Use How to The book when sent out contains the law and all rulings in force at the tin^ of subscription. It is kept up to date by the insertion of new pages as often as new rulings, regulations or decisions appear. under first-class instructions for 3 New pages are sent out postage, accompanied by proper insertion. 4 Ail pages are numbered consecutively; all paragraphs are numbered consecutively in bold figures. 5a On new pages, unde^the bold face para- graph numbers, in small type, are back refer- encCvS to preceding paragraphs. Correspond- ing forward references to the new paragraph numbers should be made each time new pages are received, thus inaking the book fully cross referenced at all times. The pages and paragraphs are numbered consecutivel 3 ^ If, when new pages are re- ceived, corresponding intennediate pages are found to be missing, notice thereof should be sent us at once, so that we may forward dupli- cates. The Corporation Trust Company 37 Wall Street, New York 111 Corporation Cmot Compang SERVICE DEPARTMENT 8T WAIX. STREET >fEW YORK I f federal income tax/service -REPORT NO. SS-i DECEMBER 20,/lgZO. 580 herewith is a/pink sheet to face page L°r P^ee 520 /ow in your binder should be removed. Also enclo^d. to follow the pink sheet, are pages 581 to 590. / mo likewis^^', are Supplementary Pages 107- » ior subs ti tut ion", and new Supplementary Page 115 / * * * THE DECEMBER AS, 1920 TAX INSTALLMENT PAYMENT. /' House Joint J^esolution 415, staying penalties for non-payment for Aifty days (the one per centum per month has been favorably reported out Tvi. t Committee by Chairman Fordney. Th^t jthe resolution will beoo.ms law we doubt. NEXT YEAR’S SERVICE. J'®^^®/^t®ntion to the matter of renewing by those who have not already done so, to insure prompt receipt of the new Service (ready, co.mpletely indexed, on sched- ule time), and to avoid possible delay in the receipt of current new matters (frequently of stupendous importance iL'L! w prevent the annoyance miss- ing the Weekly Bulletins of the Internal Revenue Bureau. Very truly yours, THE CORPORATION TRUST COMPANY. ^■O :■ ^r"‘ ^ " ^' ■"‘i-a' :• •■ ' ■ ■■- ' v<- , . . ■ sj 1 ,.i; ■■ '■. A r't :^/: '' ■ >•. ’ ■’ V ' '! - ' i ' ' - lairx® ■ ; V. A f '. ■ yiABMvi^A^^a ;abivf!3a,r4v. . ’ • , • • •:. 4 » . ' fl-V ;■ ■. 'i'X«<:>'3r ' . TSia'wl'iv-' jcjta'^ ’«'« ' • ' • <’- • -, w*; J rti • . v‘A i t;; ,.>^ . . ^ f.’ - ' ■" •■ ' ' "' • V ■• ■^; ^ ■• '■■ ■^ .Pl^a I V Hsa.-; t ^T-r" ' ' e ■ ' ■' ' ' • I ■ . . . -< i -.. ._ . •■* ^ ; -■^. - -• ' . - • . '■* *, '" •' • ■’ ■'.s ■■■ . ■ ■ ' '. '■' -r^"'-"'” ■ ' ■ ‘-'V <'•'. .i^-; .. ‘,-ii'i‘'^A'.^ '■ =j.i' Tss bssoXOiiS ■ ' dSBcr iojsi ■ u ' - i 3 M'A ■ V -W ' ' , naafeoM aHT ■■ , lol ■ ' c :rx ; in saUt-H in 9 fti^.sq-nco ■ #««■, ■ .*'"■• 'v •• . . ' ' ^■c :■ ) ,#,V > .■vg:{ .ni;T ' oJ' 4 ea'’. 9 -'fni- ve-riO’ton. ^ ..£pM bns BX&'^ edi lo | K^xJ^uIcaa*!' sdi J’.^ariT | ,■ o ^ . X 1^611 i'rn:o.::> v .- • ■^^^dz:^'ho ,.kh^i.br: A- %h 1 •■■ '\ ->ivi ...•> ' , i^ 3 r 4 £.i”io ; ri*i .^u'c^^iiw - ■• iAA ^;:o ,( v:r:: 3 > +£ siAi/ fi*W “ . j v.^es'tl.Q ion evid oriw j ■■►'- 'v'— . ■^'piv'iwS WcKt efii '’lo , . ■■ oJ b'^^' ,,(.e:iiii ; A- s^zo:^^sm V-OH' jna-t mo •:;. • ^^ V‘’ iS,-.cJ 93 fio sdi a" a-J^ ! ' .-il x: x: 3 rfi .sn 2 ] ^AAAWj'A iUi ■\:m '■v>' '■! I M - ^ r: (litie (Enrporation ®ruat Olompattg SERVICE DEPARTMENT 3T WALL STREET NEW YORK FEDERAL INCOME TAX SERVICE -REPORT HO. 54- z'" DECEMBER 29, 1920./"" Enclosed herewith are pagesy591-592. Also enclosed are Supplementary Pages 107-ipS and 115, revised for suh stitution. These enclosure^ a.re for the 1920 Service Book / 1921 SERVICE The delivery ou the 1921 Income Tax Service Book began jyesterday. fihe books are going out in the order of th0 receipt oy renewal subscriptions. T^e new se/ies of Bureau of Internal Revenue Bulle^ns, containing the special Income Tax Rulings, begina Januaj^ 1, 1921. Very truly yours, THl CORPORATION TRUST COMPANY ' 7 u gj dL, yuBiimtji) terriS imilBint|:taID TH3MT5=1A<=^3a 3DlVS=i3a MMOT THHilTS .I^FAV/ t*J 3DJV5133 XAT 3MODI^! JAJ!3a33 -^2 .051 THOTES- .o£Ci ,es HaaMHoaa beaoions oelA .ses-ise .aeasq 9ifi rfjiweierf baaoIonS tfua lol bartivsT ,311 bna &QI-?OI aa^&’i ^iBclneffleIqqy3 ©ib aoxviea OSei ©is e9 ^0so Io^9 ©ee.^ T .noiJwJx^s .aoivnaa isei aHX jfooa 90 iYi 9 a xsT eraooni ISei arfJ lo Y;i9vil9b ariT labio 9 d.t ni •tuo gnlos eis ejJoocf stlT^ .^Bbteiaex nssap . anoliqiioecSija Iswenai To Jqiaoai To ewnavafl iB.ns^nl To yssiua To 89 ties wan erfT ,ganiXyH xsT araooni Xsioaqe ariJ gninis^HOO .ani^eXIuS .iSei ,X ■'CTBi^nBX, anigecf .anrox vXyiJ "YisV ' ' '' THAqiioo tauHT KoXTAaoqaoo iht (Eor^nrattim ©mat Oliiiaiiat^ SERVICE DEPARTMENT BT WArx, STRjesrr iSKW touk. FEDERAL INCOME TAX SERVICE -BEPORT NO. 55- DECEMBER 30, 1920. Enclosed are pages 591-592 for sutstitution, showing a new Treasury Decision on page 592. Also enclosed for euhatitution is revised Sup- plementary Page 115. Service Book. •rtlE 1921 Service. Many thousand of the new 1921-lbooks are on their way to subscribers. Others arr going forward day by day without delay. As there^has been no postoffice congestion th; bers should receive their books e: usly with or very soon after the care pment has been de- livered. THE BlfEWSTER DECISION. We are publi^ing a pamphlet edition of the de- cision which begins at ^ 3021' of the 1920 Service 2538 of the 1921 Service; sent to subscribers on December 20. We shall be glad to supply our sub- scribers with Judge Thomas's opinion in this form if it is wanted. Very truly youre, THE CORPORATION TRUST COMPANY. i 4 H*^ ' ■ ,-■ ■- ^ ■ ' jinstpaalD tmi^ miftc‘mt|*iaS) U' ^.V'T i.' t^A V.' .- TH 3 MTflA«l 3 a 3 DIV 938 SHOT wax TiiiiLiTa jmtm' t© SDivfiaa XAT aMODMi -lASnaaa ■-? -ea .OH Tflo^iafl-/ .osei ,os flaaMaoaa fnoi^0^i;teina lol Sea-IGa asa^q eiB beaolona > .see esflq no noiaioaa Y-ruajssiT'^ wan b s^iworfa •qua beeivsT al noi^ud^x J’adfaa lol beaoXona balA^ . . . . .dll 0 SbS. ' ^■ .;fooH 90iYTe8 OSei erij;_;io1: ang ^ 89 ^^J 8 oID ^9 avodg erfT ' Cw:c-' 4 ^:p^ * : /. ' V > ♦ * * .4 . V \0oivi38 isex aifr ‘ ^ ■ •,. lisrf^ no eiB a^Ioocf XSex wen 0 ff,t lo bnfiawori;^ ^n^M y;d YJsb b^Bw^ol aniOQ oib aisri^O .aiecfiioacfua o^ ; , eoillo^aoq on neeb aBfl 8^^f^^ aA .^jaXeb ^uorfcTiw 0 vi 9 O 3 T bXuorfa aieditoacfua ,iss\, airf^* nbij-aeat^oo ^ nooa -ytsv lo rfd'lw YXanq8nB>tXinnia ^8rfd‘le 3)foocf ixariJ' , - 9 b nsed SBfl dnemqirfa sfixonuonn^ biBO srid n /S . r^' , # » \ ' .-.:4 ^be^9VlX ■- ■ \ .Hoiaioaa aarawaHa aHiV . ' , T '..' - \ -0b edi lo noid-iba 'deXriqoiBq b anicCatXdxrq ena eW ^ ^ J ‘ soxvTeS OSGX erf^t *^0 XSOS P ds apigecf rfoidw noiaXo '’ no aiodxnoadJJa od dnea leoxviea XSGX erf^ l6 SCaS p] >^-aLr 3 TXfO YXqqua od" b^Xg scf. XXBffa oW .OS ledmaoeCI li anol airier -nx noXniqo aVaBffloriT eabuX* dd’xw aiediioa . ^ ' ' . bednBw ax d^x - i , 91 tS 0 \ XltllS X^bV '.THA'IMOO raUHT HOlTAflO'IHOO SHT >' ' - V ;Sy. Q^or^joratinn Sruat (Enmpauy SERVICE DEPARTMENT ST WALL STRBET NEW YORK FEBEItAL SESYISfE. "AX DSCSMBSR 31, 1920. Enclosed berawitr-t are page8^^)3-694 carrying T. D. 3103, and T. dJ 3109,, on :ij^3iitoiries , the gist of which was giv* yon yest^day in the special sheet acGompanyl/g B!ep 0 ‘rt jfc) » 55. Also enclosed is Supplernentary I'dga 115, jCr substitution. As it is safe to soy 1920 SorviCi 1921 Series^ fo?/ afti^ioon of BeceTuhsr 31, It is lat tb^ will he the last report of the next report 'will be lo. 1 of/ the A Si'w of our present subscribers have not renowol for/1921. Wa realize that ranowal sub- scription!# frojf such are. presuiiably on the way to us. Therifor/ W3 shall continuo to beep all 1920 subecribi^s ^formed of devsiop-aents , until ample time liaafbG/n given fen* such renewals to reach ue -HBPORT NO. 56- Very truly yours. •THE COHPOHATIOh TRUST C0I^3PANY. 1 iHiiiS rioilBirmptiiD id© THHMTS3iA‘=i"'a 3DIVf13a ' atMOV' warK Tf! I < '1 ■■ Cdorporstfon OIruat Cmuiiaiig SERVICE DEPARTMENT 3T WAUL STREET ISEVT TOUK FEDERAL INCOME TAX SERVICE -REPORT NO. 52- DECEMBER 8, 1920. Enclosed herewith, for substitution are revised Finder Pages 1 to 6 bringing up to date the list of Article numbers of Regulations 45. Also enclosed are revised Supplementary Pages Hi to 114, for substitution for Supplementary Pages 111 to 115. A revision of the Index is also enclosed, blue Index Pages 1 to 41. The Service is now again com- pletely indexed. A self explanatory check-your-service sheet is sent herewith. Please note on this that the last Supplementary Page is 114 and not 115 (note substi- tution above). The Fourth Tax Installment. This is due Dec. 15. It is practically certain that Congress will not extend the date for payment. The matter rests entirely with Congress as the Treasury Department is bound by the present law pro- vision. 'the New Service. The new Service will be ready according to sche- dule and deliveries will be made in the order of the receipt of renewals. Very truly yours, THE CORPORATION TRUST COMPANY. -TuaMT^Aqaa 33 ivf!aa uyt ' ' ' : ~sa .ow THoqafH- ' ^ .oaei ,8 ffasMaoaa beexvs'i nox J’ud'i J’ecfua 'lol ,riJ'XW9T9f{ beBoIona to ^efl BCii B^B.b oS qjj snisni-id 6 I aagB^I labni^ to ^textmyn ©,IoxtiA 99 gr'" \‘^f5tr^:'r9Xo''vrT3 bseivsi eiB' boaoTone od'IA 8d8B‘x 'c^fi^neaisXqqyS^ lot noxJut itacfua ^ot liX .exX 0^ XXX 9 uX 0 ,b 9 QOXofi 6 oaXjs 8X xebnl erfX to noxaXveT A -ffloo oxBgB won 8X aoivneS sriT .Xj^ oX X aeas^ xebnl . ' ■ M- •' .b 9 X 9 bnX ^XeXeXq bX. X99ria eqxv^9a-^xfo^C'“^09rfo'''C^o^^^BXqx9 tXea A ■ laBl 9rix taiXt axrit no ston saBsI'i .rfXXwsiarf tnea -fXaOna 9Xon) exX ton bns >XX ai \:*iBtn9EB9Xqqu3 ; (evodB noxtnt . tnetnXXjBtanI xbT dtnno’? eriT nifitieo xXXBOxtojsnq ax tl .SX .oeCI sxrb ai aXriT .tnam^Bq lot stisb erit bnatxa ton XXxw aaengnoO tBrit 9flt aB aaBignoO ritxw Yleixtne atasn nsttBin orfT -onq viBl tneaaiq exit xcS bnuorf ai tneffltnBqeCI ^^^0aBe'lT .noxaiv .eoxvisS waPl 9 dT -erioa ot gnibnoooB YbBen ed XXxw aoxvneS wen sriT 9rit to lebno edt nx ebiioi gcT XXxw aexievxisb bna eXub .aXBWsnei to tqXeoeT ,a'iuoY ^Xunt >£i«V yMA'IMOO TaUHT MOlTAiOtflOr) aUT (Eorporatton ®ntst (Hcmpattg SERVICE DEPARTMENT •T 'WA.ix. mritjswr yirw xxt- K / FEDERAL INCOME TAX SERVICE f -REPORT nf. 51- / N0VEMBER^.-30, 19£0. Enclosed herewith afe pages 573 to 580 for sub-^ stitution, and Supplem^entary Pages 107-108 and 115, for substitution alsoi The chairman of/the Committee on Appeals and Re- view, Mr.\P. S. TaJ'iiert, has resigned from the Gov- ernment service t^ become associated with a firm of Philadelphia attc^neys. Mr. Talbert’s successor as chairman of the Committee and his successor as one of the members hereof will be announced in the very near future, pnbsumably. . .1- A . : . Very truly yours , ■ THE COBPOEATION TRUST COMPANY. / ^<^30 ao’Vflae . t- ’« .LJA.W M» 30i\ 3bmo^^ jAsiaaai .'1 -Gi» ■ ;>0V1 .TaO'JSH;- : '' Ji;' .osex ,01 saaMavoM * ' be^tni^q' 3 ^ >4‘e-E>2 ees^q ei® riJ-iweiarf fiaaoXona noiX'iXeci 9 ^'^ Isxnst) ariJ worie oi noiXyX’iJacfwa 'lo'i roe bns sa^o ^ai^ne^a ©riJ nt ttB^tontea lo Xiiw lol rdfi e.aa«l loTi aoiJtri'i^BcXye .aoxYTsa ©il^ lo 5V5 QJ .lebnicf 1U0X ni won -.natnsXcjcjit/S ©^ia ,noiiti5XXX8difa ^oi (baaoXon© oaXA .3X1 btJxs ,aoX-VOX aa'aaa . , : V-. - ..■..r.ii I |«< ■‘ ■i'":, :; , ' ‘ .ym'IOfl'J YTiaUMMOO ■ - ^ tCoeSB,) ’iVOC .0 .T sttifinsJanabtiu luo ai Jl "io. aXnsJbiaSn oi noilyoiiqqxs loeni.!) aji ni beiim^iX ai -ni lo moXoT ani^fitn lo Tsnn^in sdi tfdt bna jaaxsT aaoriw aeiaJS ni 'cXneqooq YiXi£«onimoo moil ©moo -nininoo -!ol noieivGiq"'s3ifim aaJt-'ffiJa to anoiXuli^enoo -eonwonpnq iBioillo ni beni'Xdyo oct XXiw ©mooni yXxn ©riJ lo ybnXa ©viiayarfx©, yiaaaeoon aril nsriw alnom ©vjsri iXfiria 09l£l8 eviloeqaan rioxja lo ewaX InenCnaq • .bsleXqmoo nestf aoHiJoa UAaaua lo atHTajJua IXfi oj biswTo: oooa epri (OSSX langiiA) XX JaeaiQ airiT .nolgniriasW iBoxl '(labio^xto no .ansriiioariue Xlila ,a%ntXm OSGI bnjs GX6X IXa lo alaaglb aabxrXoni ■ oiXdwq ©fafiiB naeci avari Isril .alfib larfl no ©vilosil© anx.leXXoa yXJiaoW nieril qseri ol aneriinpariya eaiw aW ■ nxl9XXya_8vxlaX!JTny D exex. aril vlnisl yo ilri -ocr bna .atno'c yXxnl >ii9V .YWAIMOO TSUat HOlTAflOaSOO aHT ' : .■ 'x; 2871 We admit that the New York cases on the subject of taxable transfers are confused and not always clear and consistent. But until the New York Court of Appeals authoritatively states that the law of New York is not what the Supreme Court of the United States said it was in the Perkins case, this court has no alternative but to hold that the New York transfer act does not Impose a tax on a legatee’s right of succession which Is deductible in her income tax return. The legacy which the plaintiff herein received under the will of her father did not become her property until after it had suffered a diminution to the amount of the tax, and the tax that was paid thereon was not a tax paid out of the plaintiff’s individual estate but was a payment out of the estate of her deceased father of that part of his estate which the State of New York had appropriated to itself which payment was the condition precedent to the allowance by the State of the vesting of the remainder in the legatee. Judgment affirmed. Note : Application for writ of certiorari denied by United States Supreme Court, October 25, 1920. 2872 Taxability of discount on non-int<="rest>bearing obligations of a state 1130 or municipality. — Reference is made to your letters of July 8 and July 1135 27, 1920, and to a recent confeience between your representative, ^ Mr. Robert R. Reed, and officials of the Bureau, relative to the taxability of discount on non-interest-bearing obligations of a municipality. liYou are advised that profit derived from state and municipal securities purchased at a discount and held until maturity is not taxable where it clearly appears that the return from the investm.ent in the hands of the taxpayer Is due solely to the compensation received from the state or muni- cipality in lieu of interest for the use of the taxpayer’s money. In no case may such exemption exceed the total discount at which the securities were originally sold by the state or municipality. (Letter to Messrs. Reed, Dougherty and Hoyt, New York, N. Y., signed by Acting Commissioner Paul H. Myers, and dated August 9, 1920.) (T. D. 3053.) [Note: To indicate the changes, which are in subdivision ih) only, would prove more confusing than helpful.] 2873 Gross income of life insurance companies: Article 549 of Regu- 987 lations 45 amended. — Article 549 of Regulations 45 is hereby amended to read as follows: Art. 549. Gross income of life insurance companies — A life insurance company shall not include In gross income such portion of any actual preniium received from any individual policyholder as is paid back or credited to or treated as an abatement of premium of such policyholder within the taxable year. (a) “Paid back” means paid in cash, (b) “Credited to” means applied by way of credit to the payment of the premium for the taxable year. It does not Include dividends applied to purchase additional paid-up insurance or annuities, or to shorten the endowment or premium paying period, or in any way that does not actually reduce the premium-receipts of the company for the taxable year.^ (c) “Treated as an abatement of premium” means of the premium for the taxable year. Where the dividend paid back is in 543 TAX INC. excess of the premium received from the policyholder within the taxable year there may be excluded from gross income only the amount of such premium received, and where no premium is received from the policy- ^ holder within the taxable year the company is not entitled to exclude from its premiums received from other policy-holders any amount in respect of such dividend payment. (T. D. 3053, signed by Acting Commissioner Paul F. Myers, and dated August 10, 1920.) (T. D. 3055.) \Notei To indicate changes herein would prove more confusing than helpful.] 2874 Computation of depletion allowance for combined holdings of oil 1420 and gas v/ells: Article 214, Regulations 45, amended. — Article 1421 214 of Regulations 45 is hereby amended to read as follows: Art. 214. Computation of depletion allowance for combined holdings of oil and gas wells. — (1) The recoverable oil belonging to the taxpayer shall be estimated for each property separately. The capital account for each property shall include the cost or value, as the case may be, of the oil or gas lease or rights plus all incidental costs of development not charged as expense nor returnable through depreciation. The unit value of the recoA erable oil or gas for each property is the quotient obtained by dividing the capital account recoverable through depletion for each property by the estimated number of units of recoverable oil or gas on that property. This unit for each separate property multiplied by the number of units of oil or gas produced within the year by the taxpayer upon such property will determine the amount which may be deducted for depletion from the gross income of that year for that property. The total allowance for depletion of all the oil or gas properties of the taxpayer will be the sum of the amounts computed for each property separately: Provided^ 227 5 (2) That in the case of gas properties the depletion allowance for 1421 each pool may be computed by using the combined capital account returnable through depletion of all the tracts of gas land owned by the taxpayer in the pool and the average decline in rock pressures of all the taxpayer’s wells in such pool in the formula given in Article 211 [^[2902]. The total allowance for depletion in the gas properties of the taxpayer will be the sum of the amounts computed for each pool. (T. D. 3055, signed by Acting Commissioner Paul F. Myers, and dated August 12, 1920.) INC, 544 TAX 11 - 194 ( 0 . I % t i % % taxable year on account of sales effected in earlier years as well as those effected in the taxable year]), which the annual gross profit to be realized on the total installment sales made during each [the taxable] year bears to the gross contract price of all such sales made during that respective [the taxable] year. In any case where the gross profit to be realized on a sale or contract for sale of personal property has been reported as income for the year in which the transaction occurred^ and a change is made to the installment plan of computing net income, no part of any installment payment received subsequently to the change, representing income previously reported on account of such transaction, should be reported as income for the year in which the installment payment is received', the intent and purpose of this provision is that where the entire profit from installment sales has been included hi gross income for the year in which the sale was made, no part of the installment payments received subsequently on account of such previous sales shall again be subject to tax for the year or years in which received. Where the taxpayer makes a change [is made] to this method of computing net income his [the taxpayer’s] balance sheet should be adjusted conformably [as of the date when the change is effected]. If for any reason the vendee defaults in any of his installment payments and the vendor repossesses the property, the entire amount received on installment payments, less the profit already returned, will be income of the vendor for the year in which the property was repossessed, and the property repossessed must be included in the inventory at its original cost to himself, less proper allowance for damage and use, if any. If the vendor chooses as a matter of consistent practice to treat the obligations of purchasers as the equivalent of cash, such a course is permissible. (T. D. 3082, signed by Commissioner Wm. M. Williams, and dated October 20, 1920.) 2966 Relief to debtor corporation on account excess liability for tax on [1695 tax-free-covenant bond interest due to compulsory filing of Form 1000 by partnership with member having personal exemption in excess of taxable income. — Receipt is acknowledged of your letter of August 5, 1920, in which you refer to Article 365 [1[1695] of Regulations 45, which provides that Form 1000 shall be used by partnerships in collecting the interest on bonds containing a tax-free-covenant clause. 2967 You state that in some cases where the partnership consists of two members who share equally in the profits and losses, one of the partners may be subject to income tax and the other may not, and where tax is paid on the interest on a bond containing a tax-free-covenant clause, which is owned by the partnership, one partner can credit himself for his share of the tax paid at the source, and the other partner having a personal exemption greater than his income, cannot take credit for his share of the tax paid at the source. You ask whether there is any way whereby the tax paid by the corporation to the Government would be in accordance with the true facts in such a case. 2968 Section 221 (b) of the Revenue Act of 1918 provides that a tax equal to 2% of the interest on bonds containing a tax-free-covenant clause, shall be deducted and withheld, when such interest is paid to a partnership. In view of this provision of the law. Article 365 of Regulations 45, provides that partnerships shall file Form 1000 revised, when presenting for payment interest coupons, from bonds containing a tax-free-covenant clause. 2969 If at the end of the year, the distributive share of any member of the partnership, combined with his other income, is less than his personal exemption, the partner ought, in justice to the debtor corporation, to advise it of that fact. This may be done by filing with the debtor cor- poration an exemption certificate. Form 1001 revised, by the member who is 567 TAX INC. not liable for tax. The member should show by a notation on the certificate that he is a miember of the partnership and what proportion of the interest received by the partnership represents his distributive share. The debtor corporation would then be in a position to pay the tax to the government in accordance with the true facts in the case. 2970 In case the annual withholding return has been filed and assessment made or the tax paid, a claim for abatement or refund, respectively, may be made by the debtor corporation for the proper proportion of the tax. (Letter to Halsey, Stuart & Co., Chicago, 111., signed by Commissioner Wm. M. Williams, and dated October 28, 1920.) 297 1 Taxability of discount on interest-bearing municipal bonds. — Further 1135 reference is made to your letter of August 23, 1920, in which you 2872 asked whether the discount on interest-bearing bonds of a munici- pality, which are sold by the municipality at a discount, is exernpt from tax. IfYou are advised that profit derived from interest-bearing munici- pal bonds, purchased at a discount and held until maturity, is not taxable where it clearly appears that such return from the investment in the hands of the taxpayer is due solely to the compensation received from the munici- pality in lieu of additional interest for the use of the taxpayer’s money. In no case may such exemption exceed the total discount at which the securi- ties were originally sold by the municipality. (Letter to Franklin Carter, Jr., Income Tax Department, The Equitable Trust Company, New York, N. Y., signed by Deputy Commissioner G. V. Newton, and dated October 29, 1920.) (T. D. 3089.) 2972 Allowance for depletion in case of discovery by the taxpayer sub- 1410 sequent to March 1, 1913 — Apportionment between lessor and lessee. 1426^ — The following opinion [T[2975] rendered b}^ the Acting Attorney 1427 ;' General under date of October 29, 1920, relative to the right of a lessor to share in the depletion allowed in the case of mines, oil and gas wells as the result of discovery on or after March 1, 1913, is published in full for your information and guidance. (T. D. 3089, signed by Com- missioner Wm. M. Williams, and dated November 6, 1920.) 2973 (1) The deduction for depletion in the case of mines, oil and gas wells, as the result of discovery on or after March 1, 1913, is allowed only to the party or parties in possession at the time of the discovery, and not to subsequent purchasers. 2974 (2) The value which may be set up in the case of the discovery of mines, oil and gas wells, pursuant to the second proviso of Section 234 (a) (9^ Revenue A.ct of 1918, to be depleted in accordance with such reasonable rules and regulations as the Commissioner of Internal Revenue and the Secretary of the Treasury miay prescribe according to the peculiar con- ditions in each case, is, in the case of a lease, to be equitabl)^ apportioned between the lessor and the lessee. Department of Justice, Washington, October 29, 1920. Dear Mr. Secretary: 2976 This will acknowledge receipt of your letter of October 9, 1920, submitting for my opinion, the question “whether the value which may be set up in the case of the discovery of mines, oil or gas wells, pursuant^ to the second proviso of Section 234 (a) (9), to be depleted in accordance with 568 TAX INC. 11 - 10 - 20 . such reasonable rules and regulations as the Commissioner and the Secretary may make according to the peculiar conditions in each case, requires that the lessor be permitted a portion of such discovery value. 2976 Section 234 (a) (9) of the Act of February 24, 1919, provides: “(a) That In computing the net Income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions: (9) In the case of mines, oil and gas wells, other natural deposits, and timber, a reasonable allowance for depletion and for depreciation of Improvements, according to the 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: vided 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 allowance shall be based upon the fair market value of the property at the date of the discovery, or within thirty days thereafter; such reasonable allowance in all the above cases to be made under rules and regulations to be prescribed by the Commissioner with the approval of the Secretary. In the case of leases the deduction allowed by this paragraph shall be equitably apportioned between the lessor and lessee. 2977 This section Is properly divisible into two parts: the first part prising all but the last sentence thereof, deals exclusively with the establishment of a basis for the determination of allowance for depletion; and the second, contained in the last sentence alone, apportions the ance, when same shall have been determined, between the lessor and the lessee in case of leases. 2978 The bases for allowance provided for in part one are: (1) Where the property was acquired after March 1, 1913, as the result of purchase of a proven tract, or lease, the cost, including cost of development not otherwise deducted, is determinative of the amount of the allowance. (2) Where the property was acquired prior to March 1, 1913, as the result of the purchase of a proven tract or lease, the fair market value on March 1, 1913, is to be taken as the basis of the allowance for depletion, in lieu of cost up to that date. (3) Where the property was at the time of Its acquisition unproven, and discovery was made thereon after March 1, 1913, the allowance is to be determined by the fair market value at the date of discovery or within thirty days thereafter, provided that the discovery was made by the party, or parties, in possession (the taxpayer.) 2979 I take it that the phrase “discovered by the taxpayer” must be read with the phrase “and not acquired as the result of purchase of a proven tract or lease,” and taken together they mean that if a discovery is made after March 1, 1913, upon an unproven tract, acquired either before or after that date, the allowance is to be determined by the discovery value only where the discovery was made by the party or parties in possession; that is, only when no transfers of the tract or lease have intervened between the date of the discovery and the incidence of the tax. In other words, if A, cither owning or leasing a property makes discovery thereon after March 1, 1913, and continues in possession, then the allowance for depletion is to be based upon the discovery value; but if after discovery made the property is transferred to B, then the cost is determinative of the allowance to B, INC. 569 TAX since there is “acquisition after March 1, 1913, as the result of purchase of a proven tract or lease.” 2930 By “discovered by the taxpayer on or after March 1, 1913, and not acquired as the result of purchase of_ a proven tract or lease,” Congress intended to provide a basis for determination, of what should be the depletion allowance, and did not attempt to determine, as between a lessee and a lessor, which of them should be entitled to the allowance for discovery value. That is provided for in the last sentence of the section which says that “In the case of leases the deductions allowed by this para- graph shall be equitably apportioned between the lessor and lessee.” Such interpretation gives effect to all the language of the section, and brings all parts of it into accord; and under the general rules of construction such interpretation should be adopted in preference to an interpretation which results in repugnance. To hold that by the language aiscovered by the taxpayer” Congress intended to give the discovery allowance to the actual discoverer, and to deny the lessor any part of such allowance on the theory that the lessee is usually the discoverer, would be repugnant to language of the latter portion of the section which in the case of leases equitably apportions the allowance between lessor and lessee. 2981 My conclusion, therefore, is that “the value^which may^be jet up in the case of the discovery of mines, oil or gas wells, pursuant to the second proviso of Section 234 (a) (9), to be depleted in accordance with such reasonable rules and regulations as the Commissioner and the Secretary may make according to the peculiar conditions in each case,” requires that the lessor be permitted a portion of such discovery value. Respectfully, Wm. L. Frierson, Acting Attorney General. Hon. David F. Houston, Secretary of the Treasury. (Opinion appended to and made a part of T. D. 3089, 1[2974.) 2982 Held that conditions under which the United States permits itself 2177 j to be sued have been met if claim for abatement has been filed 2189 and rejected, subsequent claim for refund, the tax having been paid under protest, being considered unnecessary. — The right of the plaintiff to maintain this suit is challenged in this court for the reason that the plaintiff did not appeal to the Commission of Internal Revenue after the tax was paid. This contention is based upon section 3226, Rev. St. U. S. (Comp. St. §5949). The object of the statute requiring a party to exhaust his remedies in the Internal Revenue Department before he shall bring suit is to give the department an opportunity to decide whether in its judgment the tax is legal or illegal, and thus save the delay and expense of litigation. The point under consideration was not made in the court below, nor is it mentioned in the assignment of errors; but, as it may be claimed to be jurisdictional, it will be considered. We had a similar question before us in Weaver v. Ewers, 195 Fed. 247, 115 C. C. A. 219, and we then held that, notwithstanding section 3226, an appeal to the Commissioner before the tax was paid, answered the purpose for which the statute was enacted. In the case cited we said: “What the Commissioner of Internal Revenue thought about the assessment had been obtained upon full statement of the facts, and it would have been a useless form again, after the tax was paid, to appeal to the Commissioner and obtain the same judgment. T. he reason for the appeal did not exist, and hence the appeal after tax was paid was not necessary.” 570 TAX INC. 2983 The following cases sustain our ruling: Schwarzchild, etc., Co. v. Rucker (C. C.) 143 Fed. 656; San Francisco Sav. & Loan Society v. Carey, 2 Sawy. 333, Fed. Cas. No. 12,317; Grier v. Tucker (C. C.) 150 Fed. 658; Tucker v. Grier, 160 Fed. 61 1, 614, 615, 87 C. C. A. 513; De Bary et al. V. Dunne (C. C.) 162 Fed. 961. 2984 Counsel for defendant cites Savings Bank v. Blair, 116 U. S. 200, 6 Sup. Ct. 353, 29 L. Ed. 657; Stewart v. Barnes, 153 U. S. 456, 14 Sup. Ct. 849, 38 L. Ed. 781, and Hastings v. Herold (C. C.) 184 Fed. 759. These cases have been examined, and when the facts of each case are con- sidered they sustain the ruling of this court in Weaver v. Ewers, supra. We therefore see no reason for departing from the ruling heretofore made, and hence decide that the contention is without merit. (Extract from opinion in Loomis, Collector, vs. Wattles, Circuit Court of Appeals, Eighth Circuit (266 Fed. 876).) {Decision.) Ultimate beneficiary of a trust subject to tax as an entity being a person exempt from tax. Circuit Court of Appeals, Third Circuit. Lederer, Collector, vs. Stockton. (266 Fed. 676.) In Error to the District Court of the United S ates for the Eastern District of Pennyslvania; Oliver B. Dickinson, Judge. Action by Alexander D. Stockton, sole surviving trustee,.^under the will of Alexander J. Derbyshire, deceased, against Ephraim Lederer, Collector of Internal Revenue. Judgment for plaintiff, and defendant brings error. Affirmed. For opinion below, see 262 Fed. 173. Before Buffington, Woolley, and Haight, Circuit Judges. 2985 Buffington, Circuit Judge. In the court below, Stockton, trustee 6-12 under the will of Alexander J. Derbyshire, brought suit and recovered a verdict against Lederer, United States collector of internal revenue, to recover income taxes illegally, as he alleged, collected from )iim. On entry of judgment on such verdict, the defendant sued out this writ. 2986 By his will Alexander J. Derbyshire, who died in 1879, devised his residuary estate to “the contributors to the Pennsylvania Flospital,” a corporation of Pennsylvania created for charitable uses and purposes, and no part of the net income thereof is for the benefit of any private stockholder or individual. The devise was subject to the payment to certain annuitants, all of whom, save one, have died. The residuary estate amounts to several hundred thousand dollars, its annual income is substantially $15,000 and upwards, and the remaining annuity is for a few hundred dollars per year. The construction of the will came before the Supreme Court of Pennsylvania in Biddle’s Appeal, 99 Pa. 525, wherein the title to the residuary estate was adjudged vested in the hospital; the court saying: “The residuary devise, being in trust for a charitable use and purpose, comes within the proviso to the ninth section of the act of April 18, 1853, and therefore is not within the prohibitory clause of the section forbidding accumulations after the death of the testator for a term longer than therein specified.” INC. 571 TAX 2987 The court further held that it should not be paid to the hospital until after the death of all the annuitants. As stated by the court below in its opinion: “Resort was then had to the practical expedient of the trustee invest- ing the funds of the estate in the form of a loan to the institution repre- senting the charity, upon which loan the charity paid an interest sufficient to take care of the administrative charges and the payment of the annuities. The annuities have all fallen in, except one small one.” 2983 It will thus be seen that, while the residuary estate remains theo- retically and for purposes of accounting in the hands of the trustee, it is already in the possession of the hospital in the shape of money loaned on mxortgage, and upon such loan the hospital is paying to the trustee only such interest as takes care of administrative charges and the surviving annuity. Under such circumstances, the collector assessed and collected, under protest, from the trustee on June 26, 1917, the sum of $4,273.42, being on the incom^e of the residuary estate for the years 1913, 1914, 1915, and 1916, and on June 11, 1918, an income and excess profit tax of $6,842.02 upon the income of the residuary estate of 1917. It is, of course, apparent the trustee has no financial interest in the residuary payment, and while this large sum is in theory assessed as a tax on income received by the trustee or the testator’s estate, the whole sum is paid at the expense, and from the property, of the hospital. The question, then, in substance and practice, resolves itself into this: Is this hospital liable for income tax.? 2989 In view of the fact that Congress in the pertinent taxing act of 1913 (Act Oct. 3, 1913, c. 16, 38 Stat. 168, 172)^said: “All persons, firms, companies, copartnerships, corporations, joint- stock companies or associations, and insurance companies except as hereinafter provided, in whatever capacity acting, having the control, receipt, disposal, or paymient of fixed or determinable annual or periodi- cal gains, profits, and income of another person subject to tax^ shall in behalf of such person deduct and withhold from the payment an amount equivalent to the normal income tax upon the same and make and render a return. * * * Nothing in this section shall apply * * * to any corporation or association organized and operated exclusively for religious, charitable, scientific, or educational purposes, no part of the net income of which inures to the benefit of any private stockholder or individual.” — it follows that he who construes and applies that statute to warrant taxation of a charity is doing what Congress said should not be done, viz., “that nothing in this section shall apply,” etc. So, also, when Congress in the act of 1916 (Act Sept. 8, 1916, c. 463, 39 Stat. 756) again said: “That there shall not be taxed under this title any income received by any * * * corporation or association organized and operated exclusively for religious, charitable, scientific, or educational purposes, no part of the net income of which inures to the benefit of any private stockholder or individual.” — it follows that he who taxes, under this statute, the income of a ^hospital, is taxing that which Congress expressly said should not be taxed, viz., “that there shall not be taxed under this title any income received by any * * * corporation for * * * charitable * * * purposes.” Section 11 (Comp. St. §6336k).?’’ 