MASTER NEGATIVE NO. 94-82251 COPYRIGHT STATEMENT The copyright law of the United States (Title 17, United States Code) governs the making of photocopies or other reproductions of copyrighted materials including foreign works under certain conditions. In addition, the United States extends protection to foreign works by means of various international conventions, bilateral agreements, and proclamations. Under certain conditions specified in the law, libraries and archives are authorized to furnish a photocopy or other reproduction. One of these specified conditions is that the photocopy or reproduction is not to be "used for any purpose other than private study, scholarship, or research." If a user makes a request for, or later uses, a photocopy or reproduction for purposes in excess of "fair use," that user may be liable for copyright infringement. The Columbia University Libraries reserve the right to refuse to accept a copying order if, in its judgement, fulfillment of the order would Involve violation of the copyright law. Author: National City Company Title: Digest of the Federal Revenue Act of 1921 Place: New York Date: [1921] ^M4aSLS\-< COLUMBIA UNIVERSITY LIBRARIES PRESERVATION DIVISION BIBLIOGRAPHIC MICROFORM TARGET MASTER NEGATIVE # ORIGINAL MATERIAL AS FILMED - EXISTING BIBLIOGRAPHIC RECORD '0iz " ■!r ^"" ' rr^^ w National city bank of Hew York. Digest of the federal Revenue act of 1921 for incone and excess profits taxes for 1921, 1922 and subsequent years, with tables for calcula- tion of tax and for comparison of taxes... Kew Yorl: j-Cig^i^ 99 p. tables. 1977 cm. Act passed November 23, 1921 i effective for income tax January 1, 1921. i\ inj- ]^ ■ - -^ ''''■'' ■'■■',' r.'i-i^t 'i RESTRICTIONS ON USE: c TECHNICAL MICROFORM DATA RLM SIZE: 3bw\m REDUCTION RATIO: M IMAGE PLACEMENT : IAMIa) IB IIB DATE FILMED: \^A%M TRACKING # : /nsM INITIALS: FILMED BY PRESERVATION RESOURCES, BETHLEHEM. PA. e^f^ ''#-^" 3 3 IS o ^ ^£ ^ -J) CJl OiX ^-< cx)rsi ^ .A^. . # 'S^^ ^ U1 3 > GD 0) O o m CD O OQ CJl J ^ C/) X < N X M A^ <^ ^^ opqrstuvwxy2l234567890 ABCDEFGHIJKLMNOPQRSTUVWXYZ abcdefghi|klmnopqrstuvwxy2l234567890 ABCDEFGHIJKLMNOPQRSTUVWXYZ abcdefghijklmnopqrstuvwxyz 1234567890 2.5 mm ABCDEFGHIJKLMNOPQRSTUVWXYZ abcdefghijklmnopqrstuvwxyz 1234567890 '^ :0 fp ^^ ts> V ** ■.< ii ^ ^S i:' ^o ^^ fp ^fy m O O "o ED "o OLl"o > c o m 30 O m X- <5' o ^ S-ro 3i ^E w^ -J-< OOM VO o ^o i^ 1— » N) cn O 3 3 -. 3 0> O >> °i ^i *< JO N C/) OtX ^-< OOM o Cp. ^ '^> 4^ Digest OF THE Federal Revenue Act OF 1921 THE NATIONAL QTY BANK OF NEW YORK J F I vmRP r^iTi^z^^ssTTTr < 4 LIBRARY School of Business DIGEST OF THE FEDERAL REVENUE ACT OF 1921 For Income and Excess Pkofits Taxes FOR 1921, 1922 A\D SUCSEQLENT YeARS With Taeles jor Calculation of Tax AND FOR Comparison of Taxes Act Passed November 23, 1921, Effective for Income Tax January i, 1921, THE NATIONAL CITY BANK OF NEW YORK 55 WALL STREET, NEW YORK '^'V> U/i-/ ^^^ Copyright, 1921, The National City Company 3 +30 .2. MM FOREWORD rilHIS pamphlet is confined to a consideration of ^ Federal taxation of income, as such taxation is provided for by the Revenue Act of 1921. The subject is considered under three general heads: (a) Definition of terms used in the Act. (b) Notation of the principal modifications of the Revenue Act of 1918. (c) A resume of the Income Tax Law, with comment, illustrations and tables of com- putation of tax applicable to individual, estate or trust and corporation income, and tables of comparison and effect of tax. The object sought is to assist taxpayers in reading the Law intelligently and applying it to the facts of their particular cases. The analysis and suggestions made are of course subject to such modification as departmental regu- lations — ^when issued — may require. The Law is always the source of authority. It is printed in a separate pamphlet. p i i CONTENTS V i DEFINITIONS (Words and phrases used in the Law) Pages 9 to 24 Income Tax Paragraphs Modifications of Revenue Act of 1918 I - 19 Income Tax — definition 20 Sources of Tax 21 To whom tax applies 22- 23 Kinds of Tax 24 Normal Tax 25 Surtax 26- 28 Tax — Partnerships and Personal Service Corporations. . 29- 32 Estates or Trusts 33- 37 Corporations 38- 46 Difference in rates of tax 47- 48 What is taxed 49 Income — definition of 50- 53 Gross Income definition 54- 55 Dividend — when to be included in return 56 Income not taxable — individual 57- 70 of Corporations 7 1 - 72 Deductions — Individual 73- 90 — Partnerships and Peisona! Service Coip'n 91 — Estates or Trusts 92 — Corporations 93- 1 06 Items not deductible 107-111 Exempt Corporations 112-125 Returns of Income — definition 126 Returns — Who required to make 127 — of Individuals 128-129 — Partnerships 130 — Estates or Trusts 131-133 — Corporations 134 Withholciing Agents 135-136 — Period covered by 13 7-142 — When and where to be filed 1 43- 1 48 Understatement of Income |49 Taxation of Individual and Partnership Income, as Corporate Income | 50 6 M 4 I Income Tax (Continued) Pamgraplit Insurance Companies — tax on income of 151 Credit in Computing taxable income — Individual 153-160 — Corporations 161-177 — against tax computed on return — Individuals. . . . 178-185 ^—Corporations. . . . 186-193 ^— of tax collected at source 1 94 Collection of tax at source — applies to what! 195 —Rate of 196 —Tax Covenant Interest. ... 197 —Limit of 198-199 — Exemption, how claimed. . 200 Advantage of to taxpayer. 201 — Method of securing 202-205 Ownership Certificates — Kinds and use of 206-209 Excess Profits and War Profits Tax 210-219 Payment of Tax 220-222 Receipts for tax paid 223 Refunds 224 •—Interest on 225 Limitation of examinations and final assessment 226 —Upon suits and prosecutions 227 — of Liberty Bond Exemptions 228-233 Chart of Liberty Bond Exemptions Pages 84-85 Consolidated Returns for 1917. 234 Alternative Tax on Personal Service Corporations 235 Porto Rico and Philippine Islands 236 Possession of the United States — Citizen of a — 237 — Income from sources within 238 Child Labor and Income Tax 239-240 TABLES Pages Table I. Comparison of rates and amounts of indi- vidual tax 1920-1921-1922 87 Table 11. Individual Normal and Surtax and percent- ages— 1921 88-90 Instruction for Use of Tables 2 and 3 91 Table III. Individual Normal and Surtax and percent- ages— 1922 92-93 Table IV. Comparison Corporation Tax 1921, 1922. 94 Table V. Corporation Tax on various incomes 1922. 95 Table VL Normal and Surtax Rates 1913 to 1922.. 96 Table VII. Rates under several Income Tax Laws. . . . 97-98 Table VUI. Effect of High Taxes 99 6 St f A INDEX Definitions (Words and phrases used in the Law) Pages 9 to 24 Comment and Digest {Paragraphs of text are numbered — References are to paragraphs) Par. Child Labor and Income Tax 239-240 Collection at Source 194 — advantage of 201 — applies to what 195 — e xemptlon, how claimed 200 — income to be included in returns 204 —limit of 198-199 — method securing ad- vantage of 202 — rate of 196 — relief of withholding agent on payment by taxpayer 205 — tax, not to be In- cluded in returns by individuals .... 95 Consolidated Returns 1917. 234 Corporations — credit — excess profits tax for income tax. . . . 175 — for tax paid, discre- tion Commissioner. 188 — interest on Govern- ment obligations. . 162 — for tax paid 186 — tax paid different fis- cal years, discre- tion Commissioner 189 Domestic treated as for- eign 193 Excess profits tax. differ- ent fiscal years . . . 176-177 Foreign, to be considered domestic when . . . 154 Income of 71-72 Owning majority voting stock foreign, cred- it tax paid, illus- tration 190-193 Specific exemption 163 — illustration 164-174 Tax accrued not paid, bond for 187 —collected at source not deductible by.. 9S — to be considered for- eign when 155 Credit Corporations, for comput- ing taxable income 161-177 — for taxes, what nec- essary to show. ... 184 — in computation in- come taxes 153-177 — individuals, for nor- mal tax 153-160 — tax paid, against tax computed on re- turn 178-193 — ^In different years, dis- cretion Commis- sioner 188 Fab. Deductions — amortization war in- vestment by indi- viduals 86 — corporations 100 business expense, cor- porations 93 — individuals 74 by corporations 93-106 — insurance companies. 92-106 ^-contributions or grifts by individuals .... 88 debts ascertained to be worthless by cor- porations 97 — individuals 84 depletion by corpora- tions 101 — individuals 87 depreciation by corpora- tions 19 — individuals 8S dividends received by corporations 98 estates and trusts .... 92 individuals 73-90 interest paid by corpor- ations 94 — individuals 76 — items not deductible. . 107-111 losses by corporations. 96 — individuals 81-83 non-resident aliens .... 90 partnerships and Per- sonal Service Cor- porations 91 property compulsorily or involuntarily con- verted into cash, reserve for, re- placements — indi- viduals 89 — corporations 106 taxes paid by corpora- tions 95 — individuals 76-80 dependents, credit for to individuals .... 168 dividends, when to be included in return. 68 excess profits tax, net income subject to. . 218 —corporations exempt from 214 — credit 211 — period less than 12 months 217-218 — rates of 21S — repealed when .... 216 — rules for computa- tion of 219 — 1921, what is 216 Par. Exemptions, Estates or Trusts 160 — individuals 157 — non-resident aliens.. 159 Fiscal Years, Excess Profits tax for diflferent.. 176-177 Gross Income, definition of 54 — includes wliat 55 Income, definition of 50-53 — duty of collector sus- pecting understate- ment 159 — not taxable, individ- uals and corpora- tions 57-70 —taxation of individ- ual or partnership, as corporation 150 — tax collected at source, included in returns 204 — understatement of. . 149 Income Tax, definition of. . 20 Insurance companies, tax on income of 151 Interest, on bonds War Fi- nance Corporation, credit when 156 — on refunds 225 Liberty Bond exemption — charts 84-85 Limitation Liberty Bond exemption 228-233 — e xamination and assessment 226 ^suits and prosecu- tions , . 227 Modifications, administra- tive provisions. ... 16 — excess profits tax... 17-19 — Revenue Act 1918 as to corporations... 11-15 — individuals 1-10 Ownership Certificates, re- girtement for and forms of 206-209 Payment of tax 220-222 Personal Service Corpora- ations, alternative tax on 235 Porto Rico and Philippine Islands, tax in 236 Possession of United States, citizen of 237 — Income from sources in 238 Rece'rfs for taxes paid 22 3 Refunds . . 224 — interest on 225 Returns, change from one accounting period to another 139 —-corporations required to make, for what period 138 —decedent, personal representative t o make 140 — fiduciary, who re- quired to make. . . 132 —fiscal year, when to be made 144 8 Returns Par. — for less than It months, law rt- quiring 141 — form of for corpora- tions 184 estates or trusts.... 131 — Individuals 128-129 — partnerships 130 — withholding' agents 135 — Information, forms 1065 and 1041 are 183 — law requiring making and filing 147 — of income, definition 126 — period covered by... 137 — reference to forms. . 148 — requirement of for less than 12 months 139-142 — sections of law re- quiring 136 — to be filed, when and where 143-145 — withholding, when and where to be filed 146 — who required to make 127 Sources of tax 21 Surtax 26 —1921 and 1922 27-28 Tax, applies to whom.... 22-23 — income on which paid, included In return 182 --^>ol lection at source, applies to whom... 194 — corporation income. . 38-46 — for 1921 and 1922.. 39-40 — difference in rates 47-48 — distributable trust Income 37 — estates and trusts.. 33-37 — excess profits tax for 1921 42-46 — income accumulated in trust, on 8S — held for future dis- tribution, on 86 — of deceased per- sons, on 84 Tax-covenant interest 197 — limit of collection at source 198-199 — kinds of 24-25 — levied on corporation income 88 Tax paid by partnership, credit to partner 180 — credit in computing 178-193 — of foreign, to citizen 178 — resident alien. . . 179 — ^foreign, computation of credit for 181 — receipts for 223 — to possession United States, limitation credit for 181 — partnerships and per- sonal service cor- '•orations 29-32 — payment of 220-222 Taxes accrued but not paid, bond for. . . . 183 Taxpayers, status of 160 What is taxed 49 f DEFINITIONS Capital Assets The term "capital assets" as used in this section, means prop- erty acquired and held by the taxpayer for profit or investment for more than two years (whether or not connected with his trade or business), but does not include property held for the personal use or consumption of the taxpayer or his family, or stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the tax- payer if on hand at the close of the taxable year. Capital Deductions The term "capital deductions" means such deductions as are al- lowed under this title for the purpose of computing net income and are properly allocable to or chargeable against items of capital gain as defined in this section. Capital Gain The term "capital gain" means taxable gain from the sale or exchange of capital assets consummated after December 31, 1921. Capital Loss The term "capital loss" means deductible loss resulting from the sale or exchange of capital assets consummated after December 31, 1921. Capital Net Gain The term "capital net gain" means the excess of the total amount of capital gain over the sum of the capital deductions and capital losses. Ca pital Ga in — Loss — Ded uct ion — Assets Section 206 of the Act of 1921 defines "Capital Assets": ''Property acquired and held by the taxpayer for profit or investment for more than two years (whether or not con- nected with his trade or business), but does not include property held for the personal use or consumption of the taxpayer or his family, the stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory if on hand at the close of the taxable year." 9 I i I 10 Definitions 4 f Corporations are not permitted the benefits of the provisions for "capital gain" inasmuch as the tax rate on corporate in- come is the same as the rate provided for "capital gain," at the election of individuals, partnerships and estates or trusts, to wit, 121/2% of the "capital net gain." For the purpose of ascertaining "capital net gain" the general rules for ascertaining gain or loss will apply. No asset how- ever may be included for the purpose of this special tax which does not fall within the definition of "capital assets" as defined above. Bearing in mind that every asset considered in this connection must have been "acquired and held by the taxpayer for profit or investment for more than two years," and must not include any of the items prohibited. The factors to be considered and shown in schedule are : a & c fl e / h i Cain J Cost of prop- erty. Date ac- quired and since which continuous- ly held. Selling price. Cost when acquired. Value March 1,1913 Cost of addi- ditions, if any. Depre- ciation. Cost if (f) and or C7) are to be considered. Loss Capital net gain = (i) — (j). (Regard should be had to any change of "basis" under Section 201 of the law, due to distributions with respect to stock of corporations.) When a taxpayer, who may have the benefit of these provisions of the law, elects to take advantage of it, tax will be computed on his net income other than his "capital net gain" at the nor- mal and surtax rates applicable thereto without reference to the capital gain provisions of the law. The amount of tax so computed plus 121/2% of the "capital net gain," shall be the amount of tax to be paid; Provided, that when an election is made to take advantage of the "capital gain" provisions of the law, the "total tax shall in no case be less than 12^/2% of the total net income." It may be more. In the case of a partnership, or a trust or estate, the segrega- tion between capital-gain, and other income, will be made by the firm or individual, and members of the partnership or bene- ficiaries of the trust will use the information furnished them in making their individual returns of income according to the requirements of Section 218 or 219 of the Law. Definitions 11 'J, Collector The term "collector" means the Collector of Internal Revenue. Commissioner The term "Commissioner" means the Commissioner of In- ternal Revenue. Corporation The term "corporation" includes associations, joint-stock com- panies, and insurance companies. Dividends That the term "dividend" when used in this title (except in paragraph 10) of subdivision (a) of section 234 and para- graph (4) of subdivision (a) of section 245 means any dis- tribution made by a corporation to its shareholders or mem- bers, whether in cash or in other property, out of its earnings or profits accumulated since February 28, 1913, except a dis- tribution made by a personal service corporation out of earn- ings or profits accumulated since December 31, 1917, and prior to January 1, 1922. Dividend: (1) Is a distribution by a corporation to its shareholders out of its earnings or profits ? A dividend is made by resolution adopted by the Board of Directors of the dividend making corporation. Payment of the dividend is with cash, or with property other than cash, in which the surplus has been invested. Payments of dividends are charged against and reduce the amount of surplus owned and retained by the dividend making corpora- tion. The portion of a dividend taxable is the amount thereof which was paid from earnings of the corporation accumulated subsequent to February 28, 1913 (the beginning of the taxa- tion of income under the Sixteenth Amendment to the Federal Constitution.) The Income Tax Law provides that so long as a corporation has on hand (not distributed) any earnings accumulated after February 28, 1913, no dividend paid by the corporation can be exempt from being included in a return of income. When all earnings accumulated after February 28, 1913 have been dis- tributed, then any surplus on hand which was accumulated prior thereto may be distributed free of tax. The Act of 1921 further provides that when there remains no surplus accumulated during the taxable period, but that there is surplus applicable to dividends and which was accumulated 12 Definitions prior to the taxable period, and where such free surplus was the result of earnings of the corporation or increase in value of property accrued prior to March 1, 1913; if a dividend is declared and paid out of such free surplus, it will have no effect in determining the amount of taxable gain upon a subsequent sale of such stock, but if it should ever become necessary to compute the amount of deductible loss on a sale of such stock, then the cost of the stock must be reduced by the aggregate amount of dividends received free of tax. Illustration : Let us suppose a corporation is formed with 10 shares of stock which are sold for $1,000 and with the money one bond is pur- chased for $995, and that on March 1, 1913, the bond was sold for $1,005; and thereafter the corporation declared and paid a dividend of $10, this being the entire amount of its surplus (the effect of tax as a charge against surplus is purposelv omitted in this illustration) — The first question presented is, how much of this $10 actual profit is subject to tax to the corporation? The answer is shown as follows: Cost Value March 1, 1913 9ale Price GaiQ $995 $1,000 $1,005 $5 ^ Then obviously, $5 of the dividend is from tax-free surplus. If upon a sale of the stock after dividend, the question is one of computation of profit on the sale of the stock, the tax-free dividend will have no effect ; as, Cost of Stock Amount of Tax-free Dividend Paid Basis for Determining Gain Value Maroh 1, 191.3 Sale Price Taxable (Jain $1,000 $5 $995 $1 000 $1,005 $5 If the question is the computation of amount of deductible loss, the cost of the stock sold must be' reduced by the amount of tax-free dividend received on it ; as, Definitions 13 Cost of Stock $1,000 Amount of Tax-Free Dividend $5 Basis for Determining Loss $995 Value March 1, 1913 $1,000 Sale Price $990 Loss $5 T But for the change in the Law as made by the Act of 1921, the deductible loss would have been $10. The statute provides, in addition to the foregoing, that any distribution (whether in cash or other property) made by a corporation to its shareholders or members otherwise than out of (1) Taxable surplus (accumulations after March 1, 1913), or (2) Nontaxable surplus (accumulations prior to March 1, 1913, or appreciation of property accrued prior to such date) ; then in that event, such distribution "shall be applied against and reduce the basis provided in Section 202 for the purpose of ascertaining the gain derived from or loss sustained from sale or other disposition of stock or shares by the distributee." This is equivalent to saying (and nothing more) that when all surplus of every description has been distributed, any further dis- tributions