indebtedness incurred in the purchase/ and carrying of the stock. How much of the $5,000 received by me must I include in gross income? ' The interest paid by you Was a deductible expense from gross income in income tax returns for the years in which paid or accrued. You are therefore required to include in gross income of 1919 tbe entire difference between the cost and the sale price, or $2,000. . 57. If a farmer exchanges produce for merchandise, 'groceries, etc., is the value of such merchandise to be returned for tax pur^ poses? fYes; the price placed by the merchant upon the goods ex- changed for farm produce is to be included a,s income in the farmer's return. 58. During the year 1919 $60 was placed to my credit by banks in which I had money deposited, which amount represented interest upon my deposits. Does this interest, whiph was not received- by me in cash or withdrawn from the bank, constitute a part of my gross income for 1919 ? Yes. !8 INCOME TAX PBIMEE FOE PAEMEBS. 59. I purchased a 6 per cent $100 coupon bond at its face value, plus $1.50; that is, three months' accrued interest. Three months later I detached a coupon therefrom and collected $3 interest. Must the entire amount of interest received be re- turned as income? No. Report only so much interest as accrued after the date of your purcnase. It is the seller's duty to report the balance. 60. Do the pensions and retired pay of ex-officers and men of the United States military and, naval forces constitute items of taxable income? Yes. "- 61. I own stock in a bank which, under a State law, is required to pay the taxes assessed against such stock. How is this matter t» be handled' for income-tax purposes? The proportionate part of the entire amount of taxes so paid by the bank, which is properly chargeable against the number of shares held by you, should be reported, for additional tax purposes, in your personal return as a dividend, and then claimed as a deduction under the heading of " Taxes. '-' 62. Are amounts placed to the credit of a shareholder in a building and loan association subject to income tax ? Yes, if cred.ited and made available to the shareholder. 63. Where service is rendered for a stipulated price, wage, or salary, arid paid with something other than money, shall consideration be given the transaction for income-tax purposes ? Where services are paid for with something other than money, the fair market value of the thing taken in payment is th^ amount to be included as income. If the services were rendered at a stipulated price, in the absence of evidence to the contrary, such price will be presumed to be the fair value of the compensation received. 64. I market my dairy products through a cooperative association and during the year 1919 I received $300 in dividends from ' the association. Am I required to include these dividends in my gross income, and are they exempt from normal tax the same as dividends received upon my shares of bank stock ? All dividends from cooperative - associations must be in- cluded in gross income. They are not exempt from normal tax for the reason that the associatiou itself is not taxed upon its earnings. The dividends simply r^resent additional amounts accruing to you upon sales through the associationT" 65. In rendering my 1915 return I claimed a deduction to cover a debt I then helieved to be absolutejy worthier. In 1919, the debtor has discharged part of his obligations. How should I treat this payment for mcome-tax purposes? Consider it as an item of income and include this amount under "Gross income " in your 1919 return. 66. I had cattle^ which I raised and which were worth $500, killed by lightning. The cattle were insured and I received $500 in- surance money. Must this be included in, income? Yes. For income-tax purposes the receipt is the equivalent of a sale. It constitutes income to you. IirCOME TAX PRIMER FOR FARMERS. 17 i67^ Are there aliiy items of income, other than those above suggested, which should be included in gross income ? Income from every source not wholly exempt from income tax (see answer to questioir No. 22) must be included. These include income from sallaries and wages, rents, interest on . notes, mortgages, etc. ; also income from trustees and partner- ships, royalties from mines, oil and gas wells, dividends on stocks, etc. DEDUCTIONS rUOM GEOSS INCOME. 68. What deductions are allowed from gross income in arriving at net income ? The Revenue Act of 1918 allows the following deductions from gross income in ascertaining net income: ^ (1) AH the ordinary and necessary expenses paid or in- curred during the taxable year in carrying on any trade or business. .. (2) ^11 interest paid or accrued within the taxable year on indebtedness (exdept on indebtedness incurred or continued to purchase or carry obligations or securities the interest upon which is wholly exempt from taxation. (3) Taxes paid or accrued within the taxable year except Federal income, war-profits, and excess-profits taxes and taxes assessed- against local benefits of a kind tending to increase the value of the property assessed. (4) Losses sustained during the taxable year and itot com- pensated for by insurance or otherwise if incurred in trade or business. (5) Losses sustained during the taxable year and not com- pensated for by insurance or otherwise, if incurred in any transaction entered into for profit, though not connected with the trade or business. \ (6) Losses sustained during the taxable year on property not connected with the trade or business if arising from fires, storms, diipwrecks, or other casualty, or from theft, and if not compensated for by insurance or otherwise. X ^ (7) Debts' ascertained to be worthless and charged off within the taxable year. (8) A reasonable allowance for the exhaustion, wear, and ' tear of property used in the trade or business, including a reasonable allowance for obsolesence. . (9) In the case of mines, oil and gas wells, other natural -deposits, and timber, a reasonable allowance for depletion and for depreciation of improvements according to the pecu- liar conditions in each case, based upon costs, mcluding cost of development not, otherwise deducted. ^ (10) Contributions or gifts made within the taxable year, to corporations organized and operated exclusively for re- ligious, charitable, scientific, or educational purposes, or for the prevention of cruelty to chiHren or animals, no part of the net earnings of which inures to the benefit of any private 18 ■ IITCOME TAX tEIMEE FOR FAKMEES. stockholder or individual, or to the special fund for vocational rehabilitation, authorised by section 7 of the Vocational Re- habilitation Act, to an amount not in excesp of 15 per cent of the taxpayer's net income as computed without the benefit of this paragraph- 69. What items are not deductible from gross income? Section 215 of the act provides: That in computing net in- come no deduction shall in any case be allowed in respect of— (a) Personal, living^ or family expense; , , (b) Any amount paid out for new buildings or for perma- nent iniprovements or betterments made to increase the value of any property or estate ; . y (o) Any amount expended in restoring property or in maMng good the exhaustion .thereof for wnich an allowance is or has been made ; or - (d) Premiums paid on any life insurance policy covering, the life of any officer or employee, or of any person financially interested in any trade or business carried" on by the taxpayer, when the taxpayer is directly or, indirectly a beneficiary im- dgr such policy. - ' ORDINARY AND NECESSAET EXPBNSBS. 70. What ordinary and necessary expenses are deductiljle ? AU amounts actually paid for labor in preparing land fm* a crop, p,nd the cultivation, harvesting, and marketing of the crop ; the cost of the seed and fertilizer used ; the amounts expended for labor used in caringi for live stock and the cost of the feed purchased ; the amounts paid in making repairs to farm buildings, but not the dwelling house; repairs to fences, farm machinery, etc.; the cost of material and farm tools which are used up in the course of a year or so, such as pitch- forks, spades, and similar tools, but not including farm im- plements, machinery, wagons, and other vehicles which are regarded as capital investments; and the amount of rent paid for a farm may also be claimed. If books are Ikept upon an accrual basis, such expenses are deductible for the year or ' years in which, they accrued. Amounts paid as the pui-chase price of an automobile, even though used wholly or partly in the business, are not deduc- tible because such amounts represent capital investments. ^ reasonable allowance for depreciati If, therefore, the books of a taxpayer are kept on the cash receipts and disbursementslaa^s, taxes accrued in 1919 but not payable until 1920 can not be taken as a deduction until actually paid in 1920. If, however, the books are kept on the accrual basis the taxes may be taken as a, deduction in 1919 when accrued, even though not pa^ablg until 1920. LOSSES. » 93. My wheat crop was ruined by hail. I had no insurance. May I deduct the value of the crop as a loss? No. The value of the crop has never entered into gross in- come. The cost of raising the crop is deductible as a neces- sary expense. 94. How am I to determine what amount of loss, resulting from a' sa;re of property, is allowable as a deduction ? / ^ The same method of computation should be followed as is outlined in the answer to the 32d question. If the result is a loss instead of a gain, that loss may be> claimed as a deduction. 95. Suppose I buy a f artn, wh^ch is run down, with the inten- tion of making it a profit-paying property — ^that is, I intend to operate it for profit and not for recreation or pleasure. To do this I am obliged to expend large amounts for labor in plowing and cultivating the land, for fertilizer, lime, etc.,. , and for several years tiie expenses will greatly exceed the gross receipts. Can the excess of expenses, over receipts for each jear be cla,imed as a loss? It is held that all such necessary expenses as contemplated by the, incoine-tax law of cultivating, operating, or managing a farm on a basis embodying the recognized principles of commercial farming, for the purpose of gain or profit and not for recreation or pleasure, may be claimed as deductions in returns of income, even though these expei^ises exceed the in- come from the farm and the result is a continued loss, pro- vided the farm is continued to be operated on a strictly com- mercial basis. ^6. Can a deduction be permitted on account of the total destruction of an orchard by frost, and what would be the proper method of ascertaining the loss deductible ? Yes. The amount to h& claimed as a loss is the actual cost of the trees destroyed plus the amount of expenses incurred, but not deducted for tax purposes, in caring for the orchard up to the time it reached the productive stage, less any de- preciation sustained. IJ , __-, _t,!| — ;= 111 > -from cooperative associations _ _ — _ —"J — ''—L-f^^^- 64 :0ues, social club ^~- : __— ^- — : 82 29 30 ^ • INDEX. E. - ' Question. Bxchai.ge, ot property __: __. 38, 42-44 of produce for merchandise' • 28, 5T Exemption, personal ^-. 3-7, 19, 51, 111 return of exempt Income 1 23 Expenses, crop rental paid to landlord 78 hired help , 79 improvements ; ' 8T ordinary and necessary ._ 68 (1), 70-88 payment of damage claims, !._ 54 Extension, of time when granted 17 F. Farmer, term defined^-' 1 Fiscal year, define^; : 10 returns on basis of 1 1? Forms, where obtainable-*.