2990 As justification for assessing this tax, it contended, jiowevcr, that as the act of 1916 forbids taxation on “any income received hy * * * corporation * * * for * * * charitable * * * pur- poses,” that the income of this residuary estate was not exempt because it % % % INC. 572 . TAX 11 - 10 - 20 , has not been “received/’ but remains in the hands of the trustee. But, apartjrom the fact that the corpus of the residuary estate has in fact already been “received” by the hospital in the shape of a mortgage, and the hospital Itself is pro forma paying to its own trustee the money which, pro forma, constitutes the income here taxed, the construction thus urged and the effect given to the word “received” does not commend itself to our judg- rnent. The sections in question in the acts of 1913 and 1916 are to be con- sidered and construed jointly. They concern the same 'subject-matter, and that of 1916 was evidently meant to continue the broad and absolute purpose and provisions of the act of 1913 “that nothing in this section shall apply * * * to any corporation * * * operated exclusively for * * charitable * * * purposes.” Such being the case, the residu- ary estate which produced this income being the property solely of the hospital, no^ one but the hospital owning the income thereof, and the tem- porary holding of the income being by a trustee, who was the agent and rep- resentative solely of the hospital, it is clear that when substance and spirit, and not mere form and words, are the interpreters of the statute, the receipt of this income by the hospital’s agent and representative was in truth and reality a receiving by the hospital, for he who acts by the hand of another himself acts. If this income was received from a third person by the trustee and afterwards lost, surely the hospital could never have collected it again from such third person on the theory the hospital had never received it. Moreover, it will also appear that, if the trustee had, without protest, used the money of the hospital to pay this income tax, such trustee could not, on settlement of his trusteeship, have justified such payment under section 2 of the act of 1913, for that section only warrants such deduction and with- holding where the income is the “income of another person subject to tax,” and elsewhere, as we have seen, the same section provided “that nothing in this section shall apply * * * to any corporation * * * operated exclusively for * * * charitable * * * purposes.” 2991 From the above, it is clear to us, first, that the United States, the taxing power^and real defendant in this case, speaking by its legis- lative branch in plain language enacted its purpose and will to exempt from taxation the income of “any corporation or association organized and operated exclusively for religious, charitable, scientific, or educational purposes, no part of the net income of which enures to the benefit of any private stockholder or individual;” second, that the action of the United States by its executive officer, in this case the collector of internal revenue, in assessing and collecting this income tax from the hospital, was not warranted by the taxing statutes; and, third, that it is the duty of the United States, acting by its third agency, the federal courts, to prevent its executive branch from illegally defeating its expressed will in the law enacted by its legislative branch. 2992 It follows, therefore, that the judgment entered by the court below in favor of the hospital and against the collector should be and is affirmed. (266 Fed. ;676.) INC. 573 TAX tti/S Id oKt: ni .’^bfi'^ifs YTM/bf83TafIt,'lo*auq^o^ [fiJiqeQff DrfJ bhs \o^j5g^ianT fi'Vo: 3q.Bj^3'^rf^ nrjRjfqaQa ^/Ij ( jsmiol .oiq jibrtiw xorront ©ril 09t8tnt'n?/fp*B^i cxJ qaxx^q .p 4| b©gTi/ 8ijffj ftdiiouiJanoD^ sffi „b©zB^ -^.by[ txjo' Qt Ko8J,r bndifimod Tori-8©ob rbaybo^ifs^^-biaW -noD 3cf o^ ©IB dl^I bne \o 8t©E ©i-I^ ,ot:nob3:©w^ nr. ?ipqbd©e ■ jisJTBra-iDsfcfir^^ ©msa ©dt ntoonoo- q©fiT .xllfiioj., B©u?i. 2 riqd,bfi^ ’^^ 1^12 ©irrfdarfB bne bGo*iqoiiboixi uoidv/. -fti©? ©rfj bn& ^ioq^odx ©md^ni ©dl ^irr/rc^ lB:^*qwfl ©dl X^^ft d4 -q©! bns Tn©qB ©dJ 8 gw bdv/’5©©73int b yd ^nbd ©it^qnt ©di^’^q ■gfnbloryy^^^ jJnrqa brrfi '©©netzJua n©dw j’sdj' iRab ar xi .b^ dq^qd ©dJ ■ Jqi©b©i ©di ,©Ju?jst3 ©d? lo 3‘T©r©-iqi©.r{!i ©d.r ©Is t8bnow,-{)q:K ©T9rq ro bns dJmt nr as'/r ©vbBffr©8©iq©i brrn ^n©^A' ^‘IsltqaQd ©.xb X^. TiJ ladiaoB ^o.bnsd ©dt yd 8t©c odvV ©ri xoltbl^^d ^dq. jX-d^dybbsi s^ ©©qam.t ©dr yd ao?*r©q biidr s moil, b©vi©©©i ?;.v/.9^,op,cw, aid? JI .8?©r. iibamtn ti b©iD©TfoD ©vBd 1 ©^©^ bino© [firiqaod ©dr jy(wx2 •Jr b©yi©©©T i©v©n bsd iBtlqaod ©dr, yiondr* ©dj sno.noaiaq b'lidT dbixs drb’n b©3[/ q 3 ©rbiq ?Lfod.trw ai. ©dt^s^^d^-y ^mblor^^ nr gnrdron rudr'* b©brvotq riofr©©a ©n^3*©ffl^ Xns^fi^yvricl ©.w 8E b©?Bi©qo * ♦ * notriEioqra© ynB oi: ■* .n^oxtbb^ arrn ’b8©8oqiuq' ^ ©Idsrnld.q lol ybvteulox© ©d.t ,3©rBr8 botinU ©dr rsdr ^rsaft' ,8n or »©.yQd^, -8iy©[ srr yd ^nidsaqa b.afi© aidr ni meBnobb baqi .b^^sqo'yoc^ ^nir: ^ ^ iqmsx© of HivT bnB ©aoqTuq ari’ barDsn© ©^^ arf yd baronn© v/sf ©dr rd Whrr b©88©iqx© arr ptiirJ&©l(©b< yI|B^©nr motl ri©n Bia : •■ ,d©nmd ©virBlsiq©! v/ofed rtooo ©di yd"b©T©rrt© rnsnrfyb’n^ t&dr (©7ol©i©dr rl , seos 31 bns ©cf blnods rot©©ll6© ©dt rarirs^B bnfi I^iqaoifjod; Iq . ’ - • ; : .bat W)' •y XAT ££B .om 11 - 10 - 20 . TABLE OF CASES. Paragraph Ailca: Aitheimer k Rawlings investment Co. vs. (248 Fed. 638). ......... 905 Alien: National Bank of Commerce in St. Louis vs. (223 Fed. 472) 125S Aitheimer & Rawlings Investment Co. vs. Alien (248 Fed. 688).... 905 Anderson: Brady vs. (240 Fed. 665) 688 Anderson: Jacobs and Davies (Inc.) vs. (228 Fed. 505) 1218 Anderson: Jewelers Safety Fund Society vs. (T. D. 3078) 2960 Anderson: Mail & Newspaper Transportation Company vs. (234 Fed, 590). 2184 Anderson: Thorne vs. (240 U. S. 115). 2290 .Anderson: Tyee Realty Company vs. (240 U. S. 115) 2290 Baldwin Locomotive Works vs. McCoach (221 Fed. 59) 960 Baltic Mining Co.: Stanton vs, (240 U. S. 103). 2297 Brady vs. Anderson (240 Fed, 665) 688 Brady: Dodge vs, (240 U. S. 122) .2295 Bfushaber vs. U. P. Railroad Company (240 U. S. 1) 2260 Carter: Union Hollywood Water Company vs. (238 Fed. 329), .727, 1233 Chicago & Alton Railroad Co. vs. U. S. (53 C, of C. 41).. 95.5 Cohen vs. Lowe (234 Fed. 474) 496, 1355 Crocker, et a!., Trustees: Malley vb. (249 U. S. 223) 2399 Cryan vs. Warded (263 Fed. 248) 2695 DeGanay vs. Lederer (250 U, S. 376). 2408 Digest of Recent Decisions of the Supreme Court (Acts of 1909 and 1913). .2317 U— .. - A. .... A ,h. as « » V a-v t « w 4 «« r'. 1-* A. ^ ^ 9 t « Ji A Dodge vs. Brady (240 U, S. 122) 2295 Dodge vs. Osborn (240 U. S. 118) 2166 Doyle: Grand Rapids and Indiana Railway Co., vs. (245 Fed. 792) 1206 Eliot National Bank vs. Gill (218 Fed. 600) 1257 Eisner; Macomber va. (Jan. 23, 1919) 853 Supreme Court decision (252 U. S. 189) 2573 Eisner: Mente vs. (T. D. 3029). 2754 Eisner; Peabody vs. (247 U. S. 347) .2378 Eisner: Prentiss vs. (260 Fed. 589) 1265 U. S. Circuit Court of Appeals Decision (T. D. 3050) 2848 Eisner; Towne vs. (245 U. S. 418) 2313 Evans vs. Gore (262 Fed. 550) 2669 Supreme Court Decision (253 U. S. 245) 2713 First Trust and Savings Bank, Trustee under the will of Otto Young v*. Smietanka, Collector (C. C^. A., 7th Cir., Oct. 1920 Term) 2935 General Inspection & Loading Co.: U, S. vs. (192 Fed. 223) 1781 General Inspection & Loading Company: U. S. va. (204 Fed. 657) .2027 Gill: Eliot National Bank vs, (218 Fed. 600) . 1237 Gore: Evans, vs. (262 Fed. 550} 2669 Supreme Court Decision (253 U. S. 245) 2713 Gould vs. Gould (245 U. S. 151) 2306 Grand Rapids & Indiana Railway Company: U. S. vs. (239 Fed, 153) 2043 Gulf Oil Corporation vs. Lewellyn; Example of procedure 2189 U. S. Supreme Court Decision (248 U. S. 71) 2395 Haiku Sugar Co. et al. vs. Johnstone (249 Fed. 103) 550 Heller, Hirsh & Co.; In re (258 Fed. 203) 970 Hornby: Lynch vs. (247 U. S. 339) 2337 Jackson vs. Smietanka (U. S. District Court) (T. D, 2960) 2421 facobs and Davies (Inc.) vs. Anderson (228 Fed. 505) 1218 Jewelers Safety Fund Society vs. Lowe, Collector: Same vs. Anderson, Collector (T. D. 3078) 2960 Johnstone: Haiku Sugar Co. et al, vs. (249 Fed. 103) 550 Kohlhamer vs. Smietanka (239 Fed. 408) 2175 Lederer: Dc Ganay vs. (250 U. S. 376) 2408 Lederer: Penn Mutual Life Insurance Co. vs. (253 Fed. 81) 988 Supreme Court Decision (253 U. S. 523) 2673 Lederer; Philadelphia, Harrisburg & Pittsburgh Railroad Company vs. (242 Fed. 492) 2203 Lederer vs. Stockton (266 Fed. 676) 2985 Lewellyn: Gulf Oil Corporation vs. (Example of procedure) 2189 U. S. Supreme Court Decision (248 U. S. 71) 2395 Income Tax. Supplementary Page 107. TABLE OF CASiSS.-~ConclGded. Pftragrftph Lowe: Cohea vs. (234 Fed. 474) 496, 1355 Loomis vs. Wattles (266 Fed. 876) 2982 Lowe: Jewelers Safety Fund Society vs. (T. D. 3078) 2960 Lowe; Peck vs. (247 U. S. 165).. . . 2329 Lowe: Roberts vs. (236 Fed. 604) 2201 Lowe: Southern Pacific Company vs. (247 U. S. 330).. 2380 Lynch vs. Hornby (247 U. S. 339) 2337 Lynch vs. Turrish (247 U, S. 221) 2351 Mf'Coach: Baldwin Locomotive Works vs. (221 Fed. 59) 960 McKatton: U. S. vs. (U. S. District Court) (T. D. 3043) 2770 Macomber vs. Eisner (Jan. 23, 1919) * 853 Supreme Court decision (252 U. S. 189) 2575 Maii.& Newspaper Transportation Company vs. Anderson (234 Fed. 590).. 2184 Malley vs, Alvah Crocker, et. ai., Trustees (249 U. S. 223) 2396 Marion Hotel Company: Urquhart vs. (194 S. W. 1). .. 1632 Maryland Casualty Company vs. United States (251 U. S. 342) .2517 Mente vs. Eisner (T. D. 3029) 2754 Mohawk Mining Co.; Weiss vs. (264 Fed. 502) 2668 Nashville, Chattanooga & St. Louis Railway: U. S. vs. (249 Fed. 678). ... .2050 National Bank of Commerce in St. Louis vs. Allen (223 Fed. 472) 1258 Oregon- Washington R. & Nav. Co.: U. S. vs. (251 Fed. 211) 944 Osborn: Dodge vs. (240 U. S. 118)., 2166 Peabody vs. Eisner (247 U. S. 347).. 2378 Peck vs, Lowe (247 U. S. 165) 2329 Penn Mutual Life Insurance Co. vs. Lederer (258 Fed. 81) 988 Supreme Court Decision (253 U. S. 523) 2673 Philadelphia, Harrisburg & Pittsburgh Railroad Company vs. Lederer (242 Fed. 492) 2203 Pittaro: U. S, vs. (U. S. District Court.) (T. D. 2874) 2104 Prentiss vs. Eisner (260 Fed. 589) 1265 U. S. Circuit Court of Appeals Decision (T. D. 3050) 2848 Roberts vs. Lowe (236 Fed. 604) 2201 Skinner: U. P. Coal Co. vs. (U. S. Supreme Court, March 22, 1920) 2651 Smietanka: First Trust and Savings Bank, Trustee under the will of Otto Young, vs. (C. C. A., 7th Clrc., Oct. 1920 Term) 2935 Smietanka: Jackson vs. (U. S. District Court.) (T. D. 2960) 2421 Smietanka; Kohlhamer vs. (239 Fed. 408) 2175 Southern Pacific Company vs. Lowe (247 U. S. 330) 2380 Stanton vs. Baltic Mining Co. (240 U, S. 103) 2297 Stockton; Lederer vs. (266 Fed. 676) 2985 Thorne vs. Anderson (240 U . S. 115) 2290 Towne vs. Eisner (245 U. S. 418) 2313 Turrish: Lynch vs. (247 U. S. 221) 2351 Tyee Realty Company vs. Anderson (240 U. S. 115) 2290 Union Hollywood Water Company vs. Carter (238 Fed. 329) 727,, 1205 U. P. Coal Co. vs. Skinner (U. S. Supreme Court, March 22, 1920) 2651 U. P. Railroad Company: Brushaber vs. (240 U. S. 1) 2260 U. S.t Chicago & Alton Railroad Co. vs, (53 C, of C. 41) 955 U. S, vs. General Inspection & Loading Co, (192 Fed, 223) 1781 U S. vs. General Inspection & Loading Company (204 Fed. 657) 2027 TJ. S. vs. Grand Rapids & Indiana Railway Company (239 Fed. 153) 204.3 U. S. vs. McHatton (U. S. District Court) (T. D. 3043) 2770 U. S.: Maryland Casualty Company vs. (251 U. S. 342) 2517 U. S. vs. Nashville, Chattanooga & St. Louis Railway (249 Fed. 678) 2050 U. S. vs. Oregon-Washineton R. & Nav. Co. (251 Fed. 211) 944 U. S. V8. Pittaro (U. S. District Court.) (T. D. 2874) 2104 Urquhart vs Marion Hotel Company (194 S. W. 1) 1652 Waddell; Loomis vs. (266 Fed. 876) 2982 Wardell; Cryan vs. (263 Fed. 248) 2695 Welts vs. Mohawk Mining Co. (264 Fed. 502) . .2668 Income Tax Supplementary Page 108. 11 - 10 - 20 . RUNNING TABLE OF CONTENTS.— Continued. PART 11—1920. (Page 433 (^2420) et seq.). Regulations, Special Rulings, Decisions, etc.. Issued since December 22, 1919. T. D. Date 3070 Sept. 10, 1920 3071 18, it 3072 ii 24, iC 3073 << 27, it 3074 _ Decision Oct. Oct. 1, it 3075 Oct. 5, it 3076 5, it 3077 a 7, it 3078 a 13, it 3079 u 15, it 3080 19, ti 3081 19, a 3082 “ 20, a 3083 ic 22, ic 3084 it 26, 3085 a 27, it 3086 cc 27, a 3087^ it 28, a Special it 28, it 3088 “ 30, “ Special “ 30, “ 3089 Nov. 6, “ Decision July 28, “ Decision July 8, “ Subject ^ Paragraph (Reg. 56, Rev., Motion Picture Films. — War Tax Service.) Return of income by husband and wife from community property 2903 (Distillery warehouses.) (Tobacco.) (Tobacco.) Liability to tax of estates and trusts as entities under the Act of 1913 2935 (Tax on brokers. — War Tax Service.) Arts. 228, 229, 230, 231, 233, 234 and 235, Reg. 45, amended, and Arts. 236 and 237 added. — Depletion of timber 2944 (Commercial cider.) A mutual fire insurance society is a fire insurance company under the 1909 and 1913 Acts. (Captions of court decision) 2960 (Federal prohibition.) (Excess Profits Tax (1917 Act).— War Tax Service.) (Denatured alcohol.) Art. 42, Reg. 45, amended. — Sale of personal property on installment plan 2965 (Federal prohibition.) (Federal prohibition.) (Narcotic law.) (Federal prohibition.) (Excise taxes. — Wool rugs. — War Tax Service.) Relief to debtor corporation on account excess liability for tax on tax-free-covenant bond interest due to compulsory filing of Form 1000 by partnership with member having personal exemption in excess of taxable income 2966 (Estate Tax. — Power of Appointment. — War Tax Service.) Taxability of discount on interest-bearing municipal bonds 2971 Allowance for depletion in case of discovery by the taxpayer subsequent to March 1, 1913. — Apportionment between lessor and lessee. . . . 2972 Conditions precedent to bringing suit for recov- ery of taxes paid on second assessment 2982 Ultimate beneficiary of a trust subject to tax as an entity being a person exempt from tax.. .. 2985 Income Tax. Supplementary Page 115. .b9.tfflfcrffoa-.eTH:3T%00' iO SvI^T > .OSei— II TMA*! '■■* f.??4 ^ ^v('Pi®i5 as-ox-H ■s. .QICI‘‘,SS idjtfmdosa i^itxa f>9i/2el\.at9 .anoiaiaaa ^siulu)! ifib9q^.,aa6iJ^ii ^Q£;isaiii^ . ' v». I ''■)’> '^ t ' ' '< ' Jl6t>fdu3 „ ^ tovv-?. lAW-TT.smixi^^ aoij^pI^ ‘,dci * 0^91 ,Gi ‘ Sof ! ■ recite {jojricj??!;' Vi, ’ ■ 'h HKJiV'^bv? bn»; bpcd*«4,v*<« amoani t6 rnifi^ iMsL- fi., X; ‘r,n!» ^'.j.rxii3,j?' 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' (.aiivTDS ' • *; / - • • r > ^ '‘•‘'rn«! no 16 x^'^’dexBT ' • “** • t0& ’* K.e^ ■ . . . . ■ ► v-v. -v^.^ Mi • :;';3^n6cl ffi'qbtniJBT • • ' xd ‘{aavoaeib lo aafia ni /xjKpiiaJqab lol D^fts’i^DlIA ■ * <0 .vo/l ^ T--.€iebr*I 01 ;rnpMpa?.6«a(iir''<^^M^ ^1J“ 2W Jtm .22*0 £8^.£F bBqaaa.Bp .fcu^qV^ .’» "T r i .;Wrr J, .i«i xnp^)i;Xqin9 ;p ,^. A® 723 ' - ' ’ " C*: • j & iyri.Ak' •■-■or-'j|? ■■ ^/I'-' p?:r.?,. by? ' . . a' *■>1 O'- coo P.>pjd7 o' ;r.. y. t. ..II. Me ■»:tt'>n tX^- "''. T) * .’ . f V. T ?vf *r , '. a no* < "a»ti v ( \X 5» V » , V p •: h \-i Ik (. ' ! : • : ; ; ■ , i TJ. 8. v%. OrecTiv-VH Tf, fj ?'vicr < or;7s>i'.- o'A A 8 l. !«f4y (:i!V Ftd. 1.'>3)-.,A' itor-j fA -V, f.U : .; .-.' ^ *4i: ■ ■*• . -,, , , ; 4i*>(l-Y{»y .pd, ■aia R, A.K*v. '•• •. i2bi f-,1 2i\), . /, ; . ; 8. v«. MtUro (' On.'.fri f,‘f, T't ,...■-; . .-. A . , •irpnharr /« Alsr'?:.:} I’Tivt#]! \ r^i ?. ^'if. ! . vc. F, . . ; . W^ddqll: ] ooIu■..^ vt. (2ffrFrd. v::Kj. . ... .. o. .. ■■ .■ \ Vv Crya’i vi». F, i. '•^, r)^ v». M.yoiwt Mlnku> Or,. .'2.'Fii ^ :: fv. . ya. : r»^^j 5 i 2 r :|7 5770 75 >7 0.^4 21QI; i£PZ 2b95 .‘\xsT 3(po?nI .di ( agfiX xn»iaojn^rqqu2 Corporatinn ®ruBt SERVICE DEPARTMENT ^ mr WXIJ. STKMST ?r*w york WAR TAX SERVICE -REPORT NO. 37- HOVEMBBR 10, 1920. Enclosed herewith are pages 103-104 for substi- tution for page 103 now in your binder. Also enclosed is Supplementary Page 1- Estate Tax, for substitution. Very truly yours, THE CORPORATION TRUST COMPANY. * '* tamU nfxttBioJpnID t^U TH3MTf!A'13a 3DIVflaa nnoT ^trtLV rmmM'tm ym ^ 3DlV513e XAT flAW ; '-Vt .OH THO^fl- .osex .01 HsaMavoH -Uarfija 'tol i^0I-50X aeajsq e^B rf^iweierf beaoXonS .tebnicf ^]JOv fix won 501 ea^ nol.tuJ’ 9 ^£j-aa “X es^a >c'i'6*tn&msXqqjja ax beaoXone oaXA 'yjm ,8^uo^ ^cXu^^ y;"ioV .YHAaWOO T3UHT HOITAHOMOO SfHT v 11 - 10 - 20 . ESTATE TAX REGULATIONS. % % jurisdiction thereof; and the value of any property included in the grosi estate which was transferred, or with respect to which a trust was created by the decedent, in contemplation of or intended to take effect in possession or enjoyment at or after his death (except where the making of such transfer or the creating of such trust by the decedent constituted a bona fide sale for a fair consideration in money or money^s worth), where the transferee or trustee has sold such property to a bona fide purchaser for a fair considera- tion in money or money’s worth. No other part of the gross estate is divested of the lien by virtue of Section 409 of the said Act, nor may it be divested of such lien except by discharge of the tax liability of the estate or by a certificate issued by the Commissioner of Internal Revenue releasing it from the lien. 320 It will be seen from the foregoing, therefore, that any stock of a corporation which was owned by a decedent on the date of his death is not divested of the lien by virtue of anything contained in Section 409 of the Revenue Act of 1918. 321 This Bureau is at all times willing in any proper case to issue a release of lien with respect to any part of the gross estate where the tax liability of the estate has been discharged or provided for to the satisfaction of the Commissioner. Any transfer made by an executor of property forming a part of the gross estate of a decedent whose estate is liable for the payment of Federal estate tax, or the transfer by any person having in his possession property forming a part of such gross estate, except as provided in Section 409 aforesaid, will not operate to divest such property of the lien. (Letter to The Corporation Trust Company, signed by Deputy Commissioner James Hagerman, Jr., and dated June 26, 1920.) 322 U. S. Bonds owned by non-resident alien decedent. — Please wire 173 our expense whether United States bonds held in trust for non- 174 resident alien individual but situated in United States are included in gross estate for purposes of estate tax. Has ruling published Corpo- ration Trust Company War Tax Service nineteen twenty paragraph one- seventy-three, denying exemption, been modified? (Answer.) United States bonds situated in the United States owned by non-resident alien decedent form no part of gross estate of such decedent situated in the United States for purposes of federal estate tax. (Telegram of inquiry from Herrick, Smith, Donald & Farley, Boston, Mass., and the answer thereto signed by Deputy Commissioner James Hagerman, Jr., and dated Aug. 6, 1920.) 323 [Letter supplementing the telegram above.] Referring to your letter dated May 26, 1920, relative to the taxability of bonds, notes and certificates of indebtedness of the United States and bonds of the War Finance Corporation owned by or held in trust for a nonresident alien at the time of his death, you are advised that bonds of the United States, beneficially owned by a nonresident alien, should not be included as a part of the gross estate in the United States for the purpose of the estate tax (Revenue Act of 1916, Sec. 202 (a); Revenue Act of 1918, Sec. 402 (a); Victory Liberty Loan Act, Act of March 3, 1919, Sec. 4 [11733] amending Fourth Liberty Bond Act, Act of July 9, 1918, Sec. 3). This ruling is not in conflict with Treasury Decision No. 2530 [11175], and applies only to bonds enumerated in the above-mentioned Acts. (Letter to Herrick, Smith, Donald & Farley, Boston, Mass., signed by Deputy Commissioner James Hagerman, Jr., and dated August 21, 1920.) WAR 103 TAX ESTATE TAX REGULATIONS. 324 Property passing under general pcv/er of appointment under the 121 laws of Pennsylvania. Revenue Act of 1916. — Property passing under general power of appointment, where the construction and effect of the power, and the rights of the parties thereunder, are governed by the laws of Pennsylvania, should not be included in the gross estate of the decedent exercising the power in a case arising under Title II of the Revenue Act of 1916. 325 This T. D. which merely incorporates a decision of the United States Circuit Court of Appeals for the Third Circuit, in the case of Lederer, Collector, v. Pearce, Executor, 266 Fed. 497 is published for the information of internal revenue officers and others concerned. 326 This decision is accepted by the Treasury Department as to all cases, arising under Title II of the Revenue A^ct of 1916, in which the construction and effect of the power of appointment, and the rights of the parties thereunder, are governed by the laws of Pennsylvania. In such cases the appointed property will not be included in the gross estate of the decedent exercising the power. It has no application to cases arising under Title IV of the Revenue Act of 1918. Treasury Decision 2477 [April 7, 1917] is m.odified accordingly. (T. D. 3088, dated October 30, 1920.) WAR 104 TAX 11 - 10-201 RUNNING TABLE OF CONTENTS— ESTATE TAX. Rulings, Regulations, Opinions and Decisions under the Estate Tax Law Provisions of the Revenue Act of 191 S. (The Law appears at paragraphs 1 to 39.) Giving Treasury Decision Number or other Designation, Date of Issue, and General Subject Content. T. D. No. Date Subject Paragraph No. Consult the pink sheet facing page 99. The following matters are unindexed temporarily. Decision 1919 2976 Feb. 11, 1920 3027 June 2, “ Special (< 24, Special 26, “ Special Aug. 6, “ Special Aug. 21, “ 3088 Oct. 30, “ The Pennsylvania collateral inheritance tax held to be deductible, by a court decision, under the 1916 Act 299, 313 The New York Transfer Tax. — Court decision under the 1916 Act 300 Decision. — Pennsylvania collateral inheritance tax deductible under the 1916 Act 299, 313 Tax payment may be enforced any time after expiration of one year period, in absence of en tension, without regard to 180 day interest provision 314 Transfer of stock: lien on stock and release of lien. 319 U. S. bonds owned by non-resident alien decedent 322 U. S. bonds owned by non-resident alien decedent 323 Property passing under general power of ap- pointment under the laws of Pennsylvania. Revenue Act of 1916 324 Insert this page immediately before the blue Estate Tax index. Estate Tax. — War Tax Service Supplementary Page 1. Ctihc OIiii*;iaration (itrust (llnm|iang SERVICE DEPARTMENT 3T WAI^L STRKET >E\V YORK FEDERAL INCOME TAX SERVICE -REPORT NO, 48- OCTOBER 22, 1920, Enclosed herewith are pages 565 to 567, for eut- stitution for page 565 now in your binder. Also enclosed, for substitution, are pages 303-304 to correct typographical error in f 1704 {but see q 2703 for this Article as revised), and Supplementary Pages 107-108 and 115. Very truly yours, THE CORPORATION TRUST COMPANT. -ai'^ ■ , _ OSC'I . H-'.f -el’ .-fad os .f: , letonr-f. . j, •:’ ~; ,; ;. ■ J ;■ ; 1 ec: njG^ i ' i‘.\- \ ^ 6 LCf-xwe*’^ iii. -■:>e > . ' '" I , ‘o 3 0 £ ^ ^'' .:;;Lt-i.^v axru .51: bii^ 501- SO mxm)0 T3UHT :v 5 Ci:j 10 - 23 - 20 . 2956 The total value or total cost, as the case may be, of land and timber shall be equitably allocated to the timber and land accounts re- spectively. 2957 Each of the several land and timber accounts carried on the books of the taxpayer shall be definitely described as to their location on the ground either by maps or by legal descriptions. 2958 For good and substantial reasons, to be approved by the Commis- sioner, or as required by the Commissioner, the timber of the land accounts may be readjusted by dividing individual accounts, by combining two or more accounts, or by dividing and recombining accounts. 2959 Art. 237. Timber depletion and depreciation accounts on books. — 1446 Every taxpayer claiming or expecting to claim a deduction for depletion and/or depreciation of timber property (including plants, improve- ments and equipment used in connection therewith) shall keep accurate ledger accounts in which shall be charged the fair market value as of March 1, 1913, or the cost, as the case may be, of (a) the property, and (b) the plants, improvements and equipment, together with such amounts subse- quently expended for the administration, protection and other carrying charges, or development of the property or additions to plant and equip- ment as are not chargeable to current operating expenses. (See Articles 231 and 236.) In such accounts there shall be set up separately the quantity of timber, the quantity of land, and the quantity of other resources, if any, and a proper part of the total value or cost shall be allocated to each. (See Article 236.) These accounts shall be credited with the amount of the depreciation and depletion deductions claimed and allowed each year, or the amount of the depreciation and depletion shall be credited to depletion and deprecia- tion reserve accounts, to the end that when the sum of the credits for deple- tion and depreciation equals the value or cost of the property, plus the amount added thereto for administration, protection, and other carrying charges, or development or for additional plant and equipment, less salvage value of the physical property, no further deduction for depletion and depreciation will be allowed. (T. D. 3076, signed by Commissioner Wm. M. Williams, and dated October 5, 1920.) (T. D. 3078.) 2960 A society organized to insure its members against fire (and other 767 casualty) is liable to tax on its statutory net income as a “fire insur- ance company” under the 1909 and 1913 Acts. — The appended decision [captions only, 1(2961 to 1[2964], dated July 19, 1920, of the United States District Court for the Southern District of New York in the cases of Jewelers Safety Fund Society v. Lowe, collector, and Jewelers Safety Fund Society v. Anderson, collector, is published for the information of internal revenue officers and others concerned. (T. D. 3078, signed by Commissioner Wm. M. Williams, and dated October 13, 1920.) [Captions referred to in 1[2960 above.] 2961 1. Gross Income of Insurance Companies — Premium Receipts. The premium receipts of ^‘every insurance company’^ by whatever name they are called are, unless specifically exempted by the terms of the taxing statutes in question, a part of such company’s gross income. 2962 2. Same — Premium Deposits. Premium deposits made in advance by members of a mutual insurance company to cover estimated losses and expenses are, so long INC. 565 TAX as the payment thereof constitutes the consideration, fox contract, of insurance, insurance premiums constituting gross income of the company. 29S3 3. Same— Interest on Bank Balances and Profits from Investment of Premium- Deposits. Moneys received by way of interest upon bank balances and from Investment of such portion of premium deposits as are not currently required for the payment of losses and expenses are profits earned by an insurance company subject to tax. ^ ^ . ttt. , • 2964 4. Mutual Fire Insurance Companies — Corporation Coming Within Meaning of. ^ ^ ^ .... A corporation, organized to insure its members, limited to jewelers and dealers in goods ordinarily carried in the jewelry trade, against loss or damage by fire, theft, barratry, enibezzlement and^ transporta- tion, which requires each member to deposit in advance a definite sum sufficient to cover estimated losses and expenses for the ensuing year, the balance of such deposits being returned to niembers, is a mutual fire insurance company and subject to the taxes imposed by the Acts of August 5, 1909, and October 3, 1913. (Captions of decision appended to T. D. 3078 [112960].) (T. D. 3082.) \McitteT in italics is newi that in hold face hvackets [ 1 is old viattef cut out.\ 2965 Gross income defined — Inclusions — Article 42, Regulations No. 45, 914 amended. — Article 42 of Regulations No. 45 is hereby amended to 2672 read as follows: ^ -r^ i 2822 Art. 42. Sale of personal property on instaiinxent plan. Dealers in personal property ordinarily sell either for cash,. or on the personju credit of the - buyer, or on the installment plan. Occasionally ai fourth type of sale is met with, in v/hich the buyer makes an initial payrnent of such a substantial nature (for example, a payment of more than 25 per cent) that the sale, though involving deferred payments, is not one on the in-stall- ment plan. In sales on personal credit, and in the substantial payment type just mentioned, obligations of purchasers are to be regarded as the equNalent of cash, but a different rule applies to sales on the installment plan. Dealers in personal property who sell on the installm.ent plan usually adopt one of four ways of protecting themselves in case of default: (a) through an agree- ment that title is to remain in the seller until the buyer has completely per- formed his part of the transaction; (b) by a form of contract in which is conveyed to the purchaser immediately, but subject to a hen for the unpaid^ portion of the purchase price; (c) by a present transfer of title to the pur- chaser, who at the same time executes a reconveyance in the form of a chattel, mortgage to the seller; or (d) by conveyance to a trustee pending performance of tlie contract and subject to its provisions. The general purpose and being the same in all of tliese plans, it is desirable that a uniformly applicable rule be established. The rule prescribed is that in the sale or contract for sale of personal property on the installment plan, whether or not title remains in the vendor until the property is fully paid for, the income to be returned by the vendor will be that proportion of each installment payment which the gross profit to be realized when the property is paid for bears to the gross contract price. . Such income may be ascertained by taking^ as projit proportion of the total cash collections [payments] received in the taxable year from installment sales, {such collections being allocated to the year against the sales of zvhich they apply [always including payments receited in the 566 INC. TAX taxable year on account of sales effected in earlier years as well as those effected in the taxable year]), which the annual gross profit to be realized on the total installment sales made during each [the taxable] year bears to the gross contract price of all such sales made during that respective [the taxable] year. In any case where the gross profit to be realized on a sale or contract for sale of personal property has been reported as income for the year in which the transaction occurred^ and a change is made to the installment plan of computing net income, no part of any installment payment received subsequently to the change, representing income previously reported on account of such transaction, should be reported as income for the year in which the installment payment is received; the intent and purpose of this provision is that where the entire profit from installment sales has been included in gross income for the year in which the sale was made, no part of the installment payments received subsequently on account of such previous sales shall again be subject to tax for the year or years in which received. Where the taxpayer makes a change [is made] to this method of computing net income his [the taxpayer’s] balance sheet should be adjusted conformably [as of the date when the change is effected]. If for any reason the vendee defaults in any of his installment payments and the vendor repossesses the property, the entire amount received on installment payments,^ less the profit already returned, will be income of the vendor for the year in which the property was repossessed, and the property repossessed must be included in the inventory at its original cost to himself, less proper allowance for damage and use, if any. If the vendor chooses as a matter of consistent practice to treat the obligations of purchasers as the equivalent of cash, such a course is permissible. (T. D. 3082, signed by Commissioner Wm. M. Williams, and dated October 20, 1920.) INC. 567 TAX (to oJ *ttoiq ac’oi^ kvrjc'nN :3dJ'if.ordw ?)iv.uxst ;)Ht :u ■6:b 'OJ ':';S‘3(i [abiexfi ' sd '] ^nhifD -sb^iin ee.kg (s:o? S'd: (•^fdi^zRT jfiTj V3imqrs-\ \\3\V; ^ahnb ‘^bfim ibu.: (Ifi ':o nine's ‘^0 ^\iiZ Ci no o\ 3j\t '=s‘\'vA^'i vav*5 ^Ai A^iAo': nt -^oY imo3n? \® ’2ivv‘ot<\ino~i \o v<:iM 'iSv^wWo^mt ’■i\\\ 0^ i*j ^3,n£.A3 Si ^nsi •i'\". o! 'A'.n'i\V3»bxA‘'^'L A'vYi'OM Uriw\loiin4' '{;n'Si \o on ‘i* 2 >st i\''.\r<. Ao \nno3'3n no vAiwok '=iW03n’t ^-s^nftAo u A.U'ijnWvvUi'.: '^•'\\ ns -^.r-A to\ ^wo^nV 'tSi -id ^iWoAl \s\oo'\ “^AJi ^‘'. \s4Tl ‘^A^i inSS^T "SO •sn’iv ’iAl ‘SoA 'S.W., 0 \ \33SjV;V\ '^>'1 ’ \h^h. Vi\^X. ’.VSOVS'\t«Y A’i^i-^. \o inUOOl'iSN f)Of{t'' fTT ?j,] j- oi [obsiTi aij ogrikJo r ivh-.v:^ vA\ oiody/ A'ilAo^ nx boioaib-o od fdnn’da ^ooda [ V'rr/Rqxb-t DdlJ x\A ^inooni J^n ^miuqa'oa lo 3d/ xioaROT ’{.no lol li .[b^loo’f^o at S'^^riRdD jdl /udw 3jjib 3dj I.* ahj ’{Id/innolnOo aoaa3a''iV73'i lobnov bdr bnii>J(i3nixRq j aomilRl^in/ aid lo yais ni ej[uiid3b 33bn3v odT .?;ji.ioniyftq jrT3rfri!s/anr fio bo/boji Jti.i;\ "Xiii 3ii/no sdj dofrl/x n/ •>Roy ot'j -lol lobnoT 3>f.t lo Dcnooni 3d iliv^ ^bomuioi Yb-£3Tk idoiq bobuioid sd laurn [.yj^.aaaaocrri yn^rjoia 3dj bfis .bsaaoaaoqoi asw yJrjqo^.q 3rii o^gj'rrir b lol sonii ,vcd[£ iDqoiq =,-3f /doami;! O'! Jaoo {sntqiio 3ji Jb yio/n3vni 3di //( 33f;.:>6iq .iiioj^y’aao:* Yo. toJ'^ru'. r soaooifa lobnsy 3dJ 11 .yafi ii ^38u bnR 3811X03 n doLf? jiP.r.D lo .tiioisvi r;p3 -odJ Bioasdoiuq lo anoi-UgHdo odl Jti3i.t o.t ,hiriyJ!Jr // .1/ .rnW i3iToksirnmo'J {d bongi: ^^SOb dl -T) .oldisahai^q 31 uO^qi <0S lodoioO botftb bnn W 'SL \0 r.AT 10 - 28 - 20 . WITHHOLDING AT THE SOURCE. % % % holding at the source is accordingly unnecessary except in the case oi interest payments on corporate bonds or other obligations containing a tax- free covenant where no exemption is claimed. The alien property custodian should use form looo (revised) in collecting interest on bonds containing a tax-free covenant and in all other cases should use form looi (revised). No distinction is to be made between payments directly to the alien property custodian and to his depositaries and between interest on registered bonds and interest on coupon bonds. In the case of enemies or allies of enemies holding a license granted under the provisions of the Trading with the Enemy Act, withholding is required as in the case of any nonresident alien not an enemy or ally of enemy. See article 44^ [for extension of time for filing returns in the case of enemies/’ ^1854]. (Art. 375, Reg. 45, Rev., April 17, 1919.) 1700 Use of Substitute Certificates. — Resident collecting agents and responsible banks and bankers, receiving interest coupons for collec- tion with ownership certificates attached, may present the ^coupons with the original certificates to the debtor corporation or its duly ‘authorized with- holding agent for collection or may detach and forward the original cer- tificates directly to the Commissioner, provided each such collecting agent shall substitute for such original certificates its own certificates (form 1058 (revised) or form 1059 (revised)) and shall keep a complete record of each transaction, showing (a) serial number of item received; (h) date received; (c) name and address of person from whom received; (d) name of debtor corporation; (e) class of bonds from which coupons were cut (whether containing a tax-free covenant or not) ; and (f) face amount of coupons. For the purpose of identification the substitute certificates shall be numbered consecutively and corresponding numbers given the original certificates of ownership. The use of substitute certificates by collecting agents, banks and bankers is not permitted, however, in the case of ownership certificates pre- sented with coupons for collection by nonresident alien individuals, partner- ships, or corporations. [Nor is it in the collection of foreign items, P752.] (Art. 367, Reg. 45, Rev., April 17, 1919.) 1701 No License Required of Collecting Agents for Substituting Their Own Certificates for Ownership Certificates. — Until the further ruling by this department, the banks, bankers, and other collecting agents who may substitute their certificates for the certiflcates of owners under the foregoing plan will not be required to secure a license from the Treasury Department for being permitted to make such substitutions of their own certificates for those of the owners, provided these regulations are strictly complied with. (1\ D. 1903, Nov. 28, 1913.) 