are from capital, and to the extent thereof shall reduce what would otherwise have been the basis for determining gain or loss upon a "sale or other dis- position of the stock or shares by the distributee." Dividend : Cash Dividends— Those paid with cash or its equivalent, or with property other than cash, are subject to the surtax to the owners thereof who are individuals and whether received directly by such individuals or through the intervention of partnerships or estates or trusts. When the owner and recipient of such dividend is a corpora- tion the dividend— as part of its gross income-must be re- ported in a return of income, but is to be deducted in the com- putation of net income to be subjected to tax. Dividends are wholly exempt from the normal tax to individ- uals. Dividends become part of the gross income of the re- cipients thereof when the cash or other property with which they are, or are to be paid, "is unqualifiedly made subject to their demands." The provision in Section 201 (f) of the Act of 1921, that 14 Definitions dividends paid within the first 60 days of the taxable year "shall be deemed to have been made from earnings or profits accumulated during previous taxable years," has no reference to taxation of individual incomes, nor to any case where the individual normal and surtax applies. The provision has to do solely and only with the computation of invested capital of corporations whose income is subject to excess profits tax. Stock Dividend: Is a term which is applied to a situation where the directors of a corporation declare a dividend, on the basis of the isaued and outstanding shares of the corporation, and which dividend is to be charged against and reduce the amount of surplus of the corporation carried as such at the time of declaring the divi- dend—but, instead of paying the dividend in cash, it is paid with shares of the dividend-paying corporation which were authorized at the time of the dividend declaration but which shares had never been issued. The journal entry in such a case transfers the amount of divi- dend from the surplus account to the capital account of the corporation. The Supreme Court of the United States has held that this transaction does not represent any gain to the share- holder; that what he had before the dividend was a share of stock with surplus behind it (in the ownership of the dividend- paying corporation) in the amount of such surplus transferred by this operation; that what the shareholder has after such operation is an increased number of shares, but with no addi- tional corporate assets behind them than was true before the dividend and for this reason a stock dividend, as such, is not subject to income tax. For example: A corporation has issued and outstanding shares of the par value of $100,000 and a surplus of 10,000 The total capital accounted for as above. . . $110,000 This corporation makes a 10% stock dividend (de- clares a 10% dividend and pays it with 100 shares of its before unissued shares), so that after the dividend the corporation has outstanding 1100 shares representing the same $110,000 Definitions 15 In this case the 100 shares of new stock spread the investment ™1 fl v^'^'^'u !?^ ^^^^ '^^^''' ^"^ ^^^'^ is "^ taxable income to the shareholder. The cost of each share of stock is nir f IT^lf * ^'''^'''^ ^^^"^ ^i^i^i"^ t^e investment in the old stock by the total number of shares, old and new This new cost per share will be the basis for determining gain or loss upon a sale of the stock. The Supreme Court of t>.e United States has recently held that If a corporation (A) should sell to corporation (B) the assets representing the $10,000 of surplus of (A), in consid- eration of 100 shares of (B), that while there might be no taxable profit to (A) arising from the transaction, ye if tSe 100 shares of (B) stock should be delivered to the share! holders of corporation (A), so that they held 1100 shares rep- loo^'lil^l /^^? ^f^^ ^' '"^ ^^^ fi^«* ^^^"^Ple above, the fi?. «l vf M^ ^^l '^^'^ ^°^^^ represent taxable income to the shareholders of corporation (A), and as a "profit" would be subject to both the normal and surtax to individuals • whereas if corporation (A) owned the shares of (B), or had it f A ^'^1f ""l V^ ^^^ i" P^^^^t for the assets of (A), and lZ.^Al ?f^ ^^l^i'i ^ ^.^^^^""^ °^ ^^^^ «^ t^« outstanding f^rjl ^^/^^ ^^^Fl'^ ^^'' ^^^^^^^^ ^ith the shares of (B), such dividend would have been taxable but subject to only the surtax to shareholders of (A). Domestic The term "domestic" when applied to a corporation or partner- ship means created or organized in the United States. Fiduciary l^^J"^ "fiduciary" means a guardian, trustee, executor, ad- ministrator, receiver, conservator, or any person acting in any fiduciary capacity for any person, trust or estate. Fiscal Years 1920-1921 and 1921-1922 A fiscal year is a period of twelve months ending with the last day of some month other than December. Individuals and corporations having a fiscal year beginning in 1922 wnir'^'''^ V^^^' "' ^^^^^^^S in 1921 and endini in 1922 will compute their net taxable income for the entire fiscal year—"— f ♦ DAMAGED PAGE(S) 16 Definitions (a) The tax on the entire net income will be computed at the rates for the calendar year in which the fiscal year begins ; (b) The tax on the entire net income will be computed at the rates for the calendar year in which the fiscal year ends; (c) The tax to be paid, will be the sum of : (1) Such a portion of (a) as the part of the fiscal year falling within the calendar year in which the fiscal year begins, or as such fraction of the fiscal year, is of that calendar year, and (2) Such a portion of (b) as the part of the fiscal year falling within the calendar year in which the fiscal year ends, or as such fraction of the fiscal year, is of that calendar year. In the case of partnerships, however, the rule is different. Partnerships compute their net income without regard to its taxation. The several interests of the partners are determined. The members of the partnership then separate their several shares of partnership profits in the proportions — (a) which the portion of the taxable year falling within the calendar year in which the fiscal year begins, or as such fraction of the fiscal year, is of that calendar year, and (b) which the portion of the fiscal ye?»r falling within the calendar year in which the fis^*^' f^j^r ends, or as such fraction of the fiscal year, is c. 'it calendar year. (1) The rates for the calendar yfear in which (a) falls will be applied to tl^e amount of (a) (2) The rates for the calendar in whfch (b) falls will be applied to the am^'\^nt of (b) '^ And the sum of (1) and (2) will be the amoun\^of tax on partnership income payable by ^he person making the return therefor. < As a rule, individuals make returns of income on the basis of the calendar year. Partnership profits are included in in- dividual returns for the i*alendar year in which the fiscal year of the partnership ends — (where the partnership year is also the calendar year, no question arises) — so that the portion of partnership profits represented by (b) (in the second para- graph above) would take the same rates as the other income of the taxpayer for the calendar year in which (b) falls. Definitions 17 if-. The change in rate is on the basis of the calendar year Where change m the law makes tax computed for part of a fiLcal veir incorrect any amount paid before or after passfge of the Act SfcaTion of t'"^' ^^" be adjusted in accordance^^ith the ap' plication of the new law by way of credit or refund as the case may be, so that the tax paid will conform to lega? piin! tion as between the old and the new law. Prescrip- Foreign The term "foreign" when applied to a corporation or partner- ship, means created or organized outside the United Stat^ Gain or Loss— Basis for Determining: Three cases are provided for by the Law rM w!!^''® property was acquired after February 28 1913- b) Where property was acquired before March 1 1913' (c) Upon an exchange of property. ' ^"^^ The basis for determining gain or loss in the first case is the cost of the property. There are three exceptions" the ^neral ^^^ ^l-*u^ determination is in connection with pronertv which should be included in the inventory, theTTin^ ventory value is the basis for determining gain of loS. ^^^ berTl' 19I0 W^ was acquired by gift after Decem- Der 61 192i)aHriija^ia shall be what should have been the basis m the h^nds of the donor, if such donor dIS not acqui^re the p^perty by gift, or in the hands of the St Tfhr^ -n"^' '^ ^^^"^ '' ^^ "^* acquired by gift It the gift w^ on or before December 31 1920 fcrty at the time it was acquired. inheritance, the basis is the fair market price or vilue of the property at the time of r.cquisition. JwL^f '^ ^°'' 5«t«™i"in? the gain x.r loss in the second case (where property was acquired prior to March 1 1q1^^ i= * but the method of allocating thisTa-^ or S for the^urS of income tax is determined in the following manner: '^ 'The difference between sales price and the fnii«™!« v 2oes in the return) following bases (3) ^ m- 18 Definitions mm (a) In the case of gain, the higher of the two values, "coat or value March 1, 1913." (b) In the case of loss, the lowest of the two values "coat or value March 1, 1913." (c) Where sales price falls between these two values (cost, or value March 1, 1913) there is neither gain nor loss to be included in a return of income. EXAMPLE 1 share of stock purchased for $100 prior to March 1, 1913, and sold after that date: Cost Value March 1, 1913 Sale Price Gain liOSS (a) $100 $101 $105 $4 • • ■ • (b) 100 95 90 ■ • ■ • $5 (c) 100 95 98 None None (d) 100 98 101 $1 .... In the third case (c) (exchange of property) — The basis for determining gain or loss is, "the readily real- izable market value" of the properties exchanged. The ex- cess of this value on one side over that on the other side will constitute the amount of gain and the reverse will constitute the amount of loss, resulting from the transaction; Provided, that neither a gain nor loss is to be recognized — (1) When the property exchanged is held for investment, or for productive use in trade or business (not in- cluding stock in trade or other property primarily held for sale). This exception is confined to cases where the exchange on both sides is of a like kind or is devoted to a like use. (2) When stock or securities are exchanged for stock or other securities as a result of a reorganization. I Definitions 19 t • (3) When a person who owns property, real, personal or mixed, causes a corporation to be formed to which he conveys this property and immediately after such con- veyance he is in control of the corporation, or where a corporation already formed is availed of and imme- diately after the conveyance such person is in control of the corporation. Control means 80% of all classes of stock issued and outstanding. The basis of "cost" or "market value March 1, 1913" may con- tinue in the case of "exchanged" property, where the exchange is treated as merely taking the place of property exchanged, except that if on one or both sides, there is money or other property which has a readily realizable market value, this money or value shall be applied and reduce the "basis" for de- termining gain or loss of him who receives the money or prop- erty of readily realizable market value and if the result of the application shall exceed the "basis" used in comparison, the excess shall be taxable to him. Where property is involuntarily or compulsorily converted into cash or its equivalent, the proceeds of such conversion may be used in replacing the property which was converted and the replaced property will be "held to take the place" of the prop- erty it replaces. Any surplus remaining after such replace- ment would be taxable. Property acquired as a result of a wash sale so that no loss would be allowed as a deduction in a return of income, will be held to have behind it the same capital investment as was the case with the property which was sold and repurchased. Government Contract The term "government contract" means (a) a contract made with the United States, or with any department, bureau, officer, commission, board, or agency, under the United States and acting in its behalf, or with any agency controlled by any of the above if the contract is for the benefit of the United States, or (b) a subcontract made with a contractor performing such a contract if the products or services to be furnished under the subcontract are for the benefit of the United States. The term 20 Definitions "government contract or contracts made between April 6 1917 and November 11, 1918, both dates inclusive'' when applied to a contract of the kind referred to in clause (a) of this sub- division, includes all such contracts which, although entered into during such period, were originally not enforceable, but which have been or may become enforceable by reason of sub- sequent validation in pursuance of law. Instalment Where instalment payments are made, in a transaction upon the whole of which there is a profit, each instalment has in it the elements of capital and profit— the sum of the instalment gams in any year will be accounted for in the year in which the payments made are received. Inventories Are taken at either — (a) Cost, or at (b) Cost or market value, whichever is the lower. Inventories taken at cost will show the sum of cost prices in the inventory. When inventories are taken on the alternative basis, only the lowest of the two values, the inventory; as. "cost" or "market," is carried into h Unit / a c d ff Article Quantity Cost Market at Inventory Total Cost $600 48 300 Total Market Inventory Shoes Hose Hats 10 dozen 20 dozen 10 dozen $60.00 2.40 30.00 $48.00 2.25 35.00 $480 45 350 $480 45 300 $948 $875 $825 If inventory is taken at "cost," the result as shown in column (e) would be used and the inventory schedule would not have columns (f) and (g) j ^ .A t • Definitions 21 If the inventory is taken on the alternative basis, inventory should be in above form and the value shown in column (g) would be the value of the inventory carried into the balance sheet. The basis for determining gain or loss of property carried by inventory, is the last inventory value of such property. Military or Naval Forces of the United States The term "military or naval forces of the United States" in- cludes the Marine Corps, the Coast Guard, the Army Nurse Corps, Female, and the Navy Nurse Corps, Female, but this shall not be deemed to exclude other units otherwise included within such terms. Net Loss The beginning of a period in which a net loss may be claimed is January 1, 1921. It is confined to losses sustained in or re- sulting from the operation of a trade or business regularly carried on by the taxpayer. In such a case, losses sustained from the sale of capital assets, as real estate, machinery, etc., will be included. Individuals not engaged in trade or business cannot have the benefit of a net loss. Individuals engaged in a trade or business may have a net loss in the business, and if they have other taxable income, this net loss may be set-off against such other taxable income. The benefit of this Section is also allowed to members of a partner- ship and beneficiaries of a trust or estate and to insurance companies. Where a taxpayer sustaining a net loss has a fiscal year be- ginning in 1920, the amount of the net loss which can be availed of is that portion of such loss which the portion of the fiscal year falling in 1921 is of the entire fiscal year. l' U n n 1 I "" o 22 Definitions Net loss is computed as follo^vs: (1) Gross income subject to inclusion in a return of income, say Add — (2) Interest on Liberty Bonds (exempt) , say, $4,290 Interest on municipal bonds 10,000 Any other exempt income $100,000 Interest paid on loans to buy Liberty Bonds (not origin- ally purchased) $100,000 at 5%, 3 months $1,250 Interest on loans to buy municipals, $50,000 at 6%, 2 months 500 $12,500 Deduct 1^50 Add excess of cash received over interest paid (3) Amount of loss outside of business, say, Amount of gains outside of business — »— - - Add excess of losses 3,500 (4) Dividends on stock of do- mestic corporations, when re- ceived by corporations 1,000 (5) Portion of depletion deduc- tion based on discovery in lieu of cost, say, 1,500 Total $118,500 The sum of deductions allowed under Sections 214 or 234 of the Law (itemized) 120,000 Net loss $ 1,500 Item (3) above would appear to be applicable only in the case of individuals. Item (4) above would appear to be applicable only in the case of corporations. $14,250 Definitions 23 A net loss (within the provisions of the statute and regula- tions) is deductible from the net income of a taxpayer for the succeeding taxable year ; and if in excess of the net income of the succeeding taxable year, the amount of such excess shall . be allowed as a deduction from the gross income in computing the net income for the next succeeding taxable year. The net loss not recouped from the income of the taxpayer for the two years next succeeding the taxable year in which the net loss was sustained, remains a loss to the taxpayer. A taxpayer sustaining a net loss should prepare a schedule showing the computation of the net loss and the amount thereof. This schedule should be attached to the return of income for the succeeding taxable year and in the event the amount of any loss shown by such schedule exceeds the net income of such succeeding taxable year, there should be added to the schedule the amount of the net loss used as a set-off against the net income of such succeeding taxable year, and a copy of this schedule should be attached to the return of in- come of the taxpayer for the next succeeding taxable year. Ordinary Net Income The term "ordinary net income" means the net income com- puted in accordance with the provisions of this title, after excluding all items of capital gain, capital loss, and capital deductions. Paid The term "paid" for the purposes of the deductions and credits under this title, means "paid or accrued" or "paid or incurred and the terms **paid or incurred" and "paid or accrued" shall be construed according to the method of accounting upon the basis of which the net income is computed under section 212. Personal Service Corporation The term "personal service corporation" means a corporation whose income is to be ascribed primarily to the activities of the principal owners or stockholders who are themselves regu- larly engaged in the active conduct of the affairs of the cor- poration and in which capital (whether invested or borrowed) is not a matierial income-producing factor; but does not include any foreign corporation, nor any corporation 50 per centum or more of whose gross income consists either (1) of gains, t* 24 Definitions profits, or income derived from trading as a principal, or (2) of gams, profits, commissions, or other income, derived from a government contract or contracts made between April 6 1917 and November 11, 1918, both dates inclusive. Persons The term "person" includes partnerships and corporations, as well as individuals. ' Secretary The term "secretary" means the Secretary of the Treasury. Taxable Year Ji'A*^"?"*'*^^'? ^^"" '"*^"« ^^^ calendar year, or the fiscal Iww^^"^.''"""*^ '"*^'' *='''^"<*" y^"^' "Pon the basis of 7^9 T^^ 1 '"'?i"* \^ computed under section 212 or section ;„,:; if" 3^"^^ y®*'" ""^^n^ »" accounting period of Smh'^r^^^"^'^'?.''" 11" ^^'* "^^y °^ *"y month other than foai ,h.n wt ®'1 *^*"* y"^""' *° b^ '^^"^'l the taxable year 1921, shall be the calendar year 1921, or any fiscal year endinir durmg the calendar year 1921. enaing Taxpayer Sf *f ™ "t«?P*ye«-" includes any person, trust or estate sub- ject to a tax imposed by this Act. United States The term "United States" when used in a geographical sense mcludes only the States, the Territories of Alaska and H«wau' and the District of Columbia. ""waii, Withholding Agent deductTnH''^"iL'l°'fi"^ ''«^""*" "^^"« »"y person required to 2lf"o?sSioT237?'' ''"^ *'' ""•^""- '''' '"•"''^^""^ ^* -'^«- I Income Tax 25 THE FEDERAL REVENUE ACT OF 1921 Modification of the Act of 1918 as to Individuals 1 An essential change is made in the rule for determining gain or loss in case of the sale of property acquired by gift between living persons, but this change does not apply to testamentary gifts. 2 New rules are provided for determining gain or loss in connection with the exchange of property. 3 The net loss provision of the Act of 1918 is revived in modified form. 4 A new provision provides for taxing, separately from or- dinary income, capital gains, realized upon a sale or other disposition of property acquired and held for profit or in- vestment for more than two years next preceding the sale, and makes provision for the ascertainment of such gains. 