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Author: 
 
 U.S. Internal Revenue 
 Service 
 
 Title: 
 
 Income tax primer 
 
 Place: 
 
 Washington, D.C 
 
 Date: 
 
 1918 
 
^H-^a\^lV^ 
 
 MASTER NEGATIVE # 
 
 COLUMBIA UNIVERSITY LIBRARIES 
 PRESERVATION DIVISION 
 
 BIBLIOGRAPHIC MICROFORM TARGET 
 
 ORIGINAL MATERIAL AS FILMED - EXISTING BIBLIOGRAPHIC RECORD 
 
 Business 
 
 D490.2 
 
 Un36 
 
 Internal Revenue Service. 
 U. S. Office of internal rovcnuo, 
 
 ... Income tax primer, prepared by the Bureau of in- 
 ternal revenue for the information and assistance of tax- 
 payers. Washington, Govt, print, off., 1918. 
 
 45 p. 23"*\ (65th Cong., 2d sess. House. Doc. 841) 
 
 At head of title : Treasury department. United States internal revenue. 
 
 1. Income tax— U. S.— Law. i. Title. 
 
 Library of Congress 
 Copy 2. 
 
 IIJ46S2.A4 1918 
 
 18-26148 
 
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 THE LIBRARIES 
 
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 65th C0NOBB88 1 
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 HOUSE OP REPRESENTATIVES 
 
 j DOCUMEK 
 
 t No. 841 
 
 TREASURY DEPARTNffiNT 
 \JJNITED STATES INTERNAL REVENUE 
 
 X • 
 
 INCOME TAX PRIMER 
 
 PREPARED BY THE BUREAU OF 
 
 INTERNAL REVENUE FOR THE INFORMATION 
 
 AND ASSISTANCE OF TAXPAYERS 
 
 WASHINGTON 
 
 GOVERNMENT PRINTING OFFICE 
 1918 
 
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 LO 
 CD 
 
 Im the Housb ojr Repeeskntatives, 
 
 January 19, 1918, 
 
 Ordered^ That 38,910 copies of the Income Tax Primer, prepared 
 by the Bureau of Internal Revenue for the information and assist- 
 ance of taxpayers, be printed for the use of the House of Representa- 
 tives and distributed through the folding room. 
 
 2 
 
 INCOME TAX PRIMER.' 
 
 RETURNS. 
 
 1. Am I required to render a personal income-tax return 
 for the year 1917P 
 
 Yes; if unmarried and your net income for that year equals or 
 exceeds $1,000. If you are married no return is required unless your 
 net income, including that of your husband or wife and dependent 
 children, equals or exceeds $2^00. 
 
 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 the estate 
 or trust for which you act, if the conditions outlined under the head 
 of " Fiduciaries," as requiring a return, are present in your case. 
 
 2. Where should my personal return for the year 1917 be 
 flledP 
 
 Section 8 {a) of the act of September 8, 1916, provides that your 
 return may 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 shaU be filed; but for administrative 
 reasons the Conunissioner of Internal Revenue desires that it be 
 filed with the collector of the district in which your legal residence 
 is located. 
 
 3. When may my 1917 return be filed with a collector ol 
 internal revenue? 
 
 On any day after December 31, 1917, but not later than March 1, 
 1918. 
 
 4. Will failure to file my return within the time prescribed 
 by law render me liable to any penalty? 
 
 Yes. Under the provisions of section 18 of the act of Septem- 
 ber 8, 1916, as amended, you will be liable to a specific penalty of 
 not less than $20 nor more than $1,000 if you fail to have your 1917 
 return in the office of the collector of internal revenue for your dis- 
 trict before the close of business on March 1, 1918; and, under the 
 provisions of section 3176, Revised Statutes, you will also be liable 
 to 50 per c-ent additional tax. 
 
 Therefore, you should use extreme care to see that your return is 
 placed in the mails in ample time to reach the office of your collector 
 Defore the close of business March 1, 1918. 
 
 * Information not afforded by this Primer may be obtained by making appli- 
 cation to collectors of internal revenue. 
 
 8 
 
 
 / 
 
INCOME TAX PBIMEB. 
 
 \ 
 
 5. May an extension of time beyond March 1, 1913, be 
 obtained for the filing of my 1917 return? 
 
 Yes. If, on account of illness or absence from home, you are 
 unable to render your return within the time prescribed by law, you 
 may obtain an extension of 30 days if a request therefor is filed witl 
 the collector of your district before the due date of the return. (See 
 sec. 3176, R. S.) In this request you must state the reason why the 
 return can not be filed within the time prescribed by law. 
 
 Collectors of internal revenue are not authorized to grant exten- 
 sions of more than 30 days, but the Commissioner of Internal Rev- 
 enue has authority under the provisions of section 14 (c) of the act 
 of September 8, 1916, to grant a reasonable extension beyond 30 days 
 in meritorious cases. If you desire an extension of more than 30 
 days, your request should be addressed to the commissioner and 
 should contain a detailed statement covering the reasons which make 
 it impossible for you to file your return on or before March 1. 
 
 6. Would a personal return rendered by an agent, for and 
 in my behalf, be accepted? 
 
 If by reason of illness, absence, or nonresidence a taxpayer is 
 imable personally to render 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 com- 
 plete and accurate return for his principal and assumes responsibility 
 tor making the return and incurring the penalties provided for a 
 delinquent, erroneous, false, or fraudulent return. 
 
 7. What would happen should a taxpayer render a false or 
 fraudulent return with intent to evade a proper pajrment of 
 income taxP 
 
 Under the provisions of section 3176, Revised Statutes, he would 
 become liable to an additional tax of 100 per cent, and under the pro- 
 visions of section 18 of the act of September 8, 1916, as amendea, to 
 a fine of not to exceed $2,000, or to one year's imprisonment, or both, 
 in the discretion of the court, and to the costs of prosecution. 
 
 8. May a husband and wife, living together, and each re- 
 ceiving an independent income, render separate returns? 
 
 Yes. If the husband and wife each receive an independent income 
 equal to or in excess of $1,000, separate returns may be rendered. If 
 however, the income of either is less than $1,000, but their combinea 
 income equals or exceeds $2,000, a joint return should be rendered. 
 
 Where husband^ and wife file separate returns, one of them beinc 
 filed within the time prescribed by law, the other delinquent, such 
 returns are not held to be supplemental to each other, and delin- 
 quency must be answered for by the one in connection with whose 
 return it occurred. 
 
 9. If a husband and wife render a joint return, is the addi- 
 tional tax assessed against that return based upon the aggre- 
 gate amount of income shown? 
 
 No. The normal income tax will be assessed against the aggregate 
 amount reported by the husband and wife whether joint or separate 
 returns are rendered, but the additional income taxes are oiuy as- 
 sessed against the separate income of each. 
 
 )i t 
 
 INCOME TAX PRIMEB. O 
 
 10. Is a married man entitled to a personal exemption of 
 f 2,000, and $400 additional exemption on account of two 
 de|>endent children, whose total net income does not exceed 
 $2,400, but does equal or exceed $2,000, required to render 
 a return? 
 
 Yes. While he will not be required to pay an income tax, he is re- 
 quired to render a return if his net income equals or exceeds $2,000. 
 
 1 1. I act as agent for a nonresident alien individual. What 
 responsibilities are imposed upon me by the income-tax law? 
 
 As the agent of a nonresident alien individual, you are responsible 
 for correct returns of all income accruing to your principal within 
 the purview of the agency, and for payment of any and all taxes 
 assessed against that return. 
 
 12. If an individual engaged in business takes an inven- 
 tory and closes his books on any day during a calendar year, 
 can he render his personal income tax return on the basis of 
 that fiscal year? 
 
 No. A personal-income tax return can not be rendered for any 
 other period than a full calendar year. 
 
 13. Where can I get the blank form upon which to render 
 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 copy. 
 
 RATE OF TAX. 
 
 14. What personal income taxes are imposed upon income 
 received during the calendar year 1917? 
 
 In computing income tax liability for the year 1917 the normal 
 and additional income taxes imposed by the act of September 8, 
 1916, and also the act of October 3, 1917, are to be considered. 
 
 Under section 1(a) of the former act a normal income tax of 2 per 
 cent is imposed upon so much of an individual's net income, exclu- 
 sive of that derived from dividends on the capital stock, or from the 
 net earnings of corporations, joint-stock companies, etc., subject to 
 like tax, as exceeds the amount of personal exemption to which he is 
 entitled under section 7; and so much of his total net income, in- 
 cluding that derived from individuals and net earnings of corpora- 
 tions, as exceeds $20,000 is subject to the additional income tax at 
 the graduated rates prescribed by section 1(b). 
 
 Under section 1 oi the act of Oetober 3, 1917, so much of the indi- 
 vidual's net income^ exclusive of dividends, etc., as exceeds the amount 
 of personal exemption allowed by section 3 is subject to an additional 
 normal tax of 2 per cent, and that portion of his total net income, 
 including dividends, as exceeds $5,000 is subject to the additional in- 
 come tax at the graduated rates specified in section 2, act of October 
 3, 1917. 
 
 / 
 
 r 
 
6 
 
 orooMB TAT BsnaoL 
 
 EXEMPTION. 
 
 1 5. What amount of i>ersoiial exemption is allowed by each 
 of the two actsP 
 
 Section 7 of the act of September 8, 1916, allows a pccsonaJ exemp- 
 tion of $3,000 to unmarned persons, plus $1,000 additional if the per- 
 son making the return be the head of a family or a married man wi^ a 
 wife hvmg with him. This additional exemption of $1,000 is allowed 
 if the person making the return is a married woman with a husband 
 hving with her, but in no event shall this additional $1,000 be de- 
 ducted by both husband and wife. 
 
 The exemptions allowed by section 3 of the act of October 8, 1917, 
 are the same as under the act of September 8, 1916, except that the 
 exemptions of $3,000 and $4,000 allowed by the 1916 act are, re- 
 spectively, $1,000 and $2,000. 
 
 In addition, a further exemption of $200 is allowed for each de- 
 pendent child under 18 years of age, or over that age if incapable of 
 self-support because mentally or physically defective, and this ia 
 allowed in computing normal tax liability under both acts. 
 
 16. May a widower or widow whose wife or husband died 
 during the latter part of the tax year, say, December 26, claim 
 the full amount of personal exemption allowed to a married 
 person? 
 
 No. The marital status of the person rendering the return as of 
 December 31 of the tax year determines the amount of exempti<m 
 which may be claimed. 
 
 17. What is meant by the term " Head of a family ^*P 
 Treasury Decision 2427 states that a " head of a family " is held to 
 
 be a person who actually supports and maintains one or more in- 
 dividuals who 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 individuals is based 
 upon some moral or legal obligation. 
 
 INCOME. GROSS AND NET. 
 
 18. What income, if any, is exempt? 
 
 (a) The proceeds of life insurance policies paid to individuil 
 beneficiaries upon the death of the insured. 
 
 (b) The amount received by the insured, as a return of premium or 
 premiums paid by him under life insurance, endowment, or annuity 
 contracts, either during the term or at the maturity or surrender, of 
 the insurance contract. 
 
 (c) The value of property acquired by gift, bequest, devise, or 
 descent. It must be understood, however, diat the income derived 
 from such property is taxable. 
 
 (d) Interest upon the obligations of a State, or any political sub- 
 division of a State, or upon the obligations of the United Stat>es, ex- 
 cept in the case of obligations of the United States issued after Sep- 
 teniber 1, 1917, only to the extent provided in the act authorizinii 
 their issue. ^* 
 
 •%■ ^ 
 
 INCOME TAX PBIMEB. 7 
 
 (tf) Interest upon the obligations of any possession of the United 
 States, or securities issued under the provisions of the Federal farm- 
 loan act of July 17, 1917. 
 
 (/) The compensation of the present President of the United 
 States during the term for which he has been elected, and the judges 
 of the Supreme and inferior courts of the United States in office on 
 October 3, 1917. 
 
 (g) The compensation of all officers and employees of a State or 
 any political subdivision of a State, except when such compensation 
 is paid by the United States Government. This includes the official 
 salaries received by public-school teachers. State and county officers, 
 and employees of municipalities; but income derived by such persons 
 from sources other than State, county, or municipal funds, and the 
 other sources enumerated in this answer, is taxable. (See sec. 4, ac£ 
 of Sept. 8, 1916, as amended.) 
 