1702 Endorsement by Collecting Agent Required on Certificates of Ownership for Which Own Certificate is Substituted. — The cer- tificate of the owner, for which the foregoing certificate of the collecting agent may be thus substituted by the collecting agent first receiving said coupons for collection must be given the following indorsement by the col- lecting agents and should be made preferably with a rubber stamp. Owner’s certificate No (Name of collecting agency.) 191—- (Give date of certificate.) 303 TAX r INC. WITHHOLDING At THE SOURCE. The counterpart of the within certificate bearing ' like number was attached to the coupons within " • mentioned for delivery to the debtor or withhold- ' V ing agent, by whom the coupons are payable. (T. D. 1903, Nov. 28, 1913.) 1703 Fac-simile Signature May Be Used by Collecting Agents in Sign- ing Their Own Certificates Substituted for Ownership Certificates. — You are advised that as a convenience to banks and collecting agents who desire to substitute their certificates Form 1058 and 1059 for the owner’s certificate accompanying the coupons deposited for collection, it is hereby provided that the name of the bank or collecting agent may be printed or stamped, and that a fac-simile of the signature of the person authorized to sign the substitute certificate for the bank or collecting agent may also be printed or stamped on the certificate: Provided, that in all cases the bank shall first file with the Commissioner of Internal Revenue a certificate of its authorization in' substantially the form following: The Commissioner of Internal Revenue: Washington, D. C. (City) (Date) The undersigned hereby authorizes the use of the fac-simile signature shown below upon all substitute income tax certificates issued in its name until this authorization is revoked by written notice to you. (Fac-simile signature of person authorized to sign.) (Name of bank or collecting agent) By (Signature of person authorized to sign.) Official position. (T. D. i986. May 29, 1914.) 1704 Interest Coupons Without Ownership Cettificates. — Where interest coupons are received unaccompanied by certificates of ownership the first bank shall require of the payee an affidavit showing the name and address of the payee, the name and address of the debtor corporation, the date of the maturity of the interest, the name and address of the person from whom the coupons were received, the amount of the interest, and a statement that the owner of the bonds is unknown to the payee. Such affi- davit shall be forv/arded to the collector with the monthly return on form 1012 (revised). The first bank receiving such coupons shall also prepare a certificate on form 1000 (revised), crossing out “owner” and inserting “payee” and entering the amount of interest in the space provided for a foreign cor- poration having no office or place of business within the United States, and. shall stamp or write across the face of the- certificate “Affidavit furnished,” adding the name of the bank. (Art. 368, Reg. 45, Rev., April 17, 1919.) ] i 1705 Wffien interest coupons are unaccompanied by ownership certificates affidavits should be secured by first bank as provided in Article 368 flll704J, Regulations 45. Such affidavit should accompany the own- 4# A A A INC. 304 TAX 10 - 23 - 20 . TABLE OF CASES. Paragraph Allen: Altheimer & Rawlings Investment Co, vs. (248 Fed. 688).. 905 Alien: National Bank of Commerce in St. Louis vs. (223 Fed. 472) 1258 Aitheimer & Rawlings Investment Co. vs. Allen (248 Fed. 688) 905 Anderson: Brady vs. (240 Fed. 665) 688 Anderson: Jacobs and Davies (Inc.) vs. (228 Fed. 505) 1218 Anderson: Jewelers Safety Fund Society vs. (T. D. 3078) .... * • j ' Anderson: Mail & Newspaper Transportation Company vs. (234 Fed. 590). 2184 Anderson: Thorne vs. (240 LT. S. 115) 2290 Anderson: Tyee Realty Company vs. (240 U. S. 115) 2290 Baldwin Locomotive Works vs. McCoach (221 Fed. 59) 960 Baltic Mining Co.: Stanton vs. (240 U. S. 103) 2297 Brady vs. Anderson (240 Fed. 665) 6°® Brady: Dodge vs. (240 U. S. 122) 2295 Brushaber ve. U. P. Railroad Company (240 U. S. 1) • • - 2260 Carter: Union Hollywood Water Company vs. (238 Fed. 329).. 727, 1205 Chicago & Alton Railroad Co. vs. U. S. (53 C. of C. 41) . 953 Cohen vs. Lowe (234 Fed. 474) 496, 1355 Crocker, et al., Trustees: Malley vs. (249 U. S. 223) 2399 Cryan vs. Warden (263 Fed. 248) 2695 DeGanay vs. Lederer (250 U. S. 376) ........ . . •••••• *^408 Digest of Recent Decisions of the Supreme Court (Acts of 1909 and 1913). .2317 (The opinions in the cases involving the 1909 Act are not included herein. But see the Digest, paragraph 2317.) Dodge V8. Brady (240 U. S. 122) 2295 Dodge vs. Osborn (240 U. S. 118) ; ' tin? Doyfe: Grand'Rapids and Indiana Railway Co., vs. (245 Fed. 792) ^^92 Eliot National Bank vs. Gill (218 Fed. 600) 1257 Eisner: Macornber vs. (Jan. 23, 1919) Supreme Court decision (252 U. S. 189) 2575 Fisner: Mente vs. (T. D. 3029) 2754 Eisner: Peabody vs. (247 U. S. 347) 2378 Eisner: Prentiss vs. (260 Fed. 589) ^265 U. S. Circuit Court of Appeals Decision (T. D. 3050) 2848 Eisner: Towne vs. (245 U. S. 418) 2313 Evans vs. Gore (262 Fed. 550) 2669 Supreme Court Decision (253 U. S. 245) . • .... • • • 2713 First Trust and Savings Bank, Trustee under the will of Otto Young vs. Smietanka, Collector (C. C. A., 7th Cir., Oct. 1920 Term) General Inspection & Loading Co.: U. S. vs. (192 Fed. 223). ... 1781 General Inspection & Loading Company: U. S. vs. (204 Fed. 657) 2027 Gill: Eliot National Bank vs. (218 Fed. 600) 1257 Gore: Evans, vs. (262 Fed. 550) 2669 Supreme Court Decision (253 U. S. 245) 2713 Gould vs. Gould (245 U. S. 151) ’ * ' V T’ Grand Rapids & Indiana Railway Company vs. Doyle (245 Fed. 792). 120o Grand Rapids & Indiana Railway Company: U. S. vs. (239 Fed. 153) 2043 Gulf Oil Corporation vs. Lewellyn: Example of procedure 2189 U. S. Supreme Court Decision (248 U. S. 7l) 239. Haiku Sugar Co. et al. vs. Johnstone (249 Fed. 103) 550 Heller, Hirsh & Co.: In re (258 Fed. 208) ?70 Hornby: Lynch vs. (247 U. S. 339) 2337 Jackson vs. Smietanka (U. S. District Court) (T. D. 2960) 2421 Jacobs and Davies (Inc.) vs. Anderson (228 Fed. 505) • 1218 Jewelers Safety T’uiid Society vs. Lowe, Collector: Same vs. Anderson, Collector (T. D. 3078) 2960 Johnstone: Haiku Sugar Co. et al. vs. (249 Fed. 103) 550 ICohlhamer vs. Smietanka (239 Fed. 408) 2173 Lederer: De Ganay vs. (250 U. S. 376) 2408 Lederer: Penn Mutual Life Insurance Co. vs. (258 Fed. 81) 988 Supreme Court Decision (253 U. S. 523) Lederer: Philadelphia, Harrisburg & Pittsburgh Railroad Company vs. (242 Fed. 492) 2203 Lewellyn: Gulf Oil Corporation vs. (Example of procedure) 2189 U. S. Supreme Court Decision (248 U. S. 71) • • •2395 Lowe: Cohen vs. (231 Fed. 474) ^^6, 1353 Income Tax. Supplementary Page 107. TABLK OF Cases.— C oBcluaed. P&rtgr»pb Lowe: Jewelers Safety Fund Society vs. (T. D. 3078) Lowe: Peck vs. (247 U. S. 165) Lowe: Roberts vs. (236 Fed. 604) • . • • Lowe: Southern Pacific Company vs. (247 U. S. 330) Lynch vs. Hornby (247 U. S. 339) Lynch vs. Turrish (247 U. S. 221) ; ' ‘ K V ofiO McCoach: Baldwin Locomotive Works vs. (221 Fed. 59) McHatton: U. S. vs. (U. S. District Court) (T. D. 3043) Macomber vs. Eisner (Jan. 23, _ Supreme Court decision (252 U. S. 189) eorA Mail & Newspai cr Transportation Company vs. Anderson (234 red. Malley vs. Alvah Crocker, et. al.. Trustees (249 U. 3. 223) * Marion Hotel Cbmpanv: Urquhart vs. (194 S. W I).- : Maryland Casualty Company vs. United States (2ol U. S. 342) 251/ Mente vs. Eisner (T. D. 3029) Mohawk Mining Co.-. Weiss vs. (264 Fed. 502). .. . AVAf' WcS 9 nsn Nashville, Chattanooga & St. Louis Railway; U. S. vs. (249 F/d 678) 2050 National Bank of Commerce in St. Louis vs. Allen red. 472) Oregon-Washington R= & Nav. Co.: U. S. vs. (25 i Fed. 211) Osborn: Dod?e vs. (240 U. S. Peabody vs. Eisner (247 U. S. 347). 2378 Peck vs. Lowe (247 U. S. 165) ' V. ' I ‘ orb Penn Mutual Life Insurance Co. vs. Lederer (258 Fed. 81) Supreme Court Decision (253 Lk S. 523) " Philadelphia, Harrisburg & Pittsburgh Railroad Company vs. Lederer (242 Fed. 492) 22U3 Pittaro: U. S. vs. (U. S. District Court.) (T. D. 2874) 2104 Prentiss vs. Eisner (260 Fed. 589) :•.••• ; • • • • * orab U. S. Circuit Court of Appeals Decision (T. D. 3050) 2848 Roberts vs. Lowe (236 Fed. 604) V/ 'ry Skinner: U. P. Coal Co. vs. (U. S. Sunrcrne Court, Maroh 22, 1920) . .2651 Smietanka: First Trust and Savings Bank, Trustee under the will of Otto Young, vs. (C. C. A., 7th Circ., Oct. 1920 Term) .2935 Smietanka: Jackson vs. (U. S. District Court.) (T. D. 2960) 2421 Smietanka: Kohlhamer vs. (239 Fed. 408) 2175 Southern Pacific Company vs. Lowe (247 U. S. 330) 2380 Stanton vs. Baltic Mining Co. (240 U. S. 103) 22 7 Thorne vs. Anderson (240 U. S. 115).. 2290 Towne vs. Eisner (245 U. S. 418). 2313 Turrish; Lynch vs. (247 U. S. 221) 2351 Tyee Realty Company vs. Anderson (240 U. S. 115) • • *2290 Union Hollywood Water Company vs. Carter (238 Fed. 329) 72», 1205 U. P. Coal Co. vs. Skinner (U. S. Supreme Court, March 22, 1920) 2651 U. P. Railroad Company: Brushaber vs. (240 U. S. 1) 2260 U. S.; Chicago & Alton Railroad Co. vs. (53 C. of C. 41) 955 U, S. V8. General Inspection & Loading Co. (192 Fed. 223) 1781 U. S. V8. General Inspection & Loading Company (204 Fed. 657).... -027 U. S. VS. Grand Rapids & Indiana Railway Company (239 Fed. 153) 2043 U. S. vs. McHatton (U. S. District Court) (T. D. 3043).. 2770 U, S.: Maryland Casualty Company vs. (251 U. S. 342) 2517 U. S. vs. Nashville, Chattanooga & St. Louis Railway (249 Fed. 678) 2050 U. S. vs. Oregon-Washington R. & Nav. Co. (251 Fed. 211) 944 U. S. V 3 . Pittaro (U. S. District Court.) (T. D. 2874) 2104 Urquhart vs. Marion Hotel Company (194 S. W. 1) 1652 Wardell: Ciyan vs. (263 Fed. 248) 2695 VVcIss %8. Mohawk Mining Co. (264 Fed. 502) 2668 Income Tax Supplementary Page 108. 1043-20. RUNNING TABLE OF CONTENTS.— Continued. PART 11—1920. (Page 433 (1[2420) et seq.). Regulations, Special Rulings, Decisions, etc., Issued since December 22, 1919. T. D. Date 3070 Sept. 10, 1920 3071 “ 18, ii 3072 “ 24, 3073 “ 27, ii 3074 Oct. 1, Decision Oct. 3075 Oct. 5, 3076 “ 5, 3077 7, 3078 “ 13, (( 3079 “ 15, 3080 “ 19, U 3081 “ 19, ii 3082 “ 20, ii Subject Paragraph (Reg. 56, Rev., Motion Picture Films. — War Tax Service.) Return of income by husband and wife from community property 2903 (Distillery warehouses.) (Tobacco.) (Tobacco.) Liability to tax of estates and trusts as entities under the Act of 1913 2935 (Tax on brokers. — War Tax Service.) Arts. 228, 229, 230, 231, 233, 234 and 235, Reg. 45, amended, and Arts. 236 and 237 added. — Depletion of timber 2944 (Commercial cider.) A mutual fire insurance society is a fire insurance company under the 1909 and 1913 Acts. (Captions of court decision) 2960 (Federal Prohibition.) (Excess Profits Tax (1917 Act). — War Tax Service.) (Denatured alcohol.) Art. 42, Reg. 45, amended. — Sale of personal property on installment plan. 2965 SupplementaiT' Page 115. .faduaftaeJ ’.O HaHAT OmWWUK .ocei— il THAI . .^ly! ,i:i: ,.:>t 9 ^azioiamd .saaiitiH. iAi 09 .rao 3 nr ^6 ’ ,^x '■ 'vOfc iOst^ . .. , .\tT 5 .qoTq. -^jiiTraifrc j i w. YioUitAQ; ’ " S:'C0.t v-oo'^fi.do'l ' *' AS ” tXOL ■ ' .,.oi! 3 /;d'j I t ** ;* ToO 4 *T 0 t ii:»«:;,7t. ba/5 A od‘ ... ■ • r'r-ivj'id /-5 r 7 *: -'V — .g-iftdoid n.c Tcn.r* ,i ir- ' l\0t. ^+'1 ,titS bar> KS ,tes .les ^OES ,QSS , 8 SS .&nk ‘ A ‘ > 0 ^- — ..b-abbs TES buB dE.S .atiA biiB jb^bn^ms ,2^ 1 ■i.i.srA Efy-I: ba^: y 0 ?[ 5 jj i.>lj.au xn.B,qfa •-'•>. 'vp:>=:'S . ... (aoiijn^. iiaoy ’snoir.iP/J/ (.ooind/do.T^ Ifiia.bVi ' ,dl. ' X^i: -a.u — I;;;3.A ’•■(*.■>■1;): 4«.T ^J;£tO.Ti‘l Xi::3,r3.^ " .yi ’’ «s.u.fc (-iKidopie. fc^u.t.'^a:\CI) “ ' f^.J 4 fp. ^Ifed— .a;3.btt9HmB ,2A . 39 ^ ,£b .nA ’■ . ,0S " ipys ' m viiT’v-tvrq r # (0 Corporation Croat Company SERVICE DEPARTMENT 3T WALL STREET NEW YORK WAR TAX SERVICE -REPORT NO. 35- OCTOBER 23, 1920, Enclosed herewith are pages 315-318, both inclu- sive, for substitution for page 315 now in your bind- er. Also enclosed for substitution, is Supplementary Page 1- Excess Profits Tax. Very truly yours, THE CORPORATION TRUST COMPANY. 0 «yiiBt}mnI!) tBiiiH) iioitB:iuq*jnID i ■ '“'”"th 3 MTH A^aa 3 => ' v«3a .*|ii|ii|S|-; . ^'= "-'-' ■■■ ' SM ii«OY WBK TaailTB JUJAW TB ..’i'JS'lt^ J M0&' Lf- K -a- -a 3div5138 cXAT si aw >. ■}v'’‘™ '» V’^ A-',"!' t'>fs ■ |■-’\•■'/hr vVl-iv ‘-as .OH iao9[SH f'M :K i ■ ’. < f'v;' V ,osei».ES aaaoTOo ;■' l !- v*l>i -tfXofix .riJ^od ,8is-exs ee^Bq eis rfJxwe'iarf.fDeQoXona .. ~r0 X)nxcl iuo>c nx won SXS e^aq not noiJ'u^i^scfua lol , evia '{TB^neoieXqqxj’a ex ^noi^ud'xi'ecfua lol basoXono oaXA .i® V .■ ;xbT 8itttoi:«I 3890X3 -I 98B'I*r '. ziiiox ' '^I^n^ YieV 1 mA3MOO taUHT MOlTAflOlflOO 3HT './it ump- ip J ^.vtTl '■ ' , ■;. xU'5y >, : ' ,i' “ ■K 'T' WAR-PROFITS AND EXCESS-PROFITS TAX REGULATIONS. 897 The following is the order of the court dismissing the petition, and memorandum therewith [referred to in ^[893]: Court of Claims of the United States. No. 34603. (Decided June 28, 1920.) La Belle Iron Works, a corporation, v. United States. 898 This cause coming on to be heard was submitted to the court — three judges sitting — upon the defendant’s demurrer to the plaintiff’s pe- tition, as amended, and was argued by counsel. On consideration whereof, the court is of the opinion that the'demurrer is well taken. It is therefore adjudged and ordered that the defendant’s demxurrer to the petition so amended in this cause be, and the same is hereby, sustained and the petition as amended is dismissed. MEMORANDUM. 899 The court’s conclusions are: (1) That the act in question (40 Stat., 306) undertakes to define ‘‘invested capital” and the averments of the petition can not be said to bring the plaintiff’s case within the definition of section 207. (2) That the increase in value of plaintiff’s ore lands, which was first de- clared to be surplus, and afterwards treated as the basis of a stock dividend, did not thereby become earned surplus or undivided profits or invested capital within the m.eaning of the act of 1917. The stock dividend added nothing to, and took nothing from, the corporation’s invested capital. (3) That the inequalities, which can arise in the application of the statute to particular cases, can not be corrected by judicial construction, where the enactm.ent is otherwise valid. (4) That where the act is ambiguous or uncertain, the construction of it by the administrative officers charged with its execution is entitled to great respect. (T. D. 3080.) 900 Decision of Court. — Revenue Act of 1917. — Partnerships. — Ihe appended decision of the District Court of the United States for the Western District of Michigan, Southern Division, in the case of Cartier Holland Lumber Company, a partnership, v. Doyle, collector, rendered August 7, 1920, is published not as a ruling, but for the information of internal revenue officers and others concerned. (T. D. 3080, signed by Commissioner Wm.. M. Williams, and dated Oct. 19, 1920.)^ 901 1. Partnership — Single Trade or Business. In determining liability under section 209 of the act of October 3, 1917, incom.e derived from a single timber-land deal by a partnership whose principal business is dealing in lumber cannot, by reason of section 201 of the act, be considered and treated separate and apart from other partner- ship income or profits. 902 2. “Invested Capital” defined. The term “invested capital,” as used in section 209 of the Act of October 3, 1917, includes all working capital consisting of money or property employed in the business or for its benefit, and furnished or paid in by one or more of the partners. 903 3. Partnership — Rate of Assessment Where 1 laving J nvested Capital. Where during the year 1917, a partnership had invested capital, as above defined, more than nominal in amount, excess profits taxes upon its income could not be assessed at the lower rate provided by section 209 of the Act of October 3, 1917. WAR 315 TAX WAR-PROFITS AND EXCESS-PROFITS TAX REGULATIONS. 904 4. Partnership — Objection to Method of Determining Invested Capital. A partnership which had invested capital more than nominal in amount cannot complain of regulations promulgated or of the method employed in determining the amount of such capital, where the arbitrary or supposi- titious invested capital fixed upon was larger in amount than the invested capital actually possessed and employed, and the taxes imposed were corre- spondingly diminished. 905 5. Partnership — Brokers. Members of a partnership who are paid neither a salary nor com- missions for their services, but who buy and sell lumber and undertake and assume all the risks and enjoy all the benefits of a merchandising business, employing a large amount of capital, are not brokers. 906 6. Partnership — Property pledged as Collateral Security as Part of Invested Capital. Property of member of partnership deposited with bank and pledged as collateral security for the repayment of a loan by or for the benefit of the partnership in pursuance of the articles of partnership is part of the invested capital of such partnership. DISTRICT COURT OF THE UNITED STATES FOR THE WESTERN DISTRICT OF MICHIGAN, SOUTHERN DIVISION. CHARLES E. CARTIER and EDWARD M. HOLLAND, Co-partners, doing business under the firm name and style of CARTIER-HOLLAND LUMBER COMPANY, Plaintiffs, vs. EAIANUEL J. DOYLE, Collector, Defendant. 907 SISSONS, District Judge: Cartier-FIolland Lumber Company is a partnership composed of Charles E. Cartier and Edward M. Holland engaged in the business of buying, selling and dealing in timber, lumber and other forest products. The net income or profits of the firm during the tax- able year^ 1917 amounted to $47,018.00. Of this sum, $20,353.00 resulted from an isolated sale of timbered land and the balance from the regular or customary lumber business of the partnership. The Company has never owned any lands, timber, plant, mill or yard and has never done any manu- facturing or carried any stock of manufactured lumber. Its principal business consisted of buying lumber from manufacturers and reselling the same to its own customers. The business was conducted by the partners personally with the assistance of a small clerical office force, one bookkeeper and two stenographers. Since its organization in 1912, the firm has at all times been a heavy borrovv^er of money. According to its books, on January 1, 1917, the Company’s indebtedness to banks for borrowed money was the sum of $36,300.00, and its other indebtedness, presumably for lumber pur- chased, amounted to $12,309.22, making a total indebtedness of $48,609.22; its accounts and bills receivable, probably representing lumber sold, aggre- gated $39,281.72, and its other assets, including petty cash, office furniture, insurance paid, and cash in bank, amounted to the sum of $2,108.65, making a total of assets of $41,390.37. In other words, at the beginning of the taxable year, the liabilities of the firm exceeded its assets by the sum of $7,218.85. The account of each member of the firm was then several thousand dollap overdrawn. At the end of the year 1917, the firm assets exceeded its liabilities by nearly $14,000.00, which consisted entirely of profits made during the taxable year. WAR 316 TAX 10 - 23 - 20 . WAR-PROFITS AND EXCESS-PROFITS TAX REGULATIONS. 908 Plaintiff^s articles of agreement of co-partnership contained the following provision: “The paid-in capital of the partnership is to be Thirty Thousand ^-"'($30,000.00)' Dollars, any or all portion of which amount is to be furnished to the partnership by above named Charles E. Cartier as the requirements of the partnership appear; and upon the note or notes of such partnership; such note or notes not to be made trans- ferable nor made items of record. Such notes are to be paid at the earliest practicable opportunity out of the net earnings of the part- nership business, and to bear legal rate of interest.” 909 For a time, in carrying out this provision of the partnership agree- ment, plaintiff Cartier borrowed money from the banks upon his own note secured by collateral and furnished the same to the Company. Later and probably before January 1, 1917, the- agreement was modified and working capital was obtained by borrowing money from banks upon firm notes, indorsed by both members of the firm and secured by collateral furnished by Cartier, the property so pledged as collateral security in all cases and at all times being of greater value than the face of the notes. This method was pursued during the entire year 1917. 910 Plaintiffs, as co-partners, made due return of net income of $47,018.00 for the year 1917 and voluntarily paid an excess profits tax, computed at 8% in accordance with the provisions of Sec. 209 of Title II of the Act of October 3, 1917, and amounting to $3,761.44. Apparently, their right to a deduction of $6,000.00 from the income before computing the tax was in- advertently overlooked. Thereafter the Commissioner of Internal Revenue, claiming that plaintiffs were not entitled to the benefit of the provisions of Section 209 of the Act of October 3, 1917, but were taxable under the provisions of Section 201 and 210 of that Act, assessed against them an addi- tional excess profits tax for 1917 amounting to $9,027.46. Plaintiffs paid the additional tax under protest and have brought this suit for its recovery. 9 1 1 The conclusions reached upon questions of law involved in this case may be thus summarized: 912 1. Plaintiff"s contention that, in the assessment of excess profits taxes, the income derived from the single timber-land deal amounting to the sum of $20,353.00 must be considered and treated by itself and separate and apart from other partnership income or profits is negatived, in express terms, by the statute hereunder consideration. “For the purpose of this title every corporation or partnership not exempt under the provisions of this section shall be deemed to be engaged in business, and all the trades and businesses in which it is engaged shall be treated as a single trade or business, and all its income from whatever source derived shall be deemed to be received from such trade or business.” Confessedly the company’s principal business was dealing in lumber and, under this statute, its entire income must be attributed to that business. 913 2. If, during the year 1917, Carticr-Holland Lumber Company had invested capital, within the purview and meaning of that term as employed in the statute, more than nominal in amount, excess profits taxes upon its income could not be assessed under the provisions of Sec. 209 of the statute, and, if the amount of such invested capital could not be satis- factorily determined, excess profits taxes must have been assessed under Secs. 201 and 210 in accordance with proper regulations prescribed by the Commissioner of Internal Revenue. If the Lumber Company had invested capital more than nominal in amount, plaintiffs are not in a position to complain of the regulations promulgated or of thehnethod employed in deter- WAR 317 TAX WAR-PR OFITS AND EXCESS-PROFITS TAX REGULATIONS. mining the amount of the firm’s invested capital which forms the basis of the computation of the taxes, because, under the undisputed evidence, the arbitrary or supposititious invested capital fixed upon was larger in amount than the invested capital actually possessed and employed and the taxes imposed were correspondingly diminished. These taxes are assessed upon percentages of income to invested capital. The larger the capital the smaller the percentage and resulting tax. 914 3. Plaintiffs are not brokers within any accepted definition of that term. They are paid neither a salary nor commissions for their services. They buy and sell lumber and undertake and asstime all the risks and enjoy all the benefits of a merchandising business. They employ a large amount of capital; their income is dependent upon their personal services and efforts only in the same way and to the same extent that the farmer who works his own farm or the merchant who conducts his own store derives his income from his individual endeavors. 915 4. The rights of these parties cannot be made to depend upon non- statutory classifications, regulations, or definitions. The statute applies to all trades and businesses without regard to their class or character. While, in doubtful cases, Departmental regulations may be an aid in construc- tion and interpretation, they can neither add to nor subtract from^ plain Congressional enactments. In this instance, differences in the meaning of the terms “invested capital” and “capital” are wholly immaterial. If Cartier- Holland Lumber Company had any invested capital, it was substantial and not merelv nominal and plaintiffs must fail. On the other hand, if the Company had no invested capital, plaintiffs are entitled to recover, regardless of the amount of its borrowed or other non-invested capital. 916 That the partnership was doing business upon borrowed money is beyond dispute and that invested capital does not include borrowed money is settled by the express terms of the statute, but it by no means follows that plaintiffs are right in their contentions. The term invested capital” as here used includes all v^orking capital consisting of money^ or property employed in the business or for its benefit and furnished or paid-in by one or more of the partners. Applying this test, it is clear that this part- nership had invested capital within the purview and meaning of the statute. In the determination of this question, money borrowed from banks or viduals other than members of the firm and solely upon the credit of the firm must be excluded and may not be considered; and, for the purpose of this decision, it is unnecessary to determine whether, as claimed by counsel for defendant, money borrowed upon the notes of the firm, indorsed by the individual partners, and largely, if not wholly, upon the credit of the latter, is to be deemed invested capital of the partnership. If the original partne^ ship agreement had been carried out and performed, it "would not be claimed that the moneys paid in and furnished by plaintiff Cartier in accordance with its term would not constitute invested capital of the firm, without regard to the manner in which or the source from which such moneys were obtained by him. The method or plan adopted and used in 1917 was a charige in form rather than in substance. The evidence shows conclusively that, for every dollar of money borrowed from the bank, property of one of the members of this firm, exceeding in value the amount of the loans, was deposited with the bank and pledged as collateral security for the repayment of such borrowed money. The property so furnished and pledged become a part of the working capital and was used and employed in the business of the Company to the same extent as if it had been paid directly into the firm treasury. 917 ludgment will be entered for defendant with costs of suit to be taxed. (Decision appended to and made a part of 1 . D. 3080, •iOOO.) WAR 318 TAX 10 - 22 - 20 . RUNNING TABLE OF CONTENTS— EXCESS PROFITS TAX. Rulings, Regulations, Opinions and Decisions under the War-Profits and Excess-Profits Tax Provisions of the Revenue Act of 1918. (The Law appears at paragraphs 500 to 595.) Giving Treasury Decision Number or other Designation, Date of Issue, and General Subject Content. Paragraph No. T. D. No. Date Special Dec. 9, 1919 Special D-c. 17, Special Jan. 12, 1920 3017/ May 3. Law June 5, 3051 July 27, a 3080 Oct. 19, a Subject Consult the pink page facing page 301. The following matters are unindexed temporarily. Original issue of stock sold at par on commission in relation to invested capital 870 An example of what is not a government contract Determination of first installment of tax in the case of a foreign corporation War Excess Profits Tax (Act of 1917) 879 Special deduction allowed and exemption granted to owners of certain vessels documented under the laws of the United States Decision of Court — Revenue Act of 1917 892 Decision of Court— Revenue Act of 1917 — ’Part- nerships 900 874 877 890 Insert this page immediately before the blue Excess-Profits Tax Index. Ercess- Profits Tax.— War Tax Service. Supplementary Page 1. t' f t f Corparation ®ntst Olaittiiattg SERVICE DEPARTMENT 3T W^LJL STXiEET XJEW "VORK FEDERAL INCOME TAX SERVICE / -REPORT 1^. 47- OCTOBER i, 1920. Enclosed herewith ar^ pages 557 to 56^ of the Service. Page 557-558 ^ow in your hinder should bi removed . Also enclosed, fhr substitution, are Supplemen- tary Pages 107j-108/and 115 Very truly yours, THE CORPORATION TRUST COMPANY. ■ , •» ■';, =r^ W .aK/y UttBtjmn^D lainl naftBitiifiaD ^^155 s tf! TUBMTyjAqaa 30iV«3e mvi „ -...-x’ -ii'’ fs-' ■:’4 f%; W'-l ■ ■ ®' ■ » •' .Mt*-*'' SE( M aDivfiaa xat bmodhi jairz .OH TflOiafl-' .osex .6 flaaoTDo ''•< . ■ ■ I# eriX lo cae oJ vea sss^q ' 9 ^B rfXiweieri bsaolona \ 9 . >''■'■ 'M ‘ iV ©Ij? (Unrpuratton ©rust dlnm|ia«g SERVICE DEPARTMENT 3t WAIJj STUEKT .NKW -i'ORK FEDERAL INCOME TAX SERVICE -REPORT NO. 46- SEPTEMBER 23, 1^20. Enclosed herewith are pa§^'s 551 to 558, both i elusive. Page 551 now in Service should be re moved . f Also enclosed are Su^lementary Pages 113-114, and 115, for substibuti^ for Supplementary Page 113. / \ y * * * Digest No. 10 of Income Tax Rulings. Digest No. 10 (June, 1920), just off the Govern- ment presses, has gone forward, on our order, to the subscribers to the Service. This digest together with Bulletins 27 to 37 of the 1920 Series, both in- clusive (No. 37, is the current weekly Bulletin), cover all rulings, not revoked or superseded, issued in Bulletin form since the inception of the Bulletin system. Therefore the Cumulative Bulletin for 1919, all prior digests, and Bulletins 1 to 26, both in- clusive, of the 1920 Series, may be placed aside. These should not be destroyed however but should bo retained for reference purposes should occasion de- mand . Very truly yours , THE CORPORATION TRUST COMPANY. ,r ■'Sr-, f |tnBt|jimID tain® imitmnttialD ifl® ^ TH 3 MTFlA>=l 3 a 3 DIVH 33 arno*r vfM>r TjiawT« n.JtAA/ re . Tdr ' , i ^iDIVfliaa XAT 3 MOOm JA 513 a 33 y.. . .OH THO^H- . 0 ^ 6 1 , .ea HaaMST^aa ■ \ -nx ri^ocf , 8 ae OJ laa rfctxweierf besoXona V ^91 9 cf bXjjorfa eoivTaa nx won les ©afi^ .©vxa^Io V ' ^ . bevom ,Mi~CXX eeajsa v:ifi.tn 9 ai 8 Xciaija ©ifi beaoXon© oalA 9 Sff99w ^nsnno ©rfcf ax ,VS .oH) ©viaaXo bauaax .bsbsa'ieqna no b 0 >(ov 9 i d'on .agnxXm XXjs i§voo nx^oXXaa ed'^ lo nox^qeonx 9 x 1 ^ eonxa nnol nx^teXXua ni , 9 XeX noTt nxJ-sXXxra avi^BXnnujO sxlJ- snoleierlT .meJ-a^e -ni rf^oi ,as oj- X aniJeXXxra bn£ ^a^asgxb noinq XX£ ,9bx8« bsoislq 9 cf \;£in ^aexnea OSGX erf^ *^0 .eviax/Xo. ocf bXuorfa ^x/cf n9V8woff be\£on^e 9 b eb ^on bXnorfe ©aerlT -si. noxa^DOO bXxjoria aoaoqnnq" eonenolon no*! benx^^en --- .bnBOi 'll ,tnaoY '^XmJ' ^^^eV .YHA^IMOO TaUflT HOlTAHO^flOO SHT V (Jorpnrattim ®nisf (E X ms SERVICE DEPARTMENT 37 WA.1JL HTHtKBT TXMW ^'OltK FEDERAL INCOME TAX SERVICE -REPORT NO. 45- SEPTEMBE^ 8, 1920. / / Enclosed herewith is ^/|>age 551 showing new matter. Also enclosec^ for substitution are Sup- pi ementary Pages ial3~114 . ^ / Yours very truly, TH3 CORPORATION TRUST COMPANY. gnBtpimJD tain® irnttBinifin® i(i® r\A 3 MT 9 \A^ 3 Q 3DIVf*3a JUrOTT THHMTM .ULJ>:^ rs 3DIV9I38 XAT 3MODMI JAnBQBl - .; ' ■ . f" > ' V ."V ; .OM THO^afl- I .osGX ,0 HaaMaT'iaa wsn grtiwode X6S si ri^iweieri bssoXona .^a •quS fioiiiuJ-ictBcfuB lol ).p9aoXon9 oaXA .le^^ain : ..^XX~CxK 'ssa^a \;'iaj’n9fli9 **Xq ■ \ icjav aiuoY \ YWA^uoD Tsuar HotTAfloaaoo bht : : i . \ QInrporation ©rust €mnpattg SERVICE DEPARTMENT 3T WALL STREET NEW YORK FEDERAL INCOME TAX SERVICE -REPORT NO. 44- / SEPTEMBER 3, 1920. / Enclosed herewith are new pages ^ 49-550 and, for substitution, revised Supplenknta^ Page 113. Yours very /truly, THE CORPORATIoM’BUST COMPAKY, l8wi4) rmitBini^inlD TH 3 MT«A<= 53 a 30 IVn 3 a jiHO'r wa'^ TaaMT#? .i^iaw re vi^i- 3DIVSI38 XAT BMODkIl JASIBaSl .OW THOiafl- .osei ,5 flaaMaraaa iol ,6n« 026-6^^ aesaq wen eis rfJiweneri beaolona = - , \ .5X1 egsa ^fiJ-na^eXqqua beeivei .noiJ'uii^acXi/a .xXuiAri^v aiuoY \ U .yuA'JMoo TauaT woiTAsoaHoo eht (Jorporatton Q^mst Cnmpang SERVICE DEPARTMENT 3T WALI^ STREET NEW YORK FEDERAL INCOi'WIE TAX SEIWICE -HBPORT HO. 43- y AUGUST 30, 1920. Enolosed herewith are page® 547-548 for siahstitution new matter heginning at q 2894. Also enclosed is Supplementary Page 113 f^r euh- etitution. / Very truly yours, THE CORPORATIOH TRUST COMPANY. nnjxnatj'ioID TH3lvi;THA‘R3a 30!VH3a Hi! yrHv. TaaHT^ rv. 301V5I33 XAT mnOOm -Cl' .OH TH09aa- .osei ,oe Tauo'JA ,nold'i;d’14'Qcft;3 io1 8I'3-V^2 aegjsq gib rf^lwaieri beaolona .l^esa p Jb gninnlsecf wen -tfua lol. CXI egeg \;iBXnefiieIqq);;3 al baaolona oalA .aiwoY Y-IU’iJ YteV .nolJi/*lJa .YHAaMOO TaUHT HOITAHO'MOO SHT Ebe dnrpnrattoit ®ru0t (Enmpanij SERVICE DEPARTMENT ar AS'AI.IL, STREET NEW YORK FEDERAL INCOME TAJC SERVICE -BEPOBT NO. 42- AUGUST 27, 1920. Encloeed herewith are pages 547^8 for insertion reproducing new matter. x/ Also enclosed is Supplementary Page 113 for sub- etitution. Very truly yours, TES COKPOEATIOH THUST COMPAHY. |iriiji;mnli) tmn© rfrjjtJ3iftt|itiID 'Jt!® TH3MTf1Aq3Crj3DIVfiaa HHO A TaHMTH »IvlAV^ TV. Si ’ \ :j»' tr- - - TO mv a ($ aO!¥S53® XAT 3MOOMI JAfl3^3^ -s* .oM THonaa- ,., j ■ .osex .vs T300UA* '■ -li .noi^ioenl tol 8H-V^e .»fS«I ditvoi^d boaolona -lol SIX 888iHOY Y/avr TaaH'j« ji^iav/ t« Jl: 3DBV20a XAT JAStaO^’^l ■ " - ' " ■ > .OH "'■ '?.V...T m .o&ci ,ex ‘raoouA .^.notJioeai lol di-a-ei^a aea/q sto ri^iwsiori bBeoIoni .’iBj'J'Boi wen ;QntosjbO’iqei -cfi/a lol SIX egfi*! ^'iB^nemelqqna el beeoXone osIA ^ s. « '-i .nol^u^i^a ^Xu“i^ \.*X0V ■ .YHAMOD TaUHT HOITASIO^OO SHT ■e-v.A ©lye Olnrporatton ®nt0t Company SERVICE DEPARTMENT ar WAUL. STREET WEM^ YORK I'ECEKAL' i'l’tiCOf4E£ ‘‘I'AIC £IER¥SCE -HEJPOM m. 40- AUGUST 16, 1920. Enclosad herewith are pages 543-544 and Supple. mentary Page 113 . s/ Similarly numbered pages now in your binder should be removed. Very truly yours, THE COHPOEATIOH THUST COMPANY. i tamS rtnrtBiut^inlD TH3MT«AVll JAS 13 a 3 '=l § F'fl ./i ' V. ' -o^ .OH Tfio^aa- .oaex ,ai TauDUA 9 l(iqua fcns i>^3-5f'3 eescq sif? dJlwaiod beaoXona V '.6Xi 03 b 5 ’Cifijaem r -r • lebnid -Ufov; kX won aasaq i>ei$dmiin nXiBXXmxa m .fcGVOmei ecfj^bXuoaB - \yS% .a^^0Y, Xii5i.it XioV .yilA^MOO TSUST KOITAHO^HOD MT 1 '•■ ^ ■ . -Vr ©nrporatfnn SERViCE DEPARTMENT FEDERAL INCOME TAX SERVICE -REPORT NO. 39- AUGUST 13, 1920. Enclosed herewith are pages designated as foil owe : Pages 537 to 544 Sup. Pages 107-108 \/‘/ Sup. Page 113 y/ Page 537 and Supplementary Pages 107-108 and 113, now in your tiinder should he romoved. Very truly yours, THE CORPOHATION TRUST COMPANY. gnutpttalD tamS noftBinijinlD ■-’ ■ . .; .. ':; .;a- TH3MT5^Aq3a 3DIVf!38 HaOT W 31 X 'rWIH«TH TB 30IVfi33 XAT 3MOOm JAS13a33 «r -G5 .OH THO^aa- .0S9I T3UDUA ; .r - 8 J 5 £) 9 ct'Bnai :895 eiB rfd'iwsTeri beaoXqna :awoIIol N> f.f>e oJ rse eesBl '' V 80I-roX eeasa ,qsj3 \ SXX sgsa .qua bnfi 80X-y0X asa^q xil^cr-fiQmelqqua bci& VS5 asjsq .bevomoT ecf bXuorfa Tsbnicf ^uoy; ni won ,SXX ,a*iuo^ >cXu't.t vrieV .YPiA^MOO TSUflT HOITAROaflOO SHT 5 ' f ■ < . ii I •I I Olorpnrattnn ©ruat Cnmpang SERVICE DEPARTMENT 3T WALL STREET NEW YORK FEDERAL INCOME TAX SERVi^^E -REPORT NO. 38- AUGUST 6, 1920. Enclosed herewith are pages designated as follows: Page 537- - For insertion. \/ Sup. Page 113 - Revised, for substitution^ Very truly youre, THE CORPORATION TRUST COMPANY. linctimnlD JainlD TH 3 MTf^Aq 3 a 3 DIVq 38 A Sta r y/ziy: tmmhth tk 3^W«38 X^t SMODMI JASiaOBl -85 .OM THoqaH- ■osei ,3 T 3 U 0 UA . ; awoIXc'l a£ b^^fiaaiEiet) eeg^q aijs Atiwa^ed beeolona V .noxJiaenx loU - -^£3 naxJxrj-xJatfua lol .beei^sH - £xx ag^q .qua ,a-ii;oY Y^sV .yMAquoo iguax moitahoshoo hht I Cnrporatinn ©mat Olompattg ’ ■ . \ SERVICE DEPARTMENT S’? M’A.UL .STKKKT new N'ORIv FEDERAL INCOME TAX SERVICE -REPORT NO. 37- AUGUST 2, 1920. The pages listed below and enclosed herewith are to be substituted for the similarly designated pages now in your binder. Pink sheet to face page 520,'/ Pages 533-534 - Reprinted to change style of set-/ up at bottom of paragraph 2829. v , Pages 535-536 - New matter beginning at paragraph J j 2835 . Sup. Page 113 - Revised. J Very truly yours , THE CORPORATION TRUST COMPANY. % C ■*■ ' V- - * » 'S ■ ,|fijKt{iitii5 tainlS »n}tKiiit|taID ^^155 Sf- TH3MT!rlAS3a 30IVfl3e 'tf' p ‘l" ' . . :#l>IOY y/'51K TM>IWTte T8 t' - / ' ■ • A 'i^r^ >>aW A.. »■• y ■■, n*/ \''3 \V 33iy838 XAT BMODMi uT^ > •■ , -vs .OH Tsoiaa- s'-lv .osGX ,s: TauouA «■■ ■■■-■-,:. j ft 81B rlcTiweiarf baaolone bnfi wolecf Jbs^QXI aa^Bq arfT ■» asgBq bad'Bnaiaeb ^X-tBliraia erf^ lol bs^uJ-i^acfua ecf oJ- .Tietnld luo^c ni won \ ■' ^5-^- ^,OSa 9SBq eoB'i .taerfe )fnx^ |1 -Jea “io al^^a q^nBrfo ocf ba^nxTqsH -- ^52-CCd aa^&^ 1 ■1 , V .GS0S fiqfiigBiBq lo raoJ'.tocf j-B qn — i •: ■-, rfqjBiaB'iBq' jb aninniaacf ne^sfBni waM -- 652-252 aagBSt . ' J B ■ ’-essa ^ ■' ' V ^ i X/ .beaxvaH - 5XX .qna , , annoy yXnnJ- ynaV >!i ■ ^ yMAaMoo xaoHf' noiTAHoaHoo sht .;■ V AA' .. .viv. ^ r. .1 • - ' '>* ■a* vt I* *’ ‘^'■1 ^ V hV-y'^" A. 1 ^ ^ • m ■ . I lH' .t- >■: r'i >'■■: -7 rns ii^li Jit'- Qlorporaltnn ^rmt OInmpang SERVICE DEPARTMENT 3T WALL. STREET NEW YORK -HEPOHT iro. 36- JOLY £8, 1920. Enclosed herewith are pages 539 to 535. Page 5£9 now in ^J^our binder shonld be reraoved. Also enclosed, for snbstitut ion, are Supple mentary Pages lll-112,j and 113. ^ With the next report will go forward a revised pink page reprinted for the purpose merely of showing the shift of Supplementary Page 113 to Supplementary Page 112. Committee on Review and Appeal Recesses. The Committee on Review and Appeal (see paragraph 2224 ) will not be in session during the month of August. Very truly yoin's THE COHPOHATIOH TliUGT CCIdPAHY. Vv' y-"v> ^ •■ •• ' .. ..'