5 There is a modification of the definition of gross income as contained in the Act of 1918 and as that Act was modified by regulations. 6 A new provision is added preventing deduction for amortization of "present value" of expected future income from life or other terminable interests received by gift, be- quest or inheritance. 7 A modification is made of exemptions to individuals, in- cluding non-resident aliens. 8 Section 220 of the Act of 1918, which provision was sub- stantially carried in all Income Tax Acts, provided for the taxation of undistributed surplus and income of corporations which was not required or necessary for the purposes of the corporation. This provision is modified by the Act of 1921, in view of the stock dividend decision of the Supreme Court of the United States, so that in lieu of taxing, upon Certifi- cate of the Secretary of the Treasury, such undistributed surplus to stockholders as individual income at individual rates, there is to be instead a flat tax of 25% of the net income for each year in addition to the corporation income tax upon the net income of the corporation for each year, or the stockholders may agree to be taxed on such net income in the same manner as is provided for partnerships. 1 26 Income Tax Income Tax 27 of Jr^Hif a."^f location of the rule determining the amount of credit against United States tax, for tax paid to foreign countries or to a Possession of the United States. 10 There is a modification of the basis for requiring returni of income from individuals. Corporations iL ^i^^ /®^"'v ^P .^^ ^'■''^^ '"^^^^^ ^» slightly modified to provide for relief m cases where the majority of the net income of a domestic corporation is derived from sources in a Possession of the United States. ^^ *i^4-^¥"^^ ^^ ^^^^ ^" deductions allowed to corporations, ^? 7^*1. P^^^ ^y ^^"^^ °^ «*^«r corporations for their stockho ders, as a state method of collection of tax from such stockholders, is permitted to be deducted by the corporation, unless the bank or other corporation making such payment of tax, is reimbursed by the stockholder for the tax paid. 13 The method of determining the amount of foreign tax paid which may be deducted as a credit against United States tax is similar to that provided in the case of indi- viduals. 14 The provision for consolidated returns gives to corpora- tions afniiated within the meaning of that provision an option of electing on or after January 1, 1922, whether they will make a consolidated return or separate returns the election once exercised to be binding for future returns. 15 A new plan is provided for the taxation of income of insurance companies. Administratiye Provisions 16 Some amendment has been made in the administrative provisions of the law seeking to give relief in cases of addi- tional assessment, in allowing interest on refunds in certain cases, and for other purposes. Excess Profits Tax 17 The applicable provisions of the Revenue Act of 1918 for war-profits tax and excess-profits tax are continued in the Act of 1921. That is to say, the provisions of the Reve- nue Act of 1921 for war-profits and excess-profits tax are those of the Revenue Act of 1918, with merely the elimination of rates "applicable to prior years and other provisions which have already expired." 18 The excess-profits tax is repealed as of January 1, 1922. 19 Corporations required to pay an excess-profits tax for 1921 will, therefore, have recourse to those provisions of Regulations 45 which would have applied to the Act of 1918. DIGEST OF INCOME TAX Income Tax 20 The Federal Income Tax is an annual impost or levy by the United States Government of certain specified rates of tax on a sum designated as "net income." Sources of the Tax 21 Authority for this levy for 1921 and subsequent years, until repealed, is the Revenue Act of 1921 adopted 3:55 p. m., November 23, 1921, and made effective for taxation of income as at January 1, 1921. To Whom the Tax Applies 22 This tax applies to the income of individuals, estates or trusts and to all corporations not exempt under the law. 23 The individuals whose income is thus taxed, are citi- zens of the United States, wherever residing, aliens resident in the United States and non-resident aliens receiving in- come from certain sources in the United States. The Kinds of Tax 24 Normal Tax and surtax upon the income of individuals, and estates or trusts. 25 Income tax (and excess-profits tax and war-profits tax for 1921) upon the income of corporations, domestic and foreign. Section 210— "there shall be levied, collected, and paid for each tax- able year upon the net income of every individual a normal tax of 8 per centum of the amount of the net i 28 Income Tax Income Tax 29 2$ (2) United States the rate uponfhe%;S^|° °[/«f ^ent °* *^« amount shall be 4 per centum " ' ^ '"'•' ^^'^^^^ Section 211 tws 'lct:fhe;:"s£?beT'H*^^^''°^^'' ^'^ -«<"« 210 of taxable .ear uyntltttelet^r^rdSaS ^'^ abJve^ Ssifn '* -li^ ?''" '=*"*""' °" **>« «'«' $1,000 stet,?of *9 nnn"^'**!. """« ^''adations practk-ali; in by which the" !r^' *° '' P'"" '=^"^'"" °f the amoui? Zreafter"'«"f "'/""■ ^''f ' ^'^ ^^^^ <=*I«dar year abfve^'$6 oTo V^^ -P" "'"'•"" °^ t''^ ^^st $4,000 . tt%r?2yoorh;r6^ /e^s- ^^^ <- by which fhp n^f ^ ^ centum of the amount tlble lif of^agS 92-937 "" '^'""'"°°- ^'"^ Partnerships and Personal Service Corporations Section 218 — by personal ser^cTinoratin^, ?/";"^*' *" ""^ ""'^«d shall be taxed as is the fncomrnf .1^' December 31, 1921. quently the shareholders oTLrL^^f '=°'-P<"-^«°ns, conse- si".r/ais. ■•-»="' "-.^^^^^^^^ s.X\%'srJ s-rssnr rA.\»s: corporation shall be prorated between those years according to the percentage that the part of the fiscal year falling within a calendar year is of 12 months. The shareholders shall be taxed as though members of a partnership for all of the 1921 income of the corporation. 32 Because of the reasoning of the Supreme Court of the United States, in connection with its decision on the "stock dividend" case, doubt arose as to the correctness of this provision of law. With this in mind the Congress provided in section 1332 Revenue Act of 1921 for such a contingency. By this provision, if by a final judicial adjudication the method of taxing the income of personal service corporations from 1918 to 1921 inclusive is declared invalid, then such income shall be taxed as the income of other corporations is taxed, and the shareholders of such personal service cor- porations may make claim for refund of the tax they have paid ; Provided, That a personal service corporation of which no shareholder or member has filed such a claim within six months next after such final decision shall not be subject to taxation on its said income. Estates and Trusts Section 219— 33 "That the tax imposed upon the net income of indi- viduals shall apply to the income of estates or trusts or any kind of property held in trust, including: 34 (1) Income received by estates of deceased persons during the period of administration or settlement of the estate; 35 (2) Income accumulated in trust for the benefit of an unborn or unascertained person or persons with contingent interests; 36 (3) Income held for future distribution under the terms of the will or trust; and 37 (4) Income which is to be distributed to the benefi- ciaries periodically, whether or not at regular in- tervals, and the income collected by a guardian of an infant to be held or distributed as the court may direct." o 80 Income Tax Income Tax SI 40 (b) Corporation Income Tax Section 230— -including insurance comninT.t'' '=°'P°'-^"°n (""t exempt) of sections 243 to alHSc a? tL^fn?,'"'^' • ^ *° *^*' provisions 39 Cni 1? ., ,^^ ^'^ "*« following rates : 39 (a) For the calendar year 1921, 10 per centum of fh- amount of the net income in excess of fhT ^-^ provided in section 236- and ^'^'^^ Phes to the income of corpoSions. 'ItA^Tnl^^S?^ Corporations-Excess Profits and War Profits Tax Section 301— "" ttrrshin b*: levlefcdlS^I ™r ^"^ ^^ ^^'^ ^-^t. endar year 1921 „tl' '=°"*'=*«'J ^"d Paid for the cal- Poratifte'xJfS cSora^ttr aSTnS i=e7^- 1921 of more than «J;innnn * **''"*«^ ner income for tract or conlS Sf Lt en 'ju^TTbTv ^"'l,- November 11 iqir o„j "'•^"een Juiy 6, 1917, and of $3,000 and under which TT*'''"' ^"^ '""^'''^^^ excess profits tax(^»f.^ . ^ ^'^ "°* "*''■« to lowing: •* * ^^'^ *^""' *° *^^ «"•« of the fol- 43 First Bracket— e«e's7o7?irexls'proTtrc"*Hl *.!j\"^* '--« '» section 312)%;'dnotTn excels of 20*n'™'"'''. ""''^^ the invested capital; P**" '«"'"« of 44 Second Braclcet Sce'sYor2?p^°'ent'irtr ■"' 't' "^* '-o-* ^n ^u per centum of the invested capital. 45 Government contract income in iq9i • excess proms tax at 30^ irifhT^^ '^ ^"^J®^* to an second bracket, or to a war excel n.^'f?.'^'* ^"^ ^^- ^^ ^he w a war excess profits tax of 80% of the amount of the net income in excess of the war profits credit, whichever of the two war taxes is the higher. For war excess profits tax, it is necessary to refer to the Revenue Act of 1918 and Regulations thereunder. 46 Section 302 of the Act provides a maximum tax for cor- porations. This tax most often applies to corporations with capitals from $25,000 to $100,000 and net incomes ranging in excess of 28% to 19% of these capitals. Difference in Rates of Tax 47 No change has been made in the rate of normal tax on the income of individuals. This remains at 8% flat, with a provision that in the case of citizens and resident aliens, the rates shall be reduced to 4 per centum on the first $4,000 above specific exemptions and credits. 48 There was no change as between the surtax for 1918 and subsequent years under the Revenue Act of 1918. Under the Revenue Act of 1921, a slight change is made in the surtax ; for 1921, the surtax rates are the same as under the Act of 1918, being graded up to $1,000,000. For 1922 and there- after, the surtax is slightly changed in gradations and rates and becomes a flat tax of 50% at $200,000. The rate at $200,000 under the Act of 1918, and for 1921 under the Act of 1921, was and is 56%. What Is Taxed 49 The thing that is taxed is income. Not all income is of a taxable class. Income which is of a taxable class is to be reported gross. The statute specifies certain expenditures or disbursements which may be used as a set off against gross income. These set-offs are termed "deductions." The difference between total gross income of a taxable class and total allowable deductions, is termed "net income." The tax is applied to net income. Definition of Income 50 Income is the flow of capital's service ; what one's capital does for him ; and is not necessarily synonymous with receipt. Receipt basis is the general rule for Income Tax purposes, however. Except where the books of account are con- \Kt \ ri 32 Income Tax ««H a il ^^ '" a manner so as to make a different showing and a showing which will adequately and correctly reflect income receipt basis is to be used, particularly for the pur ga n or nrnfi"? r"^ X^''" ""'"* '"^^^"'^ '" determinTg ^tlm \J^ f°u *''*' ^"■■P''^® »f ascertaining gain or profit, there must be a realization of value through some gain or ZlT %'r^''''<' «»d <^''>se6 transaction, fnwhiTh gain or profit will be measured. Snm^enfjr'l'h^ '^ * *'"^'*'?" °* '«'^*' ^"^ «««h" the Gov- the"n?ries on th/h^'^v^"/ '' ^""'' ^^ ^°°^ «"*"«« ^here tne entries on the books do not correctly state the facts. f,^ nn^^nif/*'?;''* V^ ^^ ^'^ "^^P'*^'- but in such event there IS no subtraction of capital from receipt for the DurDosrof ascertaining "gain or profit." In such case, the enWre re- ceipt has the characteristic of compensation or price of ofTncoVe"' " '''"'"^ '° "' ^"'='"''«^' «--' in theieturn 53 Disservice is a negative service. A flow of disserviVp or negative income is called outgo. The difflrence between service and disservice is, therefore, to be designated neUn come, but net income for the purpose of the Income Tax ?s not necessarily the true net income either of anTndividua or an enterprise. ^"uiviauai 54 Gross income as defined by the Act of 1921 includes- Section 213 — (a) Gains, profits and income derived from salaries wages or compensation for personal service,* of the'p^'eslTem'of^'h^luni^ed^'s^^^^^^^^^^ paid to United States, etc.. shall nSt be increased nr^Hi„"f fHf Supreme Court of the which they were elected or appointed Th^^iVm^^^^ term tot States has held that an Income tav in xr VLtsP^"'^® Court of th« United such a term would serve to ?Xce the ?c7mS?ion^fi1r"/^^ the pendency 'of of the term, and was therefore unconstUuf^ona? a^T^^** ^^ ^^ ^^^ bejrinning the beginning of such a term would rnnWtninni^oJ"''®'"^ If"^ *" effect at exception of those officials of the TTnufrt^tlfo!"^*^ compensation. With the as being exempt as hereinbefo I ?ta ed thf tnooS.^f 'n?^ ? ^S,^ C(»nstitutlon ""'The Ay^'f^?'o\'^ ^*'^^r '« «ub/e'et1o hicomrtaS.°' ^" °^^^" ^"^^™- empTSyee^'s'as'followsf'"^''"" '^^ ^^^ ^^^^^^'^ «^ '^^ome of its officials and con;?;SKtro^nTo^r Ire^r'sl^aVsTvTcl 'JiTllf J^eSdTn'f "o^f^^^^f^f ".^ any political subdivision thereof orVe nt-t .Mot ^f^^i^^^^^^^^*" compensation received as such?" Di»tilct of Columbia, the Income Tax SS (b) (c) (d) (e) whatever kind and in whatever form paid, From professions, vocations, trades, businesses, com- merce, or Sales, or dealings in property, whether real or per- sonal, growing out of the ownership or use of or interest in such property; Also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or Gains, or profits, and income derived from any source whatever. ^^, J^^ ^"^,^"«^^oj^ a" such items [except as provided in subdivision (e) of Section 201] shall be included in the gross income for the taxable year in which received by the tax- payer, unless under methods of accounting permitted under subdivision (b) of section 212, any such amounts are to be properly accounted for as of a diflTerent period. 56 Subdivision (e) of section 201 provides that dividends shall be included m returns of income of stockholders for the taxable period in which the "cash or other property is unqualifiedly made subject to their demands." It might be possible, therefore, that dividends would have been ac- counted for in some year other than that in which received ^ I ^ Income Not Taxable 57 Gross income does not include the following items, which shall be exempt from taxation under this title : 58 (1) The proceeds of life insurance policies paid upon the death of the insured ; 59 (2) 60 (3) 61 (4) The amount received by the insured as a return of premium or premiums paid by him under life insurance, endowment, or annuity contracts, either during the term or at the maturity of the term mentioned in the contract or upon surrender of the contract; The value of property acquired by gift, bequest, devise or descent (but the income from such prop' erty shall be included in gross income) ; Interest upon — (a) the obligations of a State, Territory, or any 34 Income Tax Income Tax 35 political subdivision thereof, or the District of Columbia; or (b) securities issued under the provisions of the Federal Farm Loan Act of July 17, 1916; or (c) the obligations of the United States or its possessions; or (d) bonds issued by the War Finance Corpora- tion. In the case of obligations of the United States issued after September 1, 1917 (other than postal savings certificates of de- posit), and in the case of bonds issued by the War Finance Corporation, the interest shall be exempt only if and to the extent provided in the respective Acts authorizing the issue thereof as amended and supplemented, and shall be excluded from gross income only if and to the extent it is wholly exempt to the taxpayer from income, war-profits and ex- cess-profits taxes; «2 (5) The income of foreign governments received from investments in the United States in stocks, bonds, or other domestic securities, owned by such foreign governments, or from interest on deposits in banks m the United States of moneys belonging to such foreign governments, or from any other source within the United States; fi3 (6) Amounts received, through accident or health in- surance or under workmen's compensation acts, as compensation for personal injuries or sickness, plus the amount of any damages received whether by suit or agreement on account of such injuries or sickness; «4 (7) Income derived from any public utility or the exer- cise of any essential governmental function and accruing to any State, Territory, or the District of Columbia, or any political subdivision of a State or Territory, or income accruing to the Government of any possession of the United States, or any political subdivision thereof. Whenever any State, Territory, or the District of Columbia, or any political subdivision of a State 1». or Territory, prior to September 8, 1916, entered in good faith into a contract with any person, the object and purpose of which is to acquire, con- struct, operate, or maintain a public utility, no tax shall be levied under the provisions of this title upon the income derived from the operation of such public utility, so far as the payment thereof will impose a loss or burden upon such State, Ter- ritory, District of Columbia, or political subdivi- sion; but this provision is not intended and shall not be construed to confer upon such person any financial gain or exemption or to relieve such per- son from the payment of a tax as provided for in this title upon the part or portion of such income to which such person is entitled under such con- tract ; 65 (8) The income of a non-resident alien or foreign cor- poration which consists exclusively of earnings de- rived from the operation of a ship or ships, docu- mented under the laws of a foreign country which grants an equivalent exemption to citizens of the United States and to corporations organized in the United States; 66 (9) Amounts received as compensation, family allot- ments and allowances under the provisions of the War Risk Insurance and the Vocational Rehabilita- tion Acts, or as pensions from the United States for service of the beneficiary or another in the mili- tary or naval forces of the United States in time of war; 67 (10) So much of the amount received by an individual after December 31, 1921, and before January 1, 1927, as dividends or interest from domestic build- ing and loan associations, operated exclusively for the purpose of making loans to members, as does not exceed $300; 68 (11) The rental value of a dwelling house and appur- tenances thereof furnished to a minister of the gospel as part of his compensation. 69 (12) The receipts of shipowners' mutual protection and indemnity associations, not organized for profit. ae Income Tax Income Tax 37 70 (c) and no part of the net earnings of which inures to the benefit of any private stockholder or member, but such corporations shall be subject as other persons to the tax upon their net income from interest, dividends and rents. In the case of a non-resident alien individual, gross income means only the gross income from sources within the United States, determined under the provisions of Section 217. Income of Corporations Section 233— 71 (a) That in the case of a corporation subject to the tax imposed by section 230 the term "gross income" means the gross income as defined in sections 213 and 217, except that mutual marine insurance com- panies shall include in gross income the gross premiums collected and received by them less amounts paid for reinsurance. 