^ 20 G. Gifts, receipt of exempt 22(c), 51 to charitable organizations 68 (10), 110 Gross income,~computation oM '. 27,28 deductions from : 68 defined I ^ 2'a« fartalng__ -_ ^_^_, 28-30, 41 items not deductible ^_ : ^ ^__ 69 '- H; " Head of family," defined ^ , 7 Hired help-,. - , 79 I. -V Improvements, permanent ^ -_ 69 ('b),71, 8T Income, exempt from tax .- 22,23 gross, defined , 27 net, defined : 24 other than money , 63,115 Insurance, deductible premiums 49,69 (d),73 receipt of, oh cattle killed ■ 66 Interest, credited on bank deposits ;— ^ 58 paid on indebtedness 56,68 (2), 89 received on Liberty bonds ' 22 (d) received - 59,67 Inventory, basis of reporting income 26 cost or market price as basis 26 L. Liberty bonds, interest on ■_ 22(d) shrinkage in value of 99 Losses, allowable deductions 45,68 (4-6), 96 crop : 93 fire — y 97 in operating run-down farm 95 live stock raised on farm 98 sale of property 1 94 shrinkage in value of Liberty bonds- . 99, M. Minor children, wages earned by 8 wages paid to, by taxpayer—' 80 -^ ENCOME TAX PBIMEB FOB PAEMEB8. 31 ! Queatlon. Net Inpome, defined , 24 Notes given in payment of supplies^ : . 81 P. Payments, of income tax ^ ^ 116-118 overpayments, credit for 119-120, Penalties, delinquency in payment of tax 117 disclosure of information on returns 121 failure to. file return on time ^:. 16 Pensions, subject to tax 60 B. B^tes of tax ^ ■ 21 Rents, deductible by tenant as expense 70 jjReturns, Wanks where obtainable , - , 20 change of Etccounting period ' 12 date for filing T , 15 disclosure of information contained in 121 extension .of time for filing :. ___^_ 17 , / "' made bj agent -. ^-- .-- ^ -_ 18 J , of husband and wife __^ L- 19 penalties for delinquencies in filing : ^ _^ _j._ 16 period . covered ' -;__1__L__. 11, 13 !^ pifce for filing „_. 14,113 t »^ when required. 1 i, ,_^i— ^-— „___j. — : 21 -iaeturns of inlformation, forms for____'___^_^____.;_i_£__lj.__^_L^ 113 ^ -payments ,^0 be accounted for_' ': '.S^-^ .__ 112 E", required ! — ^ — — __ — ; . 112, 114 ife salary and allowances : '^ — -, _ — 115 S.,, Salary, amounts to be accounted tor-^ . : __ — 67 compensation other than money_v 63, 115 Sales of property ^- 32, 33, 34r^7, 39, 40, 46, 47, 50, 52, 55, 94 ' Surtax '- — — . 1 > 21 Tax, rates of i-i 21 Taxable year, defined _ ^ 9 change to fiscal yea:r __-^,: ■ 32' 'Taxes, deductible.— ,— _„ _l::i- — 68 (3), 76, 90, 92 income payments not deductible — — 91 on bank stock 61 o —1 » ' — TREASURY DEPARTMENT UNITED STATES INTERNAL REVENUE SERVICE INCOME TAX PRIMER FOR FARMERS ( REVISED ) PREPARED BY THE BUREAU OF INTERNAL REVB^^<^ -^ FOR THE INFORMATION AND ASSISTANCE ^S^<^^Op OF TAXPAYERS JANUARY 1, 1921 WASHINGTON GOVERNMENT PRINTING OFFICE 1921 INCOME TAX PRIMER FOR FARMERS. RETURNS. 1. Who is a farmer? The term " farmer " as used in this primer embraces per- sons operating stock, dairy, poultry, fruit, or truck farms, plantations, ranches, or any land used for fruit raising or agricultural purposes. 2. I am a farmer. Am I required to make a personal income tax return for 1&20? Yes; if your total net income for the taxable year was $1,000 or over, unless you were married and living with your husband or wife on the last day of your taxable year, in which case you should file a return in the event your total net income equaled or exceeded $2,000. 3. To what personal exemptions am I entitled? If on the last day of your taxable year you were a single person you are entitled to an exemption of $1,000 ; if you were married and living with your wife or husband, or were the head of a family, you are entitled to an exemption of $2,000. You are also entitled to a further exemption, whether single or married or the head of a family, of $200 for each person (other than husband or wife) dependent upon and receiving his. chief support from you, if such dependent person is under 18 years of age, or, regardless of age, if incapable of self-sup- port because mentally or physically defective. 4. Wife dies July 1, 1920, leaving no children. Is the man entitled to a $2,000 or $1,500 deduction as head of a family? He is entitled to $1,000 jaersonal exemption as a single man. The joint personal exemption may not be claimed on account of husband or wife who dies during the taxable year. The status of the taxpayer on the last day of his taxable year determines his right to an additional exemption and to a credit for dependents. If then he is the head of a family or is married and living with his wife, the personal exemption of $2,000 may be taken. If then he is the chief support of a dependent who is under 18 years of age, or incapable of self- support because mentally or physically defective, the credit of $200 may be taken. Otherwise he is only entitled to a per- sonal exemption of $1,000. 5. The child dies July 1, 1920. Is the head of a family entitled to a $200 or $100 deduction on that child ? The head of the family is entitled to no credit for this child in his income tax return. See answer to question No. 4. (3) 6. On October 10, 1920, 1 married a Avidow with one dependent child 3 years old, both of whom I have supported since marriage. To what exemption am I entitled ? To an exemption of $2,000 for yourself and wife and an additional amount of $200 for the child. 7. A widower having a child under 18 years of age pays board in a private family for himself and child. Is he entitled to a personal exemption of $2,200, as the head of a family with one minor child? If not, what exemption is he entitled to? Ex- plain what is the head of a family. («) A widower with a child under 18 years of age, paying board in a private family for himself and child, is entitled to the exemption of $2,000 as the head of a family and also to the additional exemption of $200 for such dependent child. (b) A "head of a family" is a person who actually sup- ports and maintains in one household one or more individuals Avho are closely connected with him by blood relationship, relationship by marriage, or by adoption, and whose right to exercise family control and provide for these dependent in- dividuals is based upon some moral or legal obligation. 8. A child under 18 years of age has an independent income ; should this child make an individual report or must the income be included in the parent's return? This case is governed by section 223 of the Revenue Act of 1918, and Article 403 of Kegulations 46. The rule is that a minor is required to render a return of income if he has a net income of his own of $1,000 or over for the taxable year. If the minor has been emancipated by his parent his earnings are his own income and such earnings, regardless of amount, are not required to be included in the return of the parent. In case the aggregate net income of the minor from any property he possesses and from any funds held in trust for him by a trustee or guardian and from his earnings in case he has been emancipated, is at least $1,000, a return as in the case of any other individual must be made by him, or by his guardian, or some other person charged with the care of his person or property for him. An exception is made in case of a minor having earnings who has not been emancipated by his parent, and the parent appropriates or may appropriate his earnings. In such a case the earnings are income of the parent and not of the minor. It should be borne in mind, however, that in the absence of proof to the contrary, a parent Avill be assumed not to have emancipated his minor child and must include in his return any earnings of the minor. 9. What is meant by the taxable year 1920 ? The calendar year 1920 or any fiscal year ending during the calendar year 1920. 10. What does the term fiscal year mean ? An accounting period of 12 months ending on the last day of any month other than December. 11. Upon what period of time shall my 1920 income tax return be based 'i Upon the calendar year 1920 unless you have an established accounting period which is a fiscal year as defined in the answer to question 10. 12. My principal crop is tobacco. I keep books of account which accurately show my true gains and profits, take annual inven- tories, and close my books on March 31. My tax return for 1919 covered the calendar year 1919. Upon what period shall I malie a return for 1920 ? Since your annual accounting period is the fiscal year end- ing March 31, you should make a return showing your true net income from April 1, 1919 to March 31, 1920. As this return should have been filed not later than June 15, 1920, yovi should attach an affidavit to it stating the reasons why it was not filed on time. If you were keeping your books on this basis during 1918 and 1919, an amended return covering the period from April 1, 1918 to March 31, 1919, must also be filed, accompanied by an affidavit. Your returns in the future should then be filed for your fiscal year, and the one covering the period from April 1, 1920 to March 31, 1921 must be filed not later than June 15, 1921. Permission to change your accounting period for income tax purposes may be obtained through the collector for your district, if such request is made (a) not later than 30 days prior to the due date of your return on the present basis on which your accounts are kept, and (b) not later than 30 days prior to the due date of your separate return for the period between the close of your exist- ing taxable year and the date designated as the close of the proposed taxable year. 13. Can a return be made for a period of more than 12 months? No. 14. Where should my personal return for the year 1920 be filed? "With the collector of internal revenue for the district in which you have your legal residence or principal place of business. If your legal residence is located in one collection district and your principal place of business in another, it is optional with which collector your return shall be filed; but for administrative reasons the Commissioner of Internal Rev- enue desires that it be filed with the collector of the district in which your legal residence is located. 15. When should my return for calendar year 1920 be filed with a collector of internal revenue ? On any day after December 31, 1920, but not later than March 15, 1921. 16. Will failure to file my return within the time prescribed by law render me liable to any penalty ? Yes. You would be liable to a penalty of 25 per cent of the amount of the tax due from you, unless your failure to file the return on time is satisfactorily shown to be due to a reason- able cause. You would also be liable to an additional penalty of not to exceed $1,000, unless you refused to make a return when called upon to do so, in which case you would be liable to a penalty of not to exceed $10,000, and imprisonment for not more than one year, or both, together with the costs of prosecution. 