• ,: ’^■:.V;i^ . '>!■ |ijiBt|moip^ tmnM naftcin^ialD ^tllp / TH3MTf=IAq3a.301V^33 •’ ■,, ;-^^7 - ^’^'^ ' ■•>, Jt ,^' y'/ ■'■ - /^-^X c- A ' ^ ' ‘ irfltO'A Vm/L THUllTie vtlAVf TG /■'' V . '-X '• ;*'r V ■ >• ■■ : ■! S' S' ,: ' :■ s '■ " '' ' ;•'■ ■ ■ ^ ' r . < r ' .-5 ., A ;.- V-J - ...-^P',’^"-- V 'S's:-:4 iCiVT' 2iMODiii;jAsa3aa^, . . -* fS' '*■ i -3S .OJt T^O'iasi-:;;-^^ ,4|'^%:S . :- ’ , '■ ■ : 4 ;:*( sS* - 1 ^' i .oasx ,8S YJUIi -S'tt 1. ■ ■■ ■ ' -S Sr - •', ,,.- ■ ':. ■ ^■- M”', S . V ■:l)-\ ' ■ ,. ■ . - : -.,;-.:5 !i' .r - 'S'x,. S ■ ^y/' |, 'y .2S3 od- 'SS2 S33.sq G'ii3 ,,£iii'C3T3f{ sbaioIonH ' •:. .jjsvoina't sd' Bljiroxia. tiscx nt woxf eS5 f 'w "...Vr.’iSi '{■:■••,•%,'■? '''^.-- .. ' '•''.^f^Iqgsu'S 3'xa .noj-vtxr^ld-acfua ^lol !,LaaoIoxis oalA^lr ^ r S' ,r.,;*-;.^ ■ ^ , .5I.i fcnj3 t<2II-III asg^e'I Ttisirism ' : 3 i)'f£Wiol os IX.CW -^J-tQ-geaSt-xan^erfd- rf^iW- - saoq-iug odd- toI ' as^g jfftxg Baa'lvsT ;;S;S,r,,^YT:a^n3ni3Xgg;^a ■'io rtiiie oilj- 3 nxroria> lo ■^X8^^m ^.‘ -^"XX 6SBa; T/iBirxaraeXggwa ocT SIX sasl. s F--. ;. aaasaosil XsoggA X)ns wsXveH no aaXX’-liiiaioD • - 39a) XxjaggA XixiS -woivoi^ no ssX'XiniffioO s/fT Snx'Ufjb goxaSoa xti scf Xcn IXxw (X^SSS dq^'i^s'iBq .Xaxjsx/A ^o'rfXnora edS Kf . - i-- . ^ ' ■ , ax70’i xitna \’td^l - , .Yia^oo, Tausr iioiTAao^ioo' siit &s. X: s rV- .^.‘i A OInrporatfDn ©ruBt (Eompat^ SERVICE DEPARTMENT 3T WALL JSTKKHT XKM' YO«K FEDERAL INCOME TAX SERVICE -REPORT NO. 35- JULY 15, 1920. Enclosed herewith, for substitution, are pages 307-308, reprinted to correct the first line of ^ paragraph 1724 by substituting for the word “re- ^ ceived“ where it first appears, the word “returned" Also enclosed are new pages 523 to 529, and, fo substitution, revised Supplementary Page 113. Very truly yours. THE CORPORATION TRUST COMPANY. * ' ' - ^ - iiu m ^ ■ll «f l ' ll H I M ' -' ■'■-iiiiiiii ■ lll-M■■lV^i l■ l l ^ ■ i i n>. l.l> *■ l iVwjM i M i ipAh^ iii ^ P j!Wi i»i » iijM<>r 'rfuiJi’rirt TC m moivmja xat hmodiii JASiaasT L yr. "■ - as .on Tfio^aH- /:m .osex ,ex ym 5i .K * jr.: « ■-, ae^isq eifi ,aoi«XuJ-x^8Cfije to*! ,d^iweT9ri bssolona ' \ '! _lo anil erfJ J'os'noo Oo f^ecf'nxiqe"! .SOS-VOC "'J - 9 t” tnow ad^ lol xd-acfua ^^qfi^:aa^Bq . "bea'iUite'i” b"iow 9f(^ .siJseqqB craiil sierXw ’’bevxeo io'l. ,bna ,QS.^-^oS 5S5 8©^-^^ 9*^^^ beaoXons oelA - ; V-' •.5ri aaB'I \;^fi^^9^I■9^qqIJ2 feeaiv'eT ,noiJi;Jl^ad'i/8 ' ! . r ' 1 . ,a^uo\; T^eV .YKA^MOO T2UHT KOlTAflOTOOO SHT tft V. •. - '-^ f 'J ■! I >> ■ Ja: L ..yci;: OInrpnratton ®ruat dnmpang SERVICE DEPARTMENT ST WALt. STREKT NEW YORK FEDERAL INCOIV^E TAX SERVICE -REPORT NO. 34- JULY 8, 1920. Enclosed herewith are pages numbered as follows: 521-522 (for substitution for page 521). \/ Supplementary Page 107-108 (revised for substitu- Supplementary Page 113 (revised for subst Very truly yours, tion). / i tut ion) THE CORPORATION TRUST COMPANY. ifVr '' '*0 i f , V j gniittmoID tsmS f - i-. .r /■ •; - : ifc.„5.,--.. >. -I- ; ■ .. ...-^ J „, ^ , ., . ,., ... ,. ' ,■ . -Q- . ■ '.H' ' ■ir ‘ j'"'^ , .yr TH3MTf=IAq3a 30IVf=l3a i nmrr v/siw xaMJiTH tn ■N"; ' ' • ■' ■«', •' ‘ : y;J[''’5 ■ '^.r’l' 1 ^'u' '"‘V r- !> ■■■®H^■Hlu - '■ ■■ ■ 'y'-- , ' iT? -v v , ". ' -^.i. a->, I ,w **'*',■■ -u !fe ^ 3 DIVfl 3 S XAT 3 MOOHI JA 5 i 3 'a 33 -i'5■^0l^ THbiaH- '• ■- I '''-’> M -i-vaS osei ,8 X'iut ^ ;8,woIIol 6B £? 9 ^Qd't^£f^ 89geq e'lB i^^iwe^erf beaolona - f ; ‘ V : > i\y egsq lot noi-tu^iJacJua ibl) SS5-rSS -^.;>K ' ■i; ft : . ,r f ;.Aj -uJiifBdua lol beexvsT) 8QI-^9i e-BSl x^aJ^ 0 IS 6 Iq(^ua ■;%'■ ■'. (noiJ V (f'bUij«tiJ8cfi}a ^o^ baaivsT) 5X1 eael ,'tiB^rr9®eXqqu3 , 8100 ^: \ ^ ^v,>v\r 1^-., . YHA'IMOO taUST MOITASO^flOO SHT S; ;’■ 'V‘- f' ^ *. 5:f^. ■ ^ I- n ; ,? fi T'f-i-''"": ' “v- - ' ^ ; -•> •v.. ’< v* ■■::y'4 I- . ■P^. ^ ■ '\ •' ; * ' j- \ r .* V- irr. \ ^ V. ^ oily? Corporation Croat Companp SERVICE DEPARTMENT 8T WALL STREET NEW YORK FEDERAL INCOME TAX SERVICE -REPORT NO. 33- JULY 1, 1920. Enclosed herewith are pages designated as follows; Pink Page to face page 520. (The Pink Page now in your hinder facing page 446 should he removed.) v Supplementary Pages 103 to 106. (For substitution: these pages are reprinted to show the list of "Collec- tion Districts and Collectors as officially "corrected to July 1, 1920". Note particularly North and South v Dakota, Texas and Virginia.) Supplementary Pages 109-110 and 113. (For sutsti- > tution: reprinted to bring in adjustment with the new v/. Pink Page and revised index. Index Pages 1 to 40. (For substitution for the blue ^ index pages now in the binder.) Very truly yours , THE CORPORATION TRUST COMPANY. JP* ■ ■' * 'm: M: f '■ J 9-* t i ‘^> ; i >•: :..v ','* A *.. '•,-' '’V ''V I- .. ‘t" ■ 'A 7 :/?.’ ^ £ ' * ■ ■ -7'^:'^:^:}^^^: -. 'i ■' - ’r ^ : V •■■' hi.. •■f.' ('. ■ -/ -■’ ^ V TH3t4T5^ A^aa a^lv^^^:•F '. - s 'V 'r ." ' • ^ , .-■ ' g'l. '^ ■>■- ■-'I- ' V 7 *.'.-s yr3.yi nraia»T« jliavt t« ■*.\ ■<'\ ■'V' 'i. . ^ V -’S'- A 'V-;'': \. ' ' abjvsiae XAT aMoom JAfiaaaa ' . i- T -i a ^ '''., ' ' -ss .oPt THo«5aa- > / ^ .oaef ,x yJUL '■■ V. s. “13 ’.-: -'iit; ’'7 •’ ‘ ' i'-A' ■ . • . i«: '; awbij;o e;3 .bavT-snaiaob asa-eti 91* rf^iwaisri besolona ‘ >u’wo;s -ea*? lini^ edTp .OS 5 -, 0 SJiq_ 90*1 oi 93 *^ 3tnx9 .im. ‘.lj. - :.L’ 'S/a . {.fesvomai ed faltforia di'i' sasq ^nxpfil lebnxtf t go'i . , :niir3;«-di:dadrf8 I'ol) .30^0^ £01 aags^ 'cifi^nsnialqqqa ■HP'V^'."' 4 , -oa-irbvCYo dexX ,9f£d worfa od beJniiq®-! s-i* aaaaq eaerlj k - ' 'S' ba^oanpb'’ 'cXX*ioi11o ea,,aio.t.o#XloO bos aJoiiXaxG ciolt 5 > V rlX«o8 bhs rfX-toH ■(iXiaXaoxXiJsq 9doH .-"O&eX .X'^^Xul ot ^ ’,'V-, ' , ( .ainigixV bn* aaxaT .fiJojfaa ' -iip^Jwe ipT) ,£XX bns'OXX-eOX eessl. \;ifi^n9in9Xqqxfa _\i i.'t. '•ji.- x-S. wan 9fiJ rfXXw JneiaJauiibfi nx snxid oJt baXnxiqai :no,x^q>t xebax bestvsn bns ssb'I . S^' atrlcf^ noM'xfJ’iitecfxia. 'TO'^ ) o^ X xebnl ^ ( .Tebnicf erf^t rrx won eas^q xsbnr M ' ,eiiJ0.\c x:Ixn^ x.'^eV .yi/L\^MOO TaUHT HOITAHO'XaOD aHT ft .*v ®l|e (lorpatatinn ajrufit (Eompaug SERVICE DEPARTMENT 3T WALL »TR*ET NKW YORK federal income Ti%X SE!1¥ICI -BEPOHT HO. 32- JUHB 25, 1920. y Bncloeed herewith is new page 521 and, for suhsti- tution, Finder Pages 1 to 6 to be inserted immediately following the yellow index guide card marked "Reg. 45, Rev. - T. D. Finder" in place of the similarly numb pages now there. REVISBD IHDEX. A reprint of the index to the Service, revised to include all matters issued up to tho present time will be sent to subscribers next week. Very truly yours, THE COFiPORATIOH TRUST COHPAHY. lamp Tii5MTfi^=i3a-'OiVfl3e ' , ’ , Xi\T JMOnni ' 'v -’■' ' " '■'' -£s .Ofi Tiijiaa- ' .-./...o '■ ■ ■ ■' ■ . . . , ' „ , ■■ ; • -^, ■ .0S8X ,gS IKUl ' J^A ' ■ : •■■ ■% -IS’ailfSi TD"! .bC:' I-'lt' Cij-U.,; '.JS.'l' Si ..'”JWOtr#d mA Nrtp.+i'i'c.oori’i 'M oJ d o.} ' ES,»fil -abrtH tnatfut bGi^'-T^ns fn.ns c-t::, vrolXd'cjil^ Sr^iwoIIoi bcicJ.'Lcn ?rf.r la boslvf' n "teinii .U '''.T - .V3il .atea-i won sts*5 , ■\/--:: , ^ _:: . ■ •. ■’ : ;, : : ^Maiii-^feoivsK ’ ' ' 0* a>It? Cu ■ ijA^ lo iuiirift .. ilkv miii o:!.? cJ- ■•;&' L t'nai Bie.t^4sm Ifi sWIonX a’led I't^r: Scim 6• *' ..>.,^ •jyj ' >* ®I|r (Enrpnration OIniHt CHompang SERVICE DEPARTMENT 3T rnTtUEMT JfMW TOUC FEDERAL INCOME TAX SERVICE -REPORT NO. 28- JUNE 7, 1920. Enclosed herewith are pages 505-506, for suhsti-^ tution for page 505 now in your hinder; and revised Supplementary Page 111, for substitution. LEGISLATION. No tills amending the Revenue Act of 1918 or im- posing new taxes were passed hy Congress during the session just ended. This Congress reconvenes in regular session on December 6, for the short session ending March 4, 1921. The tax measures pending at the time of adjournment on Saturday will retain their then status on the reassembling of the Con- gress in December. H. J. Resolution 373 fixing the date of the end of the war for certain purposes failed to receive the approval of the President and so did not become law . Very truly yours, THE CORPORATION TRUST COMPANY "V ttnut^moID IsinS TH 3 MTf 1 A‘=! 3 a 3 D!V« 3 a atiroT tk«j»£» julxw tb 3 DIV«aa XAT 3 MOD 111 JAfl 3 a 31 i -6$ .OK THO^aH- .osGi ,v mji . -ij’ecfus lol ,a0S-C06 asgisq eic riJ-tw&isd £)«80lona ' £)8axv9'i bnB ;i95nicf ^iJO^ ni won aoS "rol aoi^ri/J- .....noid-y^lJ-scfjjQ lol «III sgis^: ^c'lB^fnemelqquS .KOITAJaiOaJ -lai 10 81 CX lo JoA eunsvsH eriJ ^nlbnonifi ellM oH sad- gniii/X) 839isrJ0^ f)9a8Bq eiaw aexBd- wsn snisoq ni asnsvnoosi aaeignoO airiT .59f)a8 noiaaaa noxaaee iiorfa lol ,6 lecfineosa no noxaesa iBlix^ei J-js gnx&neq. eeiaeBsm xbu exfT .Iii9X rioiBM anibn© nxBJ“si XXiw no ^nsmmuoti)^ “^o emi^ erf^ -noO lo aaxXclffl988B9i 9ffd- no and-B^te nad^ lisdi .i9cfai909G ni aapig ijne sdd" Tto ed^t gnixil 5VC noid-jjXoaafl .L .H 9 vxeo.*i.-od- boXiBl aeaoqiuq niBd-i90 lol ibw edd* lo 90100 ocf d-on hit) 08 bn* d-nebx 89i^ 9dd^ XsvoiqqB ed^ . wfiX , ainox xXui^ \:i9V YKAIWOO T3UaT tlOITAHC'IHOO ZST SItyp Olorporatinn ©mat CJompattg SERVICE DEPARTMENT ST WAUL. STIU5ET NEW TTOItK. FEDERAL INCOME TAX SERVICE -REPORT NO. 29- f JUNE 10, 1920. Enclosed herewith are pages 505 to 517 of the Service. Pages 505-506 now in your hinder should he removed. Also eneiosed, for substitution, are Supplement tary Pages 107-108 and 111-112. SUPREME COURT. The Supreme Court has adjourned for the summer, not to meet again until October . BULLETINS OF BUREAU RULINGS. We urge that your mail-assorting clerk he im- pressed with the value of these Bulletins to you, in order that their delivery to you may he assured, and we further urge that the Bulletin file he kept in- tact, as duplicate copies are not easily obtained. Very truly yours. THE CORPORATION TRUST COMPANY- THHMTRA'IHC 3D!V5?Ha vWTrvt ,r.aj:.f4 t3 Ir •msa «A?r 3Mopv!i jAnsaaT ( -6.S .OH :.-;.'i'iaa- .CSQi 3KUL I I T » ^rlw lo VI5 bj COC. ao^jsq eiA d^xweieri bt-uoionS ad .bSxrodsi, jeh.dd iiscx ni" b0y,oaiQi - 3^ji» . , r,.! ■ , .^98pX^?rTs osJ A' . . ■ .$XX- / II bn^ 801- VOX PS;gjBS[ \:t£/ . ;■ V . , ..Tguop . "teaimi^9 .9;fP 'joJ bai'i-ivctbj^ J-'r^roo eiCQiqifS erfT .3 6i/C stoC. "■■yrjjj ' . oein od Joa. . .aoHijuH i;Aai:ua vO efxiTSjJua . J -jiX ed 'x'tsXc:, §nX/'- uaB^-I;;':ii i.jox ^isrlX ' n X . uo Y o f a a : d e i X nB - a ed J 1 o eu / •3.1^ d4 X w be 5Ca © iq 3rM> •, f:/ ..Y.::a: o\, od .’Cie'-rf. Leb li edi istio -a: c alvTv IIaa 9:'/ ;t£dj aw /o:; "700 ©Xisoiiqi;^^ sjs' .Jr; 5^ r^^AaKOO T^UhX ^CITAHO^OO 1^;? ■ •■'■■ y, , ,, . . yi*: \n -V ©nrporattott f rttat dorapattg SERVICE DEPARTMENT 3T WAXJL STRJEST NKVT ITORS FEDERAL INCOME TAX SERVICE -REPORT HO. 27- JUNE 4, 1920. Enclossd herewith are page 505 and Supplementary Page 111, the latter for euhstitution . SALARIES OF FEDERAL JUDGES, On Tuesday, June 1, the United States Supreme Court held the income Tax Law unconstitutional to the extent that it provided that the salaries of judges of the United States Courts (and of the President) shall he included hy them in gross taxable income. The opinion will he reproduced for the Service as soon as available. CONGRESS TO ADJOURN. Congress adjourns Saturday, June 5, at 4 P. M. , not to meet sgain until December next for the short session to March 4, 1921, unless called in special session by the President , 'which is unlikely. END OF WAR FOR CERTAIN PURPOSES. H. J. Resolution 373 declaring that certain Acts of Congress, joint resolutions, and proclamations are to be construed as if the war had ended and the present or existing emergency expired, has passed the House and will no doubt be passed by the Senate either to-day or to- morrow. It is believed the President will approve this measure which has bearing on several provisions of the Income Tax Law, the regulations based there- on, and the exemption provisions of Liberty Bonds. Very truly yours, THE CORPORATION TRUST COMPANY ^ncttirralD tairtlB ttnfiKtotptilD TUBMTflAIBa 3DIVfJ3a MMor 'raaL»x« aoAVf re BDIVfiaa XAT 3MODHI JASiaa33 -vs ’.oK THoiaa- .osei .i- aMUL ^C^«J^e^IeIqql;2 5n» 303 eg^q eqs dtlvQZQd beaolona .noituJxJadua io\ 193-3&1 ed3 ,III 88*5 ,I anuL .^csbaeuT nO .330301. JAEgaaq 30 aaiHAJAS xfiT amooni eriJ blari ^luoO 6t^^^qu^ Be^a^a be^inU eIl^ bebxvoiq Ji 3e,d3 ^naJxa ariJ o3 Xanoi tq^lJ-anoonq waJ aaJaja beJinU erl^ lo aaabut aaiiaXaa erii ‘ 'id bebulonl ad IlJtfla (^nebiaaTiq ariX lo bns) aJiixoO etf XXiw'noinXqo eriT .•mooni eXrfjsxfiJ- saoia ni meriJ .aXtffiXiBVfi ee nooa aa- aoiVia3 ariJ lol baouboiqai .ViabiuJaS amuotba aaeianoO .MSUOldA OT 83SaOMOO ladmaoeO XiXny niaaa Jeem o3 Jon ,.M .3 A Js ,3 enuX aaaXnu ,XSex rionsM oJ noiaaaa Jnoiia eriJ Jxan rioiflw' , Jnabiaanq erfJ xd- noiaaaa • Xsioaqa nx .beXXfiO .xXeEiXnu ai noxJoXoaefl .0 .H .33303303 HIATaaO H03 HAW 30 OHa Jnioc .aaananoO lo aJoA nisJTao 3&d3 aninsloab CVS bennJanoo ad oJ eiB anoiJafflfiXoonq bns .anoxJxxXoaeT anxjaxxa no Jnaaanq ariJ bns babne bail ns’*’ sriJ lx a« on XXiw bna aanoH eriJ baaesq axsxl .baiiqxe xonaanama -oJ no nertJi.e aJens^ ed3 Jefixob avonqqa XXxv.- Jn*bi8en3 erfV bevaxXecf ax JI .womom anoxexvoiq Xanaxea no sninaecf aarf rfoirlw eixtaaefn. a irfJ -eiarfj beasd anoiJAXxaen arfJ- .waJ xaT amooni eriJ lo .afanoa y;jTedJJ lo anoiaivo'nq noiJqmax# eriJ bna ,nc .anuox xlnn^ xneV ; yMA3MOO T3UHT H0ITAfl03H00 SHT Sly? (Eorporatfott ©mat SERVICE DEPARTMENT 3T AV.^t,L STMJB.ET XKW YORK FEDERAL INCOME TAX SERVICE -REPORT NO. 26- MAY 21, 1920. Enclosed' herewith are pages 501 to 504 for sub- stitution for page 501 now in your binder. Also enclosed, for substitution, are Supplementary Pages 107-108 and 111 revised to date. BULLETINS OF BUREAU RULINGS. Owing to its inability to secure paper in suffi- cient quantity, the printing of Bulletins Nos. 17, 18, and 19, of the 1920 Series, by the Government for general distribution, has been delayed. These issues are now being forwarded from Washington. EXCISE TAX WITH RESPECT TO STOCK DIVIDENDS. The Ways and Means Committee has voted favorably for a yearly excise tax on corporations equivalent to $10 per $100 of face value of stock dividends de- clared and paid during the previous year, suoh tax in the first instance to be retroactive to March 15, 1920 and to cover the period from that date to June 30, 1920. Very truly yours, THE CORPORATION TRUST COMPANY i'= ; t /* .'. » 7 . .■/-■ mil: ■M • S.Df' ‘'S-r-' k ,A 4 ^ o >5 _ ■ ■; ; . ^o:.'': . ^'. '■■ v d.^'- ::’! :;«j Xi/^- cv';,. ,: .: > -.'r- ' y ci * .' .> . S jJ 1 ' i . ’ ~! ;. j w' ■_ 1 1 .' iV Cf ‘ » A .» ;'■' ■* - L > * ' j .* »• . '.'i '^1 . .•' r 1 ;'!;' . ..-Jd ■" ■■ X , -d X;.. ;-..6 .dL^CiUE :’v;EEU3 ■^O ErTTXiuJEa >■■ - i-,;E;..i a. ^ .od : * ■;« , ;■- ^.;E arij: ij .^rl: t.itiiiinbveO ;oaa' V- ; . e^x'teS .■■■:; p-aj^r .-, 6^. dayrfT. .5ev£X,<- ‘ dX scf aBd , no (.•r;;d': ''at;?x^ Xi^d-i.T-oS nxE .. nod:Snid2d'.v ;':cn't &ofcnB‘’io’i j^rxad sts aQi/sa:, =2^viaa:v!rT )iDOT3 ot XAT ::.a.,:;/^ y:Idi:iT9v,B't ^)OvO"-’' a^d BodtiuiraO d i:;:., a .i-; ‘r* ’ J3vx,jpe tifroEd,- , ; :c^.''Xv' ."' . ^ a -iid ibnsbXyXd' x-xx :X ';:• s' , oai;' . , - - ■'■xiJ Xvaaa ..d, ,:ed'*ii-' ;ai dp'X4;,i.E::'^ a.vX^a'^io^.ia'T. '.g c.' v/gd-d ^d> ni Qt yv^E-dJcdd Lnoid VoXxod' '^dd dsvoo ad bn;: ;- f'v ■ ;. . ' • • _ • . _ ... , , ■ g .., edij'"'.' ’X ■: '« ' :,piT.vEd .:' ;v EHT r ^ , '.-g. OInr|ioratimt Wmst Compattg SERVICE DEPARTMENT 3T WAii, STREET NEW TORE FEDERAL INCOME TAX SERVICE -REPORT NO. 30- JUNE 11, 1920. Enclosed herewith are pages 517-518 for sub- stitution for the similarly numbered pages now in your binder. Also enclosed is Supplementary Page 113 for i sertion. Very truly yours, THE CORPORATION TRUST COMPANY. tsmU iraltBtng'ralJ) TuaMTiRAq^a aotvnae sisitrr war?; T^scsiTa oJLAVir 3DIVS132 XAT 3MODMI JAS]3a33 -Oe .OK THO^HH- »osei ,LL awuL ; ,! '“Cfua lol 8I5'-Vf2 aegjBq aiB ristiweierf b'eaoXona nx won aegaq bQ-tedmn x.L't&Lzmzs ed^ tol noicrij,fiJ-e , .lobnicf — ■ • .1 ,',’.^y .f i 'lol SIX ^C'IJ5^a^8XqqJJS ax baaoXons oaXA ‘•A .noid-iaa fBlJJOX X'IBV /YP1A'5MOO TaUflT HOITAHO^HOO aHT Corttoration Evnst 01om)iatt|| SERVICE DEPARTMENT ST "VrJLUL STBJeKT NEW 'TOlUt FEDERAL INCOME TAX SERVICE -REPORT NO. 25- MAY 6, 1920. Enclosed herewith are pages 331-332 (reprinted to change the word ’’when” in the tenth line from the top of page 331 to the word "which"); pages 501-502 (for substitution, new matter being shown at para- graph 2694); and Supplementary Page 111 (revised for substitution) . Very truly yours , THE CORPORATION TRUST COMPANY ■f ' V' ' gttjjiimalD tamlS «Qjl3iiit|yQlD TMaMTflAqna 30IV513? ^ arjro^r v/xk TxauxTS jcjulw t« '■ ■ i 30!V5l3a XAT 3MdD^r JAfiaaJH I . -as .on THO^H- .osei ,a YAM . \ ^)©J-ni'iqsT ) SC5~I£5 asg^q 61 b rfJ'lwa'iarf bssolona arl^ mo'll anil rfinai erfj- ni ”nedw” b'low erfj: ©gn^o SOa-Ioa sag^q ;("rfoir{w” 5'iow erfi oS ICC es^q lo qo^ -fiifiq nworfa gnxacf nacr^^ni wan ,nox4‘i;;ixlacIr;a 'xol) Tol bSexva'n)-ilI \;n£ixtamalqqi;2. bnjs ; (J^edS rfqaig . (nox^xfj’xJ'sdi/e ,an]joY ^ilmi ^-laV . : . ypiASMOO T8UOT nOTTA5!oqHOO ■ * ;/ OItjf? Oliiriiorattctt 5^r«a^ 01om)iattg SERVICE DEPARTMENT Sir STKJEET NKW VORK FEDERAL IMCOME TAX SERVICE -REPORT NO. 24- APRIL 29, 1920. Enclosed herewith are pages 501-502 of the Service, showing new matter beginning with para- graph 2691. Also enclosed, for substitution, is Supplementary Page 111. * * * BULLETINS OF BUREAU RULINGS. Bulletin No. 15 of the 1920 series has gone forward to subscribers from Washington as has also a Digest of Income Tax Rulings 1 to 761, inclusive . Very truly yours, THE CORPORATION TRUST COMPANY ■ ■..■:■■ • '" ■’ ■■'• . -''■"*’.'-,W'.P 'T v^ Uttctjjtttj© tsinlS tttiftBtnt|itiiID iriS TM3MTflAR3a 3DIVF}33i jiaor v/»yt TaatMTa aaxvf Vc 3DIV5I33 XAT BMODHI JA«aa33 , ''''■^- ’ -^s .OH Tflo'iaa- ,; , .osei ,ea JiaaA i-‘ ' 'i^'* '•■':V , ■t-.' 9ii^ lo sos-ios " ^ -.fi'iBq rfi^iw sninnisscf 'leJ’^Ba wsn 'aniworia .eoiyisa 8i’ ^noUn^icracfye nol .Daeoloci©^ oaXA ,ieaS rfq^^8 .1X1 eBB'I \;'iBJ'n9m9lqqy3 * ♦ .3DHIJUH UAsaya lo aniTaJJua •m.t' 'eW'BBd asnse OSei eriJ^lo SI .pH niJsnua^^^ esri ajs ^o^^^i^^efiW mpit eTsiJiTOBCfus o3 bisw^oi ; • lav oJ I asnilua xbT emoonl lo ^aegia £ obXa .eviaulofil sr»Br 7 ; 4 ^ .aiuo'^, YHA'IMOO TaUflT KOITAHO‘ 5 a 60 HHT ii-4. y^m. ■.-Jy- '' ■"' v'' .- I -V.'.- ^’■ ' A- ■ Si. ©lye dorporatiott OIruBt dnmpattg SERVICE DEPARTMENT or ^'XIJL STREET NEW YORK FEDERAL INCOME TAX SERVICE -REPORT NO. 23- APRIL 27, 1920. Enclosed herewith are pages 493 to 501 of the Service, showing new matter. Also enclosed are Supplementary Pages l-£, Zl-ZZ, 67-68, 107-108, and 111, revised for substitution. Very truly yours , THE CORPORATION TRUST COMPANY- h' : ') THSMTJ^A^’ia 3DIVfl3a :a:KO*r vmy: rasTfiTJ^ jLi^yr tr / / ■,; ,':.‘.H -f, ’■': 301V«3a XAT 3MODM! JAWaaST -ea .OH THo?aa- . . f-f .oaci ,Ta jih^a . Yl 1 orlJ- "to X05 Qi ss^^q eia fXJ'xwoq^rf £)9aoIona, aijEi bsaolona osXA" w$n sniworfa ,90XvTa2 on-s ,801 -VOX ,8d-Td eas*®^ ^*iJBd'n9iB9Xqqx;8 '’• .-^v' ' ^ .nox^uJiXeJxra loJ Xiaaiva’^ *1X1 ti -•f' ^siijoy; ^cXtfi^ Y'l^V . ^ ymMOO T8UHT HOITAHOanOD SHT 5[t|e (Enrjjnrattott Sruat Company SERVICE department 3T WALL. STREKT NEW YORK FEDERAL INCOME TAX SERVICE -REPORT NO. 22- APRIL 19, 1920. Enclosed herewith are pages numhered as follows ; 469-470 (To correct transposition of figures in citation in eleventh line on page 469.) 491-492 (Showing new matter on page 492.) Supplementary Pages 107 to 111 (Revised for substitution, ) * * * BULLETIN NO. 14 - 1920 SERIES. This number of the Bulletins of Bureau Rulings was mailed to subscribers from Washing- ton last week. Very truly yours, THE CORPORATION TRUST COMPANY. leaiS 3({]S TH3MTnA=13a 301V93a HHOV' >fav^ Taa«T8 tg HOIV5i3e XAT 3MODHI JAf!3a33 -aa ..OH Tfloaaa- .oaei ,Gi JiaaA ee f)9'i0Clauj'.n eeg^q rf^iweisjcf t598oXoaa . ' ' ^swollol se'iusxl to noid'iaoqanfi'iJ" d'oaTTOO oT) 0VI^-9d^ (.Qd>-9i*q no oni:I H^nsvaXe nx noi^Btxo nx (.SQ^ aa^' no nad’^Bin wQff‘ saxwodS) SG^-xe^^ 'lol beexvaH)^ XXX VOX \1&in3aleiqqu^ ( .nox4‘Xfvi“iJ‘8cfxra .; Ik ^ * .3315133 OSei - i‘X .OH HITSJJUS I/Be^^;8 10 eaxXellya eriX 1o isdaii/n airlT -gnirfseW moil eiscfiTioscfua oX- ballfim sbw egnilyH • jfesw XasI noX ,aiuo'c 'iluti 'C~i_eV .yHAHMOD T8UHr HOITA510H5100 SHT Olflrpotratinn ®t«at dompang SERVICE DEPARTMENT 3r WALL STREET NEW YORK FEDERAL INCOME TAX SERVICE -REPORT NO. 21- APRIL 14, 1920. Enclosed herewith are pages/491-492 and Sup- plementary Pages 11-^12 and 111 of the Service. All similarly niimhered pages now in your hinder should he removed. * * * SALE OF PERSONAL PROPERTY ON INSTALLMENT PLAN. Attention of suhscrihers is called to the Bureau Ruling (13-20-806) at the top of page 11 of Bulletin No. 13-20, recently mailed from Washington. Very truly yours, THE CORPORATION TRUST COMPANY. iV- XAT 3MOOm JAH3C!3‘1 -.vS a .'- %■■ ■''7i.'Z b: ■■ '''^;■ ;i :' 'a ;::);>*ioioni ■ erf " ':■»:■ M f f b('- "I r'i,' \"x£.rnen'Gl 'i-f^br^bv' ■■■j.: "-naixin ••^•1 :r4:^:i .CX . [>r>vcm£':: b I ii^ri - -■■■■■ Kr'v ’ib ^bA-: .KAJq TKiiiNiJ.;/,.':.::::! 9fi^ ct t If :e5,.^:r: 'Ao . M juo v 'r , - ' , a ujO'cC vXjrr'iv '-'7 ■ -v vYr.A.L[yioc hoxt/-.;.' snr :-; i ' i^‘U'b .. ■ 10 no . ■ > I - ', 7 '' • ' '.>^7 7.7 - ) ;!^;i r j - ' . ^ rn^o-i'.- : ■ ' ■' , ! ; ^ . ia'X 7ru.fa>?.W n> >- ,r4 Cfltpntation ©rust Company SERVICE DEPARTMENT 3T STREET NEW YORK FEDERAL INCOME TAX SER¥!CE -REPORT NO. 20- MARGH 27, 1920. Enclosed herewith are pages nurahersd as follows: 489-490 - (page 490 shows new matter), 491 ' ~ (new) Supplementary Pages 101 to 104 (revised), Supplementary Pages 107-108 (revised), and / Supplementary Page 111 (revised). fours very truly, THE CORPORATION TRUST C01.IPANY. TH3MTSlA'=^2a 33|.:Vf53;a EScia.'ca; m -oa .OK THO'-ISOI- .OSOI 'riOEAM Jbs'i8o"ai;jn aei^sq q/ib rfd-iwo-iori sssofoaST :S7.’Oll0'l SB wen a~.oj.is OSA - Ov^-j-S-^ ('f/en) - 19^^ (boai'/oi) ^‘0i cj- LOI -i~iB.fn.eije.iqqrj8 ,(t:i9ai 7ST) 80i -V0I 892 ‘-''I 'C'iJ3tnoni6 laq^fO Mb . . (Bsa nro'i ) .[I aga'? 'c jb tnanisicjqi.fO Y.'J9V artuoY .YilA'IMOO TBUHT I-lOI'l'/JiOlHOO [iilT . Olorporatinn SruBt CHamtiattg SERVICE DEPARTMENT 3T' WALL STREET NEW YORK FEDERAL INCOME TAX SERVICE -REPORT NO. 19- !1ARCH 23, 1920. 489 an revise revise "ypogr i*irst I igure the 19 closed herewith a-Fage 111 d. 'age 23jF is reprinted tpAcorrect a iphical en^r ( important hrmveyer ) in th^ -ine of z^ragraph 1357^/changing the ^ 8 to y [ \t appeared 3, properly i. L9 ^«^ice ) . THE STOCK OIVIEENJJ DECISIOH. nothing ot*ficial has come from the Treasury Department bearing on the effect and scope of the Macomber vs. Eisner decision since the an- nouncement printed at paragraph 2644. COLLECTION DISTRICTS. Nevada has been tiiade a separate district, iViliiam A. Kelly, Collector, the t'wc Virginia I i s 1 1 * i c to a r e s o o n t o b e c o n s o ]. i d a. t e d , and a, V -, 1 i:-b’rict is to be organized in Texas, tohn r. Eitchel is now Collector of the Mass- achusetts District. Reprinted pages showing these and other changes will go foi'waid with our next report. Yours very truly, THE CORPORATION TRUST COMPANY. w I JCarpnratinn ©rust ©ompang SERVICE DEPARTMENT 3rl WALL STREET NEW YORK FEDERAL INCOME TAX SERVICE -REPORT NO. 18- MARCH 10 , 1920. - \/ Enclosed herewith are pages 487-488 of the Service for substitution for page 487 now in your binder. Also enclosed for substitution are Supple- ^ J mentary Pages 27 to 30, and 107-108, Yours very truly, THE CORPORATION TRUST COMPANY. 3D!y«3a XAT 3MODfe1l JAfi3a3^ ■Si • .0^: .THO^SH* uli|p Olorpntatinn Stuat ffiompattg SERVICE DEPARTMENT 3T WALL STREET NEW YORK FEDERAL INCOME TAX SERVICE -REPORT NO. 17- MARCH 9, 1920. j Hnciosed lierewith are pages 467 to 4o-7 or the Service, showing beginning at paragraph 2575 the three opinions in the Maconiber vs. Hisner stock dividend decision handed down by the Supreme Court yesterday, March 8. Pages 457-408 now in your binder should be removed. Also enclosed for substitution is Supple mentary Page 111, revised. It IS believed that an announcement rela- tive to the Court’s decision will be issued by the Bureau of Internal Revenue tomorrow. Yours very truly, THE CORPORATION TRUST COMPANY. I TMHMTflAqsa 3 DlViR 33 * iS^XViT WfffVI TiiailTH TU 3DlVfi3B XAT SMODMI JA$13a3^ 'JJx i/i^J ♦ .1.'. /I, to, V 6 ssyBq- s'i- ii-oX'-ail ffqB-iSByiBq :tB sfjliitxPgaJ . t*'-; -'1-8 ' , “{ 0-bM •ofijf ff L Rnoiniqo 6:1^ .IT j/ ifwob bebnjsrf no i; a I ‘"^Jj bno-bivib xoovf a ^-iona IE aa;gB'? .8 do-jBU , vbL- [ s:^ 3 ‘=^ i o:!i 3 'iq;.ra sd'i .bavcrnoT e3cf blnbria 'leLiflijp 'nroY ni woxi 80i^-V3:^ .'Ui xjj u -:3 ' no i. J i/vt la adnj ?: raid'd- Bor^-bl c-nH;.. oe l '\ ■ .heslvs^'i flLL sgBE' X'^>‘^bneai jnsofsonnonnB riB Bevelled" 3 1 Id, 06 ] ^a 3 .1 1 "\i!OV e : -v-'iiiOj v'i^ixo '/sn iBnaotnJ d.'' ij-BS'iijH 5 no X 'i, X f j ^ i X -e ':> s n n' 0 1 Xl3,U/iT ‘';C'lEAilOn8.C:;' EHT j ®l|e QJotporatian Qltuat Ol0mpattij SERVICE DEPARTMENT 3T WALL STRBBT NEW YORK INCOME TAX SERVICE -REPORT No. 16- MARCH 5, 1920. , V Enclosed herewith are pages 467-468 of the ServiC\^. Also ej/closed are Supplenientary Pages 101 to 106 and 111, for substitution for the pages similarly numbered now in your binder. EXTENSION OF TIME TO CORPORATIONS. Particular attention is called to the official announcement beginning on Page 467. BULLETINS OF BUREAU RULINGS. The Cumulative-1919-Bulletin has not yet been released by the Government but there is every expectation that it will be tomorrow or Monday. No later issue than No. 6 of the . 1920 weekly series has appeared from the i Government presses. Very truly yours, THE CORPORATION TRUST COMPANY. TH3M T«A«^3a 3D!VP3e vIMOY- V/'-^Vfv %'H^HTei .lvl,AW tfe aoiviias XAT hmoovii -ei .oM THO'ISH- .OSGI HOHAM ad.t lo Sa-l>-T0i> aas^3q 9 t:b riJ'lwo^rsxi baaoJoaS acgB'i Y'^BJ-nc^ T5ia«Te j^iaw tb * r./ 30IVa38 XAT 3M03t11 JAS13a33 : ,., -c,i .OM THwaa- , ' . ^ -v ^ .QSei ■ HQHAM ■ - . -- ti 7^ Vo bdh b\t iSdP ;^*i£ Htxvve'iaii i>08OlDixS vvon ad:^ e^Bq 'lal noxbi:j.iibBd;/e -i.9'i ‘,9pi:^;*ie8 0ri:r -ub'.r b'acfij^- 'io*i j'^b^^aolone cbIA .':9i)ni(i ■xjjb’v; al .LsBivs-i tXII 9SiTa tg r3DIV$I3e XAT BMOOkll JARBOBB -i'i . OM TaO'IKH- . .jsei ,I HOHAiv i"' 9 "I c’ •*■--’ r a' H ■ I c: > 1 b08rx'?.-iS : --wollo'i A'-‘ .IGiGA Otrl. X -H : L . QQO J xriC'^' ^'9 a 1 - xa/i; . y V 1 ” ,'ies Bm ''A' e M ) S's :^ ' B'-* :i ;-u:6 i B.*:rsTi9lqgr;?-; p •♦• 'V^ yto ■ •■^■'crr'b i cj*:' ■' cl C9 R r ', ■ ' ’ ' i. : ,-■ lod r?eIIoG'' sciJ lo arcc' toa'' '■ .•tc-hidaxa ciiiC li^O^ axicr lie ; .aetBj; 0..^ baa /va'H,} ;TiI a.^B\ •^.,^.aBvtnei-naL:j K-IE •j-R-i'T ■jAJiaUa. All I UA lio a-TB ar;i-‘aX .ri^T 7:Ixaa^; '^a^I G.;:f r0.,3r; x's, cA -i^a rxaea RvbA ghg .aaaaa-:.. ‘r-a ni^fca'-^cX lo c: naGria Aril'iaqjc/A aciG -^ ■, ' ‘:,.3*.i'! aGsoc^iL.^ '<:I>L99 w "Aia;,' i:'9 . n'*'X:gaiA34" ^ ...Icia-rr. .a^aileu a’v /x J-'rB.i 'vM!:;" j [' ’ 'A; .* a i-v • •lO*!: ’y;X.G9G aa J.iiw ci.BJ g) •' ilJ. .iC^ ^:a..i .. ')■: j(. J. B ‘ ■ jIcx; G -.x. 9' ^ od;:' V-! . '.vjw. XBy. ■: i : 'al ijcjd.-‘:;i a i a i.rBlx.aix;L -xaB jXaaVl ai xoi cra^G.r. ; . '■- ■ivl ■■-■'.■■ ' bBl _d: c A'c'-iad ■ L''-ox ■ V V. . j : r X • • ;.' 'v ■•- . ■ ‘V' •\r . <;sp:i S[I|e Corporation Cruot Compant} SERVICE DEPARTMENT 3r WALL STRKET NEW YORK FEDERAL INCOME TAX SERVICE -REPORT MO. 13- FEBRUARY 20, 1920. Enclosed herewith are pages 457 to 464 of the Service, Page 457 now in your binder shoula be removed, i^so enclosed are Supplementary Puges 1-2, 81 to 83, 107-108, 109-110, and 111, all re- vised, for substitution, except Supplementary" Pages 82-83 on wnich new Form 1126 is repro- duced , ^ THE BULLETINS OF BUREAU RULINGS. We have received several letters stating that tne Bulletins referred to in our Report No. 12 were not enclosed, or had not been re- ceived. We fear that in these cases the print- ed "Special Report" was not carefully read. Tnese Bulletins are not yet off the Government presses. They are expected in a day or two. In any event copies will go forward to subscri- bers imimediately upon becoming available. These Bulletins are to be supplied by us, without add- itional charge, as a Supplement to the Service. Yours very truly, THE CORPORATION TRUST COMPANY, 1 t!/iB!v1THA'^3a 33!Vfi3e iiMO < wax TaaHT;^ 4*1 tb 3DIV?r3a XAT 3MODHI JA«3aa3 ... . •■> ..C:i THu' .osr:.: Y.diVJH,::s'ti ■••. ,.. :- . . \ ■: .. .. :' . ,■ 1 : 0 " -'ui rldiw 9 *ibn ijeGoisudi .vjila v: nl ./;on , 9^.1 G .98 a, id. ..:'i,.- Gx d-.dxv.,. _ ^ .LavoGi;^^ 0 u f - ‘ ggg-' B'“' d .. ‘ '• ' " 1 d 0 ■ G ^ a G £ d 9 a 1 v- :i a -G) g -LA -■ ■ ^;Ut3EX-. ■ ; -ffrc ,r - .r-'-'i-r-,;,' ,ro^L - 07 :; 3 ;i^^ gX ; 03 i:. j-.;.', G:;,; 3 :X- ■ ■•■ ■■’ .. rt 7 , ,. 71 *. ext;. : P :} : G aajjvb . ".■^ri.Gx.G- :.- 777 ' ; ,; X • • '. .7:;g -d J, 1 s. " . X ' '. ^7 ■ G;BGg : 0 7 iao-a'i ^ 0 ^ 3n.i:dsIJ;j2 r nd dBxi- one doxi 0 7 0^3 x. X . 0 . xid Gjd 0 I gW .'Jds-V 3 0 3 ” daoq 9 gI ■Lx' X u £aS" ! . • " ' ■■ G 5 G J d 0 G. , GdiGe;' G 0 ^ G 3 : gIg. GGd g 9 G>gc sasnd •-"'XeGG .., a.'GdG 'Gidx - . j. ■ " " ~ ' ' “ ■" ■ •' d .3 d 9 3 .:^ C G 9 'I j 3 . :Gil i d 0 I i G' G. 900 3 i 7 . GdJ- •,•0 .u r.. 0 .x-,,;;-.. 0 ''iB'J 40 -nT ^ 339 G 9 -::; "•■ 3 '’;^'" ■" d'-..x’3-G p'l 3 ^ ■ [■livG Gvdj:;3 GGlc '-S. -:.-r :\: i '. ■ ^ ax "-' ■'' ^-'dG G, via ,.fG d .;‘'G 3 :.v ; ,:;g Gx: - -■ ' '■ t • ■■ 7 ' " d ■ 4 ' i 7 0 V r .; :.. , a .j” " .g g 0 • i i 2 a n x d 3 J, i >. ri '7 -G-PtGP i .^.^.GO ^-...JXG' t 0 a' 14 i. 7 : xijHX'G; ‘G r , ' ■• Gi t .'. .j -' 3 '. ; 3 li a G ) .yiiA'lMOO Ta^HT F:"' : TAHO'iHOO aHT i ■73 xr Olorpnratinn 2Jtuat C|nmpang SERVICE DEPARTMENT 3T WALL, STREET NEW YORK federal income tax service -REPORT MO. 12- EEBRUARY 16, 1920. fono;'3?°“=' are pages m^bered as . 30^57 _ matter } S,w»/Pupplementary Pao-eq i -9 /-n, ^/Supplementary Page 79 to ^ for SrnS ^ °r "^tistitution pplementary Page 79 .) 1126 - CERTIFICATE OF INVEMTORY. ^ay re^Poi^eel fP ^-^11 go lorward promptly. Service, and bulletins of income tax rulings. Special att(=n + i',e letins ^0 the'official Go ^^^losec ^tins we are sending to subsSiSrS™”"”^ Yours very truly, the corporation trust company. 'r!.13iy;TH/\S^a 'iV:-;":? .^ -- -X.., -r -'-ocfU3 ' 'IGU j ^ * ' ,- a ' ! O '' V‘''.0 . x'-l^ ^.-isj-i-sai w9'A) - '^55' ^ ^'t£"ri9rn9lqqxj' 0? S^>301 ^GlBu -'- 9.liS Y£CC"Z5LV'£I ^0 EGA! . 3 ^;;~ 9 -r,-.s sr.i G- ■ ^ ” o^.-- :p-: aB'.v rxGC'T ,5GiV‘^9ci SGxo oq-'ry"^-^ Lk T ^ . •Siri-ISG 3 1 Q'C P'JJ - w — ^ ^ liw G gt::' 980 '■,jvij ori'-/ G n 0 -.g:g ;5 V o- 1 0 t GB 'CiS ‘ • ' '' O i ' .^ -r -'^'lO 5nG Go 5 V^V.B^CJ. ^ r^ - ' - .0 3‘- .lOloGlG . ;iir:53 9"- =''^ 3r.I'90 ■ -'-' G /'-G / , o r-* ;/_ 0 i.^v.-'o * '•• :o. — 4 i i % i "3rtf ?J^3 XAT 3M0C :'^5 jAHSaST > 8 i 1 -SI . OM TSOYSr^- • 5 i i .:.sei oI YY'.UHYS^ j * '1 i 5 i. i r:, j *I ani; :{Ixw9-si:: fce'^clc-^ri , ; a’jjc ixc i ( I 4. ! ! 03 C\3 OlDrpnrattnn 2[tu0t OJumpang SERVICE DEPARTMENT 3r WALL. STREET NEW YORK FEDERAL IMCOME TAX SERVICE -REPORT RO. 11- .,LfpA FEBRUARY 13, 1920 C 1 e t Enclosed herewitn are pages 453 to 456 shr ng new .attar beginning at paragraph 2508 . Al..,o enclosed, for substitution, is Sup- lemerioary Page 109 revised to date. FORMS 1125 AND 1126. Form 1125 - Schedule of Taxable Interest t''nme^^Xr°'^^^’ issued by the Gov- 'ior of’n?l -p February 14. A reproduc- orward with tne next report. ■ > ■ % Foi'm 1126 has not yet ceen issued. I Youi-s very truly, THE CORPORATION TRUST COMPANY. } !afnp5 nrifiBitiuinD ^ilIS TH 3 MTF!Aq; 3 a 3 D!Vfl 3 a iiHoy WMvi THar: {>< aviAV/ t>: 3D1Y5I3S XAT 3^001^1 JA513a33 -11 ,;'H THO^afl- .osei ,si Y>iAuaa;aa ■ woria as^Bq -n£ n.ti'vsTari l^aaoIonS | .803S xiqB'iBB'iBq Jb aniiuiisscf -is^J-b.. wsn -au8 si .noictwi’itadBa .i'esplons o-IA j .aifii) oi tiaaivsT 901 .dsii awA 3SII aMfloa JaeT^Jnl sldsxBT lo glfA^^nloS - 2SIi -?c8 9 fld vcl fceuaai iis's'l -i'ii .atno'i ’iJ-isaiJ .i -ouio'tq‘^'1 A .M vn.irM.^.q «: •, ,;0 ^ , J .smrrije o« riiw .siy.J'G 90CV-198 a: aJ.u lO -lOX^ ..i-ioqe'i ix.9 : riJiw b'lB'A’Ton .bajjaai neea /ex, ioi; sbX' 3SI1 ji’io'R i XT 9 V criJK'Y . YM^MOO T3UH.T WUlTAHOi/iUO 'AHT f t 4 CnrporattDtt JEruat Cnmiiang SERVICE DEPARTMENT 37 WAUL, STREET NEW YORK FEDERAL INCOME TAX SERVICE -REPORT NO. 10- PEBRUARY 11, 1920. liiclo^ed are pages as follows: 451 to 454 uppi erne nt ary i (Few matter beginning at Paragraph 2504. Remove Page 451 now in your binder.) 2 (Revised to date.- For substitution . ) S J S r kj 79 101-102 uppl ementai*,y upp lament ary upplernentar-y to the note at Page lOi . The lisned as soon sources . ) o 78 ( PO rTil Fo rm Ills 1040P. ) Q ) is called the top of Supplementary complete list will be pub- as available from official ( A itent ion FORMS 1125 and 1126 rave not yet been issued by the Governn.ent . Yours very truly, THE CORPORATION TRUST COMPANY. TM2MTf1Aq3a 3D1VR32 Afiar w:-!/: 't;- >- ' Corporation Croat Company SERVICE DEPARTMENT 3T WAUL. STREET NEW YORK FEDERAL INCOME TAX SERVICE -REPORT 9» FEBRUARY 7, 1920. EiiClosed Herewith are pages for the serx^ice, / as follows: 449*450 (Reprinted with new -.matter beginning . at paragraph 2501), wA/j. 451 (New matter), Applementary 25-*26 (For substitution. - Only change in Form 1096A: ^For month of 19 ” ) , V^vippiementary 109 (For substitution, ) Very truly yours, THE CORPORATION TRUST COMPANY. t- 3::?|Vv-3© KAT -lA¥l3a3^ 4 , 4 ®I|e Ofarporattntt 2[r«at Cnmpattg SERVICE DEPARTMENT 3T WALL STREET NEW YORK FEDERAL INCOME TAX SERVICE -REPORT HO. S - FEBRUARY b, 1920. . Enclosed herewith are pages for the Ser‘ ice, follows; . ; 447-448 (Reprinted with added paragraph 2498. ) , ■ /■, . 449-450 (New matters.). , ' , . FORitfS 1119, 1096A, il2P AND 1126. Forms 1119 and 1096A in revised Jorm haVe just Been issued by Qowernment a; e be-ing Reproduced for the Service, ana f ' ^ard with our next leport. f i 1126 tiave not yet been issued by the (govern ment . ' ■ ^ • t IMPORTANT NOTE oall- ThP ?qttention of our new subscribei^iS ^ - - “t f Tr-eaSrrAcisions (see t>eginnih£_at 2499 of the oew b‘oU face tpr IS shown in itctiics, uiit^ i,^rY\es i o brackets is unchanged^^language. owrl intelpolated - cross ,.ref- JrLces will Veadily be recognized as being m ordinary fine line brackets. Very truly yours, ■ THE CORPORATION TRUST COMPANY. I taEllO S/il)' E'SE'JV-m A^53a 'iD! ^'/"33 Vr*-;:*;', T^E'S rE/?- .T.l’AVtf TU ii;i.; :-•; ':; e v’ ve^v \ ■, • (& i , ,r.i ":*-■, i:Ev :T.'’i^"Z U:; 3 - "‘-v ■■; ■^r:-. fr";^ :.:o^::.:' -'tv.. ^'■-^;.■^^' ■:■ -EH..- £.', u _> .. , e:ev- ; . ^ ' .>^x' ..i^ ... , ■' ; ;■■ • .•'• E' ^'•' ■ v;I; j , .rE;'.!': ,'V E ..r .; • ^ ^::. :m; '.■■ - .. :.z 7— ^'--•l'- >'\-;...:.-c - ..v.' . ^■: ■^1.:^- :■:■■ •■ ^- .; •• ■■ t e.^: ■; „,... ' ^:S O '• 7 .¥■;;' ■ -v ; ■■'■ZV./lt .: : t ^ ^ *in ^ ■ ■'•i'-., :.. ^ V: ■; • ; , r ■ : ..-■ ri' ...V ■.■•3,:^ : :',v- '’ ', ■ ■■•■-'--■' ■■■'■? A- u-V'T j' E ■; ■ ■ , ■ , f^^.qw ■■ 77'>:' ■ - ■ . ;■ j Corpnrattan SFruat Cnmpang SERVICE DEPARTMENT 3T WALL STREET NEW YORK FEDERAL INCOME TAX SERVICE -REPORT NO, 7- JANUARY 30, 1920. Enclosed herewith are the following: Pink pag^ to face page 446. v Page 447-448 (for sub^-itution for page 447). Supplementary Pages 1-2 (revised for substi- tution) . / Supplementary Pages 67-74 (for substitution for Supplementary Page 67). Supplementary Page^OO (revised for substi- tution) . \/ and Index Pages 1 to 40 (for substitution for the blue sheet, referring to the Index, at the back of your binder ) . It will be noted that Form 1041, Revised (Returns by Fiduciaries) is reproduced on Sup- plementary Pages 69 to 74. FORMS 1125 AND 1126. Form 1125 (see Schedule A4, Note C, on page 4 of Form 1120 and Instructions K(b} on Form 1040) and Form 1126 (see Schedule A2 on page 4 of Form 1120) have not yet been issued by the Government . QUESTIONNAIRE, FORM 819. This questionnaire (see Question 14 on page 3 of Form 1120) is ready, and may be secured from Collectors, when required. Very truly yours, THE CORPORATION TRUST COMPANY. ‘V tanilS jinitciotjinlD *itIS TM 3 MTflAq 3 a 30 ivq 3 a ^ HjiOY' wav: Taaaxa vI.iava te 3D!V«3a XAT 3MODHI JA^Saai ‘J» -V ,011 THO^SH- ■ ■ __ .osei , 0 fi YHAUPIAX :3niwoIJ’o'i: 9di a/iB x'lj iv/s-ieri DsaoIonS ' . ,SAii 9gj3g 90£i, oJ . sgBq Jinx? .(V^f- saxjq- -ioY noxi-ncfi.lacf/ia nol} aga? 'iJscfxra nol 5s3xv9'i) S-I asga? cnfi^namsXqq.uS - ,(ncxjy^ noxJnJ-xJ'sc^w?, -iQl) ^V-Va 893 B? ri^^nsraalgqxjS .(^S 93B? ’n^jnenalqqxxS '’lo'i -x^-adna, rLo-O x)93xy9'i) 601 ' 33 . 3 ? y-iBdnsaelqqi/g - . -■ ■ , . (notJxxd bn£ '■? and no'i nox j/xo Xo adt^a nol) Oi- o3 [ aasa? xsMl ji':Bd arf.-f t? ,'.:3£inl sdd od /Joarfa sxxld .(neBnirf nt/ov; Yo LecxvsH ,Id'0I ffl'xo? d.arld badon ad Ilnv dl -gtrS fio baojxbo'iqan ax ( aainjsxox/bx'S Y.d amxidaH) ;■ ;■••;*•, ■ . bV od 60 aa^B? ^n^dnamalq A A . /\3Sif am a 2ii aMHO'5 ^1 . ' ' 93sq no ,:^A aIwi)9iio2 aaa) 5SII rn'io'5 no ;a)>I anoi to;ri j'ani i)njB OSII mno'i 'io ^ J:'' egsq no 3A elifLoiloS 593 ' 33X1 mno'5 X):i£ (OAOI oxivt Xd bsjjaai: nead A 3 \; ton 9vjsri (C3II mno'5 Ic . . , . tnammsvoO .948 MH0"h /iHTAPmaiTaSU.C • > d'gsq no tl noitasjip 993 ' sn XBfinoi taeup aixii' benjLToaa ad y.jGri^ ,YX)B9n 3X (OSII mno'? lo 8 . ben rr/psn ned^’x ,2noto9XIoO nonl esnjjcv: ■’cX/x'Tt .Y'lA4i.iOO T8U4T Y0T'Y\H09:H00 HHT Clntporatinn SfrwHt Olompattg SERVICE DEPARTMENT 3T WALJ^ STREET, NEW YORK FEDERAL INCOP^E TAX SERVICE -REPORT NO. 6- TANUART 24, 1920. Enclosed herewith are Pages OTO-SSO. for suE- stitution (forward ref^ence added at Paragraph 2^5), n^w Pages 44b to 447, Suppl^entary Pages 1^, 9-10 (revised Porm 1001), 17-^0 (new Form 1065 substituted Form 1065A) and revised Sup- plementary Page 109 for substitution. FORMS 1041A, 1065A AND 1120A. - There will be no such numbered forms hereafter, so we are told. Forms 1041, 1065, and 1120 will serve for the purposes of both calendar year and fiscal year- other than calendar. Incidentally, the word in regard to Form 1041 is that it is ’’about ready.” EXTENSIONS OF TIME FOR FILINO RETURNS. - It is entirely unlikely", unless there be now unforeseen level oprnents , *that there will be a general exten- tion of time, or that the general use of tenta- tive return form.s will- be authorized as was the case last year because of the peculiar conditions then existing. The statutory provisions for* Ex- tensions (by collector, paragraph 1847; by the Commissioner, paragraph 1848) are familiat' to subscribers . THE GENERAL INDEX. - 7/e believe that we shall be able to mail the index on Wednesday, January 28. Very truly yours, THE CORPORATION TRUST COMPANY. ; r n ; ’ H - ' If i V- ■ ■m IT-' f:, 4 f T!