 INCOME. 
 
 19. What is meant by the term " Net income '' P 
 
 For the purpose of determining whether or not a personal income 
 tax return should be rendered, net income means your total gross 
 income less the exemptions specified in the answer to the eighteenth 
 question and the general deductions specified in the answer to the 
 fifty-eighth question. 
 
 20. In rendering a return what items of income must I 
 report under gross income? 
 
 Under gross income should be reported every item of income de- 
 rived from anv source whatever (except those specified in the answer 
 to question 18) actually received during the calendar year for which 
 the return is rendered, whether received in cash or the equivalent of 
 cash, including: 
 
 (a) All amounts of salary, wages, commissions, or compensation 
 of whatever kind, received for personal service, including profes- 
 sional fees. 
 
 (h) All amounts of gain, profit, or income derived from a business, 
 trade, commerce, or from any sale of property, real, personal, or 
 mixed. The method of ascertaining the amount of gam or profit 
 derived from a sale is outlined in the answer to question 26. 
 
 (c) Rents, interest on notes, mortgages, deeds of trust, or other 
 securities issued by individuals, partnerships, etc., interest on bonds, 
 mortgages, deeds of trust, or other similar obligations of corporations, 
 joint- stock companies, associations, or insurance companies, and in- 
 terest on bank deposits. 
 
 {d) All income received from fiduciaries — ^that is, amounts re^ 
 ceived from incomes of estates, trusts, etc., through trustees, admin- 
 istrators, or executors. 
 
 (e) Ii you have an interest in a partnership you should report 
 your distributive share of the earnings or profits of the partnership 
 ascertained during the calendar year for which the return is ren- 
 dered, whether distributed to you or not; that is, if the fiscal year 
 of the partnership ends on December 31 of that year your distribu- 
 tive share of its earnings or profits ascertained upon the close of the 
 
 I 
 
 r. 
 
I 
 
 V INOOMB TAX PBIMBB. 
 
 i>ooks on December 31 should be returned. If the partnership endl 
 its fiscaJ year on some day during the calendar year your distnbativo 
 share of its earnings or profits ascertained at that time should be 
 reported. 
 
 (/) All items of foreign income — that is, interest upon bonds and 
 mortgages or deeds of trust or other similar obligations issued by 
 individuals who are citizens or residents of foreign countries, toreigja 
 corporations, joint-stock companies, etc. 
 
 (g) Royalties from mine^ oil and gas wells, patents, copyrights, 
 franchises, or other legalized privileges. 
 
 (A) Dividends on stock or from the net earnings of domestic cor- 
 porations, joint-stock companies, associations, or insurance com- 
 panies, whether paid in cadi, stock, or script. As the net earnings 
 of corporations, joint-stock companies, etc., are subject to the tax 
 imposed 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 the same, but they are to be returned 
 for the additional tax purposes and are subject to that tax. The 
 rates of tax to be assessed against a dividend received during the 
 year 1917, or any subsequent year, are covered by the answer to 
 question 53. 
 
 21. If my salary for Decem'ber, 1917, is not paid to mt 
 until some day in January, 1918, or later, is its amount to 
 be included in my 1917 retumP 
 
 It is to be returned for the year during which it was actually 
 received by you. 
 
 22. "A'' is employed by a corporation at an annual salary 
 of ^,000. The corporation, being in financial straits, only 
 paid "A" $2,000 during each of the years 1915 and 1916. 
 In 1917, ^<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 1917 fai his return for 
 that year? 
 
 Yes. Five thousand dollars should be returned, and that amount 
 will be subjex^ to income tax at the rates prescribed for the year 1917. 
 
 23. 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 computing income tax 
 liabUity? 
 
 Yes. A fair rental value is to be placed upon the room and a fair 
 value upon the meals furnished, and their amounts reported as in- 
 come by the employee. If the services of the employee are used in 
 the employer's business or tande the latter may claim the rent paid 
 by him for the room^ if any, and the actual cost of the meals so 
 furnished as a deduction under the head of " Business expenses." 
 
 24. 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 diould be reported 
 as income. The difference between the expenses incurred and paid 
 while away from home and the ordinary expenses while at home may 
 be claimed as a deduction. 
 
 
 t 
 
 INCOME TAX PBIMER. V 
 
 25. If I enter into a contract in 1917 which will not be 
 completed until 1918, 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 1917 
 in my return for that year? 
 
 No. As you are unable to determine what amount of gain or profit 
 you will derive from the contract until it is completed, the payments 
 received thereon during 1917 need not be included in your return for 
 that year. 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 1918. 
 
 26. How am I to determine what amount of gain or profit 
 derived from a sale of property 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 improve- 
 ments, then deduct the aggregate of all claims for depre<?iation in 
 value of property claimed as deductions on previous returns, and 
 the difference between the result thus obtained and the selling price 
 is the amount to be reported imder " Gross income." 
 
 If you purchased the property on or after March 1, 1913, the dif- 
 ference between its cost, plus all amounts subsequently expended for 
 permanent improvements less depreciation previously claimed, 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 th it time plus all amounts subsequently expended for perma- 
 nent improvements less depreciation previously claimed, and its sell- 
 ing price, is to be returned. 
 
 27. 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 ade- 
 quately make it appear. 
 
 28. When is a farmer to return for tax purposes the value 
 of crops and stocks produced? 
 
 The value of grain, stock, and other products produced on a farm 
 is not considered taxable income until reduced to cash or the equiva- 
 lent of cash. TheFefore, if crops and stock were produced in 1916 
 on a farm owned by you and they were sold in 1917, the total amount 
 received therefor is to be included under "Gross income" in your 
 1917 return. Crops and stock produced in 1917, and on hand Decem- 
 ber 31 of that year, need not be considered; but the amount received 
 therefor should be included in your return rendered for the year dur- 
 ing which they are sold. 
 
 Farmers who keep books according to some approved method of 
 accounting, which clearly show the net income, may prepare their 
 returns from such books, although the method of accounting may 
 not be strictly in accordance with the above paragraph. 
 H. Doc. 841, 65-2 2 
 
 
10 
 
 IliOOMB TAX PBIMEB. 
 
 29. I rent a farm on shares. When is my share of the 
 crops and stock to be taken into consideration? 
 
 Only for the year in which sold. 
 
 30. Is a farmer required to report the value of the farm 
 produce which is consumed by himself and family? 
 
 No ; but any amount of expense incurred in producing garden truck, 
 or other products so consumed, can not be claimed as a deduction. 
 
 31. If a farmer exchanges produce for merchandise, gro- 
 ceries, etc., is the value of such merchandise to be returned 
 for tax purposes? 
 
 Yes; the price placed b;^ the merchant upon the goods exchanged 
 for farm produce is to be included as income in the farmer's return. 
 
 32. 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? 
 
 Report cash rental for year in which received. The difference 
 between cost of improvements and a reasonable allowance for the 
 exhaustion, wear and tear of the property arising out of its use or 
 employment in tne business or trade of lessee during the period of 
 its life under the lease should be returned as income to the lessor 
 for the year during which the lease terminates. (See T. D. 2442.) 
 
 33. Special payments, designated as " Bonuses," are often 
 made to ofla.cers and employees of corporations, firms, and 
 individuals. Are such items of Income subject to tax in the 
 hands of their recipients? 
 
 Any bonus or other item of compensation paid to an employee 
 in addition to his regular salary or wage under a contract, expressed 
 or implied, as additional compensation for services rendered as a 
 reward for past endeavors, or as a stimulus to further zeal and en- 
 thusiasm in the discharge of his duties, is held to constitute taxable 
 income which should be reported under " Gross income " in the 
 employee's return rendered for the year during which received. 
 Christmas remembrances, anniversary gifts, etc., from an employer 
 to an employee do not constitute such items as are subject to the in- 
 come tax. 
 
 34. Is an individual contractor who constructs a public 
 highway, a bridge, a drainage system, etc., for the State, 
 county, or a municipality, held to be an employee of the 
 political subdivision for which the work is performed? 
 
 No; and therefore the income derived from his contract is not 
 exempt from the Federal income tax. 
 
 35. What method should a merchant adopt to ascertain the 
 amount of gain or profit which is to be reported under gross 
 income? 
 
 Any individual who conducts a grocery, dry goods, clothing, or 
 farm-implement business or any other business which requires that 
 a stock be carried should take an inventory at the close oi each cal- 
 endar year. To the total of his inventory taken at the beginning 
 of the year for which the return is to be rendered should be added 
 
 INCOME TAX PRIMER. 
 
 11 
 
 \ 
 
 the cost of all goods purchased during that year, and the difference 
 between the amount thus obtained and the total of his inventory 
 taken at the close of the tax year, plus his total gross receipts, is the 
 amount to be reported under " Gross income." Gross recfclpts should 
 not be reported under "Gross income" and the cost of the goods 
 purchased claimed as a deduction. 
 
 36. A piano dealer sells an instrument under a contract 
 which states that payment therefor is to be made in monthly 
 installments, and that the title to the instrument is to remain 
 with the dealer until the last payment is made. How is the 
 latter to report the amount of profit derived from this trans- 
 action? 
 
 It is held that every dollar received under such a contract represents. 
 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 frtjm the transaction ; and that 
 the amount of profit represented by all payments during the tax year 
 should be included 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 montlily payment represents a return of 
 capital amounting to $15 and a profit amounting to $5, and multiply- 
 ing this latter amount by the number of payments received during the 
 year yields the amount to be returned as income for that year. When 
 there is a lapse or default in payment and the dealer becomes re- 
 possessed of the article, the entire amount theretofore paid and 
 credited to principal from date of contract to date of default is income 
 to be included in a return of income, for the reason that it is held that 
 such an amount constitutes rental for the use of the article. In case 
 of such default a reasonable allowance may be claimed as a deduction 
 to cover sucli depreciation as may have actually occurred in the value 
 of the repossessed article by reason of its use. 
 
 37. I have two children who live at home and are regularly 
 employed. One is 17 years old; the other, 21 years old. Am 
 I required to include the amount of income which accrues to 
 each during a calendar year in my own personal return? 
 
 As the first child has not reached its majority and is still legally 
 under your control, the amount of its income is to be included in your 
 personal return and is subject to tax in your hands. The income of 
 the child which has attained its majority is not to be included in your 
 return and is only subject to tax in the hands of that child. 
 
 38. Must I include in my personal return the amount of 
 interest I receive on Liberty Loan bonds, or is that interest 
 exempt from tax? 
 
 All interest derived from the Liberty Loan 3 J per cent bonds 
 issued under the act of April 24, 1917, is exempt from both the 
 normal and additional income tax. 
 
 Interest derived from the Liberty Loan 4 per cent bonds issued 
 under the act of September 24, 1917, is exempt from the normal in- 
 come tax ; but so much of the interest as is derived from such bonds, 
 the principal of which exceeds $5,000, is subject to the additional 
 income tax; that is, if you hold $8,000 of Liberty Loan 4 per cent 
 
12 
 
 nrOOMB TAX PBIMEK. 
 
 bonds the interest from $5,000, or $200, is exempt from tax, and the 
 balance of the interest, or $120, is subject to the additional tax. 
 
 89. I held an endowment life insurance policy upon which 
 I paid premiums for 20 years. In 1917 that contract matured 
 and I received its face value, or $1,000. Must I return the 
 entire amount received? 
 
 No. Return only the difference between the aggregate amount of 
 premium paid and the amount received upon maturity of the contract 
 
 40. Are commissions on renewal premiums on insurance 
 policies subject to income taxP 
 
 Yes; such commissions received by insurance agents on account of 
 business written are taxable income iror the year in which received. 
 
 41. '*A,'' who is the employee of a coi*poration, was injured 
 and under the laws of the State in which the accident oc- 
 curred he received $5,000 on account of the injury he suf- 
 fered. Must the amount tlius received be reported as income? 
 
 Yes. Any amount received under an employers' liability act or 
 workman's compensation act, or any other similar act, or as the 
 result of a settlement or compromise for "pain and suffering," is 
 held to be such income as is subject to the Federal income tax. This 
 ruling is also applicable to any amount received under the terms of an 
 accident iusurance policy. 
 
 42. I purchased a 6 per cent $100 coupon bond at its fact 
 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 be 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. 
 
 43. Do the pensions and retired pay of ex-officers and men 
 of the United States military and naval forces constitute 
 items of ta:x:able income? 
 