72 (b) In the case of a foreign corporation, gross income means only gross income from sources within the United States, determined (except in the case of insurance companies subject to the tax imposed by section 243 or 246) in the manner provided in section 217. DEDUCTIONS Section 214 — Individuals 73 The following deductions are permitted to individuals, when they actually have any of them, or some or all of them: 74 (a) "(1) All the ordinary and necessary expenses paid or incurred during the taxable year in carry- ing on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; traveling expenses (including the entire amount expended for meals and lodg- ing) while away from home in the pursuit of a trade or business ; and rentals or other payments required to be made as a condition 75 "(2) 76 "(3) 77 f 78 79 80 to the continued use or possession, for pur- poses of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity." There is a deduction here not before given to persons traveling on business. All interest paid or accrued within the taxable year on indebtedness, except on indebtedness in- curred or continued to purchase or carry obliga- tions or securities (other than obligations of the United States issued after September 24, 1917, and originally subscribed for by the taxpayer) the interest upon which is wholly exempt from taxa- tion under this title." The amendment of previous law consists in limiting deductible interest paid on indebtedness to purchase Government Bonds to such as were originally subscribed for by the taxpayer. Taxes paid or accrued within the taxable year, except — (a) income, war-profits, and excess-profits taxes imposed by the authority of the United States, (b) so much of the income, war-profits and excess-profits taxes, imposed by the au- thority of any foreign country or posses- sion of the United States, as is allowed as a credit under section 222, (c) taxes assessed against local benefits of a kind tending to increase the value of the property assessed, and (d) taxes imposed upon the taxpayer upon his interest as shareholder or member of a corporation, which are paid by the cor- poration without reimbursement from the taxpayer. For the purpose of this para- graph, estate, inheritance, legacy and suc- cession taxes accrue on the due date thereof except as otherwise provided by 88 Income Tax Income Tax 39 the law of the jurisdiction imposing such taxes." The change here is the taking away from individtcals the deduction for tax paid on bank shares, etc., and giving this deduction to corporations paying the tax, unless the shareholder reimburses the corporation, in which event there would be no advantage to the shareholder, and in permitting a deduction for estate or inheritance taxes which have o/icmed or been paid, 81 "(4) Losses sustained during the taxable year and not compensated for by insurance or otherwise, if in- curred in trade or business. This refers to inventory or operating loss, 82 "(5) Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in any transaction entered into for profit, though not connected with the trade or business; but in the case of a non-resident alien individual only if and to the extent that the profit, if such transaction had resulted in a profit, would be tax- able under this title. No deduction shall be al- lowed under this paragraph for any loss claimed to have Iseen sustained in any sale or other dis- position of shares of stock or securities made after the passage of this Act where it appears that within thirty days before or after the date of such sale or other disposition the taxpayer has acquired (otherwise than by bequest or inherit- ance) substantially identical property, and the property so acquired is held by the taxpayer for any period after such sale or other disposition. If such acquisition is to the extent of part only of substantially identical property, then only a proportionate part of the loss shall be disallowed." The Act of 1921 was passed at S:55 p. m,, November 23, 1921, Sales of stock or securities completed prior to the passage of this Act are not affected by this paragraph. It has been held that the Law does not take notice of a fraction of a day. It may be possible that the Commissioner of Internal Revenue will take the view that the Act having been passed on November 23 will require that all of that day be considered for the purposes of this provision. The statute provides that, where within 30 days before or after a sale of stock or securities ''substantially identical property*' is acquired and held by the taxpayer for any period after such sale or other disposition, no loss determined upon such a sale shall be allowed as a deduction from gross income in return of income. As originally proposed, the inhibition v)as against the repur- chase of ''identical or substantially identical** property. The Act as passed omits the word "identical** except as adjectively qualified. It is to be presumed that a repurchase unthin 30 days after sale of the identical property sold would be covered by the language of the statute, "substan- tially identical,'* "Identical** — Absolutely the same, as in es- sence or in all respects; the very same: opposed to different, and contrasted with similar; as, this is the identical volume from which he read; the identical spot. — Stand, Die, Clearly with this provisian, the sale or acquisi- tion, for example, of C, B. & Q. Bonds, Nos, 3U, 36 First Mortgage, Series "A** 5% 20-year Bonds due May 1, 1941, would require acquisition {other than by bequest or inheritance) unthin 30 days prior to a sale by the purchaser thereof of bonds of the same debtor, and same issue of the same debtor, or a replacement by purchase within 30 days after sale of either the same certificates sold or other certificates of the same debtor and same issue, A repurchase of the identical certificates would be "identical property,** Purchase of other certifir- cates of the same debtor and same issue of su4ih m ' 40 Income Tax Income Tax 41 83 "(6) 84 "(7) »* debtor wovXd he "substantially identical property. Bonds of some other debtor, or some other issue of the same debtor, would be similar, as pointed out in the definition of "identical:' A purchase of "similar" property, however, does not come within the inhibition of the statute. It might be possible where there was a holding of stock or securities which were sold, say, Decem- ber 15th, that a purchase on November 25th pre- ceding, of substantially identical property, could be sold prior to December 15th following and a gam or loss taken without affecting the gain or loss status of the sale on December 15th. Any of the purchase on November 25th, held by the taxpayer for any period after December 15th, would negative a loss deduction on a like amount of securities sold December 15th. Losses sustained during the taxable year of prop- erty not connected with the trade or business (but in the case of a non-resident alien individual only property within the United States) if arising from fires, storms, shipwreck, or other casualty, or from theft, and if not compensated for by insurance or otherwise. Losses allowed under paragraphs (4), (6) and (6) of this subdivision shall be de- ducted as of the taxable year in which sustained unless, m order to clearly reflect the income, the loss should, in the opinion of the Commissioner, be accounted for as of a different period. In case of losses arising from destruction of or damage to property, where the property so destroyed or damaged was acquired before March 1, 1913, the deduction shall be computed upon the basis of its fair market price or value as of March 1, 1913." This is a variation of the rule prescribed in section 202 for determining loss. Debts ascertained to be worthless and charged off within the taxable year (or, in the discretion of the Commissioner, a reasonable addition to a re- serve for bad debts) ; and when satisfied that a debt IS recoverable only in part, the Commissioner >* may allow such debt to be charged off in part. In previous statutes, only debts actually deter- mined to be wholly worthless and actually charged off could be taken. This is the first instance in our income tax laws where a reserve has been per- mitted as a deduction. 85 *'(8) A reasonable allowance for the exhaustion, wear and tear of property used in the trade or busi- ness, including a reasonable allowance for obso- lescence. In the case of such property acquired before March 1, 1913, this deduction shall be com- puted upon the basis of its fair market price or value as of March 1, 1913: The Uist sentence here is a previous regulation now written into the law. 86 "(9) In the case of buildings, machinery, equipment, or other facilities, constructed, erected, installed or acquired, on or after April 6, 1917, for the produc- tion of articles contributing to the prosecution of the war against the German Government, and in the case of vessels constructed or acquired on or after such date for the transportation of articles or men contributing to the prosecution of such war, there shall be allowed, for any taxable year ending before March 3, 1924 (if claim therefor was made at the time of filing return for the taxable year 1918, 1919, 1920, or 1921) a reason- able deduction for the amortization of such part of the cost of such facilities or vessels as has been borne by the taxpayer, but not again includ- ing any amount otherwise allowed under this title or previous Acts of Congress as a deduction in computing net income. At any time before March 3, 1924, the Commissioner may, and at the request of the taxpayer shall, re-examine the return, and if he then finds as a result of an appraisal or from other evidence that the deduction originally al- lowed was incorrect, the income, war-profits, and excess-profits taxes for the year or years affected shall be redetermined; and the amount of tax due 42 Income Tax Income Tax 43 87 "(10) upon such redetermination, if any, shall be paid upon notice and demand by the collector, or the amount of tax overpaid, if any, shall be credited or refunded to the taxpayer in accordance with the provisions of section 252." This paragraph definitely fixes the time mthin which war amortization is to be completed. The Government has heretofore been refusing to act finally, except in the case of actual dispositim of amortizable property, on the ground that normal conditions had not returned. In the case of mines, oil and gas wells, other natural deposits, and timber, a reasonable allow- ance for depletion and for depreciation of im- provements, according to the peculiar conditions in each case, based upon cost, including cost of development not otherwise deducted: Provided, That in the case of such properties acquired prior to March 1, 1913, the fair market value of the property (or the taxpayer's interest therein) on that date shall be taken in lieu of cost up to that date : Provided further, That in the case of mines, oil and gas wells, discovered by the taxpayer, on or after March 1, 1913, and not acquired as the result of purchase of a proven tract or lease, where the fair market value of the property is materially disproportionate to the cost, the depletion allow- ance shall be based upon the fair market value of the property at the date of the discovery, or within thirty days thereafter: And provided fur- ther. That such depletion allowance based on dis- covery value shall not exceed the net income, computed without allowance for depletion, from the property upon which the discovery is made, except where such net income so computed is less than the depletion allowance based on cost or fair market value as of March 1, 1913; such reasonable allowance in all the above cases to be made under rules and regulations to be prescribed by the Com- missioner, with the approval of the Secretary. In the case of leases the deductions allowed by this paragraph shall be equitably apportioned between the lessor and lessee." 88 "(11) 89 "(12) li. Contributions or gifts made within the taxable year or to or for the use of: (a) The United States, any State, Territory, or any political subdivision thereof, or the District of Columbia, for exclusively public purposes ; (b) Any corporation, or community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scien- tific, literary, or educational purposes, in- cluding posts of the American Legion or the Women's Auxiliary units thereof, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private stockholder or individual; or (c) The special fund for vocational rehabilita- tion authorized by section 7 of the Voca- tional Rehabilitation Act; to an amount which in all the above cases combined does not exceed 15 per centum of the tax- payer's net income as computed without the benefit of this paragraph. In case of a non-resident alien individual this deduc- tion shall be allowed only as to contribu- tions or gifts made to domestic corpora- tions, or to community chests, funds, or foundations, created in the United States, or to such vocational rehabilitation fund. Such contributions or gifts shall be allow- able as deductions only if verified under rules and regulations prescribed by the Commissioner, with the approval of the Secretary." If property is compulsorily or involuntarily con- verted into cash or its equivalent as a result of — (a) Its destruction in whole or in part, 44 Income Tax Income Tax 45 (b) Theft or seizure, or (c) An exercise of the power of requisition or condemnation, or the threat or imminence thereof; and if the taxpayer proceeds forthwith in good faith, under regulations prescribed by the Commissioner with the approval of the Secretary, to expend the proceeds of such conversion in the acqui- sition of other property of a character similar or related in service or use to the property so converted, or in the ac- quisition of 80 per centum or more of the stock or shares of a corporation own- ing such other property, or in the establish- ment of a replacement fund, then there shall be allowed as a deduction such portion of the gain derived as the portion of the proceeds so expended bears to the entire proceeds. The provisions of this para- graph prescribing the condition under which a deduction may be taken in re- spect of the proceeds or gains derived from the compulsory or involuntary con- version of property into cash or its equiv- alent, shall apply so far as may be prac- ticable to the exemption or exclusion of such proceeds or gains from gross income under prior income, war-profits and excess- profits tax acts." Tfiis paragraph is new. It ie referred to in paragraph (2) of subdivision (d) of section 202, Example : Where property converted, a$ provided in this paragraph, had a value on March 1, 1913, of, say $100,000 or its cost subsequent to that date was $100,000 and its value at conversion was larger than this sum, say $150,000 and the owner undertakes to replace the converted property from this value. Let us suppose it requires, under regulations prescribed by the Cowmmioner. $145,000 to replace the property convertedr—we would then have a gain of $ 5,000 .96-2/3% of the value would have been used in replacement and this proportion of the gain would be an allowable deduc- tion under this paragraph: $5000 X .96-2/3% = $4833.33 Taxable for the year in which determined 166.67 $5000.00 dO "(b) In the case of a nonresident alien individual the deductions allowed in subdivision (a), except those allowed in paragraphs (5), (6), and (11), shall be allowed only if and to the extent that they are connected with income from sources within the United States; and the proper ap- portionment and allocation of the deductions with respect to sources of income within and without the United States shall be determined as provided in section 217 under rules and regula- tions prescribed by the Commissioner with the approval of the Secretary. In the case of a citi- zen entitled to the benefits of section 262 the deductions shall be the same and shall be deter- mined in the same manner as in the case of a nonresident alien individual. Partnerships and Personal Service Corporations (Section 218, Law). 91 Have the same deductions as individuals, except that they are not permitted to deduct contributions or gifts for charitable and other purposes as are individuals. Estates and Trusts (Section 219, Law). 92 The net income of an estate or trust is computed as in the case of a single individual for such portion of the income as is taxed to the estate or trust, except in lieu of the \\ 46 Income Tax Income Tax 47 deduction for contributions or gifts for charitable purposes, etc., which, pursuant to the terms of the will or deed cre- ating the trust, is during the taxable year paid or per- manently set aside for the purposes and in the manner specified as controlling in the case of individuals. Deductions Allowed Corporations (Section 234, Law). Corporations are allowed the following deductions: 93 "(1) AH the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered, and including rentals or other payments required to be made as a condition to the continued use or possession of property to which the corporation has not taken or is not taking title, or in which it has no equity ;" 94 "(2) 95 "(3) All interest paid or accrued within the taxable year on its indebtedness, except on indebtedness incurred or continued to purchase or carry obli- gations or securities (other than obligations of the United States issued after September 24, 1917, and originally subscribed for by the taxpayer) the "interest upon which is wholly exempt from taxation under this title;" Limitation of taxable interest, on indebtedness to purchase or carry Government obligations, to such indebtedness as relates only to original pur- chases by the taxpayer, is new. Taxes paid or accrued within the taxable year ex- cept — (a) Income, war-profits, and excess-profits taxes imposed by the authority of the United States. (b) So much of the income, war-profits, and ex- cess-profits taxes imposed by the authority of any foreign country or possession of the United States as is allowed as a credit under section 238, and 96 "(4) (c) Taxes assessed against local benefits of a kind tending to increase the value of the property assessed. In the case of obligors specified in subdivision (b) of section 221 no deduction for the payment of the tax imposed by this title, or any other tax paid pursuant to the contract or provision referred to in that sub- division, shall be allowed, nor shall such tax be included in the gross income of the obligee. The deduction allowed by this paragraph shall be allowed in the case of taxes imposed upon a shareholder or member of a corporation upon his interest as shareholder or member, which are paid by the corporation without reim- bursement from the shareholder or member, but in such cases no deduction shall be allowed the shareholder or member for the amount of such taxes. For the purpose of this para- graph, estate, inheritance, legacy, and succes- sion taxes accrue on the due date thereof ex- cept as otherwise provided by the law of the jurisdiction imposing such taxes." The new provisions under this paragraph are: Specific authority for not including in individual returns of income amount of tax collected from such individuals at the source; the giving to corporations a deduc- tion for tax paid by them, and not reim^ bursed, for their shareholders upon shares of stock issued by corporations required to collect this tax at the source; allowance of estate, inheritance, legacy and succession taxes. Losses sustained during the taxable year and not compensated for by insurance or otherwise; unless, in order to clearly reflect the income, the loss should in the opinion of the Commissioner be accounted for as of a different period. No deduction shall be al- lowed for any loss claimed to have been sustained in 48 Income Tax any sale or other dispoaition of shares of stock or securities made after the passage of this Act where it appears that within 30 days before or after the date of such sale or other disposition the taxpayer has acquired (otherwise than by bequest or inheri- tance) substantially identical property, and the prop- erty so acquired is held by the taxpayer for any period after such sale or other disposition, unless such claim is made by a dealer in stock or securities and with respect to a transaction made in the ordin- ary course of its business. If such acquisition is to the extent of part only of substantially identical property, then only a proportionate part of the loss shall be disallowed. In case of losses arising from destruction of or damage to property, where the property so destroyed or damaged was acquired be- fore March 1, 1913, the deduction shall be computed upon the basis of its fair market price or value as of March 1, 1913;" Restriction upon reduction of loss from sale of securities is broader here than in paragraph (5) section 214 (182) for individuals, in that, in this paragraph corporate dealers in securities would ap- pear to be exempt from this provision in respect to transactions in the ordinary course of their busi- ness. 97 "(5) Debts ascertained to be worthless and charged off within the taxable year (or in the discretion of the Commissioner, a reasonable addition to a reserve for bad debts) ; and when satisfied that a debt is recov- erable only in part, the Commissioner may allow such debt to be charged off in part;" Provision for charge-off of a reserve or frac- tional loss is new. 98 "(6) The amount received as dividends — (a) from a domestic corporation other than a corporation entitled to the benefits of section 262, or (b) from any foreign corporation when it is shown to the satisfaction of the Commissioner Income Tax 49 that more than 50 per centum of the gross income of such foreign corporation for the three-year period ending with the close of its taxable year preceding the declaration of such dividends (or for such part of such period as the foreign corporation has been in existence) was derived from sources within the United States as determined under section 217." 