^3MTT, :■ -^r^C 3DiVv<4'l HHOT Tfe ■•Aq: 3 ' 33 r 3 i ■-t . - ' t. r. -ir a- :-;v ;;c -s '- V . r. t M .V ■;^ V . V .’ r, r -^r"; ' '4 ■ OT . -i-r^ . : .::i... ':: 4 : i ■•. - M. ':- •-. 4 '^ ''!.!> l/.. Corporation Olompang SERVICE DEPARTMENT ST WAI4L STREET, NEW YORK FEDERAL INCOME TAX SERVICE -REPORT NO. 5- JANUARY 20, 1920. Enclosed herewith are pages substitution for the similarly now in your binder, to correct of Paragraph 1200. / 199-200, for numbered pages the fourth line Also enclosed are Supplementary Pages 1-2 for substitution and Supplementary Pages 49 to 67 for insertion. ✓ Form 1065-Annual Return by Partnership oh Personal Service Corporation will, we under- stand, be released by the Q-overnment January 26, 1920. As in the cases of Forms 1040A, 104C , and 1120 a full size copy of Form 1065 will be mailed to each Subscribe!- to reach him on release date if possible, tut in no event before such date. Stock Dividends. The U. S. Supreme Court did not hand down its decision in the case of Macomber v. Eisner on January 19. The next decision day will be Monday, January 26. Very truly yours, THE CORPORATION TRUST COMPANY. Corpjtraltnn S’ntat Olnmpang SERVICE DEPARTMENT 3T WALL STREET NEW YORK FEDERAL INCOME TAX SERVICE -REPORT i\lO. 4 - 1920 SEPVICE- JANUARY 14, 1920. Enclosed herewith are Pages 443-444 {new matter at paragraph 2479 l , and Supplementary Pages 47-48 and 109. Similarly numbered pages now in your binder should be removed. Also enclosed is a blank page tc be used at your discretion for purposes of memoranda. Similar sheets will be sent from time to time. Forms;- 1040A, 1040, 1120 and 1120S are sched- uled for release by the Government January 19. 1120S is a new form for Government Con- tracts Profits Tax Return (Paragraph 517. 1919 War Tax Service). Form 1098, Revised January 1920, has beer, released and is reproduc-d on Supple- mentary Pago 48, herewith. Very truly yours, THE CORPORATION TRUST COMPANY. T1^3MT?1 A-- 3GI; aai'WTHS. .>/fX/L 'r;tfyi>iT^:rU.r..-vK .-t^ SDiVSIia XAT 3MODKI JAS3a3^ .-I YRAUliA^: ''■■: '■ z'rrr-*- ^ :;■ ay’ £ ■ y'? y lir [ .7e*i9;f . ;■; ^ -rnyIqq -/5 . f-O’-::. a'teiimia ,901 ad ibia'C'^r*' '\aj;-nic "iul' A " y'A\ 'L ■•AR-IH: i I ! i I I ©lyf Olorimratiott JJntHt Com^iang SERVICE DEPARTMENT 8T WAIJL, street NEW YORK rSDERAL INCOME TAX SERVICE -REPORT HO. 3 1920 SERVICE- JAHUARY 13, 1920. Enclosed are Pages 435 to 444 and Sup- plementary Page 109, for the 1920 Income Tax - Servipe . Page 435 and Supplementary Page 109 now in your binder should be removed. Very truly yours, THE CORPORATION TRUST COMPANT. 13IV^33 XAT HMOOMi JAf^aaS^ " ''1£S -soivHaa 02ei - e .O’j tho^sh- .0291 ,51 mUHAI -508 &n.s 0^ SSli gage'J s'ls issoIonS xbT Sfnoonl 0291 ssit toO ,90X sgs'I ^Tscfnsrnalq .aolvTsS won 901 osb 9 'n^^namoXgqaS Jbna 35^ .X!9voai9T 9 d bLuods lebnld twotj ni , anno-ij tX«id '^ndV .'niA (f 1920 INCOME TAX SERVICE January 1, 1920. This ])inder ('ontains the following: Yellow Pag'e (How to use the Service.) Pa^es 1-2 (Title Page and Table of Contents.) Pages 3-4 (Calendar and Foreword.) The Law (Guide Card) Pages 5 to 54 The Compilation (Guide Card) Pages 55 to 432 Reg. 45, Rev.— T. D. Finder (Guide Card) Finder Pages 1 to 1 1 1920 New Matters (Guide Card) Page 433 Supplementary Matters (Guide Card) Supplementary Pages 1 to 47* Supplementary Pages 107-108t Supplementary Page 109 Blue Index Page 1 *Supplementary Pages 48 to 100 reserved for revised and new forms. fSupplementary Pages 101 to 106 reserved for revised list of Internal Revenne Districts and Collectors. Your next report will be Report No. 1. Yours v(M-y truly, ..L 'i ■ i V,.^ f X.K- •>r; , f V'fftfr'-'li: : «?f;!V':^]ju'S 'k{I .-:!iih ii?t>') •it’):^f!iii.fr?'- I, o(ij 7/{ul- vY ■ C ruin’ );S:- 1 -roa.f!’^! ( }:xr{^r/lcy:^ luu* )') •j, (f>7;r; 7r;h7r)'^ I e'i^^ ir. Ot C '■ (F)t,-::“ ) o1>iiiO,i xr'oictfeiigmoO sriT oi Ar. > ' ) ^hirn) 7 bF?c^M If Oi 1 '•■'••ni/f -f-h )!£'•} ' 'if)ini)) ais.t;$4sM "w^VI 0P(H il-l ouu'l • • . Yi^s-tiismalqquir . ■ ■ "'T^ oi i --yiipiri '^fHU!''fif‘iJ(iqiJ^ ■!'..v)l--T0i yininoui-n oiinH 7 ;uirn‘uiniqqir-^, . . i /o! :il '^;ua .'Uirfol 7 UKI iyy o/ui io> 'l» 07 'f')w 001 ol^i- •'■{i 'io -JO’ u/>7l >:^oi f)OI oj I Of >07^0 •rinOf'UfT'Jiuq.u^l .PUOt 7 ^|[o\) ^xTr ■■ hiil>i(| y .1 .ol^ n J -‘iw s^i}ij nio'^ HOW TO USE THE INCOME TAX SERVICE. THE LAW is printed as a unit beginning on page 5, and each para- graph of the law is repeated in its proper place in the compilation. If when reading the law as a unit it is desired to know what the Bureau of Internal Revenue has said relative to a particular para- graph, turn to the paragraph in the compilation indicated at the right of the law paragraph you are reading. For instance, if you are reading Law ^383 on page 42, and wish to study the regulations on that provision of the law, turn to ^2073, in the body of the book. Conversely if you are reading Law 1[383, at 1[2073 in the body of the book, and desire to study the immediately preceding or succeed- ing law provisions turn back to Law ^383 where it is printed in the law as a unit. If when reading regulations, it is desired to see the law provision on the subject, glance back to the immediately pre- ceding Law Each Law U is doubly indented, is designated “Law T[ ,” and is always in quotations. Thus if reading Art. 1013 of Reg. 45, Rev., at Tf2074, the law provision at ^[2073 is quickly found. THE REGULATIONS are exact reprints of official promulgations. For instance, at ^2074 again: this is Art. 1013 of Reg. 45, Rev., as issued by the Government and not our rehash merely, of that Article, with a citation to it as the source of our wisdom. CROSS REFERENCES WITHIN PARAGRAPHS. For example, at ^2074, the Government says “See section 1320.” We add, [for United States bonds in lieu of securities, ^1500]. Thus you know to what the Government refers when it suggests “see section 1320,” and, if you are interested, you know exactly where to go for the information, i. e., to ^[1500. REGULATIONS 45 REVISED. You will find all the Articles tab- ulated in numerical order in the Finder section, immediately follow- ing page 432. THE FINDER. This is a finder of old matter, that is, of all mat- ters in the compilation. For instance if you are seeking a particular Article of Regulations 45 by number, or a particular T. D. by num- ber, or a letter by date, (something with which you are familiar from use last year), you will find it at once in the finder if it is in this book. All of Regulations 45, as Revised, is in the book. THE FORMS will be found on the Supplementary Pages at the back of the book, listed on Supplementary Page 1. CASES. All court opinions reproduced in the Service are listed in the Table of Cases on Supplementary Page 107. This list is always up to date so far as the Service is concerned. THE RUNNING TABLE OF CONTENTS should be borne in mind. This shows matters issued since December 22, 1919, that is, since the compilation went to press, and is always up to date. It begins on Supplementary Page 109, at the end of the book, immediately in front of the blue index pages. [Over.] THE INDEX on the blue sheets at the end of the book cannot be kept up-to-date. It can be and will be revised from time to time. The running table of contents shows matters unindexed temporarily. The pink page calls your attention to the running table of contents. THE BACK REFERENCES. The small numbers under the bold face paragraph numbers on the new current- 1920-matters pages refer back to paragraphs treating of the sarne subject as the new regula- tion, or a related subject. Now assume that today a regulation is issued on the subject of the ‘‘declaration of termination of taxable period.” We print this as paragraph 5000, let us say. We show in small type under that paragraph number, the number 2074. You will find that 1f2074 treats of, the same subject. Paragraph 2074 is indexed. When, a month from now, you are reading 1[2074, which you have turned to by means of the index or by means of the law paragraph, if your clerk has written “^[5000” in the margin opposite ^2074, with a catch word or two if desired, you will be told by this marginal entry that for later official information on the same subject you should consult ^5000. Or, glancing down the entries in the running table of contents you will quickly find whether or not there has been a recent ruling, postdating the index, on a subject of in- terest to you at the moment, and having found it, say at 1|5000, you are there referred back to the earlier discussion at ^[2074. MATTERS IN BRACKETS [ ] are ours, but are to be read as a part of the text. Otherwise everything is official as cited. CITATIONS. Except in the case of Law paragraphs and the Supreme Court Cases the citation to its source is at the end of the re- print of thebfficial regulation. Treasury Decision, letter, etc. Usually there is a break (a blank line) following each cited unit, which in the majority of cases consists of but one paragraph but may be several paragraphs in length. SUGGESTIONS are always welcome. Olurpnrattun Ermt Olumpan^. December 29, 1919. It is suggested that this sheet be preserved, — perhaps at the back of the binder. Olorporattott ®r«Bt 1913-1920 INCOME TAX SERVICE IN THREE PARTS PART 1.-1913-1919. The Income Tax Law of The Revenue Act of 1918 {Public — No. 254 — 65th Congress.) Approved February 24, 1919 Compiled with Official interpreting and Administrative Regulations. PART II.— 1920. Regulations Issued Since December 22, 1919. PART m. Supplementary Matters Including a Table of Forms and A General Index. COPYRIGHT 1920 37 Wall Street, New York AffiUated with ©Iff Qlnrptiralton ©rwat Company ^gatm 15 Exchange Place, Jerse City Organized 1892 Boston, 53 State Street (Corporation Registration Company) Chicago, 112 W. Adams Street Los Angeles, Title Insurance Bldg. (The Corporation Company) Pittsburgh, 1201 OUver Bldg. In Albany: Washington, D. C., 501 Colorado Bldg. Philadelphia, 1428 Land Title Bldg. Portland, Me., 281 St. John Street St. Louis Federal Reserve Bank Bldg. Wilmington, 4108 duPont Bldg. (Corporation Trust Co. of America) Frederic J. Knorr, Agent TABLE OF CONTENTS. PART 1. The Income Tax Law, as a unit Page 5 THE COMPILATION.— 1913-1919. Income tax liability. .1[470 Normal tax and surtax on indi- viduals . . 1f476 Individuals liable to tax . . Tf5 1 1 Resident and non - resident aliens . .1[512 Citizens and residents of Porto Rico and Philippine Islands ..1[531^ Partnerships and personal ser- vice corporations . . 1[546 Fiscal years embracing parts of calendar years. .11613 Estates and trusts . . 1[636 Tax on corporations. .1f713 Net income. .1[769 Gross income . .1[802 Dividends . .1[811 Tax on insurance companies.. 1f983 Tax on foreign corporations . . 1F1007 Basis for determining gain or loss . .111055 Inventories. .If 1090 Net losses. .If 1097 Exempt income. .If 1109 Deductions — Expenses. .If 1180, 1198 Items not deductible. .If 1184 Deductions — Interest. .If 1232 Deductions — ^Taxes. .If 1245 Credit for taxes. .If 1283 Deductions — Losses . . If 1303 Deductions — Bad debts. .1fl316 Deductions — Dividends . . If 1325 Deductions — Depreciation . . 1fl328 Deductions — Amortization . . 1fl376 Deductions — Depletion. .If 1397 Deductions' — Contributions. . If 1447 Deductions — Inventory losses . . ^ If 1467 United States Bonds as security :.1fl500^ . Credits to individuals .. If 15 13 Credits to corporations . . If 1527 Tax on non-resident aliens.. 1fl535 Withholding at the source . . If 1585 ^ Returns of information at source ..1fl728 Foreign items. .If 1749 Returns. .If 1766 Consolidated returns .. If 1821 Extensions of time. .If 1847 Returns when accounting period changed. .If 1855 Penalties — Returns 1864: Tax payments. .1f2014 Inspection of returns . . If 1955 Payment of tax. .1f2000 Abatement and refund claims.. . 1f2115 Suits for recovery of taxes . . 1f2177 Committee of Review and Ap- peal.. 1f2211 Supreme Court Decisions . . If 2240 PART n.— 1920. Regulations, etc., officially issued since December 22, 1919 1f2420 PART m.— MISCELLANY. See Supplementary Pages at the back of the book. INC. 2 TAX Qlorporation ®ruHt (Sompang’si 1913-1920 INCOME TAX SERVICE PART I. 1913-1919 The Income Tax Law of The Revenue Act of 1918 Compiled with Official Interpreting and Administrative Regulations. CALENDAR Annual returns by taxpayers: On or before the 15th day of the 3rd month after the close of the taxpayer’s taxable year. Calendar year basis — on or before March 15. Tax: One (first) quarter, on or before time for filing return; second quarter, on or before the 15th day of the 3rd month after the due date of the re- turn; third quarter, on or before the 15th day of the 6th month after the due date of the return; fourth quarter, on or before the 15th day of the 9th month after the due date of the return. Calendar year basis: 1st quarter, on or before March 15. 2d quarter, on or before June 15. 3d quarter, on or before Sept. 15. 4th quarter, on or before Dec. 15. All of the tax may be paid on or before the due date for filing the return, that is, if on a calendar year basis, on or before March 15 (no discount). Annual rc'turns of information at the source: On or before March 15. Monthly returns of information at the source: On or before the 20th day of the month following that for which the return is made. Monthly re- turns of information at the source are required in the case of (1) pay- ments of interest on bonds and other corporate obligations and (2) the collection of foreign items, only. Tax: No tax to be paid. Annual returns of amounts withheld at the source: On or before March 1. Tax: Amounts withheld to be paid to Government on or before June 15. Monthly returns of amounts withheld at the source: On or before the 20th day of the month following that for which the return is made. Monthly returns of amounts withheld at the source are required in the case of withholding on interest on bonds and other corporate obligations, only. Tax: No tax to be paid. Amounts withheld are paid to the Government annually: i. e., on or before June 15. Special. Returns of information by brokers as such: When called for. Returns of dividend payments: When called for. Returns in connection with Government contracts: When called for. INC. 3 TAX COMMENT In the copy of the law printed herein, the official wording, punc- tuation and capitalization have been carefully followed. However, it has been considered advisable to introduce a scheme of spacing and indentation, numbering the arbitrary paragraphs consecutively, which it is hoped will make the various provisions more accessible. When the lav/ paragraphs are repeated in their proper places among the regulations, they are given, in addition to the Law-paragraph num- bers which they bear, bold face general paragraph numbers to fit them in properly with the paragraphs of the regulations which precede and follow them. This will be found to be an advantage in utilizing the cross references and the general index. The date and designation of each ruling or regulation appearing in the compilation are given. Some of the old regulations have been edited by cutting out matters that applied solely to repealed provi- sions of prior Acts (shown by asterisks ***), or by inserting in brackets [ ] words or figures to be read in making the particular sentence applicable to the new law. These regulations, decisions, special letters, etc., explaining, enlarg- ing or giving specific directions for the enforcement of the provisions of the law in a particular paragraph or group of paragraphs’ of the law, are printed immediately following such law paragraph or group of paragraphs. Any regulation, part of a regulation, letter or other matter contained in our 1914, 1915, 1916, 1917, 1918 - and 1919 Services not found^ in this compilation, either has no application to the present provisions or was repealed, amended, superseded, or otherwise annulled, or was repeated in a subsequent regulation which has been used as being the latest ruling. INC. 4 The law ( c ( ( ( ( THE FEDERAL INCOME TAX LAW, BEING TITLE II of the REVENUE ACT OF 1918 To Which Have Been Added Title I — General Definitions and Parts of Title XIII — General Administrative Provisions and Title XIV — General Provisions of the Revenue Act of 1918 The arbitrary paragraphs are numbered consecutively on the left. Each paragraph will be found repeated, followed by the provisions of the regulations, if any, relating to it, in the body of the book, beginning on page 55 at the running paragraph the number of which has been placed on the right opposite that particular paragraph in the reprint below. The headings are a part of the Act as passed, except when shown in brackets. (See Law and Regulations, Page 55.) Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled. Law Paragraph 11 12 13 14 15 16 17 18 19 TITLE I.— GENERAL DEFINITIONS. Section 1. That when used in this Act — Repeated 'at iri The term “person” includes partnerships and corporations, as well 472 as individuals; The term “corporation” includes associations, joint-stock com- 728 panics, and insurance companies; The term “domestic” when applied to a corporation or partner- 1532 ship means created or organized in the United States; The term “foreign” when applied to a corporation or partnership 1008 means created or organized outside the United States; The term “United States” when used in a geographical sense in- 1009 eludes only the States, the Territories of Alaska and Hawaii, and the District of Columbia; The term “Secretary” means the Secretary of the Treasury; 503 The term “Commissioner” means the Commissioner of Internal 504 Revenue; The term “collector” means collector of internal revenue; 5 505 THE INCOME TAX LAW. Law Repeated Paragraph at If ^10 The term “Revenue Act of 1916” means the Act entitled “An 773 Act to increase the revenue, and for other purposes,” approved September 8, 1916; mi The term “Revenue Act of 1917” means the Act entitled “An Act 775 to provide revenue to defray war expenses, and for other purposes,” approved October 3, 1917; 1[12 The term “taxpayer” includes any person, trust or estate subject 470 to a tax imposed by this Act; 1[13 The term “Government contract” means (a) a contract made with 578 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 con- tractor 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 “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 paragraph, includes all such contracts which, although entered into during such period, were originally not enforceable, but which have been or may become enforce- able by reason of subsequent validation in pursuance of law; tl4 The term “military or naval forces of the United States” includes 1173 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 term; 1fl5 The term “present war” means the war in which the United States 1174 is now engaged against the German Government. ^16 For the purposes of this Act the date of the termination of the 1175 present war shall be fixed by proclamation of the President. TITLE II.— INCOME TAX. Part I. — General Provisions. Definitions. 1117 Sec. 200. That when used in this title — 794 If 18 The term “taxable year” means the calendar year, or the fiscal 795 year ending during such calendar year, upon the basis of which the net income is computed under section 212 or section 232. If 19 The term “fiscal year” means an accounting period of twelve 797 months ending on the last day of any month other than December. 1f20 The first taxable year, to be called the taxable year 1918, shall be 798 the calendar year 1918 or any fiscal year ending during the calendar year 1918; 6 THE INCOME TAX LAW. Repeated Paragraph If 1[21 The term ‘‘fiduciary” means a guardian, trustee, executor, ad- 670 ministrator, receiver, conservator, or any person acting in any fiduciary capacity for any person, trust or estate; ^22 The term “withholding agent” means any person required to 1622 deduct and withhold any tax under the provisions of section 221 or section 237; ^23 The term “personal service corporation” means a corporation 573 whose income is to be ascribed primarily to the activities of the principal owners or stockholders who are themselves regularly engaged in the active conduct of the affairs of the corporation and in which capital (whether invested or borrowed) is not a material income- producing factor; If 24 but does not include any foreign corporation, 574 ^25 nor any corporation 50 per centum or more of whose gross income con- 575 sists either T[26 (1) of gains, profits or income derived from trading as a principal, 576 or Tf27 (2) of gains, profits, commissions, or other income, derived from 577 a Government contract or contracts made between April 6, 1917, and November 11, 1918, both dates inclusive; ^28 The term “paid,” for the purposes of the deductions and credits 781 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. Dividends. 1[29 Sec. 201. (a) That the term “dividend” when used in this title 811 (except in paragraph (10) of subdivision (a) of section 234) means 1f30 (1) any distribution made by a corporation, other than a personal 812 service corporation, to its shareholders or members, whether in cash or in other property or in stock of the corporation, out of its earnings or profits accumulated since February 28, 1913, or T[31 (2) any such distribution made by a personal service corporation out 813 of its earnings or profits accumulated since February 28, 1913, and prior to January 1, 1918. If32 (b) Any distribution shall be deemed to have been made from 818 earnings or profits unless all earnings and profits have first been distributed. If33 Any distribution made in the year 1918 or any year thereafter shall 819 be deemed to have been made from earnings or profits accumulated since February 28, 1913, or. 7 THE INCOME TAX LAW. Law Repeated Paragraph ^ “ ^34 in the case of a personal service corporation, from the most 820 recently accumulated earnings or profits; 1[35 but any earnings or profits accumulated prior to March 1, 1913, may 826 be distributed in stock dividends or otherwise, exempt from the tax, after the earnings and profits accumulated since February 28, 1913, have been distributed. 1[36 (c) A dividend paid in stock of the corporation shall be consid- 848 ered income to the amount of the earnings or profits distributed. 1(37 Amounts distributed in the liquidation of a corporation shall be 866 treated as payments in exchange for stock or shares, and any gain or profit realized thereby shall be taxed to the distributee as other gains or profits. 1f38 (d) If any stock dividend (1) is received by a taxpayer between 856 January 1 and November 1, 1918, both dates inclusive, or ^39 (2) is during such period bona fide authorized^ or declared, and 857 entered on the books of the corporation, and is received by a taxpayer after November 1, 1918, and before the expiration of thirty days after passage of this Act, 1f40 then such dividend shall, in the manner provided in section 206, be 858 taxed to the recipient at the rates prescribed by law for the years in which the corporation accumulated the earnings or- profits from which such dividend was paid, but the dividend shall- be deemed to have been paid from the most recently accumulated earnings , or profits. 1f41 (e) Any distribution made during the first sixtyv days of- any tax- 821 able year shall be deemed to have been made from earnings or profits accumulated during preceding taxable years; 1[42 but any distribution made during the remainder of the taxable year 822 shall be deemed to have been made from earnings or profits accumu- lated between the close of the preceding taxable year and the date of distribution, to the extent of such earnings or profits, and if the books of the corporation do not show the amount of such earnings or profits, the earnings or profits for the accounting period within which the distribution was made shall be deemed to have been accumulated ratably during such period. Basis for Determining Gain or Loss. K43 Sec. 202. (a) That for the purpose of ascertaining the gain 1055 derived or loss sustained from the sale or other disposition of prop- erty, real, personal, or mixed, the basis shall be — 1[44 (1) In the case of property acquired before March 1, 1913, the 1056 fair market price or value of such property as of that date; and ^45 (2) In the case of property acquired on or after that date, the 1057 cost thereof; or the inventory value, if the inventory is made in accordance with section 203. 8 THE INCOME TAX LAW. T Repeated . at If Paragraph “ 1(46 (b) When property is exchanged for other property, the property 1076 received in exchange shaU for the purpose of determining gain or loss be treated as the equivalent of cash to the amount of its fair market value, if any; 1[47 but when in connection with the reorganization, merger, or consolida- 1082 tion of a corporation a person receives in place of stock or securities j _ 4 owned by him new stock or securities of no greater aggregate par or face value, ^48 no gain or loss shall be deemed to occur from the exchange, and the 1083 new stock or securities received shall be treated as taking the place of the stock, securities, or property exchanged. When in the case of any such reorganization, merger or consolida- 1084 tion the aggregate par or face value of the new stock or securities received is in excess of the aggregate par or face value of the stock or securities exchanged, a like am.ount in par or face value of the new stock or securities received shall be treated as taking the place of the stock or securities exchanged, and the amount of the excess in par or face value shall be treated as a gain to the extent that the fair niarket value of the new stock or securities is greater than the cost (or if ac- quired prior to March 1, 1913, the fair market value as of that date) of the stock or securities exchanged. Inventories. If 50 Sec. 203. That w'henever in the opinion of the Commissioner 1090 the use of inventories is necessary in order clearly to determine the income of any taxpayer, inventories shall be taken by such taxpayer upon such basis as the Commissioner, with the approval of the Secretary, may prescribe as conforming as nearly as may be to the best accounting practice in the trade or business and as most clearly reflecting the income. Net Losses. ^51 Sec. 204. (a) That as used in this section the term “net loss” 1097 refers only to net losses resulting from either 1[52 (1) the operation of any business regularly carried on by the 1098 taxpayer, or ^53 (2) the bona fide sale by the taxpayer of plant, buildings, 1099 machinery, equipment or other facilities, constructed, in- stalled or acquired by the taxpayer on or after April 6, 1917, for the production of articles contributing to the prosecution of the present war; ^54 and when so resulting means the excess of the deductions allowed 1100 by law (excluding in the case of corporations amounts allowed as a deduction under paragraph (6) of subdivision (a) of section 234) over the sum of the gross income plus any interest received free from taxation both under this title and under Title III. 9 THE INCOME TAX LAW. Law Paragraph Repeated at If 1f55 (b) If for any taxable year beginning after October 31, 1918, and 1101 ending prior to January Ij 1920, it appears upon the production of evi- dence satisfactory to the Commissioner that any taxpayer has sustained a net loss, the amount of such net loss shall under regulations prescribed by the Commissioner with the approval of the Secretary be deducted from the net income of the taxpayer for the preceding taxable year; T[56 and the taxes imposed by this title and by Title III for such pre- 1102 ceding taxable year shall be redetermined accordingly. 1[57 Any amount found to be due to the taxpayer upon the basis of such 1103 redetermination shall be credited or refunded to the taxpayer in accordance with the provisions of section 252. ^58 If such net loss is in excess of the net income for such preceding tax- HOI able year, the amount of such excess shall under regulations pre- scribed by the Commissioner with the approval of the Secretary be allowed as a deduction in computing the net income for the suc- ceeding taxable year. ^59 (c) The benefit of this section shall be allowed to the members 1105 of a partnership and the beneficiaries of an estate or trust under regu- lations prescribed by the Commissioner with the approval of the Secretary. Fiscal Year with Different Rates. ^60 Sec. 205. (a) That if a taxpayer makes return for a fiscal year 613 beginning in 1917 and ending in 1918, his tax under this title for the first taxable year shall be the sum of: 1f61 (1) the same proportion of a tax for the entire period computed 614 under Title I of the Revenue Act of 1916 as amended by the Revenue Act of 1917 and under Title I of the Revenue Act of 1917, which the portion of such period falling within the calen- dar year 1917 is of the entire period, and Tf62 (2) the same proportion of a tax for the entire period com- 615 puted under this title at the rates for the calendar year 1918 which the portion of such period falling within the calendar year 1918 is of the entire period: Tf63 Provided, That in the case of a personal service corporation the amount 616 to be paid shall be only that specified in clause (1). Tf64 Any amount heretofore or hereafter paid on account of the tax 617 imposed for such fiscal year by Title I of the Revenue Act of 1916 as amended by the Revenue Act of 1917, and by Title I of the Revenue Act of 1917, shall be credited towards the payment of the tax imposed for such fiscal year by this act, and if the amount so paid exceeds the amount of such tax imposed by this act, or, in the case of a personal service corporation, the amount specified in clause (1), the excess shall be credited or refunded in accordance with the provisions of section 252. 10 THE INCOME TAX LAW. ' Law Repeated Paragraph at ^ ^65 (b) If a taxpayer makes a return for a fiscal year beginning in 1918 618 and ending in 1919, the tax under this title for such fiscal year shall be the sum of: 1f66 (1) the same proportion of a tax for the entire period com- 619 puted under this title at the rates specified for the calendar year 1918 which the portion of such period falling within the calendar year 1918 is of the entire period, and ^67 (2) the same proportion of a tax for the entire period com- 620 puted under this title at the rates specified for the calendar year 1919 which the portion of such period falling within the calendar year 1919 is of the entire period. 1f68 (c) If a fiscal year of a partnership begins in 1917 and ends in 1918 605 or begins in 1918 and ends in 1919, then notwithstanding the pro- visions of subdivision (b) of section 218, 1f69 (1) the rates for the calendar year during which such fiscal 606 year begins shall apply to an amount of each partner’s share of such partnership net income (determined under the law applicable to such year) equal to the proportion which the part of such fiscal year falling within such calendar year bears to the full fiscal year, and 1f70 (2) the rates for the calendar year during which such fiscal 607 year ends shall apply to an amount of each partner’s share of such partnership net income (determined under the law applicable to such calendar year) equal to the proportion which the part of such fiscal year falling within such calendar year bears to the full fiscal year: 1[71 Provided, That in the case of a personal service corporation with 608 respect to a fiscal year beginning in 1917 and ending in 1918, the amount specified in clause (1) shall not be subject to normal tax. Parts of Income Subject to Rates for Different Years. ^72 Sec. 206. That whenever parts of a taxpayer’s income are 628 subject to rates for different calendar years, the part subject to the rates for the most recent calendar year shall be placed in the lower brackets of the rate schedule provided in this title, the part subject to the rates for the next preceding calendar year shall be placed in the next higher brackets of the rate schedule applicable to that year, and so on until the entire net income has been accounted for. 1(73 In determining the income, any deductions, exemptions or credits 629 of a kind not plainly and properly chargeable against the income taxable at rates for a preceding year shall first be applied against the income subject to rates for the most recent calendar year; 1(74 but any balance thereof shall be applied against the income subject 630 to the rates of the next preceding year or years until fully allowed. 11 Law Paragraph THE INCOME TAX LAW. Repeated at ^ Part II. — Individuals. Normal Tax. ^75 Sec. 210. That, in lieu of the taxes imposed by subdivision (a) 476 of section 1 of the Revenue Act of 1916 and by section 1 of the Revenue 1536 Act of 1917, there shall be levied, collected, and paid for each taxable year upon the net income of every individual a normal tax at the following rates: 1[76 (a) For the calendar year 1918, 12 per centum of the amount 477 of the net income in excess of the credits provided in section 216: 1537 ^77 Provided, That in the case of a citizen or resident of the United 478 States the rate upon the first $4,000 of such excess amount shall be 6 per centum; 1178 (b) For each calendar year thereafter, 8 per centum of the 479 amount of the net income in excess of the credits provided in section 1538 216: 1[79 Provided, That in the case of a citizen or resident of the United 480 States the rate upon the first $4,000 of such excess amount shall be 4 per centum. Surtax. K80 Sec. 211. (a) That, in lieu of the taxes imposed by sub- 482 division (b) of section 1 of the Revenue Act of 1916 and by section 1539 2 of the Revenue Act of 1917, but in addition to the normal tax imposed by section 210 of this Act, there shall be levied, collected, and paid for each taxable year upon the net income of every in- dividual, a surtax equal to the sum of the following: 1[81 1 per centum of the amount by which the net income exceeds 485 $5,000 and does not exceed $6,000; 2 per centum of the amount by which the net income exceeds $6,000 and does not exceed $8,000; 3 per centum of the amount by which the net income exceeds $8,000 and does not exceed $10,000; 4 per centum of the amount by which the net income exceeds $10,000 and does not exceed $12,000; 5 per centum of the amount by which the net income exceeds $12,000 and does not exceed $14,000; 6 per centum of the amount by which the net income exceeds $14,000 and does not exceed $16,000; 7 per centum of the amount by which the net income exceeds $16,000 and does not exceed $18,000; 8 per centum of the amount by which the net income exceeds $18,000 and does not exceed $20,000; 9 per centum of the amount by which the net income exceeds $20,000 and does not exceed $22,000;^ 10 per centum of the amount by which the net income ex- ceeds $22,000 and does not exceed $24,000; 11 per centum of the amount by which the net income ex- ceeds $24,000 and does not exceed $26,000; 12 THE INCOME TAX LAW. Law Paragraph (USD 12 per centum of the amount by which the ceeds $26,000 and does not exceed $28,000; 13 per centum of the amount by which the ceeds $28,000 and does not exceed $30,000; 14 per centum of the amount by which the ceeds $30,000 and does not exceed $32,000; 15 per centum of the amount by which the ceeds $32,000 and does not exceed $34,000; 16 per centum of the amount by which the ceeds $34,000 and does not exceed $36,000; 17 per centum of the amount by which the ceeds $36,000 and does not exceed $38,000; 18 per centum of the amount by which the ceeds $38,000 and does not exceed $40,000; 19 per centum of the amount by which the ceeds $40,000 and does not exceed $42,000; 20 per centum of the amount by which the ceeds $42,000 and does not exceed $44,000; 21 per centum of the amount by which the ceeds $44,000 and does not exceed $46,000; . 