17. May an extension of time beyond March 15, 1921, he obtained for the filing of my 1920 return? Yes. If, on account of illness or absence from home you are unable to file your return within the time prescribed by law, you may obtain an extension of 30 days if a request there- for is made to the collector of your district within the period covered by the extension asked for. In this request you must state the reason why the return can not be filed within the time prescribed by law. 18. Would a personal return made by an agent for and in my behalf be accepted? If, by reason of illness, absence, or nonresidence a taxpayer is unable personally to make his return he may appoint an agent to act for him and the return executed by the agent will be accepted if he makes affidavit that he has sufficient knowledge to make a complete and accurate return for his principal. Such agent assumes responsibility for making the return properly, and incurs liability to the specific penalties provided for erroneous, false, or fraudulent returns. 19. My net income for 1920 was $3,000. What form should I use in making my individual income tax return for that year ? You should use Form 1040-A (Eevised), the form pre- scribed for individuals whose net incomes for the taxable year were not more than $5,000. An individual whose net income for the taxable year was more than $5,000 shovild use Form 1040 (Revised). 20. Where can I get a blank form upon which to make my return? From the collector of internal revenue for your district. The collector will endeavor to have such forms sent to you, but failure to receive one will not excuse you from making a return. If you do not receive one, it is your duty to request the collector to furnish you with a blank form. RATE OF TAX. 21. What personal income taxes are imposed upon income received during the calendar year 1920? The normal income tax on the income of every individual citizen or resident of the United States is at the rate of 4 per cent upon the first $4,000 of the net income in excess of credits allowed (see question 111), and 8 per cent upon the excess over that amount. A person receiving a net income in excess of $5,000 is liable to a surtax of 1 per cent upon income from $5,000 to $6,000 ; 2 per cent upon income from $6,000 to $8,000 ; 3 per cent upon income from $8,000 to $10,000, etc. Assuming that a man's net income for 1920 was $9,000 and that he was entitled to $2,800 credits, his tax would be computed as fol- lows : NOBMAL TAX. Income fronj .$2,800 to .$6,800, at 4 per cent .$160 Income from .$6,800 to .$9,000, at 8 per cent 176 SrKTAX. Income from $5,000 to $6,000, at 1 per cent 10 Income from .$6,000 t<] $8,000, at 2 per cent 40 Income from .$8,0(X) to .$9,000, at 3 per cent 30 Total tax 416 EXEMPT ITEMS. •22. What income of an individual is exempt from income tax ? (a) The proceeds of life insurance policies paid upon the death of the insured to individual beneficiaries or to the estate of the insured ; (h) The amount received by the insured as a return of premium or premiums paid by him under life insurance, en- dowment, or annuity contracts, either during the term or at the maturity of the term mentioned in the contract or upon surrender of the contract; (c) The value of the property acquired by gift, bequest, devise, or descent (but the income from such property shall be included in gross income) ; (d) Interest upon (1) the obligations of a State, Territory, or any political subdivision thereof, or the District of Colum- bia ; or (2) securities issued under the provisions of the Federal Farm Loan Act of Jvily 17, 1916 ; or (3) the obligations of the United States or its possessions, except as follows: In the case of obligations of the United States issued after Sep- tember 1, 1917, the interest shall be exempt only if arid to the extent provided in the respective acts authorizing the issue thereof as amended and supplemented, and shall be excluded from gross income only if and to the extent it is wholly exempt from taxation to the taxpayer; (e) Amounts received, through accident or health insur- ance or under workmen's compensation acts, as compensation for personal injuries or sickness, plus the amount of any damages received, whether by suit or agreement on account of such injuries or sickness; (/) So much of the amount received during the present war by a person in the military or naval forces of the United States as salary or compensation in any form from the United States for active services in such forces, as does not exceed $3,500. 23. Am I required to make any return of income wholly exempt from income tax? The law requires that every person owning any of the obli- gations, securities, or bonds enumerated in clauses (1), (2), and (3) of paragraph (d) above shall submit a statement showing the number and amount of such obligations, securi- ties, and bonds owned by him and the income received there- from. There is a place on the return form for showing such information. NET INCOME. 24. What is meant by the term " net income " ? Net income means your total gross income, not including income exempt from the tax by law, less the general deduc- tions allowed by law. 25. What is the proper basis for computing net income of farmers? Approved standard methods of" accounting will ordinarily be regarded as clearly reflecting income. The statute provides that the net income shall be computed in accordance with the method of accounting regularly employed in keeping the booiis of the taxpayer, but if the method employed does not clearly reflect the income, the computation shall be made upon such basis and in such manner as in the opinion of the Commis- sioner does clearly reflect the income. 26. Heretofore I have made my income tax returns upon the cash' receipts and disbursements basis. May I render my return for 1920 upon the accrual basis with inventories? Farmers may change the basis of their retui'ns from that of receipts and disbursements to that of an inventory basis, which necessitates the use of opening and closing inventories for the year in which the change is made, provided there is sub- mitted with the return for the current taxable year an adjust- ment sheet for 1917 and each year thereafter (prior to the year in which the change is made) based on the inventory method, upon the amount of which adjustments the tax shall be assessed and paid (if any be due) at the rate of tax in effect for each respective year. Where it is impossible to ren- der complete inventories from the beginning of the taxable year 1917, the department will accept estimates which in its opinion substantially reflect the income, on the inventory basis, for the year 1917 and thereafter, but inventories must not include real estate, buildings, permanent improvements, or any other assets subject to depreciation. Because of the difficulty of ascertaining actual cost of live stock and other farm products, farmers may value their in- ventories according to the farm-price method, which contem- plates valuation of inventories at market, less cost of market- ing. GROSS INCOME. 27. What is included in " gross income " ? Gross income includes gains, profits, and income derived from every source whatever, unless wholly exempt from in- come tax. 28. What items must I report in my return in figuring mj' income- tax liability? All gains or profits, and income derived from the sale or exchange of property of any description, including farm prod- i;cts and live stock. The gain or profit derived from sale of animals purchased and used solely for draft or work pur- poses, or solely for breeding purposes, should be reported as income. There must also be included in gross income amounts received for board of persons, board and pasturage of animals, labor of men and teams, and hire or use of machinery. 29. I raised a large crop of wheat in 1920, but did not sell it until after the close of the year. Should I include the proceeds from the sale of this wheat in my return for 1920 ? No; unless you keep your books upon an accrual basis, in which case the wheat would be reported in your closing in- ventory for 1920. 30. 1 have always kept my accounts upon the basis of cash receipts and disbursements. In 1920 I sold wheat which was raised in 1917, 1918, and 1919. ilay I deduct the expense of raising this wheat in computing my profits, or must I incbide in gross income the total amount received for my wheat ? Where the cost of stock or farm products purchased in pre- vious years for resale or the expense of raising stock or prod- ucts on the farm has been claimed as a deduction or taken into consideration in ascertaining the farmer's liability to income tax for some year prior to 1920, the entire proceeds of the sale are to be returned as income for the year in which the sale was made, for the reason that the farmer having once received the benefit of the deduction is not again entitled to it. If, however, such cost or expense has not been claimed as a deduction or has not been, taken into consideration in ascer- taining the farmer's liability to income tax for a previous year, by reason of the income of the farmer for the pievious year not being of sufficient amount to permit of the deduction of such expense or of its being so taken into consideration, the amount of such cost or expense may be deducted from the selling price of the stock or farm products and the difference only returned as gross income. 31. I rent a farm on shares. When is my share of the crops and stock to be taken into consideration m making up my return ? In the year in which they are sold or converted into cash or the equivalent, unless your books are kept on an accrual basis and inventories are taken. 32. How am I to determine the amount of gain or profit derived from sale of property which is returnable for income-tax purposes ? If you acquired the property sold prior to March 1, 1913, you should take its fair market price or value of that date, add thereto all amounts subsequently expended in making im- Srovements, deduct therefrom depreciation sustained between [arch 1, 1913, and date of sale, and the difference between the result obtained and the selling price is the amount to be re- ported under gross income. If you purchased the property on or after March 1, 1913, the difference between its cost plus all amounts subsequently expended for permanent improvements less depreciation sus- tained for years prior to 1920 and its selling price is to be returned. If the property came to you on or after March 1, 1913, as an inheritance, the difference between the appraisal value placed upon it at the date of the death of the testator plus all amounts subsequently expended for permanent improve- ments less depreciation as above indicated and its selling- price is to be returned. 