99 "(7) A reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence. In the case of such property acquired before March 1, 1913, this deduction shall be computed upon the basis of its fair market price or value as of March 1, 1913;" 100 "(8) In the case of buildings, machinery, equipment, or other facilities, constructed, erected, installed, or ac- quired, on or after April 6, 1917, for the production of articles contributing to the prosecution of the war against the German Government, and in the case of vessels constructed or acquired on or after such date for the transportation of articles or men contribut- ing to the prosecution of such war, there shall be allowed, for any taxable year ending before March 3, 1924 (if claim therefor was made at the time of filing return for the taxable year 1918, 1919, 1920, or 1921) a reasonable deduction for the amortization of such part of the cost of such facilities or vessels as has been borne by the taxpayer, but not again including any amount otherwise allowed under this title or previous Acts of Congress as a deduction in computing net income. At any time before March 3, 1924, the Commissioner may, and at the request of the taxpayer shall, re-examine the return, and if he then finds as a result of an appraisal or from other evidence that the deduction originally allowed was incorrect, the income, war-profits, and excess- profits taxes for the year or years affected shall be redetermined and the amount of tax due upon such redetermination, if any, shall be paid upon notice and demand by the collector, or the amount of tax over- n 50 Income Tax Income Tax 51 paid, if any, shall be credited or refunded to the tax- payer m accordance with the provisions of section 252;" This provision definitely fixes the time in which 'War amortization claims may be settled. 101 "(9) In the case of mines, oil and gas wells, other nat- ural deposits, and timber, a reasonable allowance for depletion and for depreciation of improvements, ac- cording to the peculiar conditions in each case, based upon cost including cost of development not other- wise deducted: Provided, That in the case of such properties acquired prior to March 1, 1913, the fair market value of the property (or the taxpayer's in- terest therein) on that date shall be taken in lieu of cost up to that date : Provided further, That in the case of mines, oil and gas wells, discovered by the taxpayer, on or after March 1, 1913, and not ac- quired as the result of purchase of a proven tract or lease, where the fair market value of the property is materially disproportionate to the cost, the deple- tion allowance shall be based upon the fair market value of the property at the date of the discovery, or within thirty days thereafter : And provided fur- ther, That such depletion allowance based on discov- ery value shall not exceed the net income, computed without allowance for depletion, from the property upon which the discovery is made, except where such net income so computed is less than the depletion allowance based on cost or fair market value as of March 1, 1913; such reasonable allowance in all the above cases to be made under rules and regulations to be prescribed by the Ck)mmissioner with the ap- proval of the Secretary. In the case of leases the deductions allowed by this paragraph shall be equitably apportioned between the lessor and lessee;" 102 "(10) In the case of insurance companies (other than life insurance companies), in addition to the above (un- less otherwise allowed) : (a) The net addition required by law to be made within the taxable year to reserve funds (in- cluding in the case of assessment insurance companies the actual deposit of sums with State or Territorial officers pursuant to law as additions to guarantee or reserve funds) ; and (b) The sums other than dividends paid within the taxable year on policy and annuity con- tracts. After December 31, 1921, this sub- division shall apply only to mutual insurance companies other than life insurance com- panies." 103 "(11) In the case of corporations (except those taxed under section 243) issuing policies covering life, health, and accident insurance combined in one policy issued on the weekly premium payment plan con- tinuing for life and not subject to cancellation, in addition to the above, such portion of the net addi- tion (not required by law) made within the taxable year to reserve funds as the Commissioner finds to be required for the protection of the holders of such policies only. This subdivision shall not be in effect after December 31, 1921;" 104 "(12) In the case of mutual marine insurance companies, there shall be allowed, in addition to the deductions allowed in paragraphs (1) to (10), inclusive, and paragraph (14), unless otherwise allowed, amounts repaid to policyholders on account of premiums pre- viously paid by them, and interest paid upon such amounts between the ascertainment and the payment thereof;" 105 "(13) In the case of mutual insurance companies (in- cluding interinsurers and reciprocal underwriters, but not including mutual life or mutual marine in- surance companies) requiring their members to make premium deposits to provide for losses and expenses, there shall be allowed, in addition to the deductions allowed in paragraphs (1) to (10), inclusive, and paragraph (14), unless otherwise allowed, the amount of premium deposits returned to their policy- holders and the amount of premium deposits retained for the payment of losses, expenses, and reinsurance reserves;" 52 Income Tax Income Tax &3 106 "(14) If property is compulsorily or involuntarily con- verted into cash or its equivalent as a result of — (a) Its destruction in whole or in part, (b) Theft or seizure, or (c) An exercise of the power of requisition or condemnation, or the threat or imminence thereof; and if the taxpayer proceeds forth- with in good faith, under regulations pre- scribed by the Commissioner with the ap- proval of the Secretary, to expend the pro- ceeds of such conversion in the acquisition of other property of a character similar or re- lated in service or use to the property so con- verted, or in the acquisition of 80 per centum or more of the stock or shares of a corporation owning such other property, or in the estab- lishment of a replacement fund, then there shall be allowed as a deduction such portion of the gain derived as the portion of the pro- ceeds so expended bears to the entire pro- ceeds. The provisions of this paragraph pre- scribing the conditions under which a deduc- tion may be taken in respect of the proceeds or gains derived from the compulsory or in- voluntary conversion of property into cash or its equivalent, shall apply so far as may be practicable to the exemption or exclusion of such proceeds or gains from gross income un- der prior income, war-profits, and excess- profits tax Acts." (See 189.)" Section 215— (a) 107 108 ITEMS NOT DEDUCTIBLE That in computing net income no deduction shall in any case be allowed in respect of — (1) Personal, living, or family expenses; (2) Any amount paid out for new buildings or for permanent improvements or better- ments made to increase the value of any property or estate; 109 110 111 (b) (3) (4) Any amount expended in restoring prop- erty or in making good the exhaustion thereof for which an allowance is or has been made, or Premiums paid on any life insurance policy covering the life of any officer or employee, or of any person financially in- terested in any trade or business carried on by the taxpayer, when the taxpayer is directly or indirectly a beneficiary under such policy. Amounts paid under the laws of any State, Territory, District of Columbia, possession of the United States, or foreign country as income to the holder of a life or terminable interest acquired by gift, bequest, or inheritance shall not be reduced or diminished by any deduction for shrinkage (by whatever name called) in the value of such interest due to the lapse of time, nor by any deduction allowed by this Act for the purpose of computing the net income of an estate or trust but not allowed under the laws of such State, Territory, District of Col- umbia, possession of the United States, or foreign country for the purpose of computing the income to which such holder is entitled." This might refer to amortization of prem- iums of investments, depreciation of physi- cal property, and depletion of natural re- sources, in connection with the principal of a trust or estate. If so, then the holding would he that a beneficial interest therein shall not he reduced hy means of any of these considerations (as would be done were the interest not in trust) unless svjch deduction as would he allowable under this Act is al- lowable to such interests under the laws of the jurisdiction under which the estate or trust was created. The specific reason given for this provi- sion was stated as follows: WWiK !!g"J^SgE:- 54 Income Tax Income Tax 65 "Under existing law {Act 1918) persons receiving by gift, bequest or inheritance a life or other terminable interest in property frequently capitalized the ex- pected future income, set up the value of this expectation as corpus or princijml, and thereafter claimed a deduction for exhaustion of this so-called principal on the ground that with the passage of time the "principal" or corpus is gradu- ally shrinking or wasting." CORPORATIONS EXEMPT FROM TAXATION UNDER THE ACT: Section 231— 112 "(1) Labor, agricultural, or horticultural organizations; 113 "(2) Mutual savings banks not having a capital stock represented by shares; 114 "(3) Fraternal beneficiary- societies, orders, or associ- ations : (a) operating under the lodge system or for the exclusive benefit of the members of a fra- ternity itself operating under the lodge system; and (b) providing for the payment of life, sick, ac- cident, or other benefits to the members of such society, order, or association or their dependents ; 115 "(4) Domestic building and loan associations substan- tially all the business of which is confined to mak-. ing loans to members; and co-operative banks without capital stock organized and operated for mutual purposes and without profit; 116 "(5) Cemetery companies owned and operated exclusive- ly for the benefit of their members or which are not operated for profit; and any corporation char- tered solely for burial purposes as a cemetery corporation and not permitted by its charter to engage in any business not necessarily incident to that purpose, no part of the net earnings of which inures to the benefit of any private stockholder or individual; 117 "(6) Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, literary, or educa- tional purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private stock- holder or individual; 118 "(7) Business leagues, chambers of commerce, or boards of trade, not organized for profit and no part of the net earnings of which inures to the benefit of any private stockholder or individual; 119 "(8) Civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare; 120 "(9) Clubs organized and operated exclusively for pleas- ure, recreation, and other nonprofitable purposes, no part of the net earnings of which inures to the benefit of any private stockholder or member; 121 "(10) Farmers' or other mutual hail, cyclone, or fire insurance companies, mutual ditch or irrigation companies, mutual or co-operative telephone com- panies, or like organizations of a purely local character, the income of which consists solely of assessments, dues, and fees collected from mem- bers for the sole purpose of meeting expenses; 122 "(11) Farmers', fruit growers*, or like associations, or- ganized and operated as sales agents for the pur- pose of marketing the products of members and turning back to them the proceeds of sales, less the necessary selling expenses, on the basis of the quantity of produce furnished by them; or organ- ized and operated as purchasing agents for the purpose of purchasing supplies and equipment for the use of members and turning over such supplies and equipment to such members at actual cost, plus necessary expenses; 123 "(12) Corporations organized for the exclusive purpose of holding title to property, collecting income there- m I: 56 Income Tax from, and turning over the entire amount thereof, less expenses, to an organization which itself is exempt from the tax imposed by this title; 124 "(13) Federal land banks and national farm loan asso- ciations as provided in section 26 of the Act ap- proved July 17, 1916, entitled "An Act to provide capital for agricultural development, to create standard forms of investment based upon farm mortgage, to equalize rates of interest upon farm loans, to furnish a market for United States bonds, to create Government depositaries and financial agents for the United States, and for other pur- poses"; 125 "(14) Personal service corporations. This subdivision shall not be in effect after December 31, 1921." RETURNS OF INCOME 126 A return of income is a statement "required by the Government" of the total gross income of a taxable class and such other information as may be called for, and of the several deductions and the amount of each, provided by the statute as an offset against gross income, and with such particulars of information concerning each deduction as may be called for, together with the amount of personal exemptions claimed, and such information as may be called for in connection with such claims. Who Are Required to Make Returns of Income: 127 Individuals, Partnerships, Estates or Trusts, Corpora- tions, Withholding Agents. Individuals: 128 Make returns of income on Form 1040A for incomes of $5,000 and less for 1921 and for incomes of $6,000 and less thereafter; 129 On Form 1040 for incomes in excess of $5,000 for 1921 and in excess of $6,000 for subsequent years. Husband and wife having separate incomes may make separate returns, or a joint return as they may elect. If the separate income IS of an amount sufficient to be subject to surtax, they should make separate returns of income. In certain states Income Tax 57 having community property laws, husband and wife are per- mitted to make separate returns of income from the com- munity property. The income tax of individuals is computed and tax paid on the basis shown by these returns. Individual income is subject to a normal tax and a surtax, according to the amount thereof. Partnerships: 130 Make returns of income on Form 1065. These returns show gross income, deductions, and net income. Also the names and addresses of the several partners and their re- spective shares of the net income, separating net income into its several classes as called for by the return. Estates or Trusts: 131 Make returns of income on Form 1041. These returns show the gross income and deductions of the estate or trust and the net income. The names and addresses of the several beneficiaries and the portions of the annual net income to which such beneficiaries are entitled and what portion, if any, of such income is to be retained by the estate or trust, are also required to be shown. 132 The trustee or fiduciary acting for the estate or trust may also be required under certain conditions specified by the statute and regulations, to make a return on Form 1040A or Form 1040 for the beneficiaries, and or for the trust itself in case of retained income on which the estate or trust is required to pay a tax. 133 Forms 1065 and 1041 are information returns and are used in connection with the returns of individuals receiving an income reported on these information Forms. Additional returns of information are required on Forms 1098 (payments to non-resident aliens) and 1099 for payments to citizens and resident aliens. Corporations: 134 Make returns of income on Form 1120, for both the income tax and excess-profits tax. Withholding Agents: 135 Make returns on Forms 1012 and 1013 for tax collected from interest paid on bonds, mortgages, deeds of trust, or 58 Income Tax Income Tax 59 similar obligations of corporations which contain a tax cove- nant. On Form 1042 for all other tax collected at the source. 136 Sections of the Law requiring returns are 221 (c) for withholding returns; 223 for individual returns; 224 for partnership and personal service corporation returns; 225 for fiduciary returns; 226 for returns covering a period less than 12 months; 239 and 240 for corporation returns; 256, 254 and 255 for information returns. PERIOD COVERED BY RETURNS OF INCOME 137 Returns of income are to cover a period of 12 months, except in cases where a taxpayer has had a taxable status for less than 12 months at return time, and has an amount of income or other conditions requiring the making of a return of income, or in the case of a change from one accounting period to another, as a result of which there may be a period of time less than 12 months for which return of income will be required. 138 Corporations are required to make returns of income on the basis of the calendar year, unless they have a fiscal year other than the calendar year. 139 A corporation which is chartered within the calendar year and does not establish a fiscal year, will be required to make a return of income as at the end of the calendar year in which it was incorporated. If it makes returns on the basis of a calendar year or a fiscal year, and desires to change to some other accounting period, by giving the notice required by regulations, it may make such change, but it will be required to make return of income for the time between the close of its old accounting period and the date designated as the close of its new accounting period; as, where a corporation has been making returns on the basis of a calendar year and desires to have a fiscal year, say, beginning July 1 and ending June 30, it would file with the Commissioner of Internal Revenue a notice of this intention and request permission to make the change, which request must be filed not later than 30 days before March 1st next preceding the date designated for close of the fiscal year and upon receiving permission to make the change, returns of income would be required for the period between December 31 and June 30, and thereafter returns would be made on the basis of the fiscal year covering a period of 12 months. 140 Persons dying within a calendar year and having an amount of net income in excess of allowable personal ex- emptions at the time of death, or a gross income of $5,000, regardless of the amount of net income, have a status which makes it necessary for the personal representative to make a return of income for the decedent. 141 The section of the Law providing for returns for less than 12 months is section 226. Paragraph (c) of this sec- tion contains an entirely new provision for the computation of tax on such returns. This may be illustrated as follows: 142 Take the case of a married man living with wife but without other dependents, who dies March 31. A return of income made for him by his executor discloses a net income of $20,000 between January 1 and March 31, 1921. The return covers three months or l^ of the calendar year. Applying the rule under section 226 (c) : $20,000 X 12 months -^ 3 months = annual basis of $80,000 Less personal exemption 2,000 Net income subject to tax $78,000 Total tax on this sum 19,970 ^ of this sum is the tax to be paid 4,992.50 Under the Act of 1918 this tax would have been $1,990.00 The tax to be paid under the Act of 1921 is 24.96% of the net income. The tax which would have been payable under the Act of 1918 would have been 9.95% of the net income. In other words, the Act of 1921 increases the tax in this case 250%. In addition to the foregoing will come, in many cases, the Federal estate tax and State inheritance taxes. WHEN RETURNS ARE TO BE FILED— TIME AND PLACE OF FILING 143 Returns of income made on the basis of the calendar year must be filed after December 31 of the year for which return is made, and not later than March 15 next following. |i 60 '■•': Income Tax (This includes information returns.) 144 Returns which are made on the basis of the fiscal year must be made after the close of such fiscal year, and not later than the 15th day of the third month next following the close of the fiscal year. 145 Returns of income must be filed with the Collector of Internal Revenue for the district in which the taxpayer re- sides, or has his principal place of business, and if these are not within the United States, then with the Collector of Internal Revenue at Baltimore, Maryland. Returns of in- formation are to be filed with the Commissioner of Internal Revenue— Sorting Division— Washington, D. C, not later than March 15th. 146 Withholding returns must be filed not later than March 1st and are to be filed with the Collector of Internal Revenue for the district in which the withholding agent makes his return. 147 Sections of the Law controlling are: 227 for individu- als, partnerships and fiduciaries; section 241 for corpora- tions; section 221 (c) for withholding returns; section 256 and regulations for information returns. 