22 per centum of the amount by which the ceeds $46,000 and does not exceed $48,000; 23 per centum of the amount by which the ceeds $48,000 and does not exceed $50,000; 24 per centum of the amount by which the ceeds $50,000 and does not exceed $52,000; 25 per centum of the am.ount by which the ceeds $52,000 and does not exceed $54,000; 26 per centum of the amount by which the ceeds $54,000 and does not exceed $56,000; 27 per centum of the amount by which the ceeds $56,000 and does not exceed $58,000; 28 per centum of the amount by which the ceeds $58,000 and does not exceed $60,000; 29 per centum of the amount by which the ceeds $60,000 and does not exceed $62,000; 30 per centum of the amount by which the ceeds $62,000 and does not exceed $64,000; 31 per centum of the amount by which the ceeds $64,000 and does not exceed $66,000; 32 per centum of the amount by which the ceeds $66,000 and does not exceed $68,000; 33 per centum of the amount by which the ceeds $68,000 and does not exceed $70,000; 34 per centum of the amount by which the ceeds $70,000 and does not exceed $72,000; 35 per centum of the amount by which the ceeds $72,000 and does not exceed $74,000; 36 per centum of the amount by which the ceeds $74,000 and does not exceed $76,000; 37 per centum of the amount by which the ceeds $76,000 and does not exceed $78,000; 38 per centum of the amount by which the ceeds $78,000 and does not exceed $80,000; net income ex- Repeated at H (485) net income ex- net income ex- net income ex- net income ex- net income ex- net income ex- net income ex- net income ex- net income ex- net income ex- net income ex- net income ex- net income ex- net income ex- net income ex- net income ex- net income ex- net income ex- net income ex- net income ex- net income ex- net income ex- net income ex- net income ex- net income ex- net income ex- 13 THE INCOME TAX LAW. Law Paragraph ( 1181 ) 1182 39 per centum of the amount by which the net income ex- ceeds $80,000 and does not exceed $82,000; 40 per centum of the amount by which the net income ex- ceeds $82,000 and does not exceed $84,000; 41 per centum of the amount by which the net income ex- ceeds $84,000 and does not exceed $86,000; 42 per centum of the amount by which the net ceeds $86,000 and does not exceed $88,000; 43 per centum of the amount by which the net ceeds $88,000 and does not exceed $90,000; 44 per centum of the am.ount by which the net ceeds $90,000 and does not exceed $92,000; 45 per centum of the amount by which the net ceeds $92,000 and does not exceed $94,000; 46 per centum of the amount by which the net ceeds $94,000 and does not exceed $96,000; 47 per centum of the amount by which the net ceeds $96,000 and does not exceed $98,000; 48 per centum of the amount by which the net ceeds $98,000 and does not exceed $100,000; 52 per centum of the amount by which the net ceeds $100,000 and does not exceed $150,000; 56 per centum of the amount by which the net ceeds $150,000 and does not exceed $200,000; 60 per centum of the amount by which the net ceeds $200,000 and does not exceed $300,000; 63 per centum of the amount by which the net ceeds $300,000 and does not exceed $500,000; 64 per centum of the amount by which the net ceeds $500,000 and does not exceed $1,000,000; 65 per centum of the amount by which the net income ex- ceeds $1,000,000. (b) In the case of a bona fide sale of mines, oil or gas wells, or any interest therein, where the principal value of the property has been demonstrated by prospecting or exploration and discovery work done by the taxpayer, the portion of the tax imposed by this section attributable to such sale shall not exceed 20 per centum of the selling price of such property or interest. ncome ex- ncome ex- ncome ex- ncome ex- ncome ex- ncome ex- ncome ex- ncome ex- ncome ex- ncome ex- ncome ex- income ex- Repeated at (485) 487 Net Income Defined ^83 Sec. 212. (a) That in the case of an individual the term “net 769 income” means the gross income as defined in section 213, less the 1540 deductions allowed by section 214. 1[84 (b) The net income shall be computed upon the basis of the tax- 778 payer’s annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; 1[S5 but if no such method of accounting has been so employed, 779 or if the method employed does not clearly reflect the in- come, the computation shall be made upon such basis and in such manner as in the opinion of the Commissioner does clearly reflect the income. 14 THE INCOME TAX LAW. Law Repeated Paragraph at i 1f86 If the taxpayer’s annual accounting period is other than a fiscal year 793 as defined in section 200 or if the taxpayer has no annual accounting period or does not keep books, the net income shall be computed on the basis of the calendar year. 1187 If a taxpayer changes his accounting period from fiscal year to 800 calendar year, from calendar year to fiscal year, or from one fiscal year to another, the net income shall, with the approval of the Commissioner, be computed on the basis of such new accounting period, subject to the provisions of section 226. Gross Income Defined. 1[88 Sec. 213. That for the purposes of this title (except as other- 802 wise provided in section 233) the term “gross income” — 1f89 (a) Includes gains, profits, and income derived from salaries, \ 803 wages, or compensation for personal service (including in the case of the President of the Ihiited States, the judges of the Supreme and inferior courts of the United States, and all other officers and employees, whether elected or appointed, of the United States, Alaska, Hawaii, or any political subdivision thereof, or the District of Columbia, the com- pensation received as such), of whatever kind and in vrhatever form paid, or 1(90 from professions, vocations, trades, businesses, commerce, or sales, 804 or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; 1i91 also from interest, rent, dividends, securities, or the transaction 805 of any business carried on for gain or profit, or 1[92 gains or profits and Income derived from any source whatever. 806 1[93 I'he amount of all such items shall be Included In the gross Income 807 for the taxable year in which received by the taxpayer, unless, under methods of accounting permitted under subdivision (b) of section 212, any such amounts are to be properly accounted for as of a different period; but 1[94 (b) Does not include the following items, which shall be exempt 1109 from taxation under this title: 1f95 (1) The proceeds of life insurance policies paid upon the death 1112 of the insured to individual beneficiaries or to the estate of the Insured; 1(96 (2) The amount received by the Insured as a return of premium 1113 or premiums paid by him under life insurance, endowment, or an- nuity contracts, either during the term or at the maturity of the term mentioned in the contract or upon surrender of the contract; 1[97 (3) The value of property acquired by gift, bequest, devise, or 1128 descent (but the income from such property shall be included in gross income); 15 THE INCOME TAX LAW. ' "" Repeated Law at f 1198 (4) Interest upon (a) the obligations of a State, Territory, or 1130 any political subdivision thereof, or the District of Columbia; or 1199 (b) securities issued under the provisions of the Federal 1131 Farm Loan Act of July 17, 1916; or UlOO (c) the obligations of_ the^^^United States or its possessions; or 1132 1[101 (d) bonds^ issued by the^ War^ Finance;j^Corporation. 1133 11102 Provided, That every person owning any of the obligations, securities or 1134 bonds enumerated in clauses {a),{b), (c) and {d) shall, in the return re- quired by this title, submit a statement showing the number and amount of such obligations, securities and bonds owned by him and the incorne received therefrom, in such form and with such information as the Commis- sioner may require. ^103 In the case of obligations of the United States issued after September 1138 1 1917 and in the case of bonds issued by the \\ ar Finance Corpora- tion, the interest shall be exempt only if and to the extent P/ovided in the respective Acts authorizing the issue thereof as amended and supplemented, and shall be excluded from gross income only if and to the extent it is wholly exempt from taxation to the taxpayer both under this title and under Title III; 1T104 (5) The income of foreign governments received from invest- 1162 merits in the United States in stocks, bonds, or other domestic securities, owned by such foreign governments, or from interest on deposits in banks in the United States of moneys belonging to such foreign governments, or from any other source within the United States; 11105 (6) Amounts received, through accident or health insurance 1111 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, 1^106 (7) Income derived from any public utility or the exerc^e of any 1164 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. 11107 Whenever any State, Territory, or the district of Columbia, or any 1 165 political subdivision of a State 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, construct, operate, or maintain a public utility, no tax shall be levied under the provisions of this title upon the income derived from the operation of such public utility, so far as the payment thereof will impose a loss or burden upon such State, Territory, District of Columbia, or political subdivision; but this provision is not intended to confer upon such person any financial gain or exempton or to re leve such person from the payment of a tax as provided for in this title upon the part or 16 THE INCOME TAX LAW. Law Paragraph portion of such income contract; Repeated at H to which such person is entitled under such ^108 (8) So much of the amount received during the present war by a person 1172 in the military or naval forces of the United States as salary or com- pensation in any form from the United States for active services in such forces, as does not exceed $3,500 1(109 (c) In the case of nonresident alien individuals, gross income 1542 includes only the gross income from sources within the United States, 1(110 including interest on bonds, notes, or other interest-bearing obliga- 1543 tions of residents, corporate or otherwise, dividends from resident corporations, and ^111 including all amounts received (although paid under a contract for 1544 the sale of goods or otherwise) representing profits on the manu- facture and disposition of goods within the United States. Deductions Allowed. K112 Sec. 214. (a) That in computing net income there shall be allowed 1179 as deductions: K113 (1) All the ordinary and necessary expenses paid or incurred 1182 during the taxable year in carrying on any trade or business, ^114 including a reasonable allowance for salaries or other compensation 1208 for personal services actually rendered, and 1(115 including rentals or other payments required to be made as a con- 1229 - dition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he' has no equity; K116 (2) All interest paid or accrued within the taxable year on in- 1232 debtedness, 1233 K117 except on indebtedness incurred or continued to purchase or carry obligations or securities (other than obligations of the United States issued after September 24, 1917), the interest upon which is wholly exempt from taxation under this title as income to the taxpayer, or. Kll8 in the case of a nonresident alien individual, the proportion of such 1563 interest which the amount of his gross income from^ sources within the United States bears to the amount of his gross income from all sources within and without the United States; 1(119 (3) Taxes paid or accrued within the taxable year imposed 1245 K120 (a) by the authority of the United States, except income, war- 1246 profits and excess-profits taxes; or 1(121 (b) by the authority of any of its possessions, except the aniount of 1247 income, war-profits and excess-profits taxes allowed as a credit under section 222; or 17 THE INCOME TAX LAW. Law Repeated Paragraph at 1[122 (c) by the authority of any State or Territory, or any county, 1248 school district, municipality, or other taxing subdivision of any State or Territory, ^123 not including those assessed against local benefits of a kind tending 1260 to increase the value of the property assessed; or ^124 (d) in the case of a citizen or resident of the United States, by 1281 the authority of any foreign country, except the amount of income, war-profits and excess-profits taxes allowed as a credit under section 222; or ^[125 (e) in the case of a nonresident alien individual, by the authority of 1564 any foreign country (except income, war-profits and excess-profits taxes, and taxes assessed against local benefits of a kind tending to increase the value of the property assessed), upon property or busi- ness; ^126 (4) Losses sustained during the taxable year and not compen- 1303 sated for by insurance or otherwise, if incurred in trade or business; ^[127 (5) Losses sustained during the taxable year and not compensated 1310 for by insurance or otherwise, if incurred in any transaction entered into for profit, though not connected with the trade or business; ^[128 but in the case of a nonresident alien individual only as to 1565 such transactions within the United States; 1[129 (6) Losses sustained during the taxable year of property not 1311 connected with the trade or business ^130 (but in the case of a nonresident alien individual only prop- 1566 erty within the United States) 1il31 if arising from fires, stornrs, shipwreck, or other casualty, or from 1312 theft, and if not compensated for by insurance or otherwise; 1[132 (7) Debts ascertained to be worthless and charged off within 1316 the taxable year; 1(133 (8) A reasonable allowance for the exhaustion, wear and tear of 1328 property used in the trade or business, including a reasonable allowance for obsolescence; 1(134 (9) In the case of buildings, machinery, equipment, or other 1376 facilities, constructed, erected, installed, or acquired, on or after April 6, 1917, for the production of articles contributing to the prosecution of the present war, 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 the present war, there shall be allowed a reasonable deduction for the amortization of such part of the cost of such facilities or vessels as has been borne by the tax- payer, but not again including any amount otherwise allowed under this title or previous Acts of Congress as a deduction in computing net income. 18 THE INCOME TAX LAW. Law _ Paragraph ^ ^ •*il35 At any time within three years after the termination of the present 1377 war, the Commissioner may, and at the request of the taxpayer shall, reexamine the return, and if he then finds as a result of an appraisal or from other evidence that the deduction originally allowed was in- correct, the taxes imposed by this title and by Title III for the year or years affected shall be redetermined; and ^136 the am^ount of tax due upon such redetermination, if any, shall be 1378 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; ^137 (10) In the case of mines, oil and gas wells, other natural de- 1397 posits, and timber, a reasonable allowance for depletion and for depreciation of improvements, 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 13*^8 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: Vl39 Provided further, That in the case of mines, oil and gas wells, 1399 discovered by the taxpayer , on or after March 1, 1918, and not ’ ■ - acquired as the result of purchase of a proven tract or lease, where the fair market value of the property is materially dis- proportionate to the cost, the depletion allowance shall be based upon the fair market value of the property at the date of ■ the- discovery, or within thirty days thereafter; ^140 such reasonable allowance in all the above cases to_ be made under 1400 rules and regulations to be prescribed by the Commissioner with the approval of the Secretary. IfUl In. the case of leases the deductions allowed by this paragraph shall be 1401 equitably apportioned between the lessor and lessee ^142 (11) Contributions or gifts made within the taxable year to 1447 corporations organized and operated exclusively for religious, charit- able, scientific, or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private stockholder or individual, or to the special fund for vocational rehabilitation authorized by section 7 of the Vocational Rehabilitation Act, to an amount not in excess of 15 per centum of the taxpayer’s net income as computed without the benefit of this paragraph. Such contributions or gifts shall^ be allowable as deductions only if verified under rules and regulations T 1 1 prescribed by the Commissioner, with the approval of the Secretary. ^,|143 In the case of a nonresident alien individual this deduction 1567 i shall be allowed only as to contributions or gifts rnade^ to domestic corporations, or to such vocational rehabilitation i ; dund; 19 ^ THE INCOME TAX LAW. Law Paragraph 1[144 (12) (a) At the time of filing return for the taxable year 1918 a taxpayer may file a claim in abatement based on the fact that he has sustained a substantial loss (whether or not actually realized by sale or other disposition) resulting from any material reduction (not due to temporary fluctuation) of the value of the inventory for such taxable year, Repeated 1467 1[145 or from the actual payment after the close of such taxable year of re- 1468 bates in pursuance of contracts entered into during such year upon sales made during such year. ^146 In such case payment of the amount of the tax covered by such claim 1469 shall not be required until the claim is decided, but the taxpayer shall accompany his claim with a bond in double the amount of the tax covered by the claim, with sureties satisfactory to the Commissioner, conditioned for the payment of any part of such tax found to be due, with interest. If any part of such claim is disallowed then the remain- der of the tax due shall on notice and demand by the collector be paid by the taxpayer with interest at the rate of 1 per centuni per month from the time the tax would have been due had no such claim been filed. 1[147 If it is shown to the satisfaction of the Commissioner that such sub- 1470 stantial loss has been sustained, then in computing the tax imposed by this title the amount of such loss shall be deducted from the net income. ^148 (b) If no such claim is filed, but it is shown to the satisfaction of the 1471 Commissioner that during the taxable year 1919 the taxpayer has sustained a substantial loss of the character above described then the amount of such loss shall be deducted from the net income for the taxable year 1918 and the tax imposed by this title for such year shall be redetermined accordingly. Any amount found to be due to the taxpayer upon the basis of such redetermination shall be credited^ or refunded to the taxpayer in accordance with the provisions of section 252. If 149 (b) In the case of a nonresident alien individual the deductions 1561 allowed in paragraphs (1), (4), (7), (8), (9), (10), (12), and clause (e) of paragraph (3), of subdivision (a) shall be allowed only if and to the extent that they are connected with income arising from a source within the United States; ^150 and the proper apportionment and allocation of the deductions with 1562 respect to sources of income within and without the United States shall be determined under rules and regulations prescribed by the Commissioner^with the approval of the Secretary. Items Not Deductible. 1fl51 Sec. 215. That in computing net income no deduction shall in 1184 any case be allowed in respect of — 1(152 (a) Personal, living, orTamily expenses; 1185 K153 (b) Any amount paid out for new buildings or for permanent 1188 improvements or betterments made to increase the value of any property or estate; 20 THE INCOME TAX LAW. - „ Repeated at IT Paragraph , ' 11154 (c) Any amount expended in restoring property or in making 1189 good the exhaustion thereof for which an allowance is or has been made; or 11155 : (d) Premiums paid on any life insurance policy covering the life of 1 196 “^any officer or employee, or of any person financially interested in any trade or business carried on by the taxpayer, when the taxpayer is directly or indirectly a beneficiary under such policy. Credits Allowed. 1[156 Sec. 216. That for the purpose of the normal tax only there 1513 shall be allowed the following credits: 11157 (a) The amount received as dividends from a corporation which 1514 is taxable under this title upon its net income, and amounts received as dividends from a personal service corporation out of earnings or profits upon which income tax has been imposed by Act of Congress; 1fl58 (b) The amount received as interest upon obligations of the 1515 United States and bonds issued by the War Finance Corporation, which is included in gross income under section 213; 1[159 (c) In the case of a single person, a personal exemption of 1518 $1,000, or 11160 in the case of the head of a family or a married person living with 1519 husband or wife, a personal exemption of $2,000. 1[161 A husband and wife living together shall receive but one personal 1520 exemption of $2,000 against their aggregate net income; 11162 and in case they make separate returns, the personal exemption of 1521 $2,000 may be taken by either or divided between them; 1[163 (d) $200 for each person (other than husband or wife) dependent 1524 upon and receiving his chief support from the taxpayer, if such de- pendent person is under eighteen years of age or is incapable of self- support because mentally or physically defective. 11164 (e) In the case of a nonresident alien individual who is a citizen 1570 or subject of a country which imposes an income tax, the credits allowed in subdivisions (c) and (d) shall be allowed only if such country allows a similar credit to citizens of the United States not residing in such country. Nonresident Aliens — Allowance of Deductions and Credits. 1fl65 Sec. 217. That a nonresident alien individual shall receive the 1574 benefit of the deductions and credits allowed in this title only by filing or causing to be filed with the cc^llcctor a true and accurate return of his total income received from all sources corporate or otherwise in the United States, in the manner prescribed by this title, including therein all the information which the Commissioner may deem necessary for the calculation of such deductions and credits: 21 THE INCOME TAX LAW. Law Paragraph ^[166 Provided^ That the benefit of the credits allowed in subdivisions (c) and {(T) of section 216 may, in the discretion of ^ the Com- missioner, and except as otherwise provided in subdivision ^{e) of that section, be received by fling a claim therefor with the withholding agent. Repeated at % 1576 ^167 In case of failure to file a return, the collector shall collect the tax 1582 on such income, and all property belonging to such nonresident alien individual shall be liable to distraint for the tax. Partnerships and Personal Service Corporations. ^168 Sec. 218. (a) That individuals carrying on business in partner- 546 ship shall be liable for income tax only in their individual capacity. ^169 There shall be included in computing the net income of each partner 564 his distributive share, whether distributed or not, of the net income of the partnership for the taxable year, or, ^170 if his net income for such taxable year is computed upon the basis 565 of a period different from that upon the basis of which the net income of the partnership is computed, then his distributive share of the net income of the partnership for any accounting period of the partner- ship ending within the fiscal or calendar year upon the basis of which the partner’s net income is computed. 1[171 The partner shall, for the purpose of the normal tax, be allowed 571 as credits, in addition to the credits allowed to him under section 216, his proportionate share of such amounts specified in subdivisions (a) and (b) of section 216 as are received by the partnership. , 11172 (b) If a fiscal year of a partnership ends during a calendar year 601 for which the rates of tax differ from those for the preceding calendar year, then 11173 (1) the rates for such preceding calendar year shall apply 602 to an amount of each partner’s share of such partnership net income equal to the proportion which the part of such fiscal year falling within such calendar year bears to the full fiscal year, and Hi 74 (2) the rates for the calendar year during which such fiscal 603 year ends shall apply to the remainder. Hi 75 (c) In the case of an individual member of a partnership which 604 makes return for a fiscal year beginning in 1917 and ending in 1918, his proportionate share of any excess-profits tax imposed upon the part- nership under the Revenue Act of 1917 with respect to that part of such fiscal year falling in 1917, shall, for the purpose of determining the tax imposed by this title, be credited against that portion of the net income embraced in his personal return for the taxable year 1918 to which the rates for 1917 apply. H176 (d) The net income of the partnership shall be computed in the 552 same manner and on the same basis as provided in ^section 212 except 22 THE INCOME TAX LAW. Repeated at 11 Law p.rafraph^^ the deduction provided in paragraph (11) of subdivision (a) of section 214 shall not be allowed. ‘,177 (e) Personal service corporations shall not be subject to taxation 593 under this title, but the individual stockholders thereof shall be taxed in the same manner as the members of partnerships. 1178 All the provisions of this title relating to partnerships and the mem- 594 ' bers thereof shall so far as practicable apply to personal service cor- porations and the stockholders thereof; 1179 Provided, That for the purpose of thu subdivision amounts dis- 595 * tribute d by a personal service corporation during its taxable year shall be accounted for by the distributees; and any portion of the net income remaining undistributed at the close of its taxable ^ year shall be accounted for by the stockholders of such corpora- tion at the close of its taxable year in proportion to their re- spective shares. Estates and Trusts. 1180 Sec. 219. (a) That the tax imposed by sections 210 and 211 636 shall apply to the income of estates or of any kind of property held in trust, including— 1181 (1) Income received by estates of deceased persons during the 637 period of administration or settlement of the estate; 1182 (2) Income accumulated in trust for the benefit of unborn or 639 ' unascertained persons or persons with contingent interests; 1183 (3) Income held for future distribution under the terms of the 640 will or trust; and 1184 (4) Income which is to be distributed to the beneficiaries period- 644 ically, whether or not at regular intervals, and the income collected by a guardian of an infant to be held or distributed as the court may direct. 1185 (b) The fiduciary shall be responsible for making the return of 678 income for the estate or trust for which he acts. 1186 The net income of the estate or trust shall be computed m the same 651 manner and on the same basis as provided in section 212, 1187 except that there shall also be allowed as a deduction (in lieu 652 of the deduction authorized by paragraph (11) of subdivision (a) of section 214) any part of the gross income which, pur- suant to the terms of the will or deed creating the trust, is during the taxable year paid to or permanently set aside tor the United States, any State, Territory, or any political subdivi- sion thereof, or the District of Columbia, or any corporation or- ganized and operated exclusively for religious, charitable, scien- tific, or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private stockholder or individual; 23 THE INCOME TAX LAW. Law Paragraph Repeated 11188 andjn cases under paragraph (4) of subdivision (a) of this section 683 the fiduciary shall include in the return a statement of each bene- ficiary’s distributive share of such net income, whether or not distributed before the close of the taxable year for which the return is made. %189 (c) In cases under paragraph (1), (2), or (3) of subdivision (a) 641 the tax shall be imposed upon the net income of the estate or trust and shall be paid by the fiduciary, 11190 except that in determining the net income of the estate of 653 any deceased person during the period of administration or settlement there may be deducted the amount of any income properly paid or credited to any legatee, heir or other beneficiary, 11191 In such cases the estate or trust shall, for the purpose of the nor- 667 mal tax, be allowed the same credits as are allowed to single per- sons under section 216, 1(192 (d) In cases under paragraph^ (4) ^of^subdivision (a), 645 1(193 and in the case of any income of an estate during the period of ad- 646 ministration or settlement permitted by subdivision (c) to be de- ducted from the net income upon which tax is to be paid by the fiduciary, 1(194 the tax shall not be paid by the fiduciary, but there shall be included 647 in computing the net income of each beneficiary his distributive share, whether distributed or not, of the net income of the estate or trust for the taxable year, or, 11195 if his net income for such taxable year is computed upon the basis 648 of a period different from that upon the basis of which the net income of the estate or trust is computed, then his distributive share of the net income of the estate or trust for any accounting period of such estate or trust ending within the fiscal or calendar year upon the basis of which such beneficiary’s net income is computed. K196 In such cases the beneficiary shall, for the purpose of the normal 665 tax, be allowed as credits in addition to the credits allowed to him under section 216, his proportionate share of such amounts specified in subdivisions (a) and (b) of section 216 as are received by the estate or trust. Profits of Corporations Taxable to Stockholders, 1(197 Sec, 220, That if any corporation, however created or organ- 497 ized, is formed or availed of for the purpose of preventing the im- position of the surtax upon its stockholders or members through the medium of permitting its gains and profits to accumulate instead of being divided or distributed, such corporation shall not be subject to the tax imposed by section 230, but the stockholders or members thereof shall be subject to taxation under this title in the same manner as provided in subdivision (e) of section 218 in the case of stockholders 24 THE INCOME TAX LAW. Law Paracraph . j i rp* i of a personal service corporation, except that the tax imposed by Title III shall be deducted from the net income of the corporation before the computation of the proportionate share of each stockholder or member. Repeated at.H 1[198 The fact that any corporation is a mere holding company, or that 498 the gains and profits are permitted to accumulate beyond the reas- onable needs of the business, shall be prima facie evidence of a pur- pose to escape the surtax; ^199 but the fact that the gains and profits are in any case permitted to 499 accumulate and become surplus shall not be construed as evidence of a purpose to escape the tax in such case unless the Commissioner certifies that in his opinion such accumulation is unreasonable for the pur- poses of the business. 11200 When requested by the Commissioner, or any collector, every cor- 500 poration shall forward to him a correct statement^ of such gains and profits and the names and addresses of the individuals or share- holders who would be entitled to the same if divided or distributed, and of the amounts that would be payable to each. Pa3rment of Tax at Source. H201 Sec. 221. (a) That all individuals, corporations and partner- 1585 ships, in whatever capacity acting, including lessees or mortgagors of real or personal property, fiduciaries, employers, and all officers and employees of the United States, 1[202 having the control, receipt, custody, disposal, or payment, of interest, 1586 rent, salaries, wages, premiums, annuities, compensations, remuner- ations, emoluments, or other fixed or determinable annua or period- ical gains, profits, and income, 1[203 of any nonresident alien individual 1587 1[204 (other than income received as dividends from a corporation which 1588 taxable under this title upon its net income) T[205 shall (except in the cases provided for in subdivision (b) and except 1589 as otherwise provided in regulations prescribed by the Commissioner under section 217) K206 deduct and withhold from such annual or periodical gains, profits, 1590 and income ^207 a tax equal to 8 per centum thereof: 1591 T[208 Provided, That the Commissioner may authorize such tax 1627 to be deducted and withheld from the interest upon any securi- ties the owners of which are not known to the withholding agent. 1(209 (b) In any case where bonds, mortgages, or deeds of trust, or 1636 other similar obligations of a corporation contain a contract or pro- vision by which the obligor agrees 25 THE INCOME TAX LAW. Law Repeated Paragraph at ^ ^210 to pay any portion of the tax imposed by this title upon the obligee, 1637 or ^211 to reimburse the obligee for any portion of the tax, or 1638 lf212 to pay the interest without deduction for any tax which the obligor 1639 may be required or permitted to pay thereon or to retain therefrom under any law of the United States, 11213 the obligor shall deduct and withhold a tax equal to 2 per centum 1640 of the interest upon such bonds, mortgages, deeds of trust, or other obligations, whether such interest is payable annually or at shorter or longer periods and 1[214 whether payable to a nonresident alien individual or to an individual 1641 citizen or resident of the United States or to a partnership: %215 Provided, That the Commissioner may authorize such tax to 1644 be deducted and withheld in the case of interest upon any such bonds, mortgages, deeds of trust or other obligations, the owners of which are not known to the withholding agent. If216 Such deduction and withholding shall not be required in the case 1646 of a citizen or resident entitled to receive such interest, if he files with the withholding agent on or before February 1, a signed notice in writing claiming the benefit of the credits provided in subdivisions (c) and (d) of section 216; 1[217 nor in the case of a nonresident alien individual if so provided for 1649 in regulations prescribed by the Commissioner under section 217. ^218 (c) Every individual, corporation, or partnership required .to 1707 deduct and withhold any tax under this section shall make return thereof on or before March first of each year i? . .-j \2\9 and shall on or before June fifteenth pay the tax to the official of the 1708 United States Government authorized to receive it. ^220 Every such individual, corporation, or partnership is hereby made 1716 liable for such tax and j ■ %22\ is hereby indemnified against the claims and demands or any in- 1717 dividual, corporation, or partnership for the amount of any pay- ments made in accordance with the provisions of this section. 1(222 (d) Income upon which any tax is required to-be withheld at the 1718 source under this section shall be included in the return of'the recipient of such income. K223 but any amount of tax so withheld shall be credited against the 1719 amount of income tax as computed in such return. K224 (e) If any tax required under this section to be deducted and with- 1720 held is paid by the recipient of the income, it shall not be re-collected from the withholding agent; 26 8 - 1 - 20 . THE INCOME TAX LAW. Paragraph . . , ^ V225 nor in cases in which the tax is so paid shall any penalty be imposed 1721 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 payment. Credit for Taxes. 1f226 Sec. 222. (a) That the tax computed under Part II of this title 1283 shall be credited with: ^227 (1) In the case of a citizen of the United States, the amounUl284 of any income, war-profits and excess-profits taxes paid during the^ taxable year to any foreign country, upon income derived from sources therein, or to any possession^of the United States; and lf228 (2) In the case of a resident of the United States, the amount 1285 of any such taxes paid during the taxable year to any possession of the United States; and TI229 ^ ^ (3) In the case of an alien resident of the United States who is a 1286 citizen or subject of a foreign country, the amount of any such taxes paid during the taxable year to such country, upon income derived from sources therein, if such country, in imposing such taxes, allows a similar credit to citizens of the United States residing in such country; and 1f230 (4) In the case of any such individual who is a member of a part- 1287 nership or a beneficiary of an estate or trust, his proportionate 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. 1f231 (b) If accrued taxes when'^paid^differ from'^thejamounts" claimed 1288 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 condition precedent to the allowance of this credit may require the tax- payer to give a bond with sureties satisfactory to and to be approved by the Commissioner 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 redetermination; and the bond herein prescribed shall contain such further conditions* as the Commissioner may require. 1f232 (c) These credits shall be allowed only if the taxpayer furnishes 1289 evidence satisfactory to the Commissioner showing the amount of income^ derived from sources within such foreign country or such possession of the United States, and all other information necessary for the computation of such credits. 27 Law Pvagrapli THE INCOME TAX LAW. Repeated at T Individual Returns. f233 Sec. 223. That every individual having a net income for the 1766 taxable year of $1 ,000 or over if single or if married and not living with husband or wife, ^234 or of $2,000 or over if married~and living with husband or wife, 1767 1f235 shall make under oath a return stating specifically the item^s of his 1768 gross income and the deductions and credits allowed by this title. 