33. How is the value as of March 1, 1913, of property sold in 1920 to be determined? No method of determining this value can be stated which will adequately meet all circumstances. What that value was is a question of fact to be established by any appropriate evi- dence available in the particular case. 34. Please advise what report should be made on a farm sale made by contract in 1920 on which $1,000 was paid and the balance oJE purchase money to be paid March 1, 1921 ; after January 1, 27227°— 21 2 10 1921, a mutual agpeement was entered into whereby the con- tract was canceled by the return of the $1,000 and a further consideration of $1,000 paid by the seller for the cancellation of the contract. Would this be considered a repurchase of the farm, or would it be considered a loss of $l,00i0 paid for can- cellation of the contract in the 1921 income ? (a) Assuming that the original payment of $1,000 was made by the purchaser merely as a pledge for good faith in per- formance of the contract, the transaction is considered incom- plete and as not affecting income during 1920. (h) The $1,000 which the seller paid in 1921 to be relieved from the terms of the original contract is a capital investment and should be treated as additional cost of the farm. 35. A man in 1920 entered into a contract for the sale of his farm, the contract price being $40,000. His profit was $10,000. He received $800 down on contract, and was to receive $10,000 on March 1, 1921, $10,000 on March 1, 1922, and $9,200 on March 1, 1923, the deferred payments being secured by a mortgage on the land; deed and possession were to be given on March 1, 1921. How should the profit be returned for income-tax purposes ? This transaction is a contract for sale in the future as dis- tinguished from a present sale, as only a small cash payment was made and the deed and possession were not to be delivered until March 1, 1921. The $800 is held to be a return of capital, no part of which is taxable income for 1920. Inasmuch as the sale will be consummated on March 1, 1921, the entire profit from the transaction should be reported as income for the year 1921. Taxable income will be received to the extent that the contract price of $40,000, plus the amount of any depreciation sustained on the buildings upon the land (exclusive of the tax- fayer's residence), since March 1, 1913, exceeds the cost of the arm (or its fair market value as of March 1, 1913, if it was acquired prior to that date), plus the cost of any permanent improvements made by the seller since March 1, 1913, and not claimed by him in any return of income. 36. An individual buys a section of Canada land under contract dur- ing the prewar period. During 1920 he forfeited one-half section to the Canadian Government suffering loss of all pay- ments which had been madef on the land upon returning the land. After this the party sells out under contract, his right to the other half section, receiving a cash payment on the land. Would the amount for which the half section of land sold under contract be a profit ? The individual who purchased a section of Canadian land during the prewar period and during 1920 forfeited one-half section to the Canadian Government, thereby suffering loss of all payments which had been made on this half section may deduct as a loss for the year in which the property was for- feited, the cost or fair value as of March 1, 1913, if acquired prior thereto. Upon the sale by him of the other half section he should report as income the excess of the selling price over the cost to him of such half section or its fair market value as of March 1, 1913, if acquired prior thereto. 11 37. A contract to sell a farm was made in 1920, payment of $1,000 down, balance to be paid in 1921, upon possession and deliv- ery of deed. What part of cash payment goes in 1920 return? None. Profit on the sale should be returned as income for 1921. However, if the sale is not completed and the $1,000 is forfeited, the seller should return that as income. :>S. In 1914, A bought 160 acres of land at $175 an acre. Recently B bought 160 acres for $375 an acre with the idea of putting the same on the market at once. There are no buildings on either parcel of land. B finds upon investigation that if he had A's 160 acres of land he could sell the. same. Accord- ingly he takes up the matter with A. It so happens that the land owned by B is in a territory where A had formerly lived and for that reason he accepts the proposition of B's " trading even up." In the contract which is made by A and B it is specified that they are trading the land on a basis of $425 an acre, which is assumed to be its actual market value. In the whole transaction A does not receive a cent in cash and in fact will be at some expense because of having to move. Should A have to pa}' an income tax on this transaction? Yes. The difference between the cost to A of the land origi- nally' held by him ($175 per acre) and the value of the land received in exchange ($425 per acre) represents profit to A and is subject to income tax. The difference between the cost to B of the land originally held by him ($375 per acre) and the value of the land received in exchange ($425 per acre) represents profit to B and is sub- ject to income tax. 39. On August 1, 1920, A sells his farm to B on contract, complete payment to be made, deed and possession to be delivered on March 1, 1921. On December 1, 1920, A buyfe his own farm back giving B a profit of $5,000 and destroys the original con- tract. No deed is ever executed. Is A liable to an income tax on the profit he had made in the original deal? If not, then is the $5,000 he paid to get the contract released loss that can be deducted in computing his income for the year? xV made no profit on the original transaction. The contract was clearly executory at that time, since its completion was contingent upon the conveyance of title and deliverance of property on March 1, 1921. The $5,000 payment by A, over and above the consideration named in the first contract, was, in fact, an amount paid by A to be relieved from the terms of the contract, and is additional cost of the property and should be treated as a capital investment. 40. A sells his farm to B in August, 1920, for $10,000, receiving a cash payment of $2,500, balance to be paid March 1, 1921, when deed is to be delivered. Is any part of the tax on profits in this deal to be included in A's return for 1920? Or is it all to be included in his return for 1921 ? The profit on the entire transaction should be reported by A as income for 1921. If the contract is canceled and the $2,500 is forfeited that amount is taxable income to A. 41. A and B are. operating a farm in partnership and for that pur- pose sell the personal property at public sale. A buys the most 12 of the property, in which he already owns a half interest. Must an income tax be paid by the partnership on the total amount of the sale in view of the fact that A already owned a half interest in the property? For the purpose of ascertaining the gain or loss from the sale of property the partnership should report the difference between the cost of the propertj or its fair market value as of March 1, 1913, if acquirecl prior thereto, and the sale price. The fact that one of the partners purchased the property from the partnership would not affect the profit or loss to be re- ported by the partnership on Form 1065. Under the Revenue Act of 1918 partnerships as such are not subject to income or profits tax. 42. Two neighbors own farms and wish to exchange, without any money consideration except the land traded, it simply being a matter of location suiting each party better. Would this be considered a sale by each party, subject to profits based on 1913 values? Yes. Such transaction is considered a sale by each party and the basis for computing the profit on each sale is the cost of the farm or the fair market value as of March 1, 1913, if acquired prior thereto. Proper adjustment should be made for any depreciation sustained on buildings which are on the farms, and the cost of any improvements. 43. A and B each owned an 80-acre farm. A wanted to buy a 67- acre farm which was adjoining the 80 acres owned by B so they traded one 80 for the other 80 and neither party re- ceived any cash consideration, having made an even trade. Should this trade be included in the returns of either A or B, and if so, how should it be computed? In the exchange of properties having the same market value, gain or loss is realized by each owner to the amount of the difference between the fair market value at the time of the exchange of the property received and the cost or fair market value as of March 1, 1913, if acquired prior thereto, of the property exchanged plus the cost of any permanent improvements and less any depreciation sustained. 44. A exchanges farms with B as follows : A gives farm as first pay- ment of $40,000, same having been acquired after ilarch 1, 1913, for $20,000. Possession given on contract to run for five years at which time the balance due which is $60,000, is paid and deed given. When and how should return be made ? A has made a profit of $20,000. B is held to have received cash and property equal to the value of $100,000 in exchange for his farm and he is required to return as taxable profit for the year in which the exchange was made the excess of the amount received for his farm, over the fair market value of the farm as of March 1, 1913, if acquired prior thereto, or its cost if acquired on or after that date. Proper adjustment must be made for depreciation sus- tained and also for the cost of any improvements. 45. A farmer sells his farm for $15,000, received $10,000 cash and a city property which will not sell for more than $3,000, that amount being the most offered for it. The fair market value of 13 the farm on March 1, 191:3, was $15,000, and he acquired it prior to that date. How will he treat this transaction in his report, as a sale for $13,000, or a sale for $15,000? This is in effect a modification of the original contract of sale, by which seller agrees fo accept a consideration of $13,000, instead of the stipulated price of $15,000. The farmer there- fore suffers a loss of $2,000. 46. In April, 1920, A agreed to sell B his farm for $10,000, payment in full to be made in June, when B was to receive title and take possession. A died in May. Sale was completed by executor. Should the profit or loss be reported in the return for decedent or the return for the estate ? The executor should account for the profit or loss in the return for the estate covering the period from the date of death to the close of the taxable year. 47. A sells a farm' on contract in 1920 for $25,000, deed and posses- sion to be given March 1, 1921 ; $2,000 is received by A during 1920 on this contract as first payment; is this $2,000 income for 1920 or 1921? The contract is executory during 1920, hence no part of the $2,000 is taxable in A's hands for that year if it does not exceed the cost or fair market value as of March 1, 1913, if acquired prior thereto. If the contract is canceled and the $2,000 is forfeited, that amount is taxable income to the seller. That portion of the $2,000 representing a profit on the transaction should be reported (with the balance of the profit realized) by A as taxable income for the year 1921. 48. Where two persons own pi'operty in undivided interests and ■wish to divide said property by each taking his own share, would this be considered a sale of property and subject to income tax based on 1913 values? No. 49. An endowment insurance policy issued by a certain company has no cash value until the end of the third year. If such a policy were issued in the year 1911 (and therefore having no value March 1, 1913), could the insured deduct the premium paid in the years 1911 and 1912 from the amount received from the policy when it matured as an endowment, or must he deduct only the premiums paid since March, 1913? The aggregate amount of the premiums paid during the lifetime of the policy may be deducted from the amount re- ceived from the proceeds when it matured, and the difference between these two amounts represents income to be reported for the year in which the proceeds of the policy are received. 