148 Reference is made to the actual forms of return for method of statement of income and computation of tax. UNDERSTATEMENT OF INCOME 149 Section 228 of the Law provides for action of the Col- lector of Internal Revenue when he suspects the income re- ported to be less than it should be. TAXATION OF INDIVIDUAL OR PARTNERSHIP INCOME, AS CORPORATE INCOME 150 Section 229 of the Law provides that if any individual or partnership business in which capital is a material- income-producing factor, and the net income of which for the taxable year 1921 was not less than 20% of its invested capital for such year, the business may be incorporated at any time before or on March 23, 1922, and in such case have its net income for 1921 taxed as corporate income. It is also provided that if this provision is availed of, the Capital Stock Tax shall be paid by such taxpayer as though the corporation had been in existence from and after January 1, 1921. It Income Tax 61 would seem that unless this provision of Law is taken ad- vantage of before March 15, 1922, it will be necessary to apprise the Commissioner of Internal Revenue of intention, and secure from him proper action to obviate penalty for failure to file return in time. Also that within a reasonable time after incorporation, the capital stock tax return for 1921 should be filed and that tax paid. TAX ON INCOME OF INSURANCE COMPANIES 151 Sections 242 to 247 inclusive provide specially for com- putation of net income and tax on income of insurance com- panies. CREDIT FOR INCOME TAX (INCOME EXEMPT FROM TAX) Section 216 — Law: 153 Individuals — For Normal Tax Only— -(The income ex- empt from surtax is $5,000 for 1921 and $6,000 for 1922 and thereafter.) For the purpose of computation of nor- mal income tax, there shall be allowed to citizens, resident aliens and estates or trusts, as a credit, an amount to be deducted from the net income otherwise subject to the normal income tax, the following: (a) The amount received as dividend from domestic corporations. 154 155 (1) Foreign corporations are for this purpose to be considered domestic corporations, when more than fifty (50) per cent of their net income for the three year period ending with the close of the taxable year preceding the declaration of such dividend (or for such part of such period as the corporation has been in existence) was derived from sources within the United States as determined un- der the provisions of Section 217 of the law. This showing must be made in accordance with regulations prescribed by the Commis- sioner of Internal Revenue. (2) Domestic corporations are for this purpose to be considered foreign corporations, if i I m I II S2 Income Tax Income Tax 63 eighty (80) per cent or more of their gross income from all sources for the three-year period immediately preceding the close of the fiscal year (or for such part of such period immediately preceding the close of such tax- able year as may be applicable) was derived from sources within a possession of the United States (not including the Virgin Islands) ; and if also fifty (50) per cent of the said gross income for such period or such part of such r)eriod was derived from the active conduct of a trade or business within a possession of the United States either on their o\ni account or as employee or agent of another. Dividends from this class of cor- porations are not deductible as a credit in computing normal income tax. 156 (b) Amounts received as interest on obligations of the United States and bonds of the war finance corpora- tion, in excess of allowable exemptions and which is included in taxable gross income in the return of in- come. 157 (c) (1) In the case of a single person, a personal ex- emption of $1,000. (2) In the case of head of a family (an individual who actually supports and maintains in one household one or more individuals who are closely connected with him by blood relationship, rela- tionship 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) , or a married person liv- ing with husband or wife, a personal exemption of $2,500, unless the net income is in excess of $5,020.83, in which event the personal exemption shall be $2,000. A husband and wife living to- gether shall receive but one personal exemption of $2,500 or $2,000, as the case may be, and if they make separate returns of income, such ex- emption may be taken by either or divided be- in such proportion as they may tween them elect. 158 (d) $400 for each person (other than husband or wife) dependent upon and receiving his chief support from the taxpayer, if such dependent person is under eighteen years of age or is incapable of self support because mentally or physically defective. 159 (e) In the case of a non-resident alien individual or an individual a citizen of the United States who is en- titled to the benefits of Section 262 of the law because of income from within a possession of the United States, the personal exemption shall be only $1,000, and he shall not be entitled to the credit for de- pendents. 160 (f) The status of the taxpayer on the last day of the period for which return is made, determines the amount of exemption allowable to such taxpayer un- der (c), (d) and (e) herein. An individual who dies during a taxable year takes exemption according to his status on the day of his death. In such case, full credit is allowed the surviving spouse, if any, accord- ing to his or her status at the close of the period for which survivor makes return of income. Estates or trusts required to make returns of income and pay tax, have the same personal exemption as a single individual. CREDITS ALLOWED TO CORPORATIONS (FOR THE PUR- POSE ONLY OF COMPUTING INCOME TAX) 161 Section 236: In ascertaining the amount of total net in- come to be subjected to corporation income tax, there shall be allowed as credits against net income — 162 (a) The amount received as interest from obligations of the United States and bonds issued by the War Finance Corporation, in excess of allowable exemp- tions and which is included in gross income. 163 (b) In the case of a domestic corporation, the net in- come of which is $25,000 or less, a specific credit of $2,000, but if the net income is more than $25,000, the tax imposed by Section 230 of the law shall not exceed the tax which would be payable if the $2,000 credit were allowed, plus the amount of net income in excess of $25,000. I «l I 64 Income Tax Income Tax 65 164 The language of the Statute indicates thai there is some amount in excess of $25,000 the income tax on which at the rate for corporate income and without exemption, will produce an amount of tax eciual to the sum of corporation income tax on $25,000 with exemption of $2,000 plus the difference between the unknown sum and $25,000. By equation, we find this sum for 1921 to be $25,222.22 @ 10% = $2,522.22 Net income of $25,000.00 Less specific exemption 2,000.00 Taxable Income $23,000.00 Income Tax at 10% 2,300.00 Add difference between $25,000.00 and larger sum 222.22 Amount of tax $2,522.22 165 For 1922 and subsequent years, we find the unknown sum to be — $25,285.71 @ 121/2% = $3,160.71 Net Income of $25,000.00 Less personal exemption 2,000.00 Taxable Income 23,000.00 Income Tax @ 121/2 % = 2,875.00 Add difference between $25,000 and larger sum 285.71 Amount of tax 3,160.71 166 For 1921, corporations are required to pay an excess profits tax (possibly in some cases, a war profits tax). A question then arises whether determination of applica- bility of the $2,000 exemption depends on the amount of net income to be taxed for both income and excess profits tax, or on the amount of net income after credit for ex- cess profits tax and other credits not subject to income tax. The latter consideration determines the question. 167 It will be noted that paragraph (b) of Section 236 deals only with the use of the specific credit of $2,000 for the purpose of computation of income tax. 168 Paragraph (c) of the same section (omitting details of prescription in connection with the computation for fiscal years), provides that in computing income tax, the amount of any war profits tax and excess profits tax imposed by the Act of Congress for the same taxable year, shall be credited against the net income for the period of computa- tion. 169 It follows, therefore, that the amount of income subject to income tax is the remainder after credit for war profits and excess profits tax (and also for other credits not sub- ject to income tax). Therefore, when this remainder does not exceed $25,222.22 subject to income tax for 1921, the $2,000 specific credit for corporations is to be used in com- puting the income tax. 170 While the excess profits tax is repealed as of January 1, 1922, there would remain certain items which would be included in gross income, but which would not be subject to income tax for 1922 and subsequent years. Eliminating these items the specific credit of S2,00b will be used until the amount of net income subject to income tax exceeds $25,285.71. When net income subject to income tax ex- ceeds this sum no credit of $2,000 will be allowed. Example with excess profits tax for 1921: Capital For credit, 8% of Capital. Plus Net Income $25,000.00 ' $100,000.00 Excess Profits Tax Credit. 8,000.00 3,000.00 $11,000.00 Computation of Tax Income Credit Balance Rate Tax First Bracket, 20% of capital. . .— Second Bracket, Balance = $20,000.00 5,222.22 $11,000.00 $9,000.00 5,222.22 20% 40% $1,800.00 2,088.88 Net Incoioa — $25,222.22 $11,000.00 $14,222 22 Excess Profits Tax, $3,888.88 Credit Exceaa Profits „ Tax $3,888.88 Specific Credit 2,000.00 5.888.88 Balance subject tc Income Tax $19,333.34 @ 10%= Income Tax $1,933.33 fj n Total Tax $5,822 21 66 Income Tax Again : Net Income $25,222.22 $3,888.88 2,000.00 $25,000.00 Credit Excess Profits Tax . . Specific Exemption 5,888.88 5,888.88 Remainder Subject to In- come Tax $19,111.11 $19,333.34 Income Tax @ 10% $1,911.11 22.22 $1,933 33 Add 10% of Excess • • • $1,933.33 171 It will be noted that a specific exemption of $2,000 having been allowed against a remainder of less than $25,000 after credit for excess profits tax, the difference of $222.22 is not to be added to the tax on $25,000 with an allowance of $2,000, but only the amount of income tax on $222.22, or $22.22. 172 Differently stated, we have: Net Income $25,222.22 Credit of Excess Profits Tax $25,000.00 3,888.88 3,888.88 Remainder less than $25,000 . $21,111.11 $21,333.34 Tax ©10% $2,111.11 22.22 $2,133.33 Add Tax on Excess over $25 , 666 . Less 10% on allowable exemption of $2,000 ^ $2,133.33 200.00 200.00 Income Tax $1,933.33 $1,933.33 INCOM E Tax 67 173 Capital $1C For credit @ 8% of capital Plus Specific Credit Excess Profits Credit 11 K).000 8,000 3,000 11,000 Net Income $26,000.00 ™ Income Credit Balance Rate Tax First Bracket, 20% of Capital = Second Bracket, Balance. $20,000 6,000 $11,000 $9,000 6,000 20% 40% $1,800 2,400 Net Income = $26,000 $11,000 $15,000 $4,200 Credit Excess Profits Tax Balance for Income Tax less than $25,222.22 = Use specific credit 4,200 $21,800 2,000 Balance for Income Tax $19 , 800 @ 10% = Income Tax $1 , 980 174 Total Tax = $6,180 Capital $100 , 000 Net Income $50 , 000 For credit @ 8% of capital 8,000 Plus Specific Credit 3,000 Excess Profits Credit $11 ,000 First Bracket, 20% of Capital = Second Bracket, Balance , Credit Excess Profits Tax $13,800 Income Credit Balance Rate Tax $20,000 30,000 $11,000 $9,000 30,000 20% 40% $1,800 12,000 $50,000 $11,000 $39,000 $13,800 Remainder in excess of $25,222.22 $36,200 @ 10% =Income Tax $3,620 Total Tax $17,420 175 (c) The amount of any war-profits and excess-profits taxes imposed by Act of Congress for the same tax- able year. The credit allowed by this subdivision shall be determined as followi: f 68 II Income Tax 176 f 177 (1) In the case of a corporation which makes re- turn for a fiscal year beginning in 1920 and ending in 1921, in computing the income tax as provided in subdivision (a) of section 205, the portion of the war-profits and excess-profits tax computed for the entire period under clause (1) of subdivision (a) of section 335 shall be credited against the net income computed for the entire period as provided in clause (1) of subdivision (a) of section 205, and the portion of the war-profits and excess-profits tax com- puted for the entire period under clause (2) of subdivision (a) of section 335 shall be credited against the net income computed for the entire period as provided in clause (2) of subdivision (a) of section 205. (2) In the case of a corporation which makes re- turn for a fiscal year beginning in 1921, and ending in 1922, in computing the income tax as provided in subdivision (b) of section 205, the war-profits and excess-profits tax computed under subdivision (b) of section 335 shall be credited against the net income computed for the entire period as provided in clause (1) of subdivision (b) of section 205. CREDIT, AGAINST TAX COMPUTED ON RETURN OF TAX PAID ON INCOME INCLUDED IN THE RETURN. Section 222: Individuals— The tax computed under part two of the Income Tax Law, shall be credited with : 178 (a) (1) In the case of a citizen of the United States: the amount of any income, war-profits tax, and excess profits tax paid during the taxable year to any foreign country or to any possession of the United States. (2) In the case of a resident of the United States: (a) The amount of any such tax paid during the taxable year to any possession of the United States. (b) The amount of any such taxes paid dur- ing the taxable year to any foreign coun- 179 Income Tax 69 180 181 try, if the foreign country of which such resident alien is a citizen or subject, in imposing such taxes, allows a similar credit to citizens of the United States re- siding in such country. (3) In the case of any such individual in the fore- going classes who is a member of a partnership or the beneficiary of an estate or trust, his pro- portionate share of such taxes of the partnership or the estate or trust, paid during the taxable year to a foreign country or to any possession of the United States, as the case may be. (4) The above credits shall not be allowed in the case of a citizen entitled to the benefits of section 262; and in no other case shall the amount of credit taken under this subdivision exceed the same proportion of the tax, against which such credit is taken, which the taxpayer's net income (computed without deduction for any income, war-profits, and excess profits taxes imposed by any foreign country or possession of the United States) from sources without the United States bears to his entire net income (computed without such deduction) for the same taxable year. Example : French Tax United States Tax French net income without deduction for French tax. United States taxable in- come without deduc- tion for French tax United States Net Income $20,000 Net Income in France $10,000 $1,250 $10,000 $30,000 = H Total Net Income $30,000 $3,890 United States tax $3,890X i^=credit, $1,296.67 . t^redit cannot exceed amount of foreign tax |i 250 Balance of tax to be paid on return |2 640 70 Income Tax Income Tax 71 182 (5) Tax collected at the source on income included in the return of income. 183 (b) If accrued taxes when paid differ from the amounts claimed as credits by the taxpayer, or if any tax paid is refunded in whole or in part, the taxpayer shall notify the Commissioner, who shall redetermine the amount of the tax due under Part II of this title for the year or years affected, and the amount of tax due upon such redetermination, if any, shall be paid by the taxpayer upon notice and demand by the collector, or the amount of tax overpaid, if any, shall be credited or refunded to the taxpayer in accordance with the provisions of section 252. In the case of such a tax accrued but not paid, the Commissioner as a con- dition precedent to the allowance of this credit may require the taxpayer to give a bond with sureties satisfactory to and to be approved by the Commis- sioner in such penal sum as the Commissioner may require, conditioned for the payment by the taxpayer of any amount of tax found due upon any such re- determination; and the bond herein prescribed shall contain such further conditions as the Commissioner may require. 184 (c) These credits shall be allowed only if the taxpayer furnishes evidence satisfactory to the Commissioner showing the amount of income derived from sources without the United States, and all other information necessary for the verification and computation of such credits. 185 (d) If the taxpayer makes a return for a fiscal year be- ginning in 1920 and ending in 1921, the credit for the entire fiscal year, shall, notwithstanding any provision of this Act, be determined under the pro- visions of this section ; and the Commissioner is authorized to disallow, in whole or in part, any such credit which he finds has already been taken by the taxpayer. CORPORATIONS— CREDIT FOR TAX PAID Section 238: 186 (a) In the case of a domestic corporation, the total tax imposed by the Revenue Act of 1921, shall be credited with the amount of any income, war-profits and ex- cess profits tax, paid during the same taxable year, to any foreign country, or to any possession of the United States: Provided, that the amount of credit shall in no case exceed that proportion of the United States tax, which the taxpayer's foreign net income computed without deduction for foreign tax, bears to its entire net income computed without deduction for foreign tax, for the same taxable year. In the case of domestic insurance companies subject to the tax imposed by section 243 (income tax only) or section 246 (income and excess profits tax for 1921 and income tax only thereafter), the term "net in- come" as used in these paragraphs means the net income as defined in sections 245 and 246 respectively. 187 (b) If accrued taxes when paid differ from the amounts claimed as credits by the corporation, or if any tax paid is refunded in whole or in part, the corporation shall at once notify the Conamissioner who shall re- determine the amount of the income, war-profits and excess-profits taxes for the year or years affected, and the amount of taxes due upon such redetermination, if any, shall be paid by the corporation upon notice and demand by the collector, or the amount of taxes overpaid, if any, shall be credited or refunded to the corporation in accordance with the provisions of sec- tion 252. In the case of such a tax accrued but not paid, the Commissioner as a condition precedent to the allowance of this credit may require the corpora- tion to give a bond with sureties satisfactory to and to be approved by him in such penal sum as he may require, conditioned for the payment by the taxpayer of any amount of taxes found due upon any such redetermination ; and the bond herein prescribed shall contain such further conditions as the Conunissioner may require. 188 (c) These credits shall be allowed only if the taxpayer furnishes evidence satisfactory to the Commissioner showing the amount of income derived from sources without the United States, and all other information 72 Income Tax Income Tax 78 necessary for the verification and computation of such credits. 189 (d) If a domestic corporation makes a return for a fiscal year beginning in 1920 and ending in 1921, the credit for the entire fiscal year shall, notwithstanding any provision of this Act, be determined under the pro- visions of this section; and the Commissioner is authorized to disallow, in whole or in part, any such credit w^hich he finds has already been taken by the taxpayer. 