1f236 If a husband and wife living together have an aggregate net income 1769 of $2,000 or over, each shall make such a return unless the income of each is included in a single joint return. T[237 If the taxpayer is unable to make his own return, the return 673 shall be miade by a duly authorized agent or by the guardian or other person charged with the care of the person or property of such tax- payer. Partnership Returns. 1[238 Sec. 224. That every partnership shall make a return for each 555 taxable year, stating specifically^ the items of its gross^ income and to the deductions allowed by this title, and shall include in the return 559 the names and addresses of the individuals who would be entitled to share in the net income if distributed and the amount of the dis- tributive share of each individual. The return shall be sworn to by any one of the partners. Fiduciary Returns. 1[239 Sec. 225. That every fiduciary (except receivers appointed by 669 authority of law in possession of part only of the property of an individual) ^240 shall make under oath a return for the individual, estate or trust for 676 which he acts 1(241 (1) if the net income of such individual is $1,000 or over if single or 679 if married and not living with husband or wife, or $2,000 or over if mar- ried and living with husband or wife, or ^242 (2) if the net income of such estate or trust is $1,000 or over or if any 680 beneficiary of such estate or trust is a nonresident alien, K243 stating specifically the items of the gross income and the deductions 682 and credits allowed by this title. K244 Under such regulations as the Commissioner with the approval of the 681 Secretary may prescribe, a return made by one of two or rnore joint fiduciaries and filed in the office of the collector of the district where such fiduciar]^ resides shall be a sufficient compliance with the above requirement. K245 The fiduciary shall make oath that he has sufficient knowledge of the affairs of such individual, estate or trust to enable him to make the 28 677 THE INCOME TAX LAW. Law Repeated Paragraph at H return, and that the same is, to the best of his knowledge and belief, true and correct. ^ 1[246 Fiduciaries required to make returns under this Act shall be 711 subject to all the provisions of this Act which applies [apply] to individuals. Returns When Accounting Period Changed. ^[247 Sec. 226. That if a taxpayer, with the approval of the Com- 1855 missioner, changes the basis of computing net income from fiscal year to calendar year a separate return shall be made for the period between the close of the last fiscal year for which return was made and the following December thirty-first. ^248 If the change is from calendar year to fiscal year, a separate return 1856 shall be made for the period between the close of the last calendar year for which return was made and the date designated as the close of the fiscal year. ^249 If the change is from one fiscal year to another fiscal year a separate^l857 return shall be made for the period between the close of the former fiscal year and the date designated as the close of the new fiscal year. 1(250 If a taxpayer making his first return for income tax keeps his accounts 1858 on the basis of a fiscal year he shall make a separate return for the period between the beginning of the calendar year in which such fiscal year ends and the end of such fiscal year. K251 In all of the above cases the net income shall be computed on the 1859 basis of such period for which separate return is made, and the tax shall be paid thereon at the rate for the calendar year in which such period is included; 1(252 and the credits provided in subdivisions (c) and (d) of section 216 1860 shall be reduced respectively to amounts which bear the same ratio to the full credits provided in such subdivisions as the number of months in such period bears to twelve months. Time and Place for Filing Returns. K253 Sec. 227. (a) That returns shall be made on or before the 1808 fifteenth day of the third month following the close of the fiscal year, or, K254 if the return is made on the basis of the calendar year, then the re- 1809 turn shall be made on or before the fifteenth day of March. K255 The Commissioner may grant a reasonable extension of time for 1848 filing returns whenever in his judgment good cause exists and shall keep a record of every such extension and the reason therefor. Except in the case of taxpayers who are abroad, no such extension shall be for more than six months. 29 THE INCOME TAX LAW. Repeated Law at % Parag/aph , . • ^256 (b) Returns shall be made to the collector for the district in 1811 which is located the legal residence or principal place of business of the person making the return, or, ^257 if he has no legal residence or principal place of business in the United 1812 States, then to the collector at Baltimore, Maryland. Understatement in Returns. 11258 Sec. 228. That if the collector or deputy collector has reason to 1864 believe that the amount of any income returned is understated, he shall give due notice to the taxpayer making the return to show cause why the amount of the return should not be increased, and upon proof of the amount understated, may increase the same ac- cordingly. 1|259 Such taxpayer may furnish sworn testimony to prove any relevant 18o5 facts and if dissatisfied with the decision of the collector may appeal to the Commissioner for his decision, under such rules of procedure as may be prescribed by the Commissioner with the approval of the Secretary. PART III. — Corporations. T t Tax On Corporations. > 11260 Sec. 230. (a) That, in lieu of the taxes imposed by section 10 713 of the Revenue Act of 1916, as amended by the Revenue Act of 1917, and by section 4 of the Revenue Act of 1917, there shall be levied, collected, and paid for each taxable year upon the net in- come of every corporation 11261 a tax at the following rates: * 11262 (1) For the calendar year 1918, 12 per centum of the amount of 715 the net income in excess of the credits provided in section 236; and 11263 (2) For each calendar year thereafter, 10 per centum of such 716 excess amount. 11264 (b) For the purposes of the Act approved March 21, 1918, en- 737 titled “An Act to provide for the operation of transportation systems while under Federal control, ,^for the just compensation of their owners, and for other purposes,'” five-sixths of the tax imposed by paragraph (1) of subdivision (a) and four-fifths of the tax imposed by paragraph (2) of subdivision (a) shall be treated as levied by an Act ,,in amendment of Title I of the Revenue Act of 1917. Conditional and Other Exemptions. 11265 Sec. 231. That the following from taxation under this title — organizations shall be exempt 11266 (1) Labor, agricultural, or horticultural organizations; 30 739 740 THE INCOME TAX LAW. Law Paragraph ^ " %261 (2) Mutual savings banks not having a capital stock represented 741 by shares; ^268 (3) Fraternal beneficiary societies, orders, or associations, (a) 742 operating under the lodge system or for the exclusive benefit of the members of a fraternity itself operating under the lodge system, and (b) providing for the payment of life, sick, accide nt, or other benefits to the m-embers of such society, order, or association or their, de- pendents; ^269 (4) Domestic building and loan associations and cooperative 743 banks without capital stock organized and operated for mutual purposes and without profit; 11270 (5) Cemetery companies owned and operated exclusively for the 744 benefit of their miembers; 11271 (6) Corporations organized and operated exclusively for re- 745 ligious, charitable, scientific, or educational purposes, or for the prevention of cruelty to children or anim.als, no part of the net earn- ings of which inures to the benefit of any private stockholder or mdividual; 11272 (7) Business leagues, chambers of commerce, or boards of trade, 746 not organized for profit and no part of the net earnings of which inures to the benefit of any private stockholder or individual; 1[273 (8) Civic leagues or organizations not organized for profit but 747 operated exclusively for the promotion of social welfare; 11274 (9) Clubs organized and operated exclusively for pleasure, recrea- 748 tion, and other nonprofitable purposes, no part of the net earnings of which inures to the benefit of any private stockholder or miember; 11275 (10) Farmers’ or other m.utual hail, cyclone, or fire insurance 749 companies, mutual ditch or irrigation companies, miutual or co- operative telephone com.panies, or like organizations of a purely local character, the incomie of which consists solely of assessments, dues, and fees collected from members for the sole purpose of meeting expenses; 11276 (11) Farmers’, fruit growers’, or like associations, organized and 750 operated as sales agents for the purpose 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 fur- nished by them; 11'277 (12) Corporations organized for the exclusive purpose of holding 751 title to property, collecting income therefrom, and turning over the entire am.ount thereof, less expenses, to an organization which itself is exempt from the tax imiposed by this title; 11278 (13) Federal land banks and national farm-loan associations as 752 • , provided in section 26 of the act approved July 17, 1916, entitled • “An Act to provide capital for agricultural development, to create 31. THE INCOME TAX LAW. Law Repeated Paragraph » Standard forms of investment based upon farm mortgage, to equalize rates of interest upon farm loans, to furnish a market for United States bonds, to create Government depositaries and financial agents for the United States, and for other purposes”; ^279 (14) Personal service corporations. 753 Net Income Defined. 11280 Sec. 232. That in the case of a corporation subject to the tax 770 imposed by section 230 the term “net income” means the gross 1015 income as defined in section 233 less the deductions allowed by sec- tion 234, and the net income shall be computed on the same basis as is provided in subdivision (b) of section 212 or in section 226. Gross Income Defined. 11281 Sec. 233. (a) That in the case of a corporation subject to the 808 tax imposed by section 230 the term “gross income” means the gross 1016 income as defined in section 213, except that: 11282 (1) In the case of life insurance companies there shall not be 986 included in gross income such portion of any actual premium re- ceived from any individual policyholder as is paid back or credited to or treated as an abatement of premium of such policyholder within the taxable year. 11283 (2) Mutual marine insurance companies shall include in gross 996 income the gross premiums collected and received by them less amounts paid for reinsurance. 11284 (b) In the case of a foreign corporation gross income includes 1017 only the gross income from sources within the United States, 11285 including the interest on bonds, notes, or other interest- 1025 bearing obligations of residents, corporate or otherwise, dividends from resident corporations, and 1[286 including all amounts received (although paid under a 1027 contract for the sale of goods or otherwise) representing profits on the manufacture and disposition of goods within the United States. Deductions Allowed. 11287 Sec. 234. (a) That in computing the net income of a corpora- 1029 tion subject to the tax imposed by section 230 there shall be allowed 1180 as deductions: 11288 (1) All the ordinary and necessary expenses paid or incurred 1183 during the taxable year in carrying on any trade or business, 11289 including a reasonable allowance for salaries or other compensation 1209 for personal services actually rendered, and 32 THE INCOME TAX LAW. Law 1 Repeated Paragraph at ^ ^290 including rentals or other payments required to be made as a con- 1230 dition to the continued use or possession of property to which the cor- poration has not taken or is not taking title, or in which it has no equity; 1[291 (2) All interest paid or accrued within the taxable year on its 1234 indebtedness, If 292 except on indebtedness incurred or continued to purchase 1235 or carry obligations or securities (other than obligations of the United States issued after September 24, 1917) the interest upon which is wholly exempt from taxation under this title as income to the taxpayer, or, Tf293 in the case of a foreign corporation, the proportion of such interest 1031 which the amount of its gross income from sources within the United States bears to the amount of its gross income from all sources within and without the United States; ^294 (3) Taxes paid or accrued within the taxable year imposed 1249 lf295 (a) by the authority of the United States, except income, war-profits 1250 and excess-profits taxes; or T[296 (b) by the authority of any of its possessions, except the amount of 1251 income, war-profits and excess-profits taxes allowed as a credit under section 238; or 1f297 (c) by the authority of any State or Territory, or any county, school 1252 district, municipality, or other taxing subdivision of any State or Territory, 11298 not including those assessed against local benefits of a kind 1261 tending to increase the value of the property assessed; or 1f299 (d) in the case of a domestic corporation, by the authority of any 1282 foreign country, except the amount of income, war-profits and excess-profits taxes allowed as a credit under section 238; or 1f300 (e) in the case of a foreign corporation, by the authority of any 1032 foreign country (except income, war-profits and excess-profits taxes, and taxes assessed against local benefits of a kind tending to increase the value of the property assessed), upon the property or business: 1[301 Provided, That in the case of obligors specified in subdivision {b) 1279 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 subdivision, shall be allowed; 1[302 (4) Losses sustained during the taxable year and not compen- 1304 sated for by insurance or otherwise, 1f303 (5) Debts ascertained to be worthless and charged off within the 1317 taxable year; 33 THE INCOME TAX -LAW. Law Paragraph Repeated at t <1304 (6) Amounts received as dividends from a corporation, which is -1320 taxable under this title upon its net income, and «-30.=i amounts received as dividends from_ a personal service corporation 1326 " out of earnings or profits upon which income tax has been imposed by Act of Congress; 11306 (7) A reasonable allowance for the exhaustion, wear and tear of 1329 ^ property used in the trade or business, including a reasonable allow- ance for obsolescence; , •1307 (8) In the case of buildings, machinery, equipment, or other 1379 facilities, constructed, erected, installed, or acquired, on or after Anril 6 1917 for the production of articles contributing to the prosecution of ’the present war, 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 the present war, there shall be allowed 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 ac^ain including any amount otherwise allowed under this title or previous Acts oi Congress as a deduction in computing net income. •^308 At any time within three years after the termination of the present 1380 wlr the Commissioner may, and at the request of the taxpayer shal reexamine the return, and if he then finds as a result of an appraisal or from other evidence that the deduction original y allowed was in- correct, the taxes imposed by this title and by Title III for the year or years affected shall be redetermined and ^ , 1t309 the amount cf tax due upon such redetermination, if any, shall be 1381 ' paid upon notice and demand by the collector, or the amount of t_ overpaid, if any, shall be credited or refunded to the taxpayer in accordance with the provisions of section 252; ' . r (9) In the case of mines, oil and gas wells, other natural deposits, 1402 " and tim.ber, a reasonable allowance for depletion and for depreciation of improvements, according to the peculiar conditions in each case, based upon cost including cost of development not otherwise de- ducted: •1311 Provided, That inihe case of such properties acquired prior to , 1403 March 1 1913, fair market value of the property {or the taxpayer'^ interest therein) on that date shall he taken in lieu of cost up to that date: ^312 Provided further, That in the case of tnines,oil ‘!^fsasjtMs discovered hy 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 ^ proportionate to the cost, the depletion allowance shall he based upon the fair market value of the property at the date of the discovery, or within thirty days thereafter; such reasonable allowance in all the above cases to be made under 1405 ' .rules and regulations to be prescribed by the 'CQmmissioner w^th the . ' approval of the Secretary. ^ 34- 1404 THE INCOME TAX LAW. ■ Repeated Law at H the case of leases the deductions allowed by this paragraph shall 1406 be equitably apportioned between the lessor and lessee; 11315 (10) In the case of insurance companies, in addition to the above: 991 (a) The net addition required by law to be made within the taxable year to reserve funds (including 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 contracts; U316 (11) In the case of corporations issuing policies covering life, 994 health, and accident insurance combined in one policy issued on the weekly premium payment plan continuing for life and not subject to cancellation, in addition to the above, such portion of the net addition (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; 1[317 (12) In the case of mutual marine insurance companies, there 997 shall be allowed, in addition to the deductions allowed in paragraphs (1) to (10), inclusive, amounts repaid to policyholders on account of premiums previously paid by them, and interest paid upon such amounts between the ascertainment and the payment thereof; 11318 (13) In the case of mutual insurance companies (other than 999 mutual life or mutual marine insurance 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, (unless otherwise allowed under such paragraphs) the amount of premium deposits returned to their policyholders and the amount of premium deposits retained for the payment of losses, expenses, and reinsurance reserves; 11319 (14) (a) At the time of filing return for the taxable year 1918 a tax- 1472 payer may file a claim in abatement based on the fact that he has sus- tained a substantial loss (whether or not actually realized by sale or other disposition) resulting from any material reduction (not due to temporary fluctuation) of the value of the inventory for such taxable year, 11320 or from the actual payment after the close of such taxable year of 1473 rebates in pursuance of contracts entered into during such year upon sales made during such year. 11321 In such case payment of the amount of the^ tax covered by such 1474 claim shall not be required until the claim is decided, but the taxpayer shall accompany his claim with a bond in double the amount of the tax covered by the claim, with sureties satisfactory to the Commissioner, conditioned for the payment of any part of such tax found to be due, with interest. If any part of such claim is disallowed then the remainder of the tax due shall on notice and demand by the collector be paid by the taxpayer with interest at the rate of 1 per centum per month from the time the tax would have been due had no such claim been filed. 35 THE INCOME TAX LAW. _ Repeated Law & Paragraph %322 If it is shown to the satisfaction of the Commissioner that such sub- 1475 stantial loss has been sustained, then in computing the taxes imposed by this title and by Title III the amount of such loss shall be deducted from the net income. f323 (b) If no such claim is filed, but it is shown to the satisfaction of the 1476 Commissioner that during the taxable year 1919 the taxpayer has sus- tained a substantial loss of the character above described then the amount of such loss shall be deducted from the net income for the tax- able year 1918 and the taxes imposed by this title and by Title III for such year shall be redetermined accordingly. Any amount found to be due to the taxpayer upon the basis of such redetermination shall be credited or refunded to the taxpayer in accordance with the provisions of section 252. 1[324 (b) In the case of a foreign corporation the deductions allowed 1033 in subdivision (a), except those allowed in paragraph (2) and in clauses (a), (b), and (c) of paragraph (3), shall be allowed only if and to the extent that they are connected with income arising from a source within the United States; T[325 and the proper apportionment and allocation of the deductions with 1034 respect to sources of income within and without the United States shall be determined under rules and regulations prescribed by the Commissioner with the approval of the Secretary. Items Not Deductible. 1[326 Sec. 235. That in computing net income no deduction shall in 1184 any case be allowed in respect of any of the items specified in section 215. Credits Allowed. ^327 Sec. 236. That for the purpose only of the tax imposed by section 1527 230 there shall be allowed the following credits: ^328 (a) The amount received as interest upon obligations of the 1528 United States and bonds issued by the War Finance Corporation, which is included in gross income under section 233; ^329 (b) The amount of any taxes imposed by Title III for the same 1529 taxable year: ^330 Provided, That in the case of a corporation which makes^ return for a fiscal year beginning in 1917 and ending in 1918, in coni’- puting the tax as provided in subdivision (a) of section 205, the tax computed for the entire period under Title II of the Revenue Act 0/1917 shall be credited against the net income computed for the entire period under Title I of the Revenue Act of 1916 ar amended by the Revenue Act of 1917 and under Title I of the Revenue Act of 1917, and the tax computed for the entire period under Title III of this Act at the rates prescribed for the calendar year 1918 shall be credited against the net income computed for the entire period under this title; and (c) In the case of a domestic corporation, $2,000. 36 11331 1531 Law Paragraph THE INCOME TAX LAW. Repeated at H Payment of Tax at Source. 1[332 Sec. 237. That in the case of foreign corporations subject to 1614 taxation under this title not engaged in trade or business within the United States and not having any office or place of business therein, 1[333 there shall be deducted and withheld at the^ source in the same 1615 manner and upon the same items of income as is provided in section 221 1[334 a tax equal to 10 per centum thereof, 1616 ^335 and such tax shall be returned and paid in the same manner and 1617 subject to. the same conditions as provided in that section: 1[336 Provided, That in the case of interest described in subdivision 1642 {b) of that section the deduction and withholding shall be at the rate of 2 per centum. Credit for Taxes. ^337 Sec. 238. (a) That in the case of a domestic corporation the total 1295 taxes imposed for the taxable year by this title and by Title III shall be credited with the amount of any income, war-profits and excess- profits taxes paid during the taxable year 1[338 to any foreign country, upon income derived from sources therein, or 1296 ^339 to any possession of the United States. 1297 If 340 If accrued taxes when paid differ from the amounts claimed as 1298 credits by the corporation, or if any tax paid is refunded in whole or in part, the corporation shall at once notify the Commissioner who shall redetermine the amount of the taxes due under this title and under Title III 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 over- paid, if any, shall be credited or refunded to the corporation in accord- ance with the provisions of section 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 corporation 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 Commissioner may require. ^341 (b)This credit shallbeallowedonlyifthe taxpayer furnishes evidence 1299 satisfactory to the Commissioner showing the amount of income derived from sources within such foreign country or such possession of the United States, as the case may be, and all other information necessary for the computation of such credit. If342 (c) If a domestic corporation makes a return for a fiscal year begin- 1300 ning in 1917 and ending in 1918, only that proportion of this credit shall be allowed which the part of such period within the calendar year 1918 bears to the entire period. 37 Law Paragraph THE INCOME TAX LAW. Repeated at If Corporation Returns. ^343 Sec. 239. That every corporation subject to taxation under this 1778 title and every personal service corporation shall make a return, stat- ing specifically the items of its gross income and the deductions and credits allowed by this title. ^344 The return shall be sworn to by the president, vice president, or 1788 other principal officer and by the treasurer or assistant treasurer. ^345 If any foreign corporation has no office or place of business in the 1046 United States but has an agent in the United States, the return shall be made by the agent. ^346 In cases where receivers, trustees in bankruptcy, or assignees are 1785 operating the property or business of corporations, such receivers, trustees, or assignees shall make returns for such corporations in the same manner and form as corporations are required to make returns. Any tax due on the basis of such returns made by receivers, trustees, or assignees shall be collected in the same manner as if collected from the corporations of whose business or property they have custody and control. ^347 Returns made under this section shall be subject to the provisions 1779 of sections 226 and 228. 1|348 When return is made under section 226 the credit provided in sub- 1861 division (c) of section 236 shall be reduced to an amount which bears the same ratio to the full credit therein provided as the number of months in the period for which such return is made bears to twelve months. Consolidated Returns. ^1349 Sec. 240. (a) That corporations which are affiliated within 1821 the meaning of this section shall, under regulations to be prescribed by the Commissioner with the approval of the Secretary, make a consolidated return of net income and invested capital for the pur- poses of this title and Title III, and the taxes thereunder shall be computed and determined upon the basis of such return: ^350 Provided^ That therf shall be taken out of such consolidated net 1822 income and invested capital^ the net income and invested capital of any such affiliated corporation organized after August 1, 1914, and not successor to a then existing business^ 50 per centum or more of whose gross income consists of gains, profits, commis- sions, or other income, derived from a Government contract or contracts made between April 6, 1917, and November 11, 1918, both dates inclusive. In such case the corporation so taken out shall be separately assessed on the basis of its own invested capital and net income and the remctinder of such affiliated group shall be assessed on the basis of the remaining consolidated invested capi- tal and net income. *1351 In any case in which a tax is assessed upon the basis of a con- 1824 sglidated return, the total tax shall be computed in the first instance 38 THB mCOME TAX LAW L»w Paragraph Repeated at ^ as a unit and shall then be assessed upon the respective affiliated corporations in such proportions as may be agreed upon among them, or, in the absence of any such agreement, then on the basis of the net income properly assignable to each. 11352 There shall be allowed in computing the income tax only one specific 1825 credit of $2,000 (as provided in section 236); in computing the war- profits credit (as provided in section 311) only one specific exemption of $3,000; and in computing the excess-profits credit (as provided in section 312) only one specific exemption of $3,000. 11353 (b) For the purpose of this section two or more domestic corpora- 1835 tions shall be deemed to be affiliated 11354 (1) if one* corporation owns directl> or controls through closely 1836 . affiliated interests or by a nominee or nominees substantially all the stock of the other or others, or 11355 (2) if substantially all the stock of two or more corporations is 1837 owned or controlled by the same interests. 11356 (c) For the purposes of section 238 a domestic corporation which 1843 owns a majority of the voting stock of a foreign corporation shall be deemed to have paid the same proportion of any income, war-profits and excess-profits taxes paid (but not including taxes accrued) by such foreign corporation during the taxable year to any foreign country or to any possession of the United States upon income derived from sources without the United States, which the amount of any dividends (not deductible under section 234) received by such domestic corporation from such foreign corporation during the taxable year bears to the total taxable income of such foreign corporation upon or with respect to which such taxes were paid: 11357 Provided, That in no such case shall the amount of the credit for ■ 1844 such taxes exceed the amount of such dividends {not deductible under section 234) received by such domestic corporation during the taxable year. Time and Place for Filing Returns, 11358 Sec. 241. (a) That returns of corporations shall be made at the 1807 same time as is provided in subdivision (a) of section 227. 11359 (b) Returns shall be made to the collector of the district in which 1045 is located the principal place of business or principal office or agency 1813 of the corporation, or, 11360 if it has no principal place of business or principal office or agency in 1047 the United States, then to the collector at Baltimore, Maryland. 1814 39 Law Paragraph THE INCOME TAX LAW. Repeated at^ PART IV. — ^Administrative Provisions. Payment of Taxes. 11361 Sec. 250. (a) That except as otherwise provided in this section 2000 and sections 221 and 237 the tax shall be paid in four installments, each consisting of one-fourth of the total amount of the tax. 1[362 The first installment shall be paid at the time fixed by law for filing 2001 the return, and 1f363 the second installment shall be paid on the fifteenth day of the third 2002 month, 1[364 the third installment on the fifteenth day of the sixth month, and 2003 1[365 the fourth installment on the fifteenth day of the ninth month, 2004 1[366 after the time fixed by law for filing the return. 2005 1[367 Where an extension of time for filing a return is granted the time for 2008 payment of the first installment shall be postponed until the date of the expiration of the period of the extension, but the time for payment of the other installments shall not be postponed unless the Commis- sioner so provides in granting the extension. U368 In any case in which the time for the payment of any installment is 2010 at the request of the taxpayer thus postponed, there shall be added as part of such installment interest thereon at the rate of of 1 per centum per month from the time it would have been due if no extension had been granted until paid. K369 If any installment is not paid when due, the whole amount of the tax 2017 unpaid shall become due and payable upon notice and demand by the Collector. 1[370 The tax may at the option of the taxpayer be paid in a single pay- 2006 ment instead of in installments, in which case the total amount shall be paid on or before the time fixed by law for filing the return, or, where an extension of time for filing the return has been granted, on or before the expiration of the period of such extension. 1[371] [ (b)]As soon as practicable after the return is filed, the Commissioner 1880 shall examine it. If it then appears that the correct amount of the tax is greater or less than that shown in the return, the installments shall be recomputed. 1[372 If the amount already paid exceeds that which should have been paid 1881 on the basis of the installments as recomputed, the excess so paid shall be credited against the subsequent installments; and if the amount already paid exceeds the correct amount of the tax, the excess shall be credited or refunded to the taxpayer in accordance with the provisions of section 252. 1[373 If the amount already paid is less than that which should have 1882 been paid, the difference shall, to the extent not covered by any 40 THE INCOME TAX LAW. Law Repeated Paragraph IF credits then due to the taxpayer under section 252, be paid upon notice and demand by the collector. K374 In such case if the return is made in good faith and the understate- 1884 ment of the amount in the return is not due to any fault of the tax- payer, there shall be no penalty because of such understatement. ^375 If the understatement is due to negligence on the part of the tax- 1885 payer, but without intent to defraud, there shall be added as part of the tax 5 per centum of the total amount of the deficiency, plus interest at the rate of 1 per centum per month on the amount of the deficiency of each installment from the time the installment was due. 1[376 If the understatement is false or fraudulent with intent to evade 1886 the tax, then, in lieu of the penalty provided by section 3176 of the Revised Statutes, as amended, for false or fraudulent returns will- fully made, but in addition to other penalties provided by law for false or fraudulent returns, there shall be added as part of the tax 50 per centum of the amount of the deficiency. 1[377 (c) If the return is made pursuant to section 3176 of the Revised 1899 Statutes as amended, the amount of tax determined to be due under such return shall be paid upon notice and demand by the collector. 1[378 (d) Except in the case of false or fraudulent returns with intent to 2029 evade the tax, the amount of tax due under any return shall be de- termined and assessed by the Commissioner within five years after the return was due or was made, and no suit or proceeding for the collection of any tax shall be begun after the expiration of five years after the date when the return was due or was made. In the case of such false or fraudulent returns, the amount of tax due may be deter- mined at any time after the return is filed, and the tax may be col- . lected at any time after it becomes due. 1[379 (e) If any tax remains unpaid after the date when it is due, and for 2011 ten days after notice and demand by the collector, then, except in the case of estates of insane, deceased, or insolvent persons, there shall be added as part of the tax the sum of 5 per centum on the amount due but unpaid, plus interest at the rate of 1 per centum per month upon such amount from the time it became due: ^380 Provided, That as to any such amount which is the subject of a 2012 bona fide claim for abatement such sum of 5 per centum shall not be added and the interest from the time the amount was due until the claim is decided shall be at the rate of of \ per centum per month. 11381 In the case of the first installment provided for in subdivision (a) the 2013 instructions printed on the return shall be deemed sufficient notice of the date when the tax is due and sufficient demand, and the tax- payer’s computation of the tax on the return shall be deemed suffi- cient notice of the amount due. 1[382 (f) In any case in which in order to enforce payment of a tax it is 2016 necessary for a collector to cause a warrant of distraint to be served, there shall also be added as part of the tax the sum of $5. 41 THE INCOME TAX LAW. Law Repeated Paragraph at ^ ^383 (g) If the Commissioner finds that a taxpayer designs quickly to 2073 depart from the United States or to remove his property therefrom, or to conceal himself or his property therein, or to do any other act tending to prejudice or to render wholly or partly ineffectual pro- ceedings to collect the tax for the taxable year then last past or the taxable year then current unless such proceedings be brought without delay, the Commissioner shall declare the taxable period for such taxpayer terminated at the end of the calendar month then last past and shall cause notice of such finding and declaration to be given the taxpayer, together with a demand for immediate payment of the tax for the taxable period so declared terminated and of the tax for the preceding taxable year or so much of said tax as is unpaid, whether or not the time otherwise allowed by law for filing return and paying the tax has expired; and such taxes shall thereupon become im- mediately due and payable. In any action or suit brought to enforce payment of taxes made due and payable by virtue of the provisions of this subdivision the finding of the Commissioner, made as herein provided, whether made after notice to the taxpayer or not, shall be for all purposes presumptive evidence of the taxpayer’s design. A taxpayer who is not in default in making any return or paying in- come, war-profits, or excess-profits tax under any Act of Congress may furnish to the United States, under regulations to be prescribed by the Commissioner with the approval of the Secretary, security approved by the Commissioner that he will duly make the return next thereafter required to be filed and pay the tax next thereafter required to be paid. The Commissioner may approve and accept in like manner security for return and payment of taxes made due and payable by virtue of the provisions of this subdivision, provided the taxpayer has paid in full all other income, war-profits, or excess- profits taxes due from him under any Act of Congress. ^ If security is approved and accepted pursuant to the provisions of this subdivision and such further or other security with respect to the tax or taxes covered thereby is given as the Commissioner shall from time to time find necessary and require, payment of such taxes shall not be en- forced by any proceedings under the provisions of this subdivision prior to the expiration of the time otherwise allowed for paying such respective taxes. Receipts for Taxes. 