 Yes. 
 
 44. 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 propoi'tionate part of the entire amount of taxes so paid by 
 the bank, which is properly charje^eable ajjainst 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.'' 
 
 45. 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? 
 
 No; but when the stock received as a bonus is bold, the entire 
 proceeds of the sale are income subject to normal and additional tax 
 and should be included in your return rendered for the year during 
 which the sale is made. 
 
 INCOME TAX PRIMER. 
 
 18 
 
 H 
 
 ) i 
 
 46. 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 for the normal and additional income tax and should be in- 
 cluded in the return rendered for the year during which the credit 
 is made. 
 
 Where the amount of accumulations credited does not become 
 available to the shareholder until the maturity of a share it need 
 not be reported as income, but upon maturity of the share the 
 amount received in excess of the total amount actually paid in by 
 the shareholder is to be returned. 
 
 47. I hold stock in a corporation which in 1917 increased 
 its capital and gave me the right to subscribe for additional 
 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 rendered for the 
 year during which the sale is made and will be subject to both the 
 normal p.nd additional tax. 
 
 48. Are payments of alimony to be returned for tax pur- 
 poses by their 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. 
 
 49. Where service is rendered for a stipulated price, wage, 
 or salary, and paid with somtething other than money shall 
 consideration be given the transaction for income-tax pur- 
 poses? 
 
 Yes; the stipulated value of the service in terms of money is the 
 value at which the thing taken in payment is to be considered, and the 
 amount of that value is to be report^>d as income. 
 
 A\"here there is no stipulation as to the value of the service, and 
 payment therefor is made with something other than money, the fair 
 market value of the thing taken in payment is the amount to be re- 
 turned as income. 
 
 DIVIDENDS. 
 
 50. The net earnings of a corporation in which I held stock 
 in the year 1916 amounted to $50,000, which amount was 
 carried to surplus account. Its net earnings from January 1 
 to December 31, 1917, amounted to $70,000, and on this latter 
 date these last earnings were carried to surplus and a cash 
 dividend of $50,000 declared and soon thereafter paid. What 
 income taxes are to be assessed against this dividend? 
 
 Section 31 (h) of the act of September 8, 1916, as amended by 
 the war revenue act, provides, in part, as follows: 
 
 Any distribution made to tho shareholders or members of a corporation, 
 Joint-stoclj company or nssoeintion, or Insurance company, in tlie year 1917, or 
 Bubsetiuent tax years, shall be deemed to have been made from the most re- 
 cently accumulated undivided profits or surplus, and shall constitute a part of 
 
 I 
 
14 IKCOMB TAX PBOCEB. 
 
 the annual Income of the distributee for the year in which received, and ehall 
 be taxed to the distributee at the rates prescribed by law for the years In which 
 such profits or surplus were accumulnted by the corporation, Joint-stock com- 
 pany or association, or Insurance company. 
 
 Therefore, the dividend to which you refer is to be charged against 
 the most recently accumulated earnings or surplus; that is, against 
 the $70,000 earned during 1917 and carried to surplus on the day the 
 dividend was declared, and it will be subject to the additional tax 
 at the rates prescribed bv the act of September 8, 1916, and also, at 
 the rates prescribed by tiie war revenue act of October 3, 1917. 
 
 51. Suppose that instead of declaring a dividend of 
 $50,000, this corporation had declared a dividend of 
 $100,000? 
 
 If such had been the case, the entire amount of net earnings car- 
 ried to surplus on December 31, 1917, would have been subject to 
 additional tAX at the same rates as the dividend mentioned in your 
 inquiry, next above, and the balance, or $30,000, would have oeen 
 held to have been paid from the 1916 earnings and would have been 
 subject to additional tax only at the rates prescribed in the act of 
 September 8, 1916. 
 
 52. Assuming that instead of paying this dividend in cash 
 a corporation had capitalized the same amount of surplus 
 as was distributed in cash, or $100,000, and Issued the new 
 stock to its shareholders as a dividend. Would this dividend 
 be taxable? 
 
 Yes; just the same as though it had been paid in cash. 
 
 53. A corporation began business January 1^ 1912. Its 
 net earnings were as follows: 
 
 Jan. 1, 1912, to Mar. 1, 1913 $10, 765 
 
 Mar. 1. 1913, to Jan. 1, 1914 6, 220 
 
 Pot the year 1914 7. 347 
 
 Por the year 1915 • .- 11, OOO 
 
 Pot the year 1916 « 15, 300 
 
 Jan. 1 to Dec. 31, 1917 27, 400 
 
 Amount of snrplus on hand Dec. 81, 1917 77, 032 
 
 The corporation never paid a dividend until December 31. 
 1917, on which date it declared and paid a dividend of 
 $77,032. How will this dividend be taxed? 
 
 That portion of the dividend which represents the distribution of 
 1917 earnings, or $27,400, will be subject to the additional tax at the 
 rates prescribed in the act of September 8, 1916, and also in the war- 
 revenii^ act of October 3, 1917; and that portion whicli represents 1916 
 earnings, or $15,300, at the rates prescribed in the act of September 8, 
 1916, only; that portion which repre^^ents earnings which accruea 
 from March 1, 1913, to January 1, 1910, at the rates of additional 
 tax prescribed in the act of October 3, 1913. The remainder, or 
 $10,765, is exempt from tax under that portion of section 31 (6) 
 which states that — 
 
 But nothing herein shall be construed as taxing any earnings or profits 
 accrued prior to March 1, 1913, but surb earnings or profits may be distributed 
 In stoclj dividends or otherwise, exempt from the tax, after the distribution 
 of earnings and profits accrued since March 1, 1913, has been made. 
 
 INCOME TAX PEIMEE. 
 
 151 
 
 J^ 
 
 ? 
 
 54. Will it be the taxpayer's duty to advise himself what 
 proportion of a dividend received by him is properly charge- 
 able, under section 31(b), act of September 8, 1916, as ^ 
 amended, to the corporate earnings or profits for each tax 
 year? 
 
 Yes. 
 
 55. Assuming that a corporation had assets which had i 
 greatly appreciated in value and had carried the amount of | 
 that appreciation to its surplus account and capitalized same, 
 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? 
 
 Only such dividends as represent a distribution of earnings or 
 profits accrued since March 1, 1913, are subject to the additional tax 
 when received by the shareholders. As appreciation estimated to 
 have occurred in the value of the assets held and good will do not 
 represent actual earnings, profits, or income, a dividend based upon ; 
 a capitalization of any such items is not subject to tax when received 
 by the shareholders. " It should be understood, however, that when 
 any of the stock received in payment of such a dividend is sold, the 
 entire proceeds derived from the same are to be returned under 
 "Gross income" in the shareholders' return rendered for the year 
 during which the sale is made, and will be subject to both the normal 
 and additional income taxes. 
 
 56. A corporation on July 1, 1917, declared a dividend 
 and in that declaration specifically stated that it would be 
 paid out of earnings or profits which had accumulated and 
 were on hand prior to March 1, 1913. Is this dividend to be 
 returned for income-tax purposes? 
 
 No. Section 31 (6), act of September 8, 191G, as amended, pro- 
 vides that none of its provisions shall apply to any distribution made 
 prior to August 6, 1917, out of earnings or profits accrued prior to 
 March 1, 1913. 
 
 57. Are dividends on paid-up life insurance policies sub- 
 ject to income tax? 
 
 Dividends on paid-up life insurance policies are subject to the 
 additional tax for the year in which received. 
 
 GENERAL DEDUCTIONS. 
 
 58. In rendering a personal return what items may I claim 
 as deductions? 
 
 See section 5 of the act of Sei)tember 8, 19 IG, as amended by the 
 war- re venue act. 
 
 59. What constitutes an item allowable as a deduction 
 under the head " Business expenses ''? 
 
 All amounts of expenses actually paid during the tax year in the 
 conduct of a business, trade, or profession. 
 
 This includes all amounts actually paid by a farmer for labor in 
 preparing his land for a crop and the cuitivation. haivesting, and 
 marketing of the crop; the cost of the seed and fertilizer used; the 
 
16 
 
 INCOME TAX PBIMEfL 
 
 ftmonnts expended for labor used in caring for live stock and tht 
 cost of the feed: the cost of stock purchased for the purpose of 
 resale. (It should be understood, however, that if such cost is 
 claimed as a deduction, the entire proceeds received upon a sale of 
 the stock is to be returned as income.) The amounts actually paid in 
 making repairs to farm buildings, 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. The 
 amounts paid for live stock which is to be used for breeding pur- 
 poses are held to represent investment of capital and are not allow- 
 able as deductions. 
 
 A merchant may claim as deductions the amounts paid for adver- 
 tising, hire of clerks, and other employees; the cost of the light, fuel, 
 water, telephones, etc., used in or at his place of business; drayage 
 and freight bills; the cost of operating delivery wagons, trucks, and 
 the repairs to same. 
 
 The cost of goods purchased for resale is not to be claimed as a 
 deduction, as a credit for that cost may be obtained by following the 
 method of computation outlined in the answer to the thirty-fifth 
 question. 
 
 A physician 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 
 making professional calls, dues to medical societies and subscriptions 
 to medical journals, the expenses of attending medical conventions, 
 the rent paid for office 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 instru- 
 ments of a permanent character are not allowable as deductions. 
 
 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 busi- 
 ness, trade, or profession. In short, all expenses connected directly 
 and solely with the conduct of an income-producing business, trade, 
 profession, or vocation are allowable. 
 
 Items of personal expense or items connecte-d in any way with the 
 support, maintenance, and well-being of a family are not allowed; 
 neither are the amounts paid for tools, implements, vehicles, ma- 
 chinery, or surgical instruments which are more or less permanent in 
 character, nor the cost of medical, law, or other professional books, 
 nor amounts expended in making permanent imprnvement-s or bet- 
 terments of any kind whatsoever, allowable as de-ductions. The^e 
 latter items are held to be investments of capital upon which depre- 
 ciation may be claimed. 
 
 60. 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? 
 
 Unque-stionably, as to the amount paid to the male employee, 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 
 
 INCOME TAX PRIMEB. 
 
 17 
 
 I 
 
 produced for sale, in the production of butter, cheese, etc., the care of 
 milk cans and churns, or, if a separate table is maintained for laborers 
 employed on the farm and her services are used entirely in the prepa- 
 ration and serving of the meals furnished the laborers and in caring 
 for their rooms, the compensation paid her constitutes an allowable 
 deduction. If, however, she is employed to assist in caring for the 
 farmer's own household, no deduction can be claimed. 
 
 61. 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 assist- 
 ance, may I claim the amount as a deduction? 
 
 No. If, hoAvever, the son or daughter lias attained his or her 
 majorit3\ the amount of compensation paid for his or her services 
 mav be so claimed. 
 
 62. Can a taxpayer claim a deduction for his own re- 
 muneration? 
 
 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 w^ould be to take money out of one 
 pocket and put it in another. Therefore no deduction can be claimed 
 for income-tax purposes. 
 
 (Note. — Anj/ such wage or salary viay he entered on Form lOJfi^ 
 revised January^ 1918, for excess-profits tax purposes.) 
 
 63. Can the amounts expended by a business man in enter- 
 taining out-of-town customers, or prospective customers, be 
 claimed as deductions? 
 
 Yes. If the sole purpose of the business man in making such ex- 
 penditures is to cultivate the good will of his customers and secure 
 an increase in trade they may be so claimed. 
 
 64. Can a salesman working on a commission basis claim 
 as deductions the amounts expended from his own funds for 
 railroad fare, excess baggage, tsisicab or street car fare, show 
 rooms, assistants, advertising etc.? 
 
 Yes. If he is not reimbursed for such expenditures by his firm, he 
 should report under '' Gross income " the total amount of commis- 
 sions received, and he may then claim such expenses as were actually 
 incurred and paid in the earning of those commissions. 
 
 65. '^A,^' who is employed in a city, has his home in a 
 suburb. He pays car fare between his home and place of 
 employment and takes his noon lunch in the city. Can the 
 amounts expended for car fare and lunch be claimed as a 
 buSlTiess expense? 
 
 No, as such amounts are held to be items of personal expense. 
 
 66. Are the items of expense incurred and paid by me 
 during the calendar year 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 deduc- 
 tions? 
 
 Yes. 
 