190 (e) For the purposes of this section a domestic corpora- tion which owns a majority of the voting stock of a foreign corporation from which it receives dividends (not deductible under section 234), in any taxable year shall be deemed to have paid the same propor- tion of any income, war-profits or excess-profits taxes paid by such foreign corporation to any foreign country or to any possession of the United States, upon or with respect to the accumulated profits of such foreign corporation from which such dividend was paid, which the amount of such dividends bears to the amount of such accumulated profits: Pro- vided, That the credit allowed to any domestic cor- poration under this subdivision shall in no case ex- ceed the same proportion of the taxes against which it is credited, which the amount of such dividends bears to the amount of the entire net income of the domestic corporation in which such dividends are included. The term "accumulated profits" when used in this subdivision in reference to a foreign corpora- tion, means the amount of its gains, profits, or in- come in excess of the income, war-profits and excess profits taxes imposed upon or with respect to such profits or income; and the Commissioner with the approval of the Secretary shall have full r)Ower to determine from the accumulated profits of what year or years such dividends were paid, treating dividends paid in the first sixty days of any year aa having been paid from the accumulated profits of the preceding year or years (unless to his satisfaction shown other- wise) and in other respects treating dividends as having been paid from the most recently accumulated gains, profits or earnings. In the case of a foreign corporation, the income, war-profits and excess- profits taxes of which are determined on the basis of an accounting period of less than one year, the word "year" as used in this subdivision shall be construed to mean such accounting period. Example : 191 Take a United States corporation with a capital of $500,000 and a net income of $100,000, including a Canadian dividend; total tax $40,420. The United States corporation owns the entire capital stock of the Canadian corporation, which has an outstanding capital stock of $100,000 and a net income of $20,000.00 Canadian Income Tax @ 10% 2,000.00 Balance of accumulated profits subject to dividend 18,000.00 10% dividend paid to United States corporation 10,000.00 Ratio of dividend to accumulated profits from which dividend paid = 5/9, the proportion of Canadian tax which may be deducted by the United States corporation: Canadian tax paid, $2,000 X 5/9 = $1,111.11 Provided, that the credit for foreign tax allowed to the United States corporation shall in no case exceed the propor- tion of the United States tax which the amount of such dividend bears to the amount of the United States net income in which such dividend was included. United States net income in which Canadian dividend included $100,000.00 Amount of Canadian dividend 10,000.00 Ratio of Canadian dividend to United States net income = 1/10: United States tax $40,420 X 1/10 = Maximum allowance unless Ca- nadian ratio produces less $4,042.00 In this case Canadian ratio being "less" will be used. 192 Foreign corporations take credit for tax collected at the source on income included in a return of income. ', u _.J 74 Income Tax Income Tax 75 193 (f) For the purposes of this section a corporation en- titled to the benefits of section 262 shall be treated as a forei^ corporation. PAYMENT, OR COLLECTION, OF TAX AT THE SOURCE Who Are Subject: Sections 221 and 237 of the law— 194 This provision of law applies to nonresident alien in- dividuals; partnerships composed in whole or in part of non- resident alien individuals; domestic partnerships which own tax-free covenant bonds ; foreign corporations not engaged in t^de or business within the United States and having no office or place of business therein. Applies to What: 195 Interest (not including interest on deposits with per- sons carrying on a banking business, paid to persons not engaged m business in the United States and not having an office or place of business therein). Rents Salaries Wages Premiums Annuities Compensations Remunerations Emoluments, or Other fixed or determinable annual or periodical gains profits, and income. But only for the normal tax to individuals and the income tax to foreign corporations. AMOUNT OR RATE TO BE PAID BY COLLECTION AT THE SOURCE OF THE INCOME. """^"'''^ ^^ ™^ 196 On all of the above, with the exception of interest on tax-free covenant bonds, the rate to be collected from pav- ments to nonresident alien individuals and partnerships is 8%; from payments to foreign corporations subject to this method of collection, the rate for income tax for 1921 is lO'?^ and for subsequent years, 121/2%, of the payments made. TAX COVENANT INTEREST. 197 Where bonds, mortgages, deeds of trust, or other sim- ilar obligations of corporations containing a contract or provision by which obligor agrees to pay any portion of the tax imposed by the Income Tax Law upon the obligee, or to reimburse the obligee for any portion of the tax, to pay the interest without deduction for any tax which the obligor may be required or permitted to pay thereon, or to retain therefrom under any law of the United States — such corpo- rate obligation is said to contain a tax-free covenant. In such cases the obligor is required to deduct and withhold from the interest paid on such obligations, a tax equal to 2% of the interest paid, whether such interest is payable annually or at shorter or longer periods and whether payable to a nonresident alien individual or to an individual citizen or resident of the United States or to a partnership, or to a foreign corporation not engaged in trade or business with- in the United States and not having an office or place of business therein. Citizens and resident aliens may receive tax covenant interest free from all collection at the source (they assuming all tax liability themselves) by filing with the withholding agent, either at the time of collection of the interest or not later than February 1 of the year in which the return of income for the preceding calendar year is to be made, a notice in writing claiming the benefit of the personal exemptions provided by section 216 of the law. Nonresident alien individuals may likewise receive such in- terest free from collection at the source (they assuming all tax liability) by furnishing information and filing the same with the withholding agent in manner and form to be pre- scribed by the Commissioner of Internal Revenue. LIMIT OF AMOUNT OF TAX FREE COVENANT INTEREST WHICH MAY BE COLLECTED FREE FROM COLLECTION AT THE SOURCE. 198 The total of personal exemptions to which the taxpayer may be entitled, is the limit of claims for exemption from collection of 2% normal tax at the source on tax covenant interest. Single individuals (citizens or resident aliens), and non- resident aliens, have a personal exemption of $1,000 each. Heads of families or married persons living together and having taxable net income not in excess of $5,000 have a personal exemption of $2,500 per head of family or married couple living together, or $2,000 if the taxable net income exceeds $5,000. (See 1fl57, exemption in computing tax.) Citizen or resident alien taxpayers (whether single or .IlKi immnMmwRMmMMii^^ 76 Income Tax Income Tax 77 married or heads of families) who are the chief support of dependents under eighteen years of age or of persons over eighteen years of age if such persons are incapable of self support because of physical or mental disability, have an exemption of $400 for each such dependent. Nonresident alien taxpayers do not have an exemption for dependents. 199 The foregoing exemptions are personal to the taxpayer and when the amount thereof is equaled by tax covenant interest received free from collection at the source, any fur- ther receipt of such interest is subject to collection at the source. HOW EXEMPTION IS CLAIMED. 200 In the case of citizens and resident aliens, the owner- ship certificates, provided to be used in connection with the collection of interest, serve the purpose of claim. Owner- ship certificate, form 1001, is printed in black ink on yellow paper. The use of this form by a citizen or resident alien is notice to the withholding agent (the person or corporation paying the interest), that the taxpayer elects to claim the benefit of exemption from withholding. Nonresident alien individuals, foreign partnerships and corporations not en- gaged m trade or business within the United States and not having an office or place of business therein are required to use form 1000. They may claim exemption from collec- tion of tax at the source by filing with the withholding agent on or before February 1, next succeeding the year for which returns of income are required to be made, a claim on form lUUliJ. ADVANTAGE OF COLLECTION AT THE SOURCE TO THE TAX PAYER AND HOW EFFECTED. ^ ixir. iaa- 201 Where corporations have issued obligations containing a tax covenant and there is no claim of exemption from col- lection of tax at the source, the debtor corporation (obligor m the bonds, etc.) restores the amount deducted and with- held and therefore pays interest in full. This tax collected by the withholding agent is turned over to the Government and IS placed to the credit of the taxpayer. This tax col- lected at the source is not required to be included in his return of income. Only the contract interest paid is included m the return of income. Against the tax computed on the return of income, the taxpayer takes a credit for the amount of tax collected, at the source of the income, by the with- holding agent. Illustration: $1,000, 5% tax covenant bond — Interest $50; tax @ 4% = Deducted and withheld at source 1 $2.00 Remainder $49 Collection restored i Tax Received by bond owner $50 = $2.00 Credit for collection at source I.OO Amount of tax paid by taxpayer $1.00 METHOD OF SECURING ADVANTAGE OF COLLECTION OF 202 Citizens and resident aliens have an election as to whether they will use ownership certificates form 1001 (yel- low), or form 1000 (white); non-resident aliens must use form 1000, but may submit in connection with form 1000, claim for personal exemption on form lOOlB. The use of form 1000 is notice to the withholding agent that the tax- payer elects not to claim exemption from withholding. The law then casts on the withholding agent the duty of making collection of tax from payments he makes in connection with which the form 1000 is used. Foreign corporations subject to collection of tax at the source must also use certificate form 1000. 203 The foregoing is in accordance with regulations here- tofore existing. The Act of 1921 as to withholding is sub- stantially the same as the Act of 1918 under which previous regulations were promulgated. 204 Income upon which any tax is required to be withheld at the source under this section shall be included in the return of the recipient of such income, but any tax so with- held shall be credited against the amount of income tax as computed in such return. 205 If any tax required under this section to be deducted and withheld is paid by the recipient of the income it shall not be re-collected from the withholding agent; nor in cases 78 Income Tax in which the tax is so paid shall any penalty be imposed upon or collected from the recipient of the income or the withholding agent for failure to return or pay the same, unless such failure was fraudulent and for the purpose of evading pa5mient. OWNERSHIP CERTIFICATES REQUIRED IN CONNECTION WITH COLLECTION OF INCOME. 206 There are three general classes of ownership certifi- cates required in connection with collection of interest from obligations of domestic corporations: 207 (a) Form 1000 (white) to be used by citizens and resi- dent aliens and partnerships with coupons from tax covenant bonds, and by nonresident alien in- dividuals and partnerships and foreign corpora- tions not engaged in trade or business within the United States and not having an office or place of business therein, with coupons from all domestic corporation bonds. The certificate is so construct- ed as to provide for entry thereon by these several classes of taxpayers of the classes of income to which the certificate relates. 208 (b) Form 1001 (yellow) to be used by citizens and resident aliens and domestic partnerships: (1) For the purpose of claiming exemption from collection at the source of 2% normal tax on tax covenant bonds. (2) With coupons from bonds not having a tax covenant. And by domestic corporations, with coupons from all bonds, whether or not they contain a tax covenant. Domestic cor- porations are not subject to collection of tax at the source and for this reason are required to use form 1001. 209 (c) Form lOOlA (green) to be used in connection with collection of interest on foreign items. This means foreign payments of interest or dividends by means of coupons, checks, or bills of exchange. Income Tax 79 EXCESS-PROFITS AND WAR-PROFITS TAX. 210 The excess-profits tax is imposed for 1921 on net tax- able income of corporations, upon an amount thereof in excess of the excess-profits tax credit. 211 The excess profits tax credit is S% of the invested capital plus a specific exemption of $3,000. If the entire credit is not used in the first bracket of the tax, the re- mainder is carried to the second bracket of the tax. 212 The net income for excess-profits tax, is the net tax- able income as computed on a return of income. 213 The amount of the tax thus computed is the excess- profits tax to be paid and also to be used as a credit for income tax, unless the excess-profits tax computed under section 302 of the Act is less than the tax computed as above. The tax under section 302 is: 20% of amount of net income in excess of $3,000 and not exceeding $20,000. Plus 40% of the amount of net income in excess of $20,000. 214 Corporations exempt from income tax and corporations having a net income of less than $3,000 for the taxable year, are exempt from excess-profits tax. 215 The excess-profits tax provisions of the Revenue Act of 1918 with the elimination only of obsolete provisions of that Act, are carried forward into the Revenue Act of 1921 and the regulations for computation of the tax under the former Act will apply for the computation of the tax under the Act of 1921. 216 The excess-profits tax provisions of the Revenue Act of 1921 are to become obsolete as of January 1, 1922. 217 The excess-profits tax is computed on the net income as disclosed by income tax return, whether such income and return be for the full twelve months or for a year's period. The capital used for the purpose of this computation is the average invested capital for the twelve months of the tax- able year, but in case the taxable period is less than twelve months, then the invested capital for the lesser period is the same fraction of the average invested capital for the year that the period covered is of twelve months, and in such case also the $3,000 specific exemption shall be reduced to an A 80 Income Tax |j amount which is the same proportion of $3,000 as the number of months in the period covered is of twelve months. 218 Because of the provisions in the Excess-Profits Tax Law for averaging of capital and specific credit, and also because the corporation income tax is at a flat rate of 10% for the year 1921, the new provision in section 226 (c) for computa- tion of income tax for a period less than twelve months does not have the drastic effect that it does where individual tax is to be computed. (1fl42.) Example: Taxable period of three months; invested capital, $50,000. Net income, $20,000. Invested capital for computation of tax is same proportion of actual invested capital that period covered is of 12 months = }^ $12 , 500 Credit @ 8% of average capital. . . Same proportion of $3,000 as of acti $1,000 lal canital = 760 Excess-profits tax credit $1,750 Tnoome Crodit $1,750 Balance l^ate Tax 20% of Capital « Balance .V 2,500 17,500 $750 17,500 20% 40% $150 7,000 Net Income $20,000 $1,750 $18,250 $7,150 Sec. 302 ajiplies: Net Income. .$20,000 -$3,000 = $17,0(K) (&, 20% = $3,400 $3,400.00 + Specific Credit 2 , 000 Less Credit . . $5 , 400 Credit for Income Tax . = $5 , 400 Subject to In- come Tax. . .$14,600 X 12 mos. = $58,400 4- 3 mos. = $19,406.67 @ 10% = $1,946.67 Ji for Income Tax = $486. 67 Total Tax =$3,886.67 Income Tax without averaging would be , . . . $1 , 4<50 and Total Tax would be 4,8(M) 219 The rules for computation of invested capital and com- putation of excess-profits tax not being changed, but in all respects remaining as under the Revenue Act of 1918, are not reproduced here. Income Tax 81 PAYMENT OF THE TAX. 220 The tax upon income, whether income tax only or in- come and excess-profits tax, being determined, is to be paid. The tax may be paid in its entirety at the time of filing the return of income, or it may be paid, ^ at the time of filing the return of income (not later than March 15th) and the other three installments of % each on June 15th, September 15th and December 15th next following. Where the return is made on the basis of a fiscal year, the first installment is to be paid at the time of filing the return ; the remaining installments of ^ of the tax each, are to be paid on or before the 15th day of the third, sixth and ninth months after the return is due. 221 The tax is to be paid with cash, money order or check (certified or uncertified) or with notes or certificates of indebtedness of the Treasury of the United States. Such notes and certificates are receivable in payment of tax, by the Collector of Internal Revenue at par with adjustment for accrued interest to the time of payment of tax. 222 The foregoing are general rules. Modifications of the general rules and prescription for penalties and interest are to be found in sections 250, 253, 1302 and 1311 of the Revenue Act of 1921. RECEIPTS FOR TAX PAID. 223 Collectors of Internal Revenue are required to give receipts for tax paid, when such receipts are requested. The receipt is to be written or printed and shall state the amount paid and the particular account for which such payment is made. REFUNDS. 224 Section 252. Where it appears upon an examination of any return that an amount of tax has been paid in excess of that properly due, the excess may be credited against any further tax then due, or shall be refunded to the taxpayer. Refunds are made upon claim therefor. Refund claims must be made within five years from the date the return (on which the overpayment was made) was due. Sections 1315, 1316, 1317 and 1324 provide further details as to refunds. m I 82 Income Tax Income Tax 83 I INTEREST ON REFUNDS. 225 Section 1324 provides for the payment of interest on overpayments of tax allowed on refund at the rate of 1% per month from different dates, according to the facts specified in the section. LIMITATION OF EXAMINATIONS AND FINAL DETERMINA- TION AND ASSESSMENT OF TAX 226 Sections 1308, 1309, 1312 and 1313 provide for a final determination of tax liability, and when complied with, a case IS not to be reopened. LIMITATION UPON SUITS AND PROSECUTIONS. 227 Sections 1318 to 1325 inclusive specify the details of such limitations. LIMITATION OF LIBERTY BOND EXEMPTIONS. Liberty Bond Exemptions Under Revenue Act of 1921 228 Beginning January 1, 1921, and continuing for two years from July 2, 1921, the interest on an aggregate average principal, annually, not exceeding $130,000, made up of any 4% or 414%, or combination thereof, of Liberty Bonds not including First Liberty, Second Converted 4y^% Bond's, is exempt from all normal and surtax to individuals, and in- come and excess profits tax to corporations. 229 Beginning January 1, 1921, and continuing for two years from and after July 2, 1921, the interest on an aggre- gate average principal, annually, not exceeding $30,000 of First Liberty Second Converted 4iA% Bonds, is exempt from all normal and surtax to individuals and income and excess profits tax to corporations. 230 These maximum exemptions are the same as would have been possible under Liberty Bond Acts, prior to the Revenue Act of 1921, provided all conditions of collateral exemption should be in force in a particular case. The effect of the Revenue Act of 1921 is to eliminate all requirements in connection with collateral exemptions and to provide out- right a total amount of possible exemption of Liberty Bond interest for two years after July 2, 1921 (or until July 2, 1923) of interest on an aggregate average principal of $160,000. 231 For 1921 this applies both to individuals and corpora- tions. After 1921 all Liberty Bond interest will be exempt to corporations, because the only corporation tax which would apply to any corporate income from Liberty Bonds, is the excess-profits tax, and such tax is not levied by the Act of 1921 after December 31, 1921. 232 After July 2, 1923, and until July 2, 1926, the Revenue Act of 1921 provides an exemption of Liberty Bond interest on an aggregate average principal of such bonds not exceed- ing annually $55,000 to individuals, partnerships and estates or trusts, such principal to be made up of 4%, 4l^% or any combination thereof of such bonds. This may include First Liberty, Second Converted 4^/4% Bonds. 233 After July 2, 1926, the total exemption is $5,000, made up of any 4% or 41/4% Liberty Bonds or combination thereof. f- 84 Income Tax ^sJ^'^ O > Q o Q 12; o n >^ Income Tax o I— I H U -1-1 05O 08 u £ 2f ' 3 2 ^ o * o^ e« O eS fl ^ g aes a> o J3 CO .23 3 n> •-I fi i2 O tH ^ a 0) a O •-9 to to ©s a'^ >-9 •§ a 0.2 Q aoSgS '-OOQ 1-1 >oo i-» .o ..VO «3 1-1 113 C3 o o ■♦a (3 a hi o OS'S g a OQ o ■*» eji-i a V a o « O 73 Q U3 . 1—1 Or-t oj a ■tJca § ^a S'^ toy >vPt»'C CO «^"* a a -tffc a ;c>» 5 rj< CR iC C O »-H I-H >— 1 1— I T-< CO 00 C CI M* CO wt -*• ■<*• eo>o»ocoo> OOON'f »0 Qco>— ce>-i « N Q »C M COC^iOlO^ i3: 05 O O i-H O O l-H T-t I-H "5 Ot CO rH ■«f< 11 r^ CO 00 CM •-< CD w r^ cc M000( COOOOCl'* CO00O» oooooo cOOOON-* 00 0090 C< qD00OC5< 05 05 O*? 