50. A deeds his farm to his son B. The consideration in the deed recites that B shall pay $5,000 to his brothers and sisters and $400 per year to the father during his life. Shall this $400 be considered payment on the purchase price ? The sum of $5,000 paid to the brothers and sisters and the $400 paid annually to the father in accordance with the con- sideration in the deed transferring the title to the farm from the father to the son should be treated as payments on the purchase price of the farm, no portion of which is deductible hj the son. 14 61. An estate, after debts have been paid, goes to the widoAV. Execu- tor sells property, both real and personal, and after debts are paid Avidow has about $2,000 left, total proceeds from ]3rop- erty was $4,400. Does executor have to file income-tax report on said sstle for estate, and does widow pay on her $2,000 ? Where an executor sells the property of an estat-e for more than its value at the death of the decedent, the excess is in- come to the estate and, if with other income of the estate, the amount equals or exceeds $1,000, a return should be filed and any tax shown to be due thereby should be paid by the execu- tor. The estate is entitled to an exemption of $1,000. The amount of money or the value of the property received by an individual under a will or under the statutes of descent and distribution is exempt from tax. Therefore, the amount received by the widow from the estate of her husband is exempt from tax. 52. A widow acting as administratrix for the estate of her husband was, during the period of administration, forced by circum- stances to sell at public auction all stock and implements on the farm. The stock had been raised by the deceased husband. Everything on the place had been appraised by three disin- terested appraisers, as required by the law governing the settlement of estates. Would the widow be allowed to deduct from the proceeds of the sale the amount at which the ap- praisers had valued the stock? Would she not be justified in considering it as capital in place of income ? The profit or loss for purposes of income tax on the sale of property of the estate sold by the administratrix will be the difference between the selling price and the vahie of the property as of the date of the husband's death, not the value appraised for the purpose of the sale, unless the sale takes place immediately following the death of the husband. The appraised value for the purpose of the Federal-estate tax or the State- inheritance tax may be considered as the value of the property at the date of the death of the husband, for the purpose of determining the profit realized from the sale. 53. Can a farmer deduct the cost of breeding stock from the proceeds of his public sale if he has not taken his depreciation on said breeding stock in previous years? A farmer is required to report as income the excess of the selling price over the cost of breeding stock, less depreciation sustained thereon, irrespective of whether the depreciation was actually claimed in previous returns. 64. A farmer was awarded $4,000 damages by the appraisers on ac- count of the passage of a drainage ditch through his farm. The amount being approximately $100 per acre for the land destroyed. The value of the land was at least $250 per acre. Since the amount was awarded on the showing that his farm was depreciated in value to the amount of $4,000, should the amount received be shown as income in the 1920 return; and if so, should credit in the amount be given elsewhere as a "property value depreciation"? May he deduct $6,000 as damages, the same being the difference between the fair market value and the amount received? 15 In this case the damage is not limited to the removal of the dirt and the passage of the drainage ditch, but involves dam- ages to the farm as a whole. The profit or loss from the transaction should be reported for the year during which the farm is sold or otherwise disposed of. The basis for the profit or loss is the cost of the farm if acquired subsequent to March 1, 1913, or the fair market value as of that date if ac- quired prior to. March 1, 1913, due allowance being given to j)ermanent improvements and depreciation. 55. What part of a public sale goes in subject to income tax? Must machinery be valued at a depreciated figure in arriving at the taxable income, though depreciation had never been taken? In the case of property sold at a public sale, the profit to be returned for income tax purposes is the amount by which the selling price plus the amount of any depreciation sus- tained on the property since March 1, 1913, exceeds the cost of the property (or its fair market value as of Mar. 1, 1913, if it was acquired prior to that date) , plus the cost of any per- manent improvements made by the seller since March 1, 1913, and not claimed as a deduction by him in any return of income. In computing the profit on depreciable property, the amount of depreciation sustained since March 1, 1913, must be con- sidered, whether or not such depreciation has been claimed as deduction from gross income in former returns. 66. I sold some shares of bank stock in 1920 for $5,000. This stock was purchased by me in 1914 for $3,000. I have paid $400 interest in past years upon indebtedness incurred in the pur- chase and carrying of the stock. How much of the $5,000 received by me must I include in gross income ? The interest paid by you was a deductible expense from gross income in income tax returns for the years in which paid or accrued. You are therefore required to include in gross income of 1920 the entire difference between the cost and the sale price, or $2,000. 57. If a farmer exchanges produce for merchandise, groceries, etc., is the value of siich merchandise to be returned for tax pur- poses ? Yes; the price placed by the merchant upon the goods ex- changed for farm produce is to be included as income in the farmer's return. 58. During the year 1920 $60 was placed to my credit by banks in which I had money deposited, which amount represented interest upon my deposits. Does this interest, which was not received by me in cash or withdrawn from the bank, constitute a part of my gross income for 1920? Yes. 59. I purchased a 6 per cent $100 coupon bond at its face value, plus $1.60; that is, three months' accrued interest. Three months later I detached a coupon therefrom and collected $3 interest. Must the entire amount of interest received be re- turned as income? No. Eeport only so much interest as accrued after the date of your purchase." It is the seller's duty to report the balance. 16 60. Do the iJensioiis and retired pay of «x-offieers and men of the United States military and naval for-ces constitute items of taxable income? Yes. Allotments, family allowances, compensation, insur- ance, etc., paid under the provisions of the War Eisk Insur- ance Act ol September 2, 1917, as amended, are, however, ex- empt from taxation. 61. I own stock in a bank which, under a State law, is required to pay the taxes assessed against such stock. How is this matter to be handled for income-tax purposes? The proportionate part of the entire amount of taxes so paid by the bank, which is properly chargeable against the number of shares held by you, should be reported, for addi- tional tax purposes, in your personal return as a dividend, and then claimed as a deduction under the heading of " Taxes." 62. Are amounts placed to the credit of a shareholder in a building and loan association subject to income tax ? Yes, if credited and made available to the shareholder. 63. Where service is rendered for a stipulated price, wage, or salary, and paid with something other than money, shall consideration be given the transaction for income-tax purposes? Where services are paid for with something other than money, the fair market value of the thing taken in payment is the amount to be inckided as income. If the services wer* rendered at a stipulated price, in the absence of evidence to the contrary, such price will be presumed to be the fair value of the compensation received. 6-1:. I market my dairy products through a cooperative association and during the year 1920 I received $300 in dividends from the association. Am I required to include these dividends in my gross income, and are they exempt from normal tax the same as dividends received upon my shares of bank stock? All dividends from cooperative associations must be in- cluded in gross income. They are not exempt from normal tax for the reason that the association itself is not taxed upon its earnings. The dividends simply represent additional amounts accruing to you upon sales through the association. 65. In rendering my 1915 return I claimed a deduction to cover a debt I then believed to be absolutely worthless. In 19i?(), the debtor has discharged part of his obligations. How should I treat this payment for income-tax purposes? Consider it as an item of income and include this amount under " Gross income " in your 1920 return. 66. I had cattle, which I raised and which were worth $500, killed by lightning. The cattle were insured and I received $500 in- surance money. Must this be included in income? Yes. For income-tax purposes the receipt is the equivalent of a sale. It constitutes income to you. 67. Are there any items of income, other than those above suggested, which should be included in gross income ? Income from every source not wholly exempt from income tax (see answer to question Xo. 22) must be included. These include income fi'om salaries and wages, rents, intei'est on 17 notes, mortgages, etc.; also income from trustees and partner- ships, royalties from mines, oil and gas wells, dividends on stocks, etc. DEDTJCTIONS FROJt GROSS INCOME. What deductions are allowed from gross income in arriving at net income ? The Revenue Act of 1918 allows the following deductions from gross income in ascertaining net income: (1) All the ordinary and necessary expenses paid or in- curred during the taxable year in carrying on any trade or business. (2) All interest paid or accrued within the taxable year on indebtedness (except on indebtedness incurred or continued to purchase or carry obligations or securities the interest upon which is wholly exempt from taxation). (3) Taxes paid or accrued within the taxable year except Federal income, war profits, and excess profits taxes and taxes assessed against local benefits of a kind tending to increase the value of the property assessed. (4) Losses sustained during the taxable year and not com- pensated for by insurance or otherwise if incurred in trade or business. (6) Losses sustained during the taxable year and not com- pensated for by insurance or otherwise, if incurred in any transaction entered into for profit, though not connected with the trade or business. (6) Losses sustained during the taxable year on property not connected with the trade or business if arising from fires, storms, shipwrecks, or other casualty, or from theft, and it not compensated for by insurance or otherwise. (7) Debts ascertained to be worthless and charged off with- in the taxable year. (8) A reasonable allowance for the exhaustion, wear, and tear of property used in the trade or business, including a reasonable allowance for obsolesence. (9) In the case of mines, oil and gas wells, other natural deposits, and timber, a reasonable allowance for depletion and for depreciation of improvements according to the pecu- liar conditions in each case, based upon costs, including cost of development not otherwise deducted. (10) Contributions or gifts made within the taxable year, to corporations organized and operated exclusively for re- ligious, charitable, scientific, or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private stockholder or individual, or to the special fund for vocational rehabilitation, authorized by section 7 of the Vocational Re- habilitation Act, to an amount not in excess of 15 per cent of the taxpayer's net income as computed without the benefit of this paragraph. 