 H. Doc. 841, 65-2 3 
 
18 
 
 INCOME TAX PRIMER. 
 
 67. Can the amount of life insurance premiums and pre- 
 miums paid for insurance on my residence be claimed as 
 deductions? 
 
 No, as these are held to be items of personal expense. If, however, 
 3'ou pay 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. 
 
 68. An individual or a partnership, to protect his or its 
 business interests, 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? 
 
 No. However, should the policy become due and payable, the indi- 
 vidual or partnership should deduct the aggregate amount of pre- 
 miums paid from the proceeds of the policy and return the balance as 
 income. 
 
 69. A tenant, under the terms of a lease, is obligated to 
 pay a certain cash rental and all taxes assessed against the 
 property and keep it insured. May he claim as a business 
 expense the aggregate amovint of rental, taxes, and insurance 
 premiums paid? 
 
 Yes; if the property is used by the tenant for business or trade pur- 
 poses and not as a home, the aggregate amount may be claimed as a 
 deduction for the year during which actually paid. 
 
 - 70. I own stock in a corporation which, in 1917, 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 individual. 
 
 71. You say that assessments made against corporation 
 stockholders can not be claimed as deductions. In California 
 and other States fruit growers, ranchers, and farmers are 
 shareholders 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 
 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. 
 
 72. If a physician, or other professional or business man, 
 rents a home and uses a portion of same for professional or 
 business 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 so used may be claimed as a deduction. 
 
 73. In 1917 I purchased a property, the title to which 
 proved defective, and in order to straighten the matter out 
 
 t 
 
 \ 
 
 INCOME TAX PKIMEH. 
 
 19 
 
 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 bo a part of the cost of the property 
 and therefore not allowable as deductions. 
 
 74. If I employ an architect to prepare plans for a building 
 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. 
 
 75. You have heretofore stated that only such items of in- 
 come as have actually been paid to me during the tax year 
 are to be reported, and only such items of expense as I have 
 actually paid during that year claimed as deductions. Can 
 not a business or professional man who keeps a set of books 
 and enters thereon as income the cost of goods sold 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 year as shown by his books when they are balanced 
 at the end of the calendar year? 
 
 Section 8 (^7) of the act of September 8, 1916, states that : 
 
 An Inrlividual keopins aaiiunts upon any basis other than that of nftiial re- 
 ceipts au<l (lisf>iirsements, unless such other basis d«^>es not clearly refle<*t his 
 income, may. subject to rejruljstions made by the Commissioner (»f Interna! Reve- 
 nue, with the approvjd of the Secretary of the Treasury, make his return upon 
 tlie basis ui)on which Ids accounts are kept, in which case the tax shall be com- 
 puted upon his income as so returned. 
 
 76. What is meant by the statement in the Isiw that all 
 interest paid within the year upon the indebtedness of a tax- 
 payer, ** except dn indebtedness incurred for the purchase of 
 obligations or securities the interest upon which is exempt 
 from taxation as income under this title '' may be claimed 
 as a deduction? 
 
 If a taxpayer, desiring to do his patriotic dnty, borrowed money 
 to invest in Liberty Loan 3| per cent bonds, or if he borrowed money 
 to invest in the bonds of a State, county, or municipality, or any se- 
 curity issued under the provisions of the Federal farm-loan act of 
 July 17, 1916, or any other securities the interest from which is not 
 subject to income tax as explained in the answer to the eighteenth 
 question, the interest paid by the taxpayer upon the money so bor- 
 rowed can not be claimed as a deduction. All other interest paid 
 within the year may be so claimed. 
 
 77. 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. 
 
20 
 
 INCOME TAX PRIMER. 
 
 78. What forms of taxes can not be claimed as deductions? 
 Taxes assessed affainst an individual on property owned by him to 
 
 pay for the paving of a street contiguous to his property, the con- 
 struction of a sewer, sidewalk, etc., the sprinkling or oiling of a 
 street in front of his home, the construction of levees to protect, or 
 ditches to drain, property owned by him, can not be claimed as de- 
 ductions. In short, such 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 tax- 
 payer is one, are not allowable deductions. 
 
 79. If I pay any amount of personal income tax for the 
 year 1917, may I claim that amount as a deduction for the 
 year 1918? 
 
 No. The income-tax law states that income taxes are not allow- 
 able as deductions. Under this provision income tax paid in 1917 
 on income received in 1016 or any previous year can not be deducted. 
 
 80. In 1916 I bought certain stocks and bonds for $5,000, 
 and in 1917 the value of these securities dropped to $4,000. 
 May I claim the difference of $1,000 as a loss in computing 
 my income tax liability? 
 
 No. Under the provisions of the fourth and fifth paragraphs of 
 section 5 of the act of September 8, 1916, only such losses as have 
 actually been sustained during the year can be claimed; that is, the 
 loss miist have resulted from a completed and closed transaction. 
 In your case you still own the securities. They may go up in value 
 during 1918, and until they are sold or otherwise disposed of you 
 are unable to determine whether you will suffer a loss or derive a 
 gain from your 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 property. 
 
 (NoTiii. — Tkis mlmg has teen modified in the case of securities 
 (nv7ied by brokers or others regularly engaged in buying and selling 
 securities. See T. D, 2609.) 
 
 81. John Doe, while driving an automobile, ran down and 
 injured another person. He either paid over a certain sum, 
 or paid a judgment rendered against him, in settlement of 
 the injury done. Can he 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 
 t'or profit. 
 
 82. How am I to determine what amount of los&, resulting 
 trom a sale of property, is allowable as a deduction? 
 
 The same method of computation should be followed as is outlined 
 m the answer to the twenty-sixth question. If the result is a loss 
 instead of a gain, that loss may be claimed as a deduction, if it was 
 connected with your regular business or trade, or during the same 
 year you derived gains from other transactions entered into for profit 
 but not connected with your regular business or trade in excess of 
 the amount of your loss. 
 
 V 
 
 2 
 
 INCOME TAX PRIMER. 
 
 21 
 
 83. V/hat is the difTercnce between the losses allowable 
 as deductions under the provisions of the fourth paragraph 
 of section 5 of the act of September 8, 1916, and those allow- 
 able under the provisions of the fifth paragra oh, same sec- 
 tion? 
 
 Losses, for income-tax purposes, are divided into two classes: {a) 
 Those incurred in business or trade and (b) those resulting from 
 transactions entered into for profit but not connected with the tax- 
 payer's regular business or trade. 
 
 For example: "A*' is repfularly engaged in buying improved or 
 unimproved real property with the intention of selling the same as 
 early as possible at a profit. In one or more instances the property 
 purchased may be sold at a loss, and that loss may be claimed by him 
 as a deduction under the pi-ovisions of the fourth paragraph for the 
 reason thai he is regularly engaged in buying and selling real estate. 
 Now, '*B" buys a home or, perhaps, he buys two or three pieces of 
 proj)erty in the cour-se of several years. He is not regularly engaged 
 in buying and selling real estate and, therefore any loss he may 
 suffer throuffh such a transaction can onlv be claimed bv him as a 
 deduction under the provisions of the fifth paragraph of section 5; 
 that is, only so much of his losses as does not exce^^d the amount of 
 gain or profit derived during the same year from other transactions 
 entered into for profit, but not connected with his regular business or 
 trade, can be claimed. If " B," in 1917, sold one property at a loss 
 of $2,000 and another property at a gain of $1,000, he must report 
 the gain of $1,000 under "Gross income," and can claim only that 
 amount as a loss. 
 
 This same rule is applicable in the case of losses arising from pur- 
 chases and sales of stocks and bonds. If the taxpayer is regularly 
 engaged in buying and selling such securities, any loss he may suffer 
 may be claimed under the provisions of the fon^^th paragraph. If 
 he is not so engaged it may only be claimed under the provisions of 
 the fifth paragraph. 
 
 84. In computing amount of profit or loss resulting from 
 purchase and sale of securities which is to be returned or 
 claimed as a deduction under the provisions of the fifth para- 
 graph of section 5 of the act of September 8, 1916, is interest 
 or dividends received on the securities during the tax year to 
 be taken into consideration? 
 
 No. Interest and dividends are held to be items of current income, 
 returnable as such, and they are not to be considered when com- 
 puting the amount of profit or loss which results from a purchase and 
 sale. 
 
 85. A professional man or a merchant owns and operates 
 a " fancy stock farm.'' The expenses of operation exceed 
 the gross receipts. Can the difference be claimed as a deduc- 
 tion under the head of " losses "? 
 
 No. It is held that where a farm is operated for purposes of 
 recreation or pleasure, and not primarily for profit, but as a hobby, 
 that farm is not to be classed as a commei-cial enterprise, that it does 
 not form a part of its owner's business or trade and until it is placed 
 upon a pront-paying basis the gross receipts are not to be reported 
 
22 
 
 INCOME TAX PRIMER. 
 
 under " Gross income " and the expenses are not to be claimed as a 
 deduction. This ruling, of course, precludes the claiming of the 
 difference between the two amounts as a loss. 
 
 86. Suppose I buy a farm which is much run down with 
 the intention of making it a profit-paying property. To do 
 this I am obliged to expend large amounts for labor in clear- 
 ing away brush, 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? 
 
 No. The amounts so expended are held to be investments of 
 cai)ital, the result of which is an improvement or betterment, and, 
 until the farm becomes a paying proposition, no portion of the gross 
 receipts is to be reported as income and no portion of the expenses 
 can be claimed as a deduction, either under the head of "Business 
 expenses" or under the head of "Losses." 
 
 This same ruling is equally applicable in the case of a young 
 orchard. If, after the farm or orchard has been placed upon a profit- 
 paying basis a bad year follows and a loss is sustjiined during that 
 year, that loss may be claimed as a deduction. 
 
 87. I own a tract of timber which was partially destroyed 
 by fire during 1917. Is this loss allowable as a deduction? 
 
 The actual amount of capital invested in standing timber, if ac 
 quired on or after March 1, 1913, and later destroyed by fire, may be 
 claimed as a deduction if not reimbursed by insurance or otherwise. 
 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 allowable as 
 a deduction, the following is submitted: A tract of land was 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 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 1917, 400,000 feet of this timber was de- 
 stroyed by fire. In this case $1,600 is the amount which may be 
 claimed as a deduction. 
 
 88. If cattle or other live stock are produced 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 the stock which died was purchased and the cost has not 
 been claimed in a previous return as a deduction, that cost may be 
 claimed as a deduction in your return rendered for the year during 
 which the loss occurred. 
 
 89. 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. 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. 
 
 INCOME TAX PKIMEB. 
 
 23 
 
 90. What conditions are necessary in order that a debt may 
 be claimed as a deduction? 
 
 It must be (a) a bona fide debt, (h) definitely ascertained to be 
 worthless and uncollectible during 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. 
 
 91. In 1917 a corporation or a firm to which I had loaned 
 money became bankrupt. Can this debt be considered abso- 
 lutely worthless and claimed as a deduction for 1917? 
 
 No, unless the affairs of the debtor have been finally adjusted, its 
 assets sold for the benefit of, or distributed to, its creditors, and its 
 receivpT in baukniptcy discharged. If all this has occurred during 
 the year 1917, so much of the debt as remains unpaid after the receiver 
 is discharged may be claimed as a deduction for the year 1917. 
 
 92. Is it absolutely necessary that the debtor corporation 
 or firm mentioned in the ninety-first inquiry be declared a 
 bankrupt ai)d its receiver discharged before I can claim a 
 deduction on account of the debt in question? 
 
 No. If the debtor corporation has no assets whatsoever, and it is 
 definitely known that nothing whatsoever cjin 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. 
 
 93. *'A'' indorses a note for '* B." The latter has since de- 
 parted for parts unknown and the note became due in 1917, 
 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 lie has no knowledge of " B's " prosent whereabouts 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 ariount so paid 
 by "A" may be considered a bad debt due him from " B." 
 
 94. 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 every be returned, 
 may I now claim a deduction to cover such advance? 
 
 No. Such an advance, partaking, as it does, somewhat of the 
 nature of a philanthropic donation or a good-will offering, is not 
 held to constitute a bona fide debt. 
 
 95. In rendering my 1914 return I claimed a deduction 
 to cover a debt I then believed to be absolutely worthless. 
 In 1917 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 vour 1917 return. 
 