8^ -4. I^00O»-if< cOi-'t^W t» t^ooooosoj «J5 O "5 O >-0 e •-• 00 O h- (M Ttt O CO "— ' CO >— • COOSCONt^ t>- t^ 00 C5 OS ^1 CO » ■«»< If M t^ 0) r^ f-H CO op 1^5 00 CO «0 >0 CO CO N- COO) CO t^ o WNCOCO'0 CO t>. 00 00 CO ^^ CO ^^ CO Mcoeo-*'* t^«ONO»CO iOU5cOCOt~ COO»'<*«Q«0 CO CO ■<»< >o »c r>.(Nr>.CM r>. r>. 00 00 © o e«C4(NC4 CO t» 0090 00000 (N>*cOOOO — ' CO "^ »C»OcOO h- MC4C4Ca ^Jfi ^9^ ^sf^ ^Sr T POOQO ^•^ CO 000 CDCOCOCD t>- QOOOO «-«*<»00O t*t^h»t*O0 §: 0000 ■^ CO 3C O 00 00 QOOOO cor^ooctcp 0000 COCO-H t^coco COOCO tCCOcO OCO^iO CO CO CO <0 COOO< ^1 'f O C ( oooo< CO 00 c-ie< 8o 0>Oi-i^hC4 00000 »-(iO 1-tCJ! o COO»kOCO CO-t ^lOcO oooop t-< iC •-< o o C40or^ CO t^ 00 000 o OC5000 r— I IC I— I rH r- < CO»C lO i'5«C .-•Mcoor^ N01C4«tr* 000 »-( ^^ .-< ^^coeo CO CO 00 oc^oo°8 CO »o CO 000 COCO CO ro ^ opooo CO 01 00 ■^o 1— < cO'^ cO 00 ^^p ^^P ^^ ^^n ^^^ OOOOQ CO 01 « 'i* O CJi .-H M -^ CO »t*>c »o o »o OQOOO Tt» O CO M 00 ^Ot^OO CO COCO co^ Si lOOOO _ 100 •^OcO lOcC aCO»-< eoco co^ "# oooop OSiO^OO'* t« 000 O O oq46*' ococ<c 00 00 AO o eocooo»S 1-1 1^ COOCO OOX AO O COOOQOI'^ ^^ tOU)lO 00000 •<4H r« ■^tiOcOt-OO iWDJCO-* $F >ooo SoooN-'j' U3 CO CO to "yo-65a CO co^o o >o 0000'<}^ ■<*' IQtCCOCOCO 00000 •«:<< O to IN 00 COOi-iCO'* to CO CO CO CO ;5o66< C-J 00 ■* o < OOOI^t *0 CO CO CO CO 5&6oi t>. b- o CO cr. OOiCOOOt^ 00 O •-IO* .-i.-ie4(N0» ' gboo6 iO>0 t^^t- i-iCOOOO OsQQ»hC4 •-iC4C4CtO« iOkOCOb>00 00000 eocoiootft C4 <-o>o co-*kOcooo (N(N(N(NC>J OC OC rs^ COOOOiM-* OOOO A A o oocoo C-l « 'T Tj- Tf O CO 00 QO 00 t.t^t>.1-4lO c 0000 t- 1>. o o o »0 — ^r-. ooo—'^eo C4 CO CO coo CO CO CO CO o o NCOt^ 000 •»f Tf ^ oooooo CO O) o c>«cor- 000 ^MCO COOCO •Mcoco 050 ,H rH CO C4 CO CO COO OOOQO CO t0»0»0t0 -iNeococo O O »-•'-< CO ^^co^5coo ■533^ opo< ooo< 10 10 lO CO OOOQO 000U50 o5'6" (NC<0« r-COCO COOCO ^^ CO CO CO i-HCOC 2gJ oo< po< coS( ¥ I o 90 & ■♦» 09 a « u O I QO •8 p d 9 s M 0> s 9 Tables and Charts 'fs 9 t^ N «0 e» «o »ffl >-( »H e4 CO c H oca c:S 1-2 s 6a So « S3 o a S JO S ^ S 5 o M w 8 2 ® 0» »0 »0 «0 IC lO ^ O « t* 00 o r^ _ ss Ss; N ri 00 _ go a CI ■*t< o O o <-" f^ s CO woo ?? 00 b» 5 " >2 t* 00 i-H .^ o o o -H . SOI if O 5 S N W « N 00 M ^ 05 »0 t* 03 (N lO t>. •-I »-( (N (N 61 U5 _ •<*' 00 - . „ ^ 03 ^ t^ Oi N Tj< t^ •H N CS M (N O S "^ 5 fc Ci Q «0 CO © o >^ JS S J* S 00 CO OS b» ■»»< 00 o jp ^ 00 w t^ » o •<»< t^ '-' »-^ M M « § •3 48 .t5 i. "S O O «- *" S H - H ►$ S H .2 o © S o o o o ® CO ® CO « W "-I OS t^ U5 eo ^ ^ lo CO 2 2 2 "=> c ^. ^. ? « » CO ^ U5 lO CO o o o o o 00 CO 00 fO 00 «D 00 Tt< CO N t^ O ^ oo" CO ^H 1^ i-H e,i F c o o o o «0 t-i CO 1-1 m t<- 9 tC t^ CO t^ o •^j^" 00 eo •^ »H i-H C^ 3! S 00 « t>." o* ^ "5" ^ iC I I »o CO s o >c CO OO »-< co' CO 8 OS OS CO OS CO "o" OS J2_ o S5 o 5! ^ « 00 <-" 1-t ei "5 CO ■eo CO 8 o 2 !2 S !9 •« ^ »0 CO t^ 00 CO iiO -s*«5,4. ■^ Tables and Charts 91 INSTRUCTIONS FOR USE OF TABLES 2 AND 3 FOR TAX ON INDIVIDUAL INCOME EXAMPLE: A married man without dependents has a net income, all subject to Normal and Surtax ' $51 000 From the column of total tax, with exemption of $2,000 we find the tax for $50,000 to be $9,190 The next higher Surtax rate is 24% Add Normal Tax rate 8% 32% The additional $1,000 at 32% 320 « Total tax ^9 51Q If the tax be calculated in detail, we have: Total net income Less exemption * «* $51,000 000 Amount of income subject to Normal Tax. . . $49 000 $ 4,000 at 4% $1 fin ' $45,000 at 8% '...'.'.', V.\V. .[',.'. 3600 Normal Tax $3,760 From Surtax table, we find tax on $50,000 to be. . $5 510 Total tax, $9,510 The Normal Tax and Surtax tables may be taken separately, or m any combination desired. The method is the same for the 1922 table. "V- 92 Tables and Charts 0) ce 0) es S CQ hi o s QO S lis CO W l_l V_; l^ l_> !.■•.■ •5 5 Q Q 5 00 d o 5 o o ■ lOCO OC 05 O N ■«*< ® c c o o o i5c ooo (/) ^ C>« -^ «D .-1 W M CS CI C-J CO C<3 «D « r* ;,D o O C c 'M -r ® OC *T ^ ^^ ^^ ^it* SIN"* H *-w- Oi g-;s c M ® csUn oo; 0<-i MCCOt^iO eo c c*3 ic h^ waofoxjc ccooo or 00 -r ? - » '--: OO r- 5 o -H J-" cC »-' "i* t>- <-i DJ (M M ^ C- -f »C iC cc c^ i-l O lO c '"5 «0<0«0 h- •~< i-H rH r-1 1-1 Oi-iirj tOi-1 CO t^OJOO M 8 B Sj3 © o o ^ 6 «=§ •S » 2 - 85COC^ ooooo O C f^ 50 >0 O w CD X r- C O CO IM 30 ■^co tfl^^^- O O O O -r _ CO o « »* C .""t '^ Tj< -r :; CD M 00 00 J-, rft o o M OCO(N«> ^ o ic r^ (N i-H(N(N?OrJ< C ^-S ■* fH t- C rtcoOJf- ct) rr;oc M35 f o>c OCO r^ rl T-l r-l 1— > tCOQO Tt< ct, -^ t>.|>00 ii » E H I CM 9i M •a s s o s e 01 o fl i. 2 2 H C o-r oj O . C . * * a * «:;3n «(n EhO>-J h «• «» r^oocp CO 1.1 -':^ Tt< CO C Q >-i h- coco Ot^ro (MiCcDJDt- oco< c r t^.-fo cr 4 (M c. »c OC xooo cS o c 1-H WMccoeo ^ ?o .-H c ic —I -H M CO Tjt C r^ (M h- O C '♦• OC —1 '-'1 « — ' CO M t^ ^iCiCCOCO »C5D«050 QO )0 S -ol5 OOOCO Cv| XiOX e& rH • o ooooo COX'^O CD rH ■^ CC X OS O Q O O O c>i gC) ■* o CO rH C) ^ CO r^ ooooo o ciM 'O r- i-iCCCO?0 2'^2 «DXO coco ^ r--a I _ - «.ti ft"S2 |E^6°8 O « wi » S - OOOOt^ ■^XINOO «0 rHrH • OOOOO T}< cC C. X O ooooo C CD'NX'*' W !*? "O ;0 X ooooo O CO M •<4» O o-^ CO cox CM CM MCM M* OOOOO CC «A H- oooco CM ©ox «» 1-H o CM ooooo CDCMCMt1. X oooot^ TfXCMcDcO o ooooo ■"tOOCM® CMcOXOS OOOOO N QCMcOQO OOQ ■<* OOO cmtj ooooo ooooo ooooo 0''M'»J<0 §c ooo C Q O O ooooo X C CM-«t CO rH CI CM W CM foooo oooo oooo XOClcOX CM CO CO CO CO O O OQO 88888 ocm'tjTcooo XJ* ^ ^ ^J* ^ 800 CM CD X050 ooo ooo ooo OS to is /^ > ' Tables and Charts 93 10S3 odcdS ©XOCM'^ cOcOt-.r^b. §0000 lOXOCMrlJ^ CDOOQCM*'* §OOP( PO'O! ^COO! «O00QQ( ~ OOu5( Ci a;; CO lO t^ i>. op Tt >-'* (O t>- 00 •HCOrHCO >-H Oi 05 O O <-H i-. « •»f* CM 05 0> O I-H CM ?1 CO CM t^ CM r>. "H CM CM CO CO C4 CM CM CM CM t^-^4QcO-H CO^OUSCO CM t- CM r^ CM rH Tt< i>0 lf3 CO CI CM M CM M t^CJXCOh- cor^t^xx r>-CMr^cMt^ CMeMC«CMM CM«OQN.O OSO^OCOO CMt^COXTjt ~ OjOXCO CM CO CO'* § Ot^COXCO 05 o: O o •— ' •-HrHCMCMCM ©XOrHCM t^ X O rH CI iC 0X1 I-H CO -H CI CM CO CO C-) CM C< CM CM CM rHO X© CO 'I* >OiO CD >-H CO I-H CO 1-H rr ■^f'-O 10 CO CM CI CM CM CM TfrHOCDCM J-^XXOO CO ^H CO I-H t^ CO t^ t^ X X CMCMCMMCM t^ooox iOr^Oi-H?3 XOiO o o 1-H rHrH CM C5 ipcot^xos CM CM CM CM CM QO-tOcOO O I-H CM 1-H CO CM t^ CM GO CO osaoooco CM CI CO CO-* l0 1— I coo "i* »Ot>-XOrH -4— I I-H© O h- X c^ o o ^ Li O CO r-^ O cOt^l^XX CM CM CM CM CM g§ »-iCMeo-* CO CO CO CO 'OcOt>.XOS CO CO CO CO CO Oi-tc^eo-* ^3^ Tj* ^^ ^J' '^J' )OOOQ >CM-«1 M5 lO >0 >C 8 oooo CMCOCi o Tt<0'*'0?0 «ocoooo CM CO-* CO CM rHCO'^t^CO osooxco CM CM CO CO -"t lOcOt^XOO ■^ ■>1* -^ -^ rjMti OpOQO OCM'^cDX CO CO CD CO CO SOOOQ CMCOCMO CMX'<* O^O' ^^ OOOOO OCMcDC^O CO 1-H CJ X t^ cOh-t^-XO OOOOO O CM CD -O CO CO «o ■* '«< o o 1-H cm'cd o" C» CM CM Tft is. ooooo COCIX'- Oi O CI Tj< tC lO CO CO CO OOOOO cOCMXtiO lO r* X o i55 CO cocDr^t>> ooooo CD X X X CO lO CO CO CO 0( CM' >§CM( tJ* ^J1 ^J1 '^J' ^5^ OCOOC5 ^QcoCMao ocicoioco 10 10 «5 kC 10 o< x< >ooo >CDC1X lO CO CO O CO ooooo -^OCOCMX CO X C5 rH C-l CO CO CD t^ t^ OOOOO ^ococo«5 ^ COt^ t>. t~» b- 1>. r>. »-< in 000( CMX'*< CO-^COC >o ;co )Oi ^j^ ^T^ ^r ^p ^^ ooooo CM X Tf O CO rHCM ■^ CO t>- iO>C lOiOiO ooooo CMX<+iOcO 05 O CM Ti< O »C CO CO CO CO Soooo ^ ■* CO O OOC^iCO^ OrHrHdCO OOOOO ■^f CMCMtJ^X COMOt--^ O'l-H cTcM* CO ooooo CI X -H CO t- X O CM M cDcct*t>ir>. OCOOO CI xt:< »* -♦( ocoxabx b- t-» t- <-H lO ooooo cOt». lO 1^ •*■«*' ic CO t>r 00000 ■^CMCM^X CMOXcO-* ■«*nOiOcOt^ OQOC50 CMOOCMCO t^-^rHXiO O^CM*CM*C0 s 000 ^ - ociS C0i-hOI>.»0 •^lOU^COtC ooooo CO ■^ ^ O o CM i-hO O 05 X 0> O O r-t 1-H rH CI CM CM OOOOO ■o CO CM CM CM CM CM OOOOO ■^ CM CI C-J CM O " CI CI r^ XOOQOCO CM CM CO "JX OOOOO CMOQCMCO •^COCMrHO oooTo'i-hcm •-HrHCMCICI s 000 _ _ OCICO ooooo CO'«*nOcOh- C« CM CM CM CM S8888 1-1 CM CO cox xosoxco CMCM00»OX CDQOOCM^ ■OUOCOCOCO OOOOO OOpOQ o o_o o © coooo'cm"-* COCOt»t«t« ooooo 00800 COXOCM-* t^b-XXX ooooo 222^p ooooo coxpcm'tjT XX05 090 22222 2 ©o©©o 5 coxo'qq o OSOSOiO O I, o rHi-ICM OJCM 6 t^ CM «0 UO >0 LO 115 •-< "-H Ci CO Tf lit t^ O CO © CO 1-H rH CPXCOOOX'-'O Q'^-hXcCCOX t^X©C032X O O t-* f^ f^ r-t s >0»^fOiC HOUOCO ■* _>iO^— 1|^ )i:-ococDx )OlHl-HrH tH §00000 gg2^g »OiOiO»df5»o cot»xo)CMr« cor^xcior>. ■^ X I-H rf Tf lO Tf o lo 0"r ■* !-< CO CD 05 10 rH CM CM CM CI CO -"J" COQ'^N.COi-H CM X CI O t^ rH CO X t O CO •<»" -HCOCDXlC rH CM CI CM CM CO •^J^ ?-Q5?35g reOcO'TffM _ _ ®^ © rH CM O CO §»t>ocoicx ©©l-HrH rH rH 8 COOS'* CM CO r^CM t^rH o CMi^coxcoro rH CO CO X l-O r^ CldCMCICO-* uSiCOOOpO •-— I X^H OS 1-H CM CO CO 82 2 2''=' o I'O O "0 CO —1 O •— I Oi •— -^ t>- XCIiCO»l<"oO rH rH CJ CO O ©000000 XXOOXXXX CMCOXCD-^CMO ^CJCO''*' ooooo© X X X 00 X X X CO ■* C5 CD CO ^lOcOt^OCO 0000000 CO CO CO CO CO CO CO CO t>- 05 t^ lO CO I-H rHCMCO't CDOCOO© CO CD CD O CD CO 0> t-- >Z 70 t^ l^ ■*ioor>.05co 00©©©oo 'SxoxS'i*^ -HrH CM CO Tj< 000000 ^ ■'J* rh T** --^l T^ OXCO'T XX iC i« COt^OS CO •2 ic o o o p o O {;- « CD CO 00 CO CMt-OOCO^CM i-i C>l "t t- o iC iC o o o o o t>. lO '»' r}< rH CD rH CO X rH CD r>. CM CO rH CM ^*t* O 000000 X CO X 'O — ' r^ t^ Oij CO T rH CO CO t» CM t-- ■^w CI 1-H rH CI CM •«*< t>. OOOOO© CO rH CO m CM t>. X Oi ■<*' i!5 CM i*< CO r>. CM t- tJ* CM 1-H rH CM CM •* t^ »o >o P O O O «o CO c5 CM 55 Tj< 35 -* 03 CM t^ r>. CO CO rH CM 1r© ©OOOO© O O lO ift CO >.s CO t* CM r>. Tj< CM* rH rH C* CI •* t>- SOOOO©©o P o p o o o _S ©_o coo t* CM »0 iC lO »0 »0 T-l rH CM CO 1* W5 §0000© ooooo _ooooo wsioio leicio «Ofr»XOCMt^ I' 94 (M OS tH M g CM «H X iH ^ ^ B OS *8 tH c fH -M o e^ a •^ 0) 5 o £ g 03 >» •^ s ^ c o > 2 tH OS tH OQ n S OS Eh X o bo es 08 eO O H T? a OQ 4J ^ o «C ^ U P £ ,^ (M o •H 02 o n 4^ o U ^ 00 a E g bfi •c -3 9 80 U i 1 »-^ ^ ss s ss o t> cs) le t«: ge -2 cj CO « 00 ce '««< V t«^ «o s §s o le c\ «-<_ e4 CO i-T oo «>■ V CO t« >o ra IM »H 51 MS •-I 00 «• c« CO r« wi i4 g 2S2 ~ ee r» OS aT x9 t-T tC »^ eo ^ »-< CO S § S S O o ■<»< <* S S 8 s •-< CO ■* o o IO w ■«(«" of •^ s s s s -V C* A -^ ei «o «p c| ■«< ^' e»f to M3 CM -s r* «> « «o o 8 C4 Q IQ 3 as c4 « S S eo c* ^ CO « CO o C4 C« 8SS e« Ok CO t>I >o S9 £3 00 ^ O U3 O >o r» >o t>^ oq t^ 00 «e ec cf >-i '^ OS ^ O US t^ 00 |> 00 (O cj -H •,». cJ o o o S S S S b^ 00 InT (D C) «0 CO o DO t>r ^ o S o . »o S S •O t^ to C4 »-t CO t^ »-< e» o 00 0» ec S S S S «0 TJ«^ "* T^ 00 r>r io" CO »H •<»< a» ^ SS 1 S !P Ok 0f e> t<. 00 r>. >o ©ij ^ ro t>r »-r >o to CD rjD 1-! ci M »4 esi 94 >0 CO 00 ss VD S S S OO ■^^^ ■^^ T^ IO © -^ e^' 'H -^ 00 CJ ssa •>* -^ ^ •-<" of qf o» Oft r*. a iH »-• •* ai o» TABLE V Table Showing Total Income Taxes of Corporations for 1922 on Various Net Incomes io^^^^ |25,000 of Taxable Income, Percentage of Tax to Income is l/J%7o. Percentage varies from 7^^% on $6,000 to 11^% on $25,000.) Net Income ^.•9 5 SS IO tN;^ r^ CO i^ IO CO --^ 00 FI •x CO S M if§f 5SS2S" 1>4 ^ 00 ^ IO CO (O o» ^ o >o e S S O TJ^ Tjt^ ^ ec CO ^. 1^ •H CO CO o o »o t~ C4 IO t-- $. S S. 9. »-f e-f IO 00 O >0 O IO IO (M IO (M *» i-<^ t» r-l — T 00 «>» *-• N t* s s s s s '**, '*! ■*! ■* •o* OS oT a» CO CO t^ IO •4 o5 C* M o e O IO to t^ •o" CO rfi CS -H CO N S^ ^ss •» 04 ft ssss . _ 00 IO «-< e^ V *«r w S S S S *i '^l ■^ '^ O C» CO o ^ e* IO 00 |S S 3 ^ Oi O^ O CO CO -H C4 •-I «■« »o »<- Ti fM »4 ^ CO §11 8'8'i Tl s' $ 1 ^" •X e4 to t~ O IO O IO 'H C) IO t<- * S ^ o W ^ CO 9 2' I' s' S s' O IO O IO •-< of IO t^ 11! §811 Till liS§ >H ^ S S $2,000 6.000 10.000 15.000 20,000 25.000 25,286.71* 30,000 40.00) 50.000 60.000 70,000 80.000 100.000 110.000 120.000 130,000 140.000 150,000 160.000 170,000 180,000 190,000 200,000 225,000 250,000 275,000 300.000 325.000 350.000 376,000 400,000 425.000 450.000 Total Tax None ' ; $375 11.000 .1,625 2.250 ^2.875 3,160.71 3,750 5,000 6,250 7,600 8,760 10,000 12,500 13,750 15,000 16.250 17.500 18,750 20,000 21,250 22.500 23,750 25.000 28,125 31.250 34,375 37.500 40.625 43.750 46,875 50,000 53.125 56.250 Net Income 475,000 500,000 1,400,000 1,500,000 1,600,000 1.700,000 1.800.000 1.900,000 2,000,000 3,000,000 4,000,000 5,000,000 6,000,000 7,000.000 8,000.000 9.000,000 10,000.000 15.000,000 25,000,000 50,000,000 Total Tax 59,375 62,500 ' 650,000 68,750 600,000 75,000 r50,000 81.250 ^700,000 87.500 750.000 93.750 800,000 100,000 850,000 106.250 900,000 112.500 950.000 118.760 1,000,000 125.000 1,100,000 137.500 1,200,000 150,000 1,300,000 162,500 175,000 187,500 200,000 212,500 225,000 237,500 250.000 375,000 50), 000 625.000 750.000 875.000 1,000,000 1,125,000 1,250,000 1.875,000 3,125,000 6,250,000 •Thii amount of income is the dividing line for the use of the $2,000 exemption. Incomes in excess of $25,285.71 have no specific exemption of $2,000. 96 Tables and Charts TABLE VI Individual Tax Rates Under the Several Income Tax Laws The first Income Tax Law was passed October 3, 1913. There have ibeen four Income Tax Laws since enacted. These have been supplemented from time to time by Acts levying various kinds and forms of tax. The outstanding indication is that taxation of income is to be a permanent feature of Federal revenue. The several Income Tax Acts and their rates are as follows: INDIVIDUAL, Act First Second Third Fourth Fifth Passed Oct. 3, 1913 X Sept. 8, 1916 fx) Oct. 3, 1917 * Feb. 24, 1919 (a) (Act 1918) Nov.23, 1921 (b) Normal Tax 2% 4% (2% on first $2,000 above exemption) 112% (6% on first S4,000 above exemption) Ifor 1918 I 8% (4% on first »J .000 above exemption) /after 1918 8% (4% on first $4 .000 above exemption) X Effective March 1, 1913. (X) EfEective Jan. 1, 1916. •Effective Jan. 1, 1917. (a) Effective Jan. 1, 1911 (b) Effective Jan. 1, 1921. The rates of surtax and the years for which effective, are shown in tables below. The surtax rates of the Act of 1918 and for 1921 are identical — See Table II. The surtax rates for 1922 are shown in Table III. SURTAXES FOR 1913, 1914. AND 1915 Rates $50,000 1% 75,000 2 100,000 3 250.000 4 500,000 5 $20,000 50,000 75,000 100,000 250,000 Above $500,000, 6 per cent to to to to to SURTAXES FOR 1916 $20,000 40,000 60,000 80.000 100,000 150,000 to to to to to to $40,000 1% 60,000 2 80,000 3 100,000 4 150,000 5 200,000 6 Above $2,000,000, 13 per cent 200 OltO to 250,000 7% 250.000 to 300,000 8 300.000 to 500,000 9 500,000 to 1,000,000 10 1.000 OOO to 1,500,000 11 1,500.000 to 2.000,000 12 SURTAX FOR 1917 $5,000 to $7,500 1% 7,500 to 10,000 2 10,000 to 12,500 3 12,500 to 15,000 4 15,000 to 20,000 5 20,000 to 40,000 8 40.000 to 60.000 12 60,000 to 80,000 17 80,000 to 100,000 22 100,000 150.000 200,000 250,000 300,000 500.000 750,000 1,000,000 1,500,000 to to to to to to to to to 150,000 27% 200,000 31 250,000 37 300,000 42 500,000 46 750,000 50 1,000,000 55 1,500,000 61 2,000,000 62 Tables and Chakts 97 TABLE VII Corporation Tax Rates Under Several Income Tax Laws INCOME TAX Act First Second Third Fourth Fifth Sixth Pa.ssed Aug. Oct. Oct. Feb. 5, 1909 3, 1913 8. 1916 3, 1917 21. 1019 Exemption fAct 1918) Nov. 2.3, 1921 $.5,000 None None None $2,000 $2,000 for Incornos not over $25,000. EfFeotive Jan. Mar. Jan. Jan. Jan. 1909 1913 1916 1917 1918 Jan. 1, 1921 Rate 1% 1% 2% 6% —1918 after 1918 /12%- 110% / 10%— 1921 1 12}^%— 1922 and thereafter Credit ■I Amount of Ex- cess Profits Tax or War Profits Tax; (Liberty Bond IntereBt and Dividends included in tax- able income on return.) Under Acts 1917. 1918, 1921. EXCESS PROFITS TAX, 1917 Required computation of average Invested Capital and Income for Pre-War Period (1911 to 1913, inclusive) and for 1917 Excess Profits Credit against net taxable income: no t un der "7% and not over (of Average Invested Capital for 1917), Plus $3,000 COMPUTATION Bracket Ist. not over 1-5% of Capital 2nd, not over 5% of Capital 3rd, not over 5% of Capital 4th, not over 8% of Capital ■■ oth. Balance of Income. . . . ■■ Income Net Income Credit Excess Profits Tax Balance S $ s $ $ $ Credit $ S. s. $. $. Dif- ference Taxable $. 9. $. S. Kate 20% 25% 35% 45% 60% Tax S. f. $. S. $. * * $ Excess Profits Tax ®S%fo'" f Income Tax Total Tax =S Over $2,000,000, 63 per cent. Prior to 1917, dividends were subject to income tax. Occasion- ally cases were met with where it was necessary to modify the fore- going formula so as not to assess more than 1% on dividends for yeai^ prior to 1916, or 2% for 1916. i J Tables and Charts TABLE Vll— Continued COMPUTATION 1918 Bracket Ist, not over 20% of Capital 2nd, Balance Net Income. Income Credit Difference Taxable Rate $ $ $ 30% 65% $ $ $ Tax Less War Profits Credit $ Excess Profits Tax Balance Taxable = $ @ 80% Compare Maximum Tax (Sec. 302) $. . = $ War Profits Tax AFTER 1918 Bracket Income Credit Difference Taxable Rate Excess Profits Tax l8t, not over 20% of Capital 2nd, Balance •- $ $ $ 20% 40% $ Net Income . . * $ 1 $ $ $Tax In both cases the applicable war tax is deducted from net income before computing income tax. While taxation for 1917 was under both the Acts— 1916 and 1917 — the combination of the two gave, generally, the formula for in- come tax used above. Excess Profits and War Profits Tax— Act 1918 For 1918 — Required computation of average pre-war (1911-1913, in- clusive) Invested Capital and Net Income, and for taxable year. Excess Profits Credit: 8% of Invested Capital, + $3,000. War Profits Credit: » n- 'p , (a) Average Pre-war Net Income, plus or minus 10% of difference between average Pre-war Invested Capital and average Invested Capital for taxable year. (b) But this credit could not be less than 10% of In- vested Capital for taxable year plus $3,000. Excess Profits Tax Rates for 1918: j?2T? ^l ^^^* bracket, (65% of second bracket. War Profits tax rate: 80% of net income in excess of War Profits Credit. The higher of the two taxes was assessed, unless the maxi- mum tax under Section 302 was lower, in which ev#nt the maximum tax was assessed. Tables and Charts 99 TABLE Vni Showing Effect of High Taxes Table A—Table showing decline of incomes over $300,000— Individual. (Reported shrinkage due to excessive surtaxes.) Number of returns Net Income Income from dividends interest, and investments All Classes Incomes over $300,000 All Classes Incomes over $300,000 au Classes Incomes over $300,000 1916 1917 1918 1919 437,036 3,472,890 4,425,114 5,332,760 1,296 1,015 627 679 $6,298,577,620 13,652,383,207 15,924,639,355 19,859,491,448 $992,972,986 731,372,153 401,107.868 440.011.589 $3,217,348,030 3,785,557,955 3,872,234,935 3,954,553,925 $706,945,738 616,119,892 344.111,461 314,984,884 Table B— Table showing average rate of excess-profits and income taxes, upon corporations of different size, illustrating difference in effect of the tax upon small or moderately capitalized and large corporations. [Average size of corporations (measured by invested capital) earn- mg different rates of profit; corporation returns made in 1919.] Per cent of Net Income to Invested Capital Less than 5 per cent . . 5 to 10 per cent 10 to 15 per cent 15 to 20 per cent 20 to 25 per cent 25 to 30 per cent 30 to 40 per cent 40 to 50 per cent 50 to 75 per cent 75 to 100 per cent 100 per cent, and over Total... Number of coTpo- rations. Invested Capital 10,689 21,869 22,684 17,388 11,987 7,743 9,050 4,807 4,911 1,734 2,194 115.056 $14,104 15,925 8,962 5,482 3,251 3,785 2,421 1,232 784 205 133 ,248,246 .632,944 ,689.034 ,627.463 ,948,260 ,581,785 .285,621 .173,122 ,254,745 .744,478 .853,470 $56.290,039.168 Per cent of Average Income and Invested Profits Tax Capital to Net In- come $1,319,511 10.99 728,229 11.93 395,111 21.60 315,311 33.99 271,290 41.51 488,904 51.22 267,545 53.38 256.329 57.58 159,693 62.30 118,653 64.24 61,009 67.40 $489,240 |i . 37. S6 I M m^^^m €tab!iiitd Committee of ' 'Dtieciors en Investment of Trust Funds Joseph P. Grace James H. Post Percx A. Rockefeller i^rovisionfor the future IN order-to be certain that your estate w ill be distributed in accordance with your desires there are certain legal steps which must be taken. Hv availing yourself of the services of the Trust Department of The National City Hank you are assured that your estate will not only be distributed in accord- ance with your wishes but that your property will be carefully conserved. If you cannot visit the Trust Depart- ment at the Head Office, 55 Wall Street, or the branch office, 42nd Street at Madison Avenue, we suggest that you write for our book "Conserving Your Property", which will answer many questions of great importance to you. The Trust Department invites corres- pondence directly with individuals or through their attorneys. THE NATIONAL CITY BANK OF NEW YORK C^pUaly Surplus and Undivided Trqfits more than $100,000,000 Head Office^ 55 Wall Street Uptown Branchy 42ND Street at Madison Avenue Date Due I}.A90..Z Nat i onal City Eank Digest o'' th^ Fed^^r-"! ?-e\^'i.ue act of 1921 IZl This book must be returned to the desk at which it was borrowed before 10 o'clock A. M. the next day, unless special arrangement is made. If this book is not returned by that hour, a fine of 25 cents a day will be incurred. -^o* "7 s-Zi ^..■/'^^^^H ^-^ a' WAY 1 9 19/u w ■" " ■■■' ■^^ ■1 i m k END OF TITLE