18 69. What items are not deductible from gross income? Section 215 of the act provides: That in computing net income no deduction shall in any case be allowed in respect of— (a) Personal, living, or family expense; (b) Any amount paid out for new buildings or for perma- nent improvements or betterments made to increase the value of uny property or estate ; (c) Any amount expended in restoring property or in mak- ing good the exhaustion thereof for which an allowance is or has been made ; or (d) Premiums paid on any life insurance policy covering the life of any officer or employee, or of any person financially interested in any trade or business carried on by the taxpayer, when the taxpayer is directly or indirectly a beneficiary under such policy. ORDINARY AND NEOESSART EXPENSES. 70. What ordinary and necessary expenses are deductible ? All amounts actually paid for labor in preparing land for a crop, and the cultivation, harvesting, and marketing of the crop ; the cost of the seed and fertilizer used ; the amounts expended for labor used in caring for live stock and the cost of the feed purchased ; the amounts paid in making repairs to farm buildings, but not the dwelling house ; repairs to fences, farm machinery, etc.; the cost of material and farm tools which are used up in the course of a year or so, such as pitch- forks, spades, and similar tools, but not including farm imple- ments, machinery, wagons, and other vehicles which are re- garded as capital investments; and the amount of rent paid for a farm may also be claimed. If books are kept upon an accrual basis, such expenses are deductible for the year or years in which they accmed. Amounts paid as the purchase price of an automobile, even though used wholly or partly in the business, are not deduc- tible because such amounts represent capital investments. A reasonable allowance for depreciation may be claimed, based upon a portion of the cost in the ratio that the use of the automobile for business purposes bears to its use for pleasure or for personal and family convenience. 71. Are any payments for permanent improvements to my farm deductible ? No ; they are not expenses ; they are investments of capital. 72. I purchased in 1920 a mowing machine and cultivator, at a cost of $150, and small hand tools, at a cost of $60. Can these amounts be deducted from gross income? The cost of the hand tools may be deducted as an ordinary expense. The purchase price of the cultivator and mowing machine constitutes investment. They have an estimated life of more than one year, and payment for them should be con- sidered capital expenditures. A reasonable amount for depre- ciation of the machines may be deducted from gross income. 19 73. Can payments of premiums on insurance policies for insurance against fire, hail, tornado, or windstorm be deducted? The cost of insurance of crops and of all farm buildings ex- cept the house in which the owner lives is deductible. 74. Can the cost of gasoline, repairs, and upkeep of an automobile or other vehicle used partly for business purposes and partly for pleasure be deducted? If the automobile is used one-half of the time or one-third of the time for business purposes, the same fractional pa it of the cost of repairs, etc., may be deducted as a necessarj- expense. No deduction may be made if the automobile is used solely for the pleasure or personal convenience of the taxpayer or his family. 75. Are the items of expense incurred by me during the calendar j^ear in connection with a farm which I lease to another on a cash or crop-share rental basis, such as repairs to fences, farm buildings, etc., allowable as deductions? Yes ; deductible for the year in which paid if your books are kept on a cash, receipts and disbursements basis. If your books are kept on an accrual basis these expenses are deductible in the year in which they accrued. 76. A tenant, under the terms of a lease, is obliged to pay a cer- tain cash rental and all taxes assessed against the property and keep it insured. May he claim as a business expense the aggregate amount of rental, taxes, and insurance premiums paid ? • Yes, if the property is used bj'^ the tenant for business or trade purposes. 77. I own stock in a corporation which in 1920, assessed each of its stockholders $50 on each share held. Can the amount paid • , , by me be claimed as a deduction ? No. Assessments made by a corporation on its capital stock are regarded as further investments of capital and do not constitute an allowable deduction in the return of the in- dividual. 78. Can the value of a crop paid to the landlord by the tenant be deducted as an expense by the tenant? No. It is not a part • of the expenses paid by him. He may deduct all amounts paid by him in raising the crop. 79. I employ a man to assist me in operating my farm and a woman to assist about the house. Is the compensation paid to each allowable as a deduction ? Unquestionably, as to the amount paid to the male em- ployee, but a line must be drawn as to the amount paid to the female employee. If her time is employed entirely in taking care of milk and cream produced for sale, in the pro- duction of butter, cheese, etc., the care of milk cans and churns, or, if a separate table is maintained for laborers em- ployed on the farm and her services are used entirely in the preparation and serving of the meals furnished the laborers and in caring for their rooms, the compensation paid her con- stitutes an allowable deduction. If, however, she is employed to assist in caring for the farmer's own household, no deduc- tion can be claimed. 20 80. If I employ a minor son or daughter to assist me in my business or trade and I pay a salary or wage for such assistance, may I claim the amount as a deduction? No. If, however, the son or daughter has attained his or her majority or has been emancipated, the amount of compen- sation j)aid for his or her services may be so claimed. (See question No. 8.} 81. In purchasing fertilizers I gave notes in payment which I had not paid at the close of the year. Should the cost of the fer- tilizers be deducted in the year in which I gave the notes or in the year in which I paid them ? Paj^ment by a note is the equivalent of a payment in cash. Therefore, the cost of the fertilizers should be deducted from income in the year in which the notes were given. 82. I pay dues to a county social club. Are these payments de- ductible ? No ; such dues are a personal expense rather than a business expense. 83. In certain States fruit growers, ranchers, and farmers are share- holders in irrigation companies, which are mutual, in character, and they are often assessed, in proportion to their holdings of stock, for sufficient amounts to make repairs to tha irrigation system, cleaning out pipes, laterals, etc. Can such assessments be claimed as deductions under the head of business expenses ? Yes. Where the purpose of the assessment is merely to raise funds to keep the irrigation system in usable condition and not to make extensions or betterments, the amount assessed against each shareholder may be so claimed. 84. I purchased a thrashing machine at an auction. Is the amount I paid a legal deduction? No ; it is an investment of capital. 85. Can the cost of digging irrigation ditches be deducted as an ex- pense ? No ; because it is a capital expenditure.. The cost of repair- ing such ditches may be deducted, go to New York every ye 86. I go to New York every year for the purpose of arranging for the sale of my orange crop. May I deduct the expenses of my trip ? The amount expended by you for railroad fare may be claimed as a deduction. The amount expended by you for meals and lodging in an amount in excess of any expenditures ordinarily required for such purposes when at home may also be claimed as a deduction. 87. The average farm has at least a fair set of improvements. Build- ings require new roofs and other repairs. Pumps, windmills, tanks, and troughs wear out. Fences must be repaired. All these and other expenses not thought of, make a big item of expense on the farm. What is a fair way to estimate this depreciation when listing the income from farming for income tax? Depreciation on farm buildings and equipment depends upon the useful life of the property used in the business. See answer to question number 105. It is to be understood, however, that the cost of placing new roofs on buildings, and 21 the cost of pumps, windmills, tanks, etc., including the cost of their installation, constitute capital expenditures and thj amount thereof may be made the subject of depreciation charges the same as the cost of the original items. Cost of repairs of articles that do not prolong the life moie than a period of one year may be deducted from gross income as a business expense. Repairs in the nature of replacements, to the extent that they arrest deterioration and appreciably prolong the life of the property, should be charged against the depreciation re- serve. 88. A man sold an option on several town lots. The lots were to be paid for as sold by option holder. It later developed that the option holder contemplated erecting undesirable build- ings on the lots, and to prevent this from being done the owner returned the amount paid for the option and in ad- dition paid $400 for its release. Is this $400 a deductible item of expense or capital investment? The $400 is a capital investment, and should be treated as additional cost of the lots. INTEREST. S9. Can all interest paid or accrued within taxable year on indebted- ness be deducted? Yes; except on indebtedness incurred or continued to pur- chase or carry securities (like municipal or county bonds), the income from which is wholly exempt from tax. TAXES. 90. Can aU Federal and local taxes be deducted ? Yes ; with the exception of United States income, excess and war profits taxes, inheritance or legacy taxes, and assessments against local benefits of a kind tending to increase the value of the property assessed. 91. Am I not entitled to deduct the income tax which I paid to the collector for the taxable j^ear 1919? No. 92. A taxpayer's fiscal year ends January 31, 1921 ; is it proper to charge against expense local taxes accrued for 1920, payable in 1921, although taxes for 1919, payable in 1920, were charged against the 1920 business ? The Revenue Act of 1918 provides that in computing the net income there shall be allowed as a deduction " taxes paid or accrued within the taxable year imposed * * * ^y jj^g authority of any State or Territory or any county, school dis- trict, municipality, or other taxing subdivision ' of any State or Territory, not including those assessed against local bene- fits of a kind tending to increase the value of the property assessed." Section 200, however, provides that the term " Paid or accrued " is construed according to the method of accounting upon the basis of which the net income is computed under section 212, and article 23 thereunder, of Regulations 22 45, which provides that the accounts of a taxpayer may be kept on eitiier a receipts or accrual basis and that deductions shall be taken accordingly. If, therefore, the books of a taxpayer are kept on the cash receipts and disbursements basis, taxes accrued in 1920 but not payable until 1921 can not be taken as a deduction until actually paid in 1921. If, however, the books are kept on the accrual basis the taxes may be taken as a deduction in 1920 when accrued, even though not payable until 1921. LOSSES. 