 96. A professional man earned a fee in 1916. As he keeps 
 no bookS; he reports his income for tax purposes on an actual 
 
24 
 
 INCOME TAX PRIMER. 
 
 INCOME TAX PBIMEE. 
 
 25 
 
 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 havirigr been returned as income, it can not be claimed 
 as a deduction. 
 
 97. ^'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 purcliase price and tlie 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 claim the dilference between the amount of the debt and the net 
 amount paid to the mortgagee as a bad debt. 
 
 98. ^^A" claimed that " B '' owed him $1,000. " B '' con- 
 tested the claim, but agreed to pay $500 in compromise. 
 May "A'' claim as a deduction the balance which he con- 
 tended was due him? 
 
 No. Where an indebtedness is claimed, contested, and a settlement 
 is had b}^ way of compromise, whereby an amount less than the debt 
 claimed is accepted in full payment, the dilference between the 
 amount claimed and the amount paid can not be claimed as a de- 
 duction. 
 
 DEPRECIATION. 
 
 99. At what rates may depreciation be claimed and under 
 what conditions? 
 
 As the rate at which depreciation may be claimed is dependent, in 
 a gi'eater or less extent, upon local conditions, the use to Avhich the 
 property is put, and its probable lifetime under normal l)usiness con- 
 ditions.no specific rates at which it may be claimed have ever been 
 established. The law states that a "reasonable allowance" may be 
 claimed and it is for the taxpayer to determine what constitutes a 
 " reasonable allowance." To compute the amount \yhich may be 
 claimed, a taxpayer should determine the probable lifetime of the 
 property, then divide its cost to him by the number of years it will be 
 usable in a business in which employed, and the result thus obtained 
 will represent the amount which may be claimed each year as a de- 
 duction, e. g., a frame building, the probable lifetime of which, with- 
 out repair or replacement, is 25 years, cost $5,000. Divide $5,000 by 
 25 and claim $200 each year as depreciation. 
 
 While each taxpayer must determine the probable lifetime of his 
 property without regard to the following figures, it has been estimated 
 that the average usable lifetime of a frame building is 25 years ; a brick 
 building, 35 years ; a stone building or a steel and concrete building, 
 50 to 100 years. The estimated lifetime of ordinary machinery is 10 
 years, that of automobiles used for business or farm purposes and 
 farm tractors, 4 to 5 years. 
 
 'I; 
 
 ■■i; 
 
 If a taxpayer wishes to claim the full amount of depreciation esti- 
 mated to have occurred in the value of a building or other property 
 used for business or trade purposes, he may do so, but this precludes 
 his claiming a deduction to cover any amount expended during the 
 same year in making repairs. If he wishes to claim a deduction on 
 account of repairs, their cost must be deducted from the full amount 
 of depreciation, and the balance may then be claimed as a deduction 
 under the heading of "Depreciation"; that is, if the taxpayer ex- 
 pends $100 in making repairs to a building which will depreciate in 
 value $200 during the calendar year he may claim $100 as a business 
 expense and $100 as depreciation, or he may claim $200 as deprecia- 
 tion and nothing? for repairs. In short, the aggregate deductions 
 claimed on account of repairs and depreciation must not exceed the 
 full amount of depreciation estimated to have occurred. 
 
 (Note. — The repairs referred to in this paragraph are such as are 
 general in character, represent replacements, etc. Small items, such 
 as replacement of broken window panes, papering, minor repairs, 
 etc., are allowable, even though full amount of depreciation has l^een 
 claimed.) 
 
 In claiming depreciation the following fundamental principles 
 nwut 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, 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 used for the 
 purpose of producing income. 
 
 (b) Depreciation other than that arising from wear and tear, such 
 as a lessening of values due to changes in the social or business condi- 
 tions in the neighborhood in which a property is located, changes of 
 street grade, or fluctuations in market values, etc., can not be claimed. 
 
 {c) Depreciation in the value of land, whether improved or unim- 
 proved, due to ordinary erosion, exhaustion, or any other cause can 
 not be claimed. 
 
 (d) Where the value of a piece of machinery or any other asset i3 
 lessened by reason of the production of an improved machine or ar- 
 ticle, that depreciation can not be claimed, as it does not result from 
 exhaustion, wear, and tear. 
 
 (e) Where, in the course of years, the owner of property has 
 claimed its full cost as depreciation in his income-tax returns, no fur- 
 ther claim wull be allowed. 
 
 (/) 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. 
 
 100. A store or other building has outlived its usefulness; 
 the owner tears it down to make room for a building of an 
 improved type. Can the value of the old building at the time 
 of destruction be claimed as depreciation or as a loss? 
 
 No. Losses due to the voluntary removal or destruction of build- 
 ings, etc., incident to improvements are either a proper charge to the 
 cost of new additions or to depreciation already provided, as the facts 
 may indicate, but in no case is it a proper deduction in determining 
 
26 
 
 INCOME TAX PRIMER, 
 
 net incomo. If, bovvever, a building is destroyed prior to the close 
 of its lifetime, as estiinated for the purpose of making depreciation 
 cbarges. that portiori of its cost which is properly chargeable to the 
 period it might liavc remained in a usable condition may be consid- 
 ered a part of the cost of the new building when computing the 
 amount of the gain or profit derived from a sale of the latter. 
 
 101. If the authorities of a municipality declare that a 
 building is unsanitary or unsafe for the purposes to which 
 put and its destruction is ordered, can the losses sustained 
 by the owner be claimed as a deduction? 
 
 No; neither as a loss nor as depreciation. 
 
 102. I bought a patent for $5,000 which, under the patent 
 laws of the United States, had five years yet to run. As the 
 value of this patent depreciates each year on account of the 
 exhaustion of the patent period, may a deduction be claimed? 
 
 Yes. The cost of the patent 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. 
 
 103. I understand that depreciation in the value of articles 
 for personal use can not be claimed as a deduction. How- 
 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 purchased by members of the theatrical profession are 
 used exclusively 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 occui-s 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. 
 
 DEPLETION. 
 
 104. Under what conditions and at what rates may deple- 
 tion due to the removal of a natural product from oil or gas 
 wells, mines J quarries, etc., be claimed? 
 
 Paragraph 8 of section 5 of the act of September 8, 1916, as 
 amended by the war-revenue act of October 3, 1917, 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 consid- 
 erable detail by Treasury Decisions 2446 and 2447 and the Regula- 
 tions, copies of which may be obtained from the collector of internal 
 revenue for your district,'and where thesa Decisions and Regulations 
 do not afford all the information necessary in your particular 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. 
 
 105. With reference to the ninth paragraph of section 5 
 of the act of September 8, 1916, as amended, how am I to 
 
 *► 4 
 
 \ 
 
 ^ I » 
 
 INCOME TAX PRIMEE. 
 
 27 
 
 determine to what extent contributions or gifts made to cor- 
 porations or associations, organized exclusively for religious, 
 charitable, scientific or educational purposes, societies for the 
 prevention of cruelty to children or animals, 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 contributions or 
 gifts made to such corporations, associations, or societies, and then 
 if the aggregate of your contributions and gifts made during 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 deductions " on a per- 
 sonal return form. If such aggregate amount exceeds 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. 
 During the year you have contributed to the National Red 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 clamiing 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 (h) 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. 
 
 106. During 1917 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. 
 
 PARTNERSHIPS. 
 
 107. Are partnerships subject, as such, to the Federal in- 
 come tax and required to render annual income-tax returns? 
 
 No. Section 8 {e) of the act of September 8, 1916, as amended by 
 section 1204 of the war-revenue act provides that : 
 
 Persons carryin^j on business in partnership shall be liable iov income tax 
 only in their individual capacity, and the share of the profits to which a partner 
 would be entitled if the same were divided, whether divided or otherwise, shall 
 be returned for taxation and the tax paid under the provisions of this title. 
 
 This section further states how the distributive share of partner- 
 ship earnings or profits, which is taxable in the hands of the indi- 
 vidual member, is to be ascertained. 
 
 While annual returns are not required of a partnership for income- 
 tax purposes, the Commissioner of Internal Kevenue or any district 
 collector is authorized to request at any time that a true and accurate 
 return of a partnership's earnings, profits, and income shall be made, 
 excepting only the income which is exempt ffom taxation under the 
 
28 
 
 INCOME TAX ITRIMEB. 
 
 provisions of section 4 of the act of September 8, 1010, as amended, 
 which income is specified in the answer to the eighteenth question. 
 The required return shall set forth all the items of '* Giioss income'" 
 and general deductions, and the names and addresses of the indi 
 viduals who would be entitled to the net earnings, profits, or income, 
 if distributed, and the distributive share of each. 
 
 It is held thnt the income from a f)aitnership accrues to the indi- 
 vidual partner at the time his distributive interest is determined and 
 reducible to possession. In the returns of income made by indi- 
 viduals for the calendar year, therefore, there should be inchided such 
 income accruing from the business of the partnership for its busi- 
 ness oi' fiscal year as may have been definitely aiic.ertained by uieans of 
 a book bahince, whether distributed or not. In other words, mem- 
 bers of partnership's are required to make retui-ns of income like other 
 individuals for the calendar vear, and should include in th^'ir returns 
 the net proceeds of their interests in partnership profiis ascertained 
 at the end of the l)usiness vear fallincr within the calendar vear for 
 which the individual return is being tendered. 
 
 All domestic partnerships having a net income of $0,000 or more 
 for 1917, or any subsequent year, are required to render excess-profits 
 tax returns. 
 
 108. A partnership was organized in July, 1913, and in 
 1917 one of its individual members sold his interest therein 
 and retired. How is he to determine the an* ount of gain or 
 profit derived from the transaction which is returnahle for 
 income-tax purposes? 
 
 From the selling price should be deducted the amount of capital he 
 has actually invested in the partnership's assets and the difference 
 reported under " (iross income." 
 
 109. What forms of income, if any, are subject to with- 
 holding of tax at the source when paid to a partnership? 
 
 As the income received by a partnership is not subject to income 
 tax in the hands of the partnership, no tax is to be withheld from 
 income paid to a partnershij), either domestic or foreign. 
 
 FIDUCIARIES. 
 
 110. 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 in- 
 come-tax pur^)oses is any person or corporation that holds in trust 
 r.n estate of another person or i)ersons. 
 
 There may be fiduciary relationship between an agent and the nrin- 
 ipal, but the word " agent " d(jes 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 oi attorney. An agent having entire charge 
 of property, without authority to effect and execute leases with ten- 
 ants entirely on his own responsibility, and without consulting prin- 
 cipal, paying taxes and expenses and all other charges in connection 
 with the property out of funds in his hands from collections of rents, 
 
 c 
 
 S 
 
 t 
 
 INCOME TAX PRIMER. 
 
 29 
 
 merely turning over the net profits from the pre porty periodically 
 to his principal by virtue of authority conferred upon him by power 
 of attorney, is not a "fiduciary" within the meaning of the income- 
 tax law. In all cases where no legal trust bus been created in the 
 estate controlled by the agent and attorney the liability under the 
 law rests with the principal. 
 
 A deed of trust must be absolute so far as the conveyance of title 
 is concerned, and irrevocable by the donor. Otherwise the income 
 from the property in question will be held for income-tax purposes 
 to accrue to the donor and must be accounted for by him. 
 
 111. 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 ward? 
 
 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. 
 
 112. Is the duly appointed administrator of an estate of 
 a deceased person, who died during the tax year, required to 
 render a personal retvirn 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 remainfi m process of administration and its net 
 income from the date of the decedent's death to December 31 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 
 return rendered by him. 
 
 113. Is the trustee having charge of a trust estate, the 
 net income of which is regularly distributed among the bene- 
 ficiaries, required to render a return? 
 
 Yes; if any one of the beneficiaries is unmarried and his or her 
 distributive interest in the net income of the trust equals or exceeds 
 $1,000. Yes, also, if all the beneficiaries are married and the dis- 
 tributive interest of any one equals or exceeds $2,000. Othenvise, no. 
 
 It should be understood, however, that this answer is applicable 
 only in a case where all the beneficiaries are citizens or residents of 
 the United States. If any portion of the net income of an estate or 
 trust is distributed to a nonresident alien beneficiary a return is . 
 required, and the normal income tax of 2 per cent is to be deducted 
 and withheld from so much of the amount remitted to such bene- 
 ficiaries as was not derived from dividends or from the net earnings 
 of corporations, joint-stock companies, etc., subject to a like tax, or 
 has been subject to the withholding of the normal tax at the source. 
 