93. My wheat crop was ruined by hail. I had no insurance. May I deduct the value of the crop as a loss ? Xo. The value of the crop has never entered into gross in- come. The cost of raising the crop is deductible as a neces- sary expense. 94. How am I to determine what amount of loss, resulting from a sale of property, is allowable as a deduction ? The same method of computation should be followed as is outlined in the answer to the 32d question. If the result is a loss instead of a gain, that loss may be claimed as a deduction. 95. Suppose I buy a farm, which is run down, with the inten- tion of making it a profit-paying propertj' — that is, I intend to operate it for profit and not for recreation or pleasure. To do this I am obliged to expend large amounts for labor in plowing and cultivating the land, for fertilizer, lime, etc., and for several years the expenses will greatly exceed the gross receipts. Can the excess of expenses over receipts for each year be claimed as a loss? It IS held that all such necessary expenses as contemplated by the income-tax law of cultivating, operating, or managing a farm on a basis embodying the recognized principles of commercial farming, for the purpose of gain or profit and not for recreation or pleasure, may be claimed as deductions in returns of income, even though these expenses exceed the in- come from the farm and the result is a continued loss, pro- vided the farm is continued to be operated on a strictly com- mercial basis. 96. Can a deduction be permitted on account of the total destruction of an orchard by frost, and what would be the proper method of ascertaining the loss deductible ? Yes. The amount to be claimed as a loss is the actual cost of the trees destroyed plus the amount of expenses incurred, but not deducted for tax purposes, in caring for the orchard up to the time it reached the productive stage, less any de- preciation sustained. 97. I own a tract of timber which was partially destroyed by fire during 1919. Is this loss allowable as a deduction? The actual amount of capital invested in standing timber if acquired on or after March 1, 1913, and later destroyed by fire, may be claimed as a deduction if not compensated for by insurance or otherwise. If the timber was acquired prior to March 1, 1913. its fair market price or value as of that date 23 may be claimed. To illustrate the method to be employed in eompTiting the amount of loss allowable as a deduction, the following is submitted : A tract of land was acquired prior to March 1, 1&13, and the estimated amount of timber standing on that tract on that date was 1,000,000 feet, board measure, the fair market price or value per 1,000 feet established by the current prices prevailing in the locality of the tract in question as of March 1, 1913, being $4. During the year 1919 400,000 feet of this timber was destroyed by fire. In this case $1,600 is the amount Avhich may be claimed as a deduction. SIS. If cattle or other live stock are raised on a farm which I own or operate, and are then lost through disease, may I claim their value at the time of death as an allowable deduction ? No. If, however, the stock which died were purchased for any purpose and the cost has not been claimed in a previous return as a deduction, that cost, less any insurance which ma^^ be received, may be claimed as a deduction. In determining the cost of stock for the piirpose of ascei'taining the deducti- ble loss there shall be taken into account only the purchase price, and not the cost of fxnj feed, pasturage, or care which has been deducted as an expense of operation. If gross in- come is ascertained by inventories, no deduction can be made for live stock or products lost during the year, whether purchased for resale or produced on the farm, as such losses will be reflected in the inventory by reducing the amount of live stock or products on hand at the close of the year. 09. I purchased $6,000 Liberty bonds in May, 1918, pajdng $5,000 for same. The market price of these bonds was only $4,800 on December 31, 1919. Am I entitled to deduct a loss of $200 on these seciirities? I am not a recognized dealer in securities. : rr i Xo. The securities have not been sold, and no loss has been sustained. No loss can be deducted imtil securities are disposed of and a loss actually is sustained. DEBTS ASCERTAINED TO BE WORTHLESS. 100. What conditions are necessary in order that a worthless debt may be claimed as a deduction ? It must be («-) a bona fide debt, (6) definitely ascertained to be worthless and uncollectible dviring the year for which the deduction is claimed,, and (c) if books are kept it must be charged off within the year for which the deduction is claimed and no longer considered an asset or carried as such on the books. An account merelj' written down or a debt recognized as worthless prior to the beginning of the taxable year is not deductible. 101. In ]920 a corporation or a firm to which I had loaned money became bankrupt. Can this debt be considered absolutely worthless and claimed as a deduction for 1920? Yes ; if it is definitely known that nothing can be collected from the debtor itself or any person connected with it. 102. Is it absolutely necessary that the debtor corporation or firm mentioned in the above inquiry be declared a bankrupt and its receiver discharged before I can claim a deduction on account of the debt in question ? 24 No. If the debtor corporation has no assets whatsoever available for application to the debt in question, and it is definitely known that nothing whatsoever can be collected from the debtor itself or any person connected with it, a creditor need not go to the expense of instituting bankruptcy proceedings in order to establish his right to claim the worth- less debt as a deduction. 103. "A" indorses a note for "B." The latter has since departed for parts unknown and the note became due in 1920, and "A" was required to make good his indorsement. Can he- now claim as a deduction the amount paid by him to the creditor ? Yes. If he has no knowledge of " B's " present wherea'bouts and has good reason to believe that he is possessed of no assets and that it is his intention never to make payment of it, the amount so paid by "A" may be considered a bad debt due him from " B." DEPRECIATION. 104. What is depreciation? Depreciation is a lessening in value of farm buildings, machinery, etc., employed in the business arising from wear, tear, or obsolescence. 105. At what rates may depreciation be claimed, and under what conditions ? The annual allowance for depreciation should be based upon the life of the property; that is, the cost of the property or the value of the same when acquired, if received by gift or bequests, or its fair market price or value as of March 1, 1913, if acquired prior thereto, should be ratably spread over its life. For instance, the rate of depreciation to be deducted on buildings used for business purposes the probable life of which is 60 years would be 2 per cent. The probable life means of course the number of years the property would be usable in business if ordinary repairs are made from the date of acquisition or in case of property acquired prior to March 1, 1913, the number of years the property would be usable from March 1, 1913. In the case of property acquired by gift or bequest, the " cost " of such property for depreciation purposes is the ai:)praised value at the time the property was acquired. If property in respect of which depreciation is claimed was acquired prior to March 1, 1913, the fair market value as of that date will be assumed to be, in the absence of proof to the contrary, the cost of the property, less depreciation up to that date. In claiming depreciation the following fundamental prin- ciples must be taken into consideration : (a) Only such depreciation as results from exhaustion, wear, and tear of property, arising out of its use or employ- ment in business or trade, can be claimed. Depreciation m the value of a home or any article of property, such as auto- mobiles, used for personal pleasure or convenience, can not be claimed ; the property must be used for the purpose of pro- ducing income. 25 (h) Depreciation in the value of land, whether improved or unimproved, due to ordinary erosion, exhaustion, or any other cause, can not be claimed. (c) Where, in the course of years, the owner of property has claimed its full cost as depreciation in his income-tax re- turns, no further claim will be allowed. (d) The value to be cared for by depreciation is the actual amount invested in the property and not the value which may be arbitrarily or otherwise fixed. 106. What is the usual depreciation allowed on general feed mill machinery, mill building, electric light plant, and frame build- ing combined? As the rate at which depreciation may be claimed is de- pendent to a greater or less extent upon local conditions, the use to which the property is put and its probable life under normal business conditions, no rates applicable to all classes of property have been established, and no specific rates can be gi^en at Avhich depreciation may be claimed with respect to any particular property. 107. What is the depreciation on gasoline engine? The rate of depreciation which may be claimed on a gasoline engine depends upon the useful life of the engine in the busi- ness. See answer to question No. 105. 108. Am I entitled to deduct under the headin,g of " Depreciation " shrinkage in the value of cattle, work horses, and mules pur- chased or raised on my farm? Depreciation may be claimed with respect to live stock pur chased for breeding or draft purposes on account of reduc- tion in value due to increase of age or other causes. 109. In 1914 I inherited a farm which I rent. May I claim any amount on account of wear and tear on the buildings which are depreciating in value? You are entitled to claim a reasonable allowance for depre- ciation, based on the fair value of the buildings at the time acquired and the estimated life after such acquirement. GIFTS. 110. How am I to determine to what extent contributions or gifts made to corporations, organized and operated exclusively for religious, charitable, scientific, or educational purposes, or for prevention of cruelty to children or animals, or to the special fund for vocational rehabilitation, may be claimed as a de- duction ? You should first ascertain what your net income would be were you not entitled to a deduction on account of such con- tributions or gifts, and then if the aggregate of such contri- butions or gifts made during the year to such corporations does not exceed 15 per cent of your taxable net income so computed their aggregate amount may be entered in the space provided therefor under " Contributions " on a personal return form. If such aggregate amount exceeds 15 per cent of your taxable net income so computed, the excess can not be claimed. 