 114. 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 
 
 
i5G 
 
 INCOME TAX PRIMEIL 
 
 and additional tax assessed thereon, will the net income be 
 subject to tax in the hands of the beneficiaries when received 
 by them? 
 
 No. The estate cliirino- fidministration is helrl to be a taxable 
 entity; the fiduciary having it in charge is required to render returns 
 and pay the taxes assessed thereon, and, these taxes having once been 
 paid, such income is exempt from tax in the hands of the beneficiaries 
 who receive the same. 
 
 The income of estates in process of administration or in trust for 
 accumuhuion of income is taxed as for an unmarried person. 
 
 115. Is any other than a return of income required of a 
 fiduciary? 
 
 Yes. Fiduciaries come within the provisions of section 28 of the act 
 of September 8, lOlO, as amended l)y section 1211 of the wai'-revenue 
 act, and will be required to render to the Commissioner of Internal 
 Revenue a return of information, if, during the tax yt^ar. any income 
 has been paid to an indivnlual. partnership, corporation, joint-stock 
 company, etc., equal to, or in excess of, $800. 
 
 116. 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 is made to a nonresident alien iridividual 2 per 
 cent is to be deducted and withheld. 
 
 117. Is an ancillary administrator required to render 
 income-tas returns covering income received by him? 
 
 An ancillary administi-ator is held to be merely the agent of the 
 domiciliary administrator. The former should transmit to the latter 
 all information as to income received by him in order tiuit the domi- 
 ciliary administrator may make a return covering the entire income 
 of the estate. 
 
 118. Have the beneficiaries cf an estate or trust a right to 
 inspect income-tax returns rendered by a fiduciary covering 
 the income of the estate or trust in which they are interested'^ 
 
 An executor, administrator, or trustee acts for his principal, and 
 not for the beneficiaries of the estate of his principal ; therefore, 
 beneficiaries are not entitled, as such, to an inspection of returns of 
 income filed by such a fiduciary. 
 
 119. 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. 
 
 120. I act as trustee of a trust estate. A part of the net 
 income v/liich 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 me? 
 
 If the trust itself is named as a beneficiary and the amount of net 
 income which accrues to it as a beneficial^ equals or exceeds $1,000, 
 a return executed on Form 1040, for and in behalf of the trust, in 
 addition to the return executed on Form 1041, is required. 
 
 
 Ml 
 
 i 
 
 .r 
 
 > 
 
 INCOME TAX PRIMER. 
 
 31 
 
 121. May an executor or administrator render his fiduciary 
 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 dis- 
 charge upon final accounting, file with the proper collector of 
 internal revenue a return covering the income and deductions of the 
 estate for the period 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 adminis- 
 trator 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. 
 
 122. An individual, now deceased, held a life insurance 
 policy in which his estate was named as the beneficiary. Are 
 the proceeds of this policy subject to income tax? 
 
 The proceeds of life insurance policies payable to the estate of the 
 decedent, when received by his executor or administrator, axe, in 
 the amount by wliich such proceeds exceed the premium or premiums 
 paid by the decedent, income to the estate and are to be accounted 
 for by the executor or administrator. 
 
 123. 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 
 different instruments. When a trustee holds trusts created by differ- 
 ent persons for the benefit of the same beneficiary he should make 
 return for each trust separately on Form 1041. This ruling is based 
 on the identity of the creator and the identity of the trustee of the 
 various trusts and not upon the identity of the beneficiary. 
 
 124. May the expenses of administration of an estate be 
 claimed by the fiduciary as deductions in computing 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 bene- 
 ficiaries thereof. 
 
 125. May a fiduciary 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 form- 
 ing a part of the corpus of such estate has suffered depreciation 
 through its employment in business, a deduction from gross income 
 for the purpose of caring for this depreciation, where the deduc- 
 tion is applied or held by the fiduciary for making good such depreci- 
 ation, may be claimed by the fiduciary in his return of income. 
 
 i 
 
 I 
 
I..- 
 
 . 
 
 32 
 
 INCOME TAX PRIMER. 
 
 Fidnciaiios when making such a claim should set forth, in con- 
 nection with thfir returns, the provisions of law, trust, or decree re- 
 quiring- sucli d(^prcciation deduction where any exists, or when actual 
 depreciation occurs, the amount thereof, and that the same has been 
 or will be i)resorvod and applied as such. xVll amounts paid by fidu- 
 ciaries to beneficiaries of trust estates from income of sucli trust 
 estates, whetlier froui reserves or otherwise, are held to be distribu- 
 tions of income, and will be treated for income-tax purposes in 
 accordance with the in'ovisions of law and regulations applicable to 
 the income oi' such beneficiaries. 
 
 126. 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 tlie United States is the recipient of trust in- 
 come foT- 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 1040 or 1040 A, as the case may 
 be, for this trust income on l)ehalf of the nonresident alien and pay 
 any and all tax shoAvn by such return to be due. Where tliere 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 
 Ihe trust estate and a ])ers<inal return on Form 1040 or 1040 A for each 
 nonresident alien beneficiary. 
 
 WITHHOLDING OF TAX. 
 
 127. At what rates and from what income is the normal 
 income tax now to be deducted and withheld at the source? 
 
 All persons, corporations, partnerships, associations, or insurance 
 companies paying any amount of fixed or determinable gain, profit, 
 or income, other than that paid as dividends on tlie capital stock or 
 from the net earnings, profits, or income of corj^orations, joint-stock 
 companies, etc., subject to a like tax, to a nonresident alien individual, 
 are required to deduct and witiihold normal tax at the rate of 2 per 
 cent from the entire amount paid. 
 
 Normal income tax at the rate of 6 i)er cent is to be witliheld from 
 all payments of interest upon bonds, mortgages, deeds of trust, or 
 other similar obligations of domestic or other resident corporations, 
 joint-stock companies, associations, or insurance companies, when 
 paid to foreign corporatious, joint-stock companies, associations, or 
 insurance companies haviiig no vofHce or place of business in the 
 United States. 
 
 When dividends are ])aid upon the capital stock or from the net 
 earnings of domestic or < ther resident corporations, joint-stock com- 
 panies, associations, or insurance comjianies, to foreign corporations, 
 joint-stock companies, etc., liaving no office or place of business in 
 the United States, normal tax at the rate of 2 per cent is to be with- 
 held. 
 
 No amount of tax is to be withhekl from any payment of income 
 made to a partnership, whether domestic or foreign. 
 
 The normal income tax is not to be deducted and withheld from 
 any payment of income made to a citizen or resident of the United 
 States except when derived from interest on a bond, mortgage, or 
 
 i 
 
 -r I V 
 
 INCOME TAX PBIMEE. 
 
 38 
 
 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 miposed by the Federal income-tax law upon 
 the obligee or to reimburse the obligee for any portion of the tax 
 which the obligor may be required or permitted 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 corpora- 
 tion, joint-stock company, etc., which contains a so-called *' tax-free" 
 or " no-deduction " clause to a citizen or resident of the United States 
 normal tax at the rate of 2 per cent is to be withheld, unless personal 
 exemption is claimed, and then only from the amount paid in excess 
 of the exemption claimed. 
 
 A State, county, municipality, or any other political subdivision 
 of a State is not required to withhold any amount of income tax from 
 interest which it may pay upon its own obligations, even though such 
 interest is paid to nonresident alien individuals or foreign corpora- 
 tions. 
 
 128. Is a corporation required to actually 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 f undsf 
 
 The stipulation in the bonds of a corporation whereby the tax 
 which may be assessed against them, or the income therefrom, \a 
 guaranteed, is held to be a contract wholly between the corporation 
 and the bondholder. The debtor corporation will be held liable for 
 the amount of tax due, whether that tax is actually deducted and with- 
 held, or the interest paid in full and responsibility for payment of 
 the tax assumed by the corporation. 
 
 129. How may a citizen or resident of the United States 
 secure the benefit of personal exemption to which he is en- 
 titled when receiving a payment of interest on bonds con- 
 taining a so-called *' tax-free " or " no-deduction " clauseP 
 
 By attaching to the interest coupons an income-tax exemption cer- 
 tificate, Form 1001, revised January, 1918. If exemption is not 
 desired, Form 1000, revised January, 1918, should bo used. 
 
 RELEASE OF TAX HERETOFORE BUT NOT NOW REQUIRED TO BB 
 
 WITHHELD. 
 
 130. Will I be required to make a return of, and be held 
 liable for, the amount of normal tax which I deducted and 
 withheld during the year 1917, prior to the passage of the 
 war-revenue act of October 3, 1917, from income paid to 
 citizens or residents of the United States? 
 
 No. Section 1212 of the act of October 3, 1917» provides that any 
 amount heretofore withheld by any withholding agent, as required 
 by Title I of the act of September 8, 1916, on account of the tax im- 
 posed upon the income of any individual, a citizen or resident of thi 
 United States, for the calendar year of 1917, except that withheld 
 from interest paid on bonds containing a "tax-free" or "no deduc- 
 tion " clause, shall be released and paid over to such individual 
 
■'"' ---T^—- ■ - —n 
 
 84 
 
 INCOME TAX PRIMER. 
 
 IirOOME TAX PBIMEB. 
 
 35 
 
 If 
 
 *-■■ X 
 
 Therefore, any amount of normal tax withheld during the year 
 1917 from income paid to a citizen or resident of the United States, 
 except interest on oonds and mortgages or deeds of trust, or other 
 similar obligations of corporations, joint-stock companies, etc., con- 
 taining a so-called " tax-free " or " no deduction " clause, may now 
 be released and paid over to sfuch individual and no return or pay- 
 ment of such tax will be required from the withholding agent. 
 
 RETURN AND PAYMENT OF TAX WITHHELD AT THE SOURCE. 
 
 131. How is tax withheld at the source to be returned and 
 paid? 
 
 Tax withheld from income other than interest on corporate obli- 
 
 fations shall be reported to the collector of internal revenue for your 
 istrict on income tax Form 1042 on or after February 1, but not 
 later than March 1 of the year next succeeding the year during which 
 the withholding occurred. Tax withheld from interest on corporate 
 obligations shall be reported to the colhctor on Form 1012 within 
 20 days after the close of the month during which the withholding 
 occurred, and a summary of such monthly returns shall be made to 
 the collector on or after February 1, but not later than March 1, on 
 Form 1013. 
 
 Payment of the amount of tax assessed against a withholding re- 
 turn shall be made to the collector of internal revenue in whose dis- 
 trict the withholding agent is located. 
 
 132. 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 amount of tax withheld. 
 
 RETURNS OF INFORMATION. 
 
 133. From whom are returns of information required? 
 
 Section 26, act of September 8, 1916, as amended provides that every 
 corporation, joint-stock company, or association or insurance com- 
 pany subject to the Federal income tax on it^ own income shall, when 
 required by the Commissioner of Internal Revenue, render a correct 
 return, duly verified under oath, of its payments of dividends 
 whether made in cash or its equivalent or in stock, which return shall 
 give the names and addresses of the stockholders, the number of 
 shares owned by each, the aggi*egato amount of dividends received 
 by each, and the tax years and the applicable amounts in which such 
 dividends were earned. 
 
 Section 27, san^e act, provides that every person, corporation, part- 
 nership, or association doing business as a broker on any exchange 
 or board of trade or other similar place of business shall, when re- 
 quired by the Commissioner of Internal R€venue, render a correct 
 return, duly verified under oath, showing the names and addresses 
 of customers for whom any business has ueen transacted, with such 
 details as to profits, losses, or other information which the Commis- 
 sioner of Internal Revenue may require to enable him to determine 
 whether all income tax due on profits or gains of such customers has 
 been paid. 
 
 t 
 
 I 
 
 ,»^. 
 
 •^ 
 
 I 
 
 Section 28, same act, provides that aU persons, corporations, part- 
 nerships, associations, and insurance companies making a payment 
 to any person, corporation, partnership, association, or insurance 
 company of interest, rent, salaries, wages, premiums, or other items 
 of fixed and determinable gains, profits, and income (other than 
 dividends on stocks or gains or profits derived from transactions on 
 any exchange or board of trade or other similar place of business) of 
 $800 or more during any calendar year shall render a true and 
 accurate return covering the payments made, which return shall 
 disclose the names and addresses of the recipients of such payments 
 and the aggregate amount paid to each durmg the calendar year. 
 