26 For example : Your total net income without deduction for contributions amounts to $20^000. During the year you have contributed to the National Bed Cross $1,000; to the Young Men's Christian Association $1,000; toward the construction of a new church $1,000; and to the associated charities of your home city $500; a total of $3,500. Fifteen per cent of your total net income amounts to $3,000; therefore this latter amount may be claimed as a deduction and the balance of your contributions and gifts may not be claimed. In claiming a deduction on account of such contributions or gifts there should be shown on the return of income (a) the name and address of each organization to which a contri- bution or gift was made and (b) the date and amount of each such contribution or gift. Where a gift is other than money, the basis for calculation of the amount of the gift shall be the cost of the property, if acquired subsequent to February 28, 1913, or its fair market value as of March 1, 1913, if acquired prior thereto, after de- ducting from such cost or value the amount, if any, which has been or which should have been set aside and deducted in the current year and previous years from gross income on account of depreciation, and not paid out in making good the deprecia- tion sustained. CREDITS. 111. I understand that a part of the net income is not liable to the normal tax. To what credits am I entitled in arriving at the net income liable to the normal tax ? (a) The amounts received as dividends from a corporation which is taxable by the United States upon any portion of its net income. (h) The amount received as interest upon obligations of the United States which is included in gross income. (e) The personal exemptions referred to in answer to ques- tion No. y>. (For the purpose of imposing the surtax the taxpayer's net income is entitled to none of these credits.) RETURNS or INFORMATION. 112. Are returns of information required of farmers? Section 256 of the Revenue Act of 1918 provides in part that all individuals, corporations, and partnerships, in whatever capacity acting, including lessees or mortgagors of real or per- sonal property, fiduciaries, and employers, making payment to another individual or partnership of interest, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable gains, profits * * * of $1,000 or more in any taxable year * * * shall render a true and accurate return to the Commissioner, under such regulations and in such form and manner and to such extent as may be prescribed by him with the approval of the Secretary, setting forth the amount of such gains, profits, and income, and the name and address of the recipients of such payment. 27 113. Upon what forms shall I make returns of information and with whom shall I file such I'eturns? Returns of information should be filed on Form 1099 (re- vised) and should be filed with the Commissioner of Internal Revenue on or before March 15 of each year, accompanied by a letter of transmittal, under oath, on Form 1096 (revised). 114. I pay an annual rent exceeding $1,000 to an agent who refuses to disclose the name of the landlord. Should I make a return of information? No. The return in that case should be made by the agent. 115. Where a person receives a cash compensation for services ren- dered, and in addition thereto commissions, living expenses, or other allowances, is the aggregate amount of cash, plus the value to such person of the allowances, to be returned ? Yes. A return is required in each case where the cash com- pensation, plus the value of the allowances, equals or exceeds $1,000 for the taxable year. PAYMENT, ABATEMENT, AXD KEFUXD OF TAX ASSESSED. 116. To wliom is an assessment of income tax to be paid'^ To the collector of internal revenue with whom your return was filed. 117. When does payment of income tax assessed against an individual on a calendar year return become due and payable? The first installment shall be paid at the time fixed by law for filing the return, and the second installment shall be paid on the 15th day of the third month, the third installment on the 15th day of the sixth month, and the fourth installment on the 15th day of the ninth month, after the time fixed by law for filing the return. The total tax may be paid at the time of filing the return, or if not so paid, one installment may be paid and the balance may be paid in installments, or in full, on or prior to any sub- sequent installment date referred to above. Failure to pay any installment on the date fixed by law makes the taxpayer liable for the payment of the balance of tax due upon notice and demand by the collector. 118. May the income tax due from a taxpayer be paid in a single payment instead of in installments? Yes. Section 250 of the act provides that the tax may, at the option of the taxpayer, be paid in a single payment, in which case the total amount is to be paid on or before the time fixed- by law for filing the return; or, where an extension of time for filing the return has been granted, on or before the expiration of the period of such extension. 119. What recourse has a taxpayer when he feels that he has been assessed an income tax in excess of his true tax liability? He may pay the tax under protest and file claim for refund, or he may exercise his right to file with the collector of in- ternal revenue for his district a claim for abatement, executed on Form 47, copies of which may be obtained from the col- lector. The filing of a bona fide claim prior to the due date of the tax acts as a stay to the collection of the 5 per cent penalty for delinquency in payment, provided in case of re- jection of the claim, the tax due is paid within 10 days from the date of notice of such rejection. However, in case of re- jection interest at the rate of one-half of 1 per cent per month will run from the date the amount was due until paid. It should be understood, however, that the filing of a claim for abatement of tax alleged to have been erroneously assessed does not operate as a suspension of the collection of the tax. If the collector feels that the suspension of collection will jeopardize the interests of the Government, he may collect the tax and leave the taxpayer to his remedy of filing a claim for refund. 120. In 1919 I paid $50 income tax in excess of my true tax liability for the year 1918. Can this excess payment be applied in payment of a later assessment of tax? Yes; the excess payment is to be credited against any in- come, war-profits, or excess-profits taxes, or installment thereof, due from the taxpayer at the time of the discovery of the overpayment for the prior year, and any balance of such excess is to be refunded to the taxpayer. It will be necessary, however, to file a claim for such credit with your collector on Form 47-A. 121. Will any information contained in my personal return be dis- closed to another? No. The law specifically provides that any information reiatiAe to an individual's income and deductions obtained from his personal return or otherwise, in connection with, the income tax, shall be inviolably confidential, and it is unlaw- ful for any employee of the United States to divulge or make known such information in any manner whatsoever to any person except the proper officers and employees of the Treas- ury Department, or to the proper officers of a court for use in a trial of any case to which both the United States and the person rendering the return are parties; and any offense against this provision of law will be held to be a misdemeanor and be punishable by a fine not exceeding $1,000, or imprison- ment not exceeding one year, or both, at the discretion of the court, and dismissal from the service of the Government. 122 . If mj' attorney requests a copy of my return or any informa- tion relative thereto, will his request be granted? No ; unless the return was rendered by him for and in your behalf, or he submits an authorization, personally signed by you, permitting the copy or information to be given to him. INDEX. A. Question. Accounting, inventory basis 2*; receipts and disbursements 26 system required 25 Accounting period, ctiange of 12 Agent, returns filed by 18, 122 Allowances ' 115 Assessments, income tax 116-120 capital stock 6i^ 77 irrigation company 83 Automobile, repairs upon 70, 74 B. Blank forms, where obtainable 20 Building and loan associations, dividends on stock 62 C. Change from calendar year to fiscal year basis 12 Claims for excess taxes paid 119 Computation of income 25 Contributions to charitable organizations G8 (10) Cbopei^t'ive associations 64 Credits, allowable 111 for excess payment of tax 120 Crop rentals, income from ,S1 not deductible expense of tenani 78 D. Debts, bad or worthless charged off 65,68 (7), 100-103 collection of bad, charged off 65 payment by surety 103 Deductions, from gross income , 68 gifts to charitable organizations 68 (10), 110 items not deductible 69 ordinary and necessary expenses 68 (1), 70-88 taxes paid by tenant 76 worthless debts 65,68 (7), 100-103 Depletion, allowance for 68 (9) Depreciation, allowance for 55,68 (8, 9), 105-109 defined 104 live stock 53, 108 Dividends, exempt from normal tax 111 from cooperative associations 64 Dues, social club 82 E. Exchange of property . ... ^8, 42-44 of produce for merchandise 28,57 (20) 30 Question. Exemption, personal 3-7, 19, 51, 111 return of exempt Income 23 Expenses, crop rental paid to landlord 78 hired help 79 improvements - 87 ordinary and necessary 68 (1), 70-88 payment of damage claims 54 Extension of time, when granted 17 P. Farmer, term defined 1 Fiscal year defined 10 returns on basis of 12 Forms, where obtainable 20 G. Gifts, receipt of, exempt 22 (c), 51 to charitable organizations 68 (10), 110 Gross income, computation of 27, 28 deductions from 68 defined : 27 farming 28-30, 41 items not deductible . 69 H. " Head of family " defined '_ 7 Hired help 79 I. Improvements, permanent 69 (b), 71, 87 Income exempt from tax 22,23 gross, defined 1 27 net, defined 24 other than money 63, 115 Insurance, deductible premiums 49, 69 (d), 73 receipt of, on cattle killed 66 Interest credited on bank deposits 58 paid on Indebtedness 56, 68 (2), 89 received on Liberty bonds 22 (d) received 59,67 Inventory, basis of reporting income 26 cost or market price as basis 26 L. Liberty bonds, interest on 22 (d) shrinkage in value of 99 Losses, allowable deductions 45, 68 (4-6) 96 crop ' '93 fire 97 in operating run-down farm 95 live stock raised on farm 98 sale of property 94 shrinkage In value of Liberty bonds 99 M. Minor children, wages earned by 8 wages paid to, by taxpayer 80 31 Qui ^tion, Net income defined 24 Notes given in payment of svippUes 81 1'. Payments (if income tax nO-118 overpayments, credit for 119-320 Penalties, delinqnency in payment ot tax __ .^"_ [ 117 disclosure of information on returns __ ._ ._ 121 failure to tile return on time ]r> Pensions subject to tax 60 R. Rates of tax 21 Rents deductible by tenant as expeiisi- 70 Return blanks, where obtainable 2() change of accounting period 12 date for tiling 15 disclosure of ii.fcirmation contained in 121 extension of time for filing 17 made by agent IS of husband and wife 19 penalties for delinquencies in filing 16 period covered 11, 13 place for filing 14,113 when required 21 Returns of information, forms for 113 payments to be accounted for 112 required ]]2, 114 salary and allowances 115 Salary, amounts to be accounted for 67 compensation other than money 63,115 Sales of property 32, 33, 34-37, 39, 40. 46, 47, "lO, 52, 55, 94 Surtax— 21 T. Tax, rates of 21 Taxable year defined 9 change to fiscal year _. 12 Taxes deductible—^ OS (3), 76, 90, 92 Income payments not deductible 91 on bank stock ^ 61 o