 Under this section returns of information will also be required, 
 regardless of amounts paid, in the case of payments of interest upon 
 bonds and mortgages or deeds of trust or other similar obligations 
 of corporations, joint-stock companies, associations, and insurance 
 companies^ and also in the c^se of collections of items (not payable 
 in the United Stat.es) of interest upon the bonds of foreign coun- 
 tries and interest upon bonds and dividends from the stock of foreign 
 corporations, from all persons, corporations, partnerships, or asso- 
 ciations which undertake as a matter of business or profit the collec- 
 tion of foreign payments of Interest or dividends by means of cou- 
 pons, checks, or bills of exchange. 
 
 Under the provisions of section 9 of the act of September 8, 1916, 
 as amended, no person, corporation, partnership, or association can 
 undertake as a matter of business or tor profit the collection of for- 
 eign payments of interest or dividends by means of coupons, checks, 
 or bills of exchange without first obtaining a license from the Com- 
 missioner of Internal Revenue, and whoever knowingly undertakes 
 to collect such payments as aforesaid without having obtained a 
 license therefor or without complying with prescribed regulations 
 shall be deemed guilty of a misdemeanor and for each offense be fined 
 in a sum not exceeding $5,000 or imprisoned for a term not exceeding 
 one year, or both, in the discretion of the court. 
 
 The returns which will he required under the provisions of sections 
 26, 27, and 28 are to be rendered under such rules and regulations as 
 the Commissioner of Internal Revenue, with the approval of the 
 Secretary of the Treasury, may prescribe, which rules and regula- 
 tions are now in course of preparation and will soon be announced. 
 
 134. I pay an annual rent, exceeding $800 in amount, to 
 an agent who refuses to disclose the name of the landlord. 
 May I require the agent to furnish me with the name and 
 address of his principal in order that I may make a proper 
 return of information? 
 
 Yes. When an agent receives, in behalf of his principal, a payment > 
 falling within the provisions of law for information at the source, 
 he is required by law to furnish the name and address of the prin- 
 cipal upon receipt of a demand therefor from the payer, and in de- 
 fault of a compliance with such a demand the agent becomes liable to 
 a penalty of not less than $20 nor more than $1,000. 
 
 135. 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 
 
> 
 
 86 
 
 INCOME TAX PRIMEB, 
 
 li 
 
 cash plus the value to such person of the allowances to be 
 returned? 
 
 Yes. A return under section 28 is required in each case where the 
 cash compensiition plus the vahie of the allowances equals or exceeds 
 $800 for the tax year. 
 
 PAYMENT, ABATE»IENT, AND REFUND OF TAX ASSESSED. 
 
 136. To whom is an assessment of income tax to be paid? 
 To the collector of internal revenue with whom your return was 
 
 filed and from whom a receipt will be received. 
 
 137. When does payment of income tax assessed against 
 an individual become due and payable? 
 
 The tax is to be paid upon receipt of a notice from the collector 
 of internal revenue of the amount of tax due, and at all events not 
 later than June 15. If the tax is not paid by June 15, the collector 
 will issue a second notice and demand therefor, and if at the expira- 
 tion of 10 days from date of this notice the tax remains unpaid it 
 becomes delinquent. The penalty for such delinquency is 5 per cent 
 of the amount of tax unpaid and interest at the rate of 1 per cent per 
 month upon such tax from the time the same became due to date of 
 payment. 
 
 138. What recourse has a taxpayer when he feels that ho 
 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 oi 
 such a 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, pro- 
 vided, in case of rejection of the claim, the tax due is paid within 10 
 days from the date of notice of such rejection. However, in case 
 of rejection, interest at the rate of 1 per cent per month will run 
 fi'om the date of the notice served prior to the fihng of the claim and 
 until the tax due is paid. 
 
 It should be understf5od, however, that the filing of a claim for 
 abatement of tax alleged to have bex»n erroneously assessed does not 
 operate as a suspension of the collection of the tax. If the collector 
 feels that the suspension of collection will jeopard ize the interests of 
 the Government, ho may collect the tax and leave the taxpayer to his 
 remedy by a claim for refund. 
 
 139. On my 1916 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 collector of internal revenue for your district a 
 claim for refund, executed on Form 46, copies of which may be ob- 
 tained from the collector. 
 
 140. In 1317 I paid $50 income tax in excess of my true 
 tax liability for the year 1916. Can this excess payment be 
 applied in payment of a later assessment of tax? 
 
 INCOME TAX PBIMEB. 
 
 87 
 
 4 
 s 
 
 \ 
 
 * 
 
 No. An excess payment of tax in one year can not be offset against 
 an assessment of tax for a subsequent year. 
 
 141. Can an assessment of income tax be paid in install- 
 ments? 
 
 Section 1009, act of October 3, 1917, provides that taxpayers liable 
 for income tax may make payments of such tax in advance, in in- 
 stalhnents, or m whole, of an amount not in excess of the estimated 
 tax which will be duo from them, and upon determination of the tax 
 actually due, any amount paid in excess shall be refunded as taxes 
 erroneously collected, and credit against such tax so paid in advance 
 may be allowed in an. amount not to exceed 3 per cent per annum, 
 collected upon the amount so paid from the date of such payment to 
 the date now fixed by law for such payment; but no such credit shall 
 be allowed on payments in excess of taxes determined to be due, nor 
 on payments made after four and one-half months after the close of 
 the taxable year. In case of an undertaking to pay tax in install- 
 ments, and default of any installment, the penalty for failure to pay 
 tax when due will attach. 
 
 Rules for the calculation of the 3 per cent credit on account of ad- 
 vance payment of tax, or a reduction otherwise of the amount of tax 
 assessable on a return of income by means of advance payments, are 
 fully set forth in Treasury Decision 2622. 
 
 INSPECTION OF RETURNS. 
 
 142. Will any information contained in my personal re- 
 turn be disclosed to another? 
 
 No. The law specifically provides that any information relative 
 to an individual s income and deductions, obtained from his personal 
 return, or otherwise, in connection with the income tax, shall be in- 
 violably confidential, and it is unlawful 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 em- 
 ployees of the Treasury Department, or to the proper officers of % 
 court for use m 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 imprisonment not 
 exceeding one year, or both, at the discretion of the court, and dis- 
 missal from the service of the Government. 
 
 143. If my attorney requests a copy of my return or any 
 information relative thereto, will his request be granted? 
 
 No; unless the return was rendered by him for and in your behalf, 
 or ho submits an authorization, personally signed by you, permitting 
 the copy or information to be given to him. 
 
 \ 
 
tNDEX. 
 
 - 
 
 • 
 
 Abatement of assessment, claim for 
 
 Accident Insurance IZL.J1!! 
 
 Accrual basis, returns may be made on 
 
 Farmers ~r~" 
 
 Actors and actresses, costumes of. 
 
 Additional tax 
 
 Dividends are subject to IIIIZ! 
 
 Husband and wife r__~"~^_~2[ 
 
 Rates IIIZ^^ 
 
 Administration, expenses of Z. 
 
 Administrators 
 
 Ancillary 
 
 Qoestiom. 
 
 — 138 
 
 — 41 
 
 — 75 
 28 
 
 — 103 
 
 14 
 
 Expenses deductible 
 
 Advance payment of tax 
 
 Agents for nonresident aliens. 
 
 Airents may make returns for principals. 
 
 AgenU real estate; in connection with information at the TOu'rceand rent 
 payment _^ _^ 
 
 Agents versus fiduciaries I_IIII Z, 
 
 Agents working on commission basis, expenses " [||^ 
 
 Alimony ~ 
 
 Appreciation involving value of capftai assets rrtoci'divWrads^resuitine 
 from capitalization of 
 
 Appr<-ciatlon in value of tecurities evidencS bybookentri^only II 
 
 Assessment of tax 
 
 Assessment on stock ..«««. ~ 
 
 20 (h) 
 
 9 
 
 14 
 
 124 
 
 112,114,121 
 
 117 
 
 124 
 
 141 
 
 U 
 
 6 
 
 134 
 
 110 
 
 64 
 
 48 
 
 55 
 
 80 
 137 
 
 — 70, 71 
 
 Bad debts .. 
 
 Compromises 
 Recoveries 
 
 90-98 
 98 
 95 
 44 
 118 
 137 
 
 Banlc : Taxes paid on stock for shareholders IIIII I_»III~~ 
 
 Beneficiaries : Inspections of returns made by fiduciaries" " I I" 
 
 Bills for taxes ~~~ 
 
 Bonuses IIIIIIIIIIIIII II~II~II~II" 33 
 
 O-immon stock as bonus when purchasing preferred stock ~ - - - 
 
 Books and bookkeeping ~ 75 
 
 Appreciation in values evidenced by books only IIIIIIIII"" 80 
 
 Depreciation In values evidenced by books only I gn 
 
 Farmers _ oq 
 
 Bonds: "^ 
 
 Interest : Deduction of the tax at the source 127-128 
 
 liiieiesi: Keturas of information by the debtor IIIIII"" 133 
 
 Liberty loan bonds ^ 38 7A 
 
 Losses In connection with purchase of IIIIII_II ' 80 
 
 State bonds : No withholding of tax on interestlllllllllllllllH 127 
 
 Tax-free covenant bonds, tax to be deducted on interest on~III~127~128 129 
 
 Building and loan associations : Amounts placed to credit of shareholders ' 46 
 
 Buildings, depreciation of _ " 99 
 
 Condemned IIIIIIIIII I_ ini 
 
 Outlived usefulness IIIIIIIIIIIIIIII"! "I lOQ 
 
 Brokers, returns of information by IIIIIIIIIIIIII I 133 
 
 ••Business expenses" defined IIIIIIIIIIIIIII IIII 59 
 
 SS 
 
 I 
 i 
 
rl 
 
 
 I 
 
 40 
 
 INCOME TAX PKlMEiU 
 
 O. 
 
 Question. 
 55 
 
 7T 
 
 129 
 
 15 
 
 135 
 40 
 45 
 65 
 
 Capital assets, capitalization of appreciation of 
 
 Capital invested, estimated interest on 
 
 Certiticates of ownership 
 
 Cmidren : 
 
 Additional exemption on account of 
 
 Employed by parent 61 
 
 Wages of, liability of parent in connection with 37 
 
 Claim for abatement of assessnieut 138 
 
 Claim for refund of excess taxes paid 139 
 
 Commissions : 
 
 In addition to salary ; In connection with Information at the source— 
 
 On renewal premiums 
 
 Common stoclj as bonus to preferred stoclt 
 
 Commuters ; railroad fares, lunches, etc 
 
 Comprorai.ses of indebtedness 98 
 
 Cod tracts: 
 
 Installment sales 36 
 
 With State or political subdivision thereof 34 
 
 Coupons; certiticates of ownership to accompany 129 
 
 Coui:K>ns purchased ; accrued Interest 42 
 
 Crops, lasses in connection with 89 
 
 D. 
 
 Damag:es paid for Injuries inflicted 81 
 
 Damages received for injuries sustained 41 
 
 r»ebtors, deduction of taxes at the source by 127 
 
 Debtors, returns of information by 133 
 
 Debts deductil»te or not ^^oq 
 
 Compromises 98 
 
 Recoveries 9o 
 
 Decedent dying during tax year 1*- 
 
 Deduction of tax at tlie source ^-^ 
 
 Exemption claims 1^9 
 
 Fiduciaries for nonresident aliens Ho 
 
 Foreign corporations Ij^^ 
 
 N<»nrcsident nliens ^ •['» j^^ 
 
 Parttiersliips 1^^*^' ^27 
 
 Payment of tax withheld 1^1 
 
 Release of taxes withheld during 1917 1^2 
 
 Returns 
 
 130. 132 
 
 Tax-free covenant bonds, interest on 127,128,129 
 
 Deductions 
 P»ad debts 
 
 58 
 90 
 
 Gifti5___ 
 Interest. 
 
 Losses 
 
 Taxes. 
 
 Depletion 1^ 
 
 Deprocintion 99 
 
 Expenses ^9 
 
 Fiduciaries « l-"* 1-*^ 
 
 94, 105 
 
 _ ~_ _ 7G 
 
 ■_ 80 
 
 '"'""'"_ 78 
 
 Deed of trust must be absolute and irrevocable 110 
 
 Delay in payment of tax 1 137 
 
 Depletion of mines and wells 104 
 
 Depreciation 99 
 
 Buildings condemned 191 
 
 Buildings, outlived usefulness 100 
 
 Costumes of actors ond actresses 103 
 
 Patents 192 
 
 Rates 99 
 
 Securities, depreciation evidenced by booijs only 80 
 
 Trust estates 125 
 
 I 
 
 IKCSUB TAX PSIICBB. 
 
 41 
 
 Qnestloik 
 
 Dteeonnt on account of advance payment of taxes 141 
 
 Dividends , , M. 50, 6S 
 
 Declared prior to Aagnst ^ 1917, from funds specified to hare been 
 
 acciuDuhited prior Co March I. 1913 58 
 
 DeductloD of the tax at the sour^se; nonresident alien corporations 127 
 
 Sixempx for normal tax purposes 20(h) 
 
 Life Insurance; paid-up policies 57 
 
 Returns of information relative to dividend payments made 138 
 
 Sale of stock ; loss resulting from not to be offset by dividends earned 84 
 
 Stock dividends ; 52, 56 
 
 Stockholder's duty to ascertain year in which properly taxable 54 
 
 Donations deductable or not 94, 105, 106 
 
 E. 
 
 Entertainment expenses fjg 
 
 Estates: 
 
 Expenses of administration 124 
 
 In process of administration 114 
 
 Insurance accruing to 12J 
 
 Trust estates lis, li4,~i20, 123, 125 
 
 Excess payments of taxes 139, 140 
 
 Executors 112, 114, 121 
 
 Expenses deductable 124 
 
 Exempt Incomes __^ xi 
 
 Exemption iB 
 
 Decedent dying during tax year jjj 
 
 Deduction of tax at the source: Claims for exemption 129 
 
 EiStatc s during gettiement 112, 114 
 
 Guardians, etc, for wards, etc I I m 
 
 Head of family 21 17 
 
 Husband or wife dying during tax year I i<§ 
 
 Returns may be required even though income may exceed exemption 10 
 Trust estates us^ 114^ 12O 
 
 Expenses deductable or not 59 
 
 Business v, personal expenses _-._«. M 
 
 Failure to fUe returns 
 
 False returns 
 
 Farms and farmers : 
 
 Books and bookkeeping. 
 
 Crop losses 
 
 i 
 T 
 
 Expenses deductable 89 66, 86 
 
 Fancy stock farm "~ ' ' g^ 
 
 Hired help Z ZI"I_I 00 
 
 Income subject to return and tax I 28,29,30.31 
 
 Live stock losses ' 'gg 
 
 Recreation or pleasure; farm operated for_ ZI_II 80 
 
 Fees paid to attorneys^ arcliitects, etc 
 
 Fees; uncollectible 
 
 Fiduciaries 
 
 Derturtion of the tax at the source by 
 
 7S, 74 
 
 UO 
 
 110 
 
 Deductions allowable to i24, 120 
 
 Income received from ZII II 20(4) 
 
 Information at the source I_IIIIIIIIIIIIII 110 
 
 Nonresident alien beneficiaries IIII_III"ll6 120 
 
 Returns _ IIIII~ ' lil 
 
 Tax liability I__I IIII.IIIIII I" ilj 
 
 Fires ; timberhinds HI IIIIIII.IIIH 87 
 
 Foreclosure proceedings IIII_I I 97 
 
 Foreign items; returns of information relative to___II__IIIIIIIII_IIII 138 
 Foreign organizations liaving no office or place of business in the 
 United States ^^ 
 
42 
 
 IKOOME TAX PBIMEB. 
 
 nroOMB TAX PBIMEB. 
 
 48 
 
 G. 
 
 Gas wells; depletion of. 
 Gifts deductatne or not.. 
 
 QaestloA. 
 _- 1( 
 
 Good will ; stock dividends resnltinf from a capitalization of 
 
 Gross income-. 
 Guardians; returns by. 
 
 0il06,l( 
 
 Head of family 
 
 Hired help: 
 
 Cbildren paid by parent 
 
 
 Farmers — . 
 
 Husband and wife: 
 
 Additional tax liability 
 
 Deatb of one during tax year 
 
 Keturns by 
 
 61 
 60 
 
 9 
 
 16 
 
 8 
 
 ImproTements made nnder terms of lease 
 
 Income 
 
 82 
 
 18 
 
 Amount needed to make return necessary 1 
 
 Exempt Inctime 18 
 
 Flduciarlea; income received from _.« 20(d) 
 
 Gross Income 20 
 
 Information at the source 135 
 
 Net income 19 
 
 Partnerships 107 
 
 Income received from . — — . 20(c) 
 
 Sale of Interest in 108 
 
 Income tax paid for previous tax year Is not duductible 79 
 
 Incompetents: Conservator of estate to make return 111 
 
 Information at the source 133 
 
 Fiduciaries 115 
 
 Inspection of returns 142, 143 
 
 By beneficiaries of returns made by fiduciaries 118 
 
 Inf(tallment sales 
 
 Installments; payment of tax in 
 
 Insurance : 
 
 Accident 
 
 36 
 
 141 
 
 41 
 57 
 39 
 
 Dividends on paid-up life 
 
 Endowment policies matured 
 
 Life ; on employee or member of partnership for benefit of employer 
 
 or firm 68 
 
 Life and fire ; on self and home 67 
 
 Payable to estate 122 
 
 Interest accrued on coupons purchased 42 
 
 Interest deductible or not 76 
 
 Interest on liberty loan bonds 38 
 
 Interest payments ; returns of information by debtor 133 
 
 Inventories 35 
 
 Investments; losses in connection with 80 
 
 Dividends received; bearing on losses 84 
 
 Judgments paid. 
 
 81 
 
 Liberty loan bonds : 
 
 Interest from as taxable income — 38 
 
 Interest on money borrowed with which to buy bonds 76 
 
 License for collecting foreign items 133 
 
 Live stock; losses in connection with 88 
 
 Local improvements ; taxes for — <o 
 
 * I } 
 
 f 
 
 Losses dednctibla or not 
 
 Losses from sale of property 
 
 losses "in business " v. ** Losses outside of business ** 
 
 March L 1913 ; manner of determining value of property as of 
 
 Merchants : 
 
 Y Expenses deductible - . 
 
 Profit or loss ; manner of determining 
 
 Mines; depletion of : 
 
 QuestlML 
 
 _ 80 
 ^ 82 
 — 83 
 
 27 
 
 59 
 35 
 
 104 
 
 N. 
 
 Net Income _«_- 
 
 Nonresident aliens: 
 
 Agents acting for , 
 
 Deduction of tax at the source 
 
 Fiduciaries of 
 
 .Normal tax rates 
 
 Dividends are exempt for normal tax 
 
 Notice and demand for tax 
 
 19 
 
 11 
 
 127 
 
 116, 126 
 
 14 
 
 20 {h) 
 
 137 
 
 O. 
 
 on wells; depletion of. 
 
 Orchards ; initial expenses In cozmection with. 
 
 Ownersllip norriflrMitoa 
 
 104 
 
 86 
 
 129 
 
 P. 
 
 Partnerships — __>_^-.«-»__ 1(JT 
 
 Deduction of tax at source against 109, 127 
 
 Income received from __?0(f) 
 
 Life Insurance on member for benefit of firm . 68 
 
 Sale of Interest in , 108 
 
 Patenta depreciation of 102 
 
 Penalties : 
 
 Delay In pajrment of tax _— »_ .—_.-, 187 
 
 Dividing contents of returns „,-,_ 142 
 
 Failure to make returns 4 
 
 XZ Failure to obtain license for coll fiction of foreign it^ma igg 
 
 C Failure to supply information at the source 134 
 
 False return -,.,^„,—., - . ■ -«-,^ 7 
 
 Pensions 43 
 
 Pw diem allowances in addition to salary 24 
 
 personal expenses . S9 
 
 Profit from sale of prox>erty -«« — .. , 26 
 
 Installment contracts 36 
 
 Professional men: 
 
 Expenses deductible 59,72 
 
 Fees paid to — _. 73, 74 
 
 Fees uncollectible 96 
 
 R 
 
 pecoverles on bad debts 95 
 
 Itefund of excise taxes paid ; claims for 139 
 
 Release of tax withheld at the source in 1917 131 
 
 Bent payments; information in regard to by payor 133 
 
 Agent to give name and address of principal 134 
 
 Retired pay of Army and Navy officers 43 
 
 Returns . 1 
 
 Accrual basis ; returns may be made on 75 
 
 Farmers 28 
 
 Administrators 112, 114, 121 
 
 Agent may make return for principal 6 
 
44 
 
 INCOME TAX PRIMER. 
 
 Beturas-Continueil. Question. 
 
 By whom filed ^ 
 
 Conservator of estate of incompetent 111 
 
 Deduction of tax at tlie source ; return of amounts withheld 130, 132 
 
 Exemption may exceed income yet return may be required 10 
 
 Extension of time for flHng 5 
 
 Failure to file return 4 
 
 False return '* 
 
 Fiduciaries 111 
 
 Form for making 13 
 
 Guardians HI 
 
 Husband and wife 8 
 
 Information at the source 133 
 
 Fiduciaries 115 
 
 Partnerships 1^^ 
 
 Penalty for failure to file 4 
 
 Penalty for false return 7 
 
 Period covered is calendar year for Individuals 12 
 
 Secrecy of 142, 143 
 
 Trustees iid, izu 
 
 When filed 3 
 
 Where filed 2 
 
 Rights to subscribe to additional stock 47 
 
 Boom and board in addition to salary 23 
 
 S. 
 
 Salary received 21, 22, 23, 24 
 
 Bonuses ^ 
 
 Paid in kind 49 
 
 Paid self by taxpayer ^- 
 
 Returns of information by payor 1^. i^^ 
 
 Bale of property : 
 
 Installment contracts ^ 
 
 Loss incurred °- 
 
 Profit from ^^ 
 
 Salesmen working on commission basis; expenses of 04 
 
 Secrecy of returns ^42, 14o 
 
 State or political subdivision thereof: 
 
 Bonds ; no withholding of tax on interest on 1^< 
 
 Contracts with 34 
 
 Stock : 70 71 
 
 Assessment against '"» *^ 
 
 Dividends on 20 ( h) 
 
 Common, as bonus on purchase of preferred 45 
 
 Losses in connection with purchase of |^ 
 
 Dividends received ; bearing on losses 84 
 
 Rights to subscribe to additional 47 
 
 Taxes paid by bank for shareholders 44 
 
 Stock dividends \oo 
 
 Stockholders, returns of information relative to loo 
 
 T. 
 
 Tax 1^^ 
 
 Abatement of assessment, claim for 138 
 
 Advance payment of ™ 
 
 Rills l0< 
 
 Excess payments ^^^' |3X 
 
 Penalty for delinquency ^^^ 
 
 Refund of excess amounts paid, claims for io» 
 
 To whom paid |gl^ 
 
 When due 
 
 Tax-free covenant bonds, etc. ; tax to be withheld on interest 127, 128 
 
 Tax liability ^.J 
 
 Fiduciaries ™ 
 
 Tax rates ^^ 
 
 Tax year for individuals ^^ 
 
 INCOME TAX PRIMES. 
 
 Taxes deductible or not „ 
 
 Taxes paid by bank on Its stock for shareholders ^ 
 
 Taxes paid by tenants under lease contract 
 
 Tenants — .»- 
 
 Tlmberlands; losses from fires 
 
 Title, defective; expenses in connection with — — . 
 
 Trust estates —»—._«—— 
 
 Depreciation allowable « 
 
 More than one trust — _— « 
 
 Trustees to make returns — ,, .-_ 
 
 More than one trust 
 
 4« 
 
 Question. 
 
 78 
 
 44 
 
 69 
 
 82, 69 
 
 87 
 
 73 
 
 113, 120 
 
 125 
 
 123 
 
 113, 120 
 
 123 
 
 * \ 
 
 United States bonds ; taxability of interest on the Ub»t7 loaa bonds 
 
 W. 
 
 Wells : Depletion of oil and gas wells 
 
 WitlUioicling of tax at the SQiirce (see " Dedncdaa 9t tax at tke soorce.") 
 
 38 
 
 ICM 
 
 
 It.t 
 
 i^i 
 
 rr 
 
 
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