1(384 Sec. 251. That every collector to whom any payment of any 2102 tax is made under the provisions of this title shall upon request give to the person making such payment a full written or printed^ receipt, stating the amount paid and the particular account for which such payment was made; K385 and whenever any debtor pays taxes on account of payments made 2114 or to be made by him to separate creditors the collector shall, if re- quested by such debtor, give a separate receipt for the tax paid on account of each creditor in such form that the debtor can conveniently produce such receipts separately to his several creditors in satisfaction of their respective demands up to the amounts stated in the receipts; and such receipt shall be sufficient evidence in favor of such debtor to justify him in withholding from his next payment to his creditor the amount therein stated; but the creditor may, upon giving to 42 THE INCOME TAX LAW. Law Paragraph his debtor a full written receipt acknowledging the payment to him of any sum actually paid and accepting the amount of tax paid as aforesaid (specifying the same) as a further satisfaction of the debt to that amount, require the surrender to him of such collector’s Repeated at ^ receipt. Refunds. Sec. 252. That if, upon examination of any return of income 2121 made pursuant to this Act, the Act of August 5, 1909, entitled “An Act to provide revenue, equalize duties, and encourage the industries of the United States, and for other purposes,” the Act of October 3, 1913, entitled “An Act to reduce tariff duties and to provide revenue for the Government, and for other purposes,” the Revenue Act of 1916, as amended, or the Revenue Act of 1917, it appears that an amount of income, war-profits or excess-profits tax has been paid in ex- cess of that properly due, then, notwithstanding the provisions of section 3228 of the Revised Statutes, the amount of the excess shall be credited against any income, war-profits or excess-profits taxes, or installment thereof, then due from the taxpayer under any other return, and any balance of such excess shall be immediately refunded to the taxpayer: ^387 Provided, That no such credit or refund shall be allowed or 2122 made after five years from the date when the return was due, unless before the expiration of such five years a claim therefor is filed by the taxpayer. Penalties. ^388 Sec. 253. That "any individual, corporation, or partnership re- 1902 quired under this title to pay or collect any tax, to make a return or to supply information, who fails to pay or collect such tax, to make such return, or to supply such information at the time or times required under this title, shall be liable to a penalty of not more than $1,000. Any individual, corporation, or partnership, or any officer or employee of any corporation or member or employee of a partnership, who willfully refuses to pay or collect such tax, to make such return, or to supply such information at the time or times required under this title, or 11 - who willfully attempts in any manner to defeat or evade the tax im- posed by this title, shall be guilty of a misdemeanor and shall be fined not more than $10,000 or imprisoned for not more than one year, or both, together with the costs of prosecution. Returns of Payments of Dividends. 1[389 Sec. 254. That every corporation subject to the tax imposed 1762 by this title and every personal service corporation shall, when re- quired by the Commissioner, render a correct return duly verified under oath, of its payments of dividends, stating the name and address of each stockholder, the number of shares owned by him, and the amount of dividends paid to him. 43 THE INCOME TAX LAW. Repeated at ^ Law Paragraph Returns of Brokers. ^390 Sec. 255. That every individual, corporation, or partnership doing 1764 business as a broker shall, when required by the Commissioner, render a correct return duly verified under oath, under such rules and regula- tions as the Commissioner, with the approval of the Secretary, may prescribe, showing the names of customers for whom such individual, corporation, or partnership has transacted any business, with such details as to the profits, losses, or other information which the Com- missioner may require, as to each of such customers, as will enable the Commissioner to determine whether all income tax due on profits or gains of such customers has •been paid. Information at Source. 11391 Sec. 256. That all individuals, corporations, and partnerships, in 1728 whatever capacity acting, including lessees or mortgagors of real or personal property, fiduciaries, and employers, 11392 making payment to another individual, corporation, or partnership, 1729 1[3Q3 of interest, rent, salaries, wages, premiums, annuities, compensations, 1730 remunerations, emoluments, or other fixed, or determinable gams, profits, and income 11394 (other than payments described in sections 254 and 255), 1731 1[395 of $1,000 or more in any taxable year, 1732 lf396 or in the case of such payments made by the United States, the 1733 officers or employees of the United States having information as to such payments and required to make returns in regard thereto by the regulations hereinafter provided for, 11397 shall render a true and accurate return to the Commissioner, under 1734 such regulations and in such form and manner and to such extent as may be prescribed by him with the approval of the Secretary, setting forth the amount of such gains, profits, and income, and the name and address of the recipient of such payment. 11398 Such returns may be required, regardless of amounts, (1) in the 1747 case of payments of interest upon bonds, mortgages, deeds of trust, or other similar obligations of corporations, and 11399 (2) in the case of collections of items (not payable in the United 1749 States) of interest upon the bonds of foreign countries and interpt upon the bonds of and dividends from foreign corporations by in- dividuals, corporations, or partnerships, undertaking as a matter of business or for profit the collection of foreign payments ot such interest or dividends by means of coupons, checks, or bills of exchange. 11400 When necessary to make effective the provisions of this section the 1753 name and address of the recipient of income shall be furnished upon demand of the individual, corporation, or partnership paying the income. 44 THE INCOME TAX LAW. Law Repeated Paragraph “ 1[401 The provisions of this section shall apply to the calendar year 1735 1918 and each calendar year thereafter, 1[402 but shall not apply to the payment of interest on obligations of the 1745 United States. Returns to be Public Records. ^403 Sec. 257. That returns upon which the tax has been determined 1955 by the Commissioner shall constitute public records; 1[404 but they shall be open to inspection only upon order of the President 1956 and under rules and regulations prescribed by the Secretary and approved by the President: ^405 Provided^ That the proper officers of any State imposing an 1970 income tax may, upon the request of the governor thereof, have access to the returns of any corporation, or to an abstract thereof showing the name and income of the corporation, at such times and in such manner as the Secretary may prescribe: lf406 Provided further. That all bona fide stockholders of record 1972 owning 1 per centum or more of the outstanding stock of any corporation shall, upon making request of the Commissioner, be allowed to examine the annual income returns of such corpora- tion and of its subsidiaries . ]f407 Any stockholder who pursuant to the provisions of this section 1973 is allowed to examine the return of any corporation, and who makes known in any manner whatever not provided by law the amount or source of income, profits, losses, expenditures, or any particular thereof, set forth or disclosed in any such return, shall be guilty of a misdemeanor and be punished by a fine not exceeding $1,000, or by imprisonment not exceeding one year, or both. 11408 The Commissioner shall as soon as practicable in each year 1986 cause to be prepared and made available to public inspection in such manner as he may determine, in the office of the collector in each internal-revenue district and in such other places as he may determine, lists containing the names and the post-office addresses of all individuals making income-tax returns in such district. Publication of Statistics. 1[409 Sec. 258. That the Commissioner, with the approval of the 1987 Secretary, shall prepare and publish annually statistics reasonably available with respect to the operation of the income, war-profits and excess-profits-tax laws, including classifications of taxpayers and of income, the amounts allowed as deductions, exemptions, and credits, and any other facts deemed pertinent and valuable. Collection of Foreign Items. 1[410 Sec. 259. That all individuals, corporations, or partnerships under- 1755 taking as a matter of business or for profit the collection of foreign payments of interest or dividends by means of coupons, checks, or bills of exchange shall obtain a license from the Commissioner and 45 THE INCOME TAX LAW. Law Repeats Paragraph ^ ^411 shall be subject to such regulations enabling the Government to 1756 obtain the information required under this title as the Commissioner, with the approval of the Secretary, shall prescribe; ^412 and whoever knowingly undertakes to collect such payments without 1757 having obtained a license therefor, or without complying with such regulations, shall be guilty of a misdemeanor and shall be fined not more than $5,000, or imprisoned for not more than one year, or both. Citizens of United States Possessions. ^413 Sec. 260. That any individual who is a citizen of any possession 531 of the United States (but not otherwise a citizen of the United States) and who is not a resident of the United States, shall be subject to taxation under this title only as to income derived from sources within the United States, ^414 and in such case the tax shall be computed and paid in the same 532 manner and subject to the same conditions as in the case of other persons who are taxable only as to income derived from such sources. Porto Rico and Philippine Islands. ^415 Sec. 261. That in Porto Rico and the Philippine Islands the 534 income tax shall be levied, assessed, collected, and paid in accord- ance with the provisions of the Revenue Act of 1916 as amended. ^416 Returns shall be made and taxes shall be paid under Title I of 535 such Act in Porto Rico or the Philippine Islands, as the case may be, by ^417 (1) every individual who is a citizen or resident of Porto Rico or the 536 Philippine Islands or derives income from sources therein, and ^418 (2) every corporation created or organized in Porto Rico or the 537 Philippine Islands or deriving income from sources therein. ^[419 An individual who is neither a citizen nor a resident of Porto Rico or 538 the Philippine Islands but derives income from sources therein, shall be taxed in Porto Rico or the Philippine Islands as a nonresident alien individual, and ^420 a corporation created or organized outside Porto Rico or the Philippine 539 Islands and deriving income from sources therein shall be taxed in Porto Rico or the Philippine Islands as a foreign corporation. 11421 For the purposes of section 216 and of paragraph (6) of subdivision 540 (a) of section 234 a tax imposed in Porto Rico or the Philippine Islands upon the net income of a corporation shall not be deemed to be a tax under this title. 11422 The Porto Rican or Philippine Legislature shall have power by due 541 enactment to amend, alter, modify, or repeal the income tax laws in force in Porto Rico or the Philippine Islands, respectively. 46 Law Paragraph THE INCOME TAX LAW. Repeated at ^ TITLE XIII. — General Administrative Provisions. (Of the Revenue Act of 1918.) [Advisory Tax Board.] 1[423 Sec. 1301. (Revenue Act of 1918.) (a) . (b) . (c) . 2211 (d) (1) There is hereby created a board to be known as the “Advisory Tax Board,” hereinafter called the Board, and to be composed of not to exceed six members to be appointed by the Commissioner with the approval of the Secretary. The Board shall cease to exist at the expira- tion of two years after the passage of this Act, or at such earlier time as the Commissioner with the approval of the Secretary may designate. 1[424 Vacancies in the membership of the Board shall be filled in the 2212 same manner as an original appointment. Any member shall be subject to removal by the Commissioner with the approval of the Secretary. The Commissioner with the approval of the Secretary shall designate the chairman of the Board. Each member shall re- ceive an annual salary of $9,000, payable monthly, together with actual necessary expenses when absent from the District of Columbia on official business. 1f425 (2) The Commissioner may, and on the request of any taxpayer 2213 directly interested shall, submit to the Board any question relating to the interpretation or administration of the income^ war-profits or excess-profits tax laws, and the Board shall report its findings and recommendations to the Commissioner. ^{426 (3) The Board shall have its office in the Bureau of Internal Revenue 2214 in the District of Columbia. The expenses and salaries of members of the Board shall be audited, allowed, and paid out of appropriations for collecting internal revenue, in the same manner as expenses and salaries of employees of the Bureau of Internal Revenue are audited, allowed, and paid. 1(427 (4) The Board shall have the power to summon witnesses, take 2215 testimony, administer oaths, and to require any person to produce books, papers, documents, or other data relating to any matter under investigation by the Board. Any member of the Board may sign subpoenas and members and employees of the Bureau of Internal Revenue designated to assist the Board, when authorized by the Board, may administer oaths, examine witnesses, take testimony and receive evidence. [Leaves of Absence to Internal-Revenue Men.] 1(428 Sec. 1302. (Revenue Act of 1918.) That all internal-revenue 2239 agents and inspectors shall be granted leave of absence with pay, which shall not be cumulative, not to exceed thirty days in any calendar year, under such regulations as the Commissioner, with the approval of the Secretary, may prescribe. 47 THE INCOME TAX LAW. Repeated atH I.aw ""TrECORDS to be kept: returns to be MADE; BOOKS TO BE OPEN TO INSPECTION BY GOVERNMENT OFFICERS.] •’429 Sec. 1305. (Revenue Act of 1918.) That all administrative, 1998 " special, or stamp provisions of law, including the law relating to the aLessment of taxes, so far as applicable, are hereby extended to and made a part of this Act, and every person liable to any tax imposed bv this Act, or for the collection thereof, shall keep such records and render, under oath, such statements and returns, and shall compy with such regulations as the Commissioner, with the approval of the Secretary, may from time to time prescribe. 11430 Whenever in the judgment of the Commissioner necessary he may 1876 require any person, by notice served upon him, to make a return or such statements as he deems sufficient to show whether or not such person is liable to tax. «;4tl The Commissioner, for the purpose of ascertaining the correctness 1877 of any return or for the purpose of making a return where none has been made, is hereby authorized, by any revenue agent or inspector designated by him for that purpose, to examine any books, papew, records or memoranda bearing upon the matters required to be included in the return, and may require the attendance of the peison rendering the return or of any officer or employee of such person, or the attendanceof any other person having knowledge m the premises, and may take his testimony with reference to the matter required by law to be included in such return, with power to administer oaths to such person or persons. [TAX TO BE COLLECTED AS COMMISSIONER MAY PRESCRIBE IF NO METHOD IS SPECIFICALLY PROVIDED.] 11432 Sec. 1307. (Revenue Act of 1918.) That in all cases where the 1583 method of collecting the tax imposed by this Act is not specifically pro- vided in this Act, the tax shall be collected in such manner as the Com- missioner, with the approval of the Secretary, may prescribe. . . . [THE COMMISSIONER AUTHORIZED TO MAKE RULES AND REGULATIONS-! 11433 Sec. 1309. (Revenue Act of 1918.) That the Commissioner, with 2227 the approval of the Secretary, is hereby authorized to make all needful rules and regulations for the enforcement of the provisions of this Act. * * * [FRACTIONAL PARTS OF A CENT IN PAYMENT OF TAX.] Sec. 1313. (Revenue Act of 1918.) That in the payment of any 2089 tax under this Act not payable by stamp a fractional part of a cent shall be disregarded unless it amounts to one-half cent or more, in which case it shall be increased to 1 cent. ITPEASURY CERTIFICATES OF INDEBTEDNESS AND UNCERTIFIED CHECKS ' " IN PAYMENT OF TAXES.] [35 Sec. 1314. (Revenue Act of 1918.) That collectors may receive, 2091 at par with an adjustment for accrued interest, certificates^ of in- debtedness issued by the United States and uncertified checks in pay- 48 T.434 THE INCOME TAX LAW. Law Paragraph Repfa e at f ^1f435) merit of income, war-profits and excess-profits taxes and any other (2091) taxes payable other than by stamp, during such time and under such regulations as the Commissioner, with the approval of the Secretary, shall prescribe; but if a check so received is not paid by the bank o a which it is drawn the person by whom such check has been tendered shall rernain liable for the payment of the tax and for all legal penalties and additions the same as if such check had not been tendered. [AMENDED SECTIONS OF THE REVISED STATUTES.) [Commient: The following sections of the Revised Statutes, having directly to do with the admxinistration of the Income Tax Law, are reprinted here because of the fact that they were am.ended by’ the Revenue Act of 1918. These sections, with the exception of section 3220 and sections 3164 and 3165, were carried into the Income Tax Title of the Re\enue Act of 1916 as amended by the Revenue Act of 1917. They are no longer embodied in the Income Tax Law. Section 3173, Revised Statutes, heretofore carried in the Income Tax Law, was so amended by the Revenue Act of 1918 (Sec. 1317), as to make it inapplicable to the income tax, and for that reason it is not incorporated here.] [REMISSION AND REFUSING OF TAXES AND PENALTIES.] ^436 Sec. 1316. (Revenue Act of 1918.) (a) That section 3220 of 2116 the Revised Statutes is hereby amended to read as follows: “Sec. 3220. The Commissioner of Internal Revenue, subject to regulations prescribed by the Secretary of the Treasury, is author- ized to remit, refund, and pay back all taxes erroneously or illegally assessed or collected, all penalties collected without authority, and all taxes that appear to be unjustly assessed or excessive In amount, or in any manner wrongfully collected; also to repay to any collector or deputy collector the full amount of such sums of money as may be recovered against him In any court, for any internal revenue taxes collected by him, with the cost and expenses of suit; also all damages and costs recovered against any assessor, assistant assessor, collector, deputy collector, agent, or inspector, in any suit brought against him by reason of anything done in the due performance ofliis official duty, and shall make report to Congress at the beginning of each regular session of Congress of all transactions under this section.” [BURDEN OF PROOF AS TO FRAUD IN CONNECTION WITH SUITS TO RECOVER TAXES ON SECOND ASSESSMENT.) ^437 (b) Section 3225 of the Revised Statutes of the United States is 2176 hereby amended to read as follows: “Sec. 3225. When a second assessment is made in case of any list, statement, or return, which in the opinion of the collector or deputy collector was false or fraudulent, or contained any under- statement or undervaluation, such assessment shall not be remitted nor shall taxes collected under such assessment be refunded, or paid back, or recovered by any suit, unless It Is proved that such list, statement, or return was not willfully false or fradulent and did not contain any willful understatement or undervaluation.” 49 THE INCOME TAX LAW. Law Repeated Paragrs ph at «lf ^438 Sec. 1317. (Revenue Act of 1918.) That sections 3164, 3165, 3167, 3172, 3173, and 3176 of the Revised Statutes as amended are hereby amended to read as follows: [Duty of Collectors to Report Violations of Law.] ^[439 ‘‘Sec. 3164. It shall be the duty of every collector of internal 2068 revenue having knowledge of any willful violation of any law of the United States relating to the revenue, within thirty days after com- ing into possession of such knowledge, to file with the district attorney of the district in which any fine, penalty' or forfeiture may be in- curred, a statement of all the facts and circumstances of the case within his knowledge, together with the names of the witnesses, setting forth the provisions of law believed to be so violated on which reliance may be had for condemnation or conviction. [R.evenue Officers Who May Administer Oaths.] ^j440 “Sec. 3165. Every collector, deputy collector, internal-revenue 1790 agent, and internal-revenue officer assigned to duty under an internal- revenue agent, is authorized to admiinister oaths and to take evidence touching any part of the administration of the internal-revenue laws with which he is charged, or v/here such oaths and evidence are authorized by law or regulation authorized by law to be taken. [Disclosure of Information Made Available to Internal Revenue Officers.] ^441 “Sec. 3167. It shall be unlawful for any collector, deputy col- 1976 lector, agent, clerk, or other officer or employee of the United States to divulge or to make known in any manner whatever not provided by law to any person the operations, style of work, or apparatus of any m.anufacturer or producer visited by him in the discharge of his official duties, or the amount or source of income, profits, losses, expenditures, or any particular thereof, set forth or disclosed in any income return, or to permit any income return or copy thereof or any book containing any abstract or particulars thereof to be seen or examined by any person except as provided by law; and it shall be unlawful for any person to print or publish in any manner whatever not provided by law any income return, or any part thereof or source of income, profits, losses, or expenditures appearing in any income return; and any offense against the foregoing provision shall be a mis- demeanor and be punished by a fine not exceeding $1,000 or by imprisonment not exceeding one year, or both, at the discretion of the court; and if the offender be an officer or employee of the United States he shall be dismissed from office or discharged from employ- ment. [Canvass of Districts by Collectors.] ^[442 “Sec. 3172. Every collector shall, from time to time, cause his 1867 deputies to proceed through every part of his district and inquire after and concerning all persons therein who are liable to pay any internal-revenue tax, and all persons owning or having the care and management of any objects liable to pay any tax, and to make a list of such persons and enumerate said objects. * * * Hi * H “Sec. 3173. 50 [See 111981.] THE INCOME TAX LAW. Repeated at *11 Law Paragraph [Penalties for Failure to Make Return and for False Returns.] 1[443 Sec. 3176. If any person, corporation, company, or associa- 1889 tion fails to make and file a return or list at the time prescribed by law or by regulation made under authority of law, or makes, will- fully or otherwise, a false or fraudulent return or list, 1[444 the collector or deputy collector shall make the return or list from 1890 his own knowledge and from such information as he can obtain through testimony or otherwise. 1[445 In any such case the Commissioner may, from his own knowledge 1891 and from such information as he can obtain through testimony or otherwise, make a return or amend any return made by a collector or deputy collector. 1f446 Any return or list so made and subscribed by the Commissioner, or 1892 'by a collector or deputy collector and approved by the Commis- sioner, shall be prima facie good and sufficient for all legal purposes. 1[447 “If the failure to file a return or list is due to sickness or absence, 1847 the collector may allow such further time, not exceeding thirty days, for making and filing the return or list as he deems proper. 1[448 “The Commissioner of Internal Revenue shall determine and|l893 assess all taxes, other than stamp taxes, as to which returns or lists are so made under the provisions of this section. ^449 In case of any failure to make and file a return or list within the 1894 time prescribed by law, or prescribed by the Commissioner of In- ternal Revenue or the collector in pursuance of law, the Commis- sioner of Internal Revenue shall add to the tax 25 per centum of its amount, 1[450 except that when a return is filed after such time and it is shown that 1895 the failure to file it was due to a reasonable cause and not to willful neglect, no such addition shall be made to the tax. ' K451 In case a false or fraudulent return or list is willfully made, the 1896 Commissioner of Internal Revenue shall add to the tax 50 per centum of its amount. ^452 “The amount so added to any tax shall be collected at the same 1897 time and in the same manner and as part of the tax ^453 unless the tax has been paid before the discovery of the neglect,M898 falsity, or fraud, in which tase the amount so added shall be collected in the same manner as the tax.” [Jurisdiction of U. S. District Courts.) 1(454 Sec. 1318. (Revenue Act of 1918.) That if any person is sum- 1878 moned under this Act to appear, to testify, or to produce books, papers or other data, the district court of the United States for the district in which such person resides shall have jurisdiction by ap- 51 THE INCOME TAX LAW. I Law Repeated Paragraph at t propriate process to compel such attendance, testimony, or produc- tion of books, papers, or other data. 1[455^,The district courts of the United States at the instance of the United 1879 States are hereby invested with such jurisdiction to make and issue, both in actions at law and suits in equity, writs and orders of injunction and of ne exeat republica, orders appointing receivers, and such other orders and process, and to render such judgments and decrees, granting in proper cases both legal and equitable relief together, as may be necessary or appropriate for the enforcement of the provisions of this Act. The remedies hereby provided are in addition to and not exclu- sive of any and all other remedies of the United States in such courts or otherwise to enforce such provisions. (UNITED STATES BONDS IN LIEU OF SURITIES, IN CONNECTION WITH “PENAL BONDS.”] f456 Sec. 1320. (Revenue Act of 1918.) That wherever by the laws of 1500 • the United States or regulations made pursuant thereto, any person is required to furnish any recognizance, stipulation, bond, guaranty, ^ or undertaking, hereinafter called “penal bond”, with surety or sureties, such person may, in lieu of such surety or sureties, deposit as security with the official having authority to approve such penal bond. United States Liberty bonds or other bonds of the United States in a sum equal at their par value to the amount of such penal bond required to be furnished, together with an agreement authorizing such official to collect or sell such bonds so deposited in case of any default in the performance of any of the conditions or stipulations of such penal bond. The acceptance of such United States bonds in lieu of surety or sureties required by law shall have the same force and effect as individual or corporate sureties, or certified checks, bank drafts, post-office money orders, or cash, for the penalty or amount of such penal bond. The bonds deposited hereunder, and such other United States bonds as may be substituted therefor from time to time as such security, may be deposited with the Treasurer, or an Assistant Treasurer of the United States, a Government depository. Federal Reserve bank, or member bank, which shall issue receipt therefor, describing such bonds so deposited. As soon as security for the per- formance of such penal bond is no longer necessary, such bonds so deposited, shall be returned to the depositor: Provided, * * * , 1457 Provided further, That nothing herein contained shall affect or impair the priority of the claim of the United States against the bonds deposited or any right or remedy granted by said Acts or by this section to the United States for (default upon any obliga- tion of said penal bond: 1501 1(458 Provided further. That all laws inconsistent with this section are hereby so modified as to conform to the provisions hereof: 1502 1(459 And provided further, That nothing contained herein shall aftect the authority of courts over the security, where such bonds are taken as security in judicial proceedings, or the authority of any 52 1503 Law Paragraph THE INCOME TAX LAW. Repeated at ^ administrative officer of the United States to receive United States bonds for security in cases authorized by existing laws, 1[460 The Secretary may prescribe rules and regulations necessary and 1504 proper for carrying this section into effect. TITLE XIV.— GENERAL PROVISIONS. (Of the Revenue Act of 1918.) [Repeal of Prior Laws.) 1[461 Sec. 1400. (Revenue Act of 1918.) (a) That the following 2032 parts of Acts are hereby repealed, subject to the limitations provided in subdivision (b): (1) The following titles of the Revenue Act of 1916: Title I (called “Income Tax”); ********* (2) The following parts of the Act entitled “An Act to provide increased revenue to defray the expenses of the increased appropria- tions for the Army and Navy and the extensions of fortifications, and for other purposes,” approved March 3, 1917: ********* Section 402 (called “Returns of Dividends”). (3) The following titles of the Revenue Act of 1917: Title I (called “War Income Tax”); ********* Title X (called “Administrative Provisions”) ; Title XII (called “Income-Tax Amendments”). ^462 (b) Such parts of Acts shall remain in force for the assessment 2033 and collection of all taxes which have accrued thereunder, and for the imposition and collection of all penalties or forfeitures which have accrued and may accrue in relation to any such taxes, and except that the unexpended balance of any appropriation heretofore made and now available for the administration of any such part of an Act shall be available for the administration of this Act or the corresponding provision thereof: Provided^ That, except as otherwise provided in this Act, no taxes shall be collected under Title I of the Revenue Act of 1916 as amended by the Revenue Act of 1917, or Title I or II of the Revenue Act of 1917, in respect to any period after December 31, 1917: ******** ^463 In the case of any tax imposed by any part of an Act herein re- 2034 pealed, if there is a tax imposed by this Act in lieu thereof, the pro- vision imposing such tax shall remain in force until the corresponding tax under this Act takes effect under the provisions of this Act. 1[464 Title I of the Revenue Act of 1916 as amended by the Revenue 542 Act of 1917 shall remain in force for the assessment and collection of the income tax in Porto Rico and the Philippine Islands, except as may be otherwise provided by their respective legislatures. 53 THE INCOME TAX LAW. Law Paragraph [Invalidating Clause.] 1[465 Sec. 1402. (Revenue Act of 1918.) That if any clause, sen- 2240 tence, paragraph, or part of this Act shall for any reason be adjudged by any court of competent jurisdiction to be invalid, such judgment shall not affect, impair, or invalidate the remainder of this Act, but shall be confined in its operation to the clause, sentence, paragraph, or part thereof directly involved in the controversy in which such judgment has been rendered. [Short Titles.] 1[466 Sec. 1403. (Revenue Act of 1918.) That the Revenue Act of 774 1916 is hereby amended by adding at the end thereof a section to read as follows: “Sec. 903. That this Act may be cited as the ‘Revenue Act of 1916’.” - lf467 Sec. 1404. (Revenue Act of 1918.) That the Revenue Act of 776 1917 is hereby amended by adding at the end thereof a section to read as follows: “Sec. 1303. That this Act may be cited as the ‘Revenue Act of 1917’.” Tf468 Sec. 1405. (Revenue Act of 1918.) That this Act may be cited 777 as the “Revenue Act of 1918.” Sec. 1408. [See 11580.] [Effective Date.] 1f469 Sec. 1409. Revenue Act of 1918.) That unless otherwise 2418 herein specially porvided, this Act shall take effect on the day fol- lowing its passage. Comment . — [The p rovisions of Title XIII and Title XIV, so far as reproduced above, there being no specific provision to the con- trary, became effective on the day following “the passage” of the Act, that is on February 25, 1919, the day after approval by the President.] Approved by the President, February 24, 1919, at 6.55 P. M. Repeated at^ 11470 For 1(470 see page 55. The CosnpHation INCOME TAX LAW AND REGULATIONS. INCOME TAX LIABILITY. Law j[12. “Taxpayer” Defined. — “The term ‘taxpayer’ includes any person, trust or estate subject to a tax imposed by this Act;” 471 A taxpayer is any person, trust or estate subject to tax. (Art. 1501, Reg. 45, Rev., April 17, 1919.) 472 Law 1[2. The Term “Person” as Used in the Revenue Act of 1918. — “The term ‘person’ includes partnerships and corporations, as well as individuals 473 The statute recognizes three chief classes of persons, to wit, individ- uals, partnerships and corporations. Corporations include associa- tions, joint-stock companies and insurance companies, but not partner- ships properly so-called, (Art. 1501, Reg. 45, Rev., April 17, 1919.) 474 Income Tax Liability — The statute imposes an income tax on individuals, including a normal tax and a surtax. See section 211 of the statute [for surtax |[482]. The tax is upon net income, as defined in the statute, after deducting from gross income, as defined in the statute, the allowable deductions. In certain cases credits are allowed against net income and against the amount of the tax. Special provisions of the statute deal with the effect of the tax on nonresident alien individuals, partnerships and personal service corporations, estates and trusts, and the stockholders of corporations which unreasonably accumulate their profits. The tax is payable upon the basis of returns rendered by the persons liable thereto, except that m some instances it is to be paid at the source of the income! i he statute also imposes an income tax at a fixed rate and a war profits 1919T^^^^ corporations. (Art. 1, Reg. 45, Rev., April 17, Persons Paying Income Taxes to Other Countries.— American citizens, whether residing at home or abroad, resident aliens, and non-resident aliens receiving income from property owned and from busi- ness, trade, or profession carried on witliin the United States, all of whom flv October 3, 1913, are not relieved from tTtbe Wn T 1 '’y ‘he faet that they are also subject in283 1 7 t eetmtries. [See credit for such taxes at 1I1283.J (T. D. 2152, February 12, 1915.) 470 Lavv [[75. Normal Tax on All Individuals. — “Sec. 210. That, in 1 rxT 1 . . Ihe taxes imposed by sub-division (a) of section rwT“ '"'^hyiduals] of the Revenue Act of 1916 and byf section [War-normal tax on individuals] of the Revenue Act of 1917 there shall e levied collected, and paid for each taxable year upon the net income 'SIS •' • "“"-I INC. 55 TAX NORMAL TAX AND SURTAX ON INDIVIDUALS. 477 Law]f76. Rates for 1918. — “(a) For the calendar year 1918, 12 per centum of the amount of the net income in excess of the credits provided in section 216 [j[1513] 478 Law ^77. Special 1918 Rate for Citizens and Residents. — “Pro- vided, That in the case of a citizen or resident of the United States the rate upon the first $4,000 of such excess amount shall be 6 per centum;” Application of Rates for Fiscal Year Embracing Parts of Calendar Years with Differing Rates. — [Read at 1|613]. 479 Law1f78. Rates for 1919. — “(b) For each calendar year there- after, 8 per centum of the amount of the net income in excess of the credits provided in section 216 [111513] 480 LawU79. Special 1919 Rate for Citizens and Residents. — “Pro- vided, That in the case of a citizen or resident of the United States the rate upon the first $4,000 of such excess amount shall be 4 per centum.” 481 For the calendar year 1918 the normal income tax on individual citizens or residents of the United States is at the rate of 6 per cent upon the first $4,000 of net income subject to the normal tax and 12 per cent upon the excess over that amount, and for the calendar year 1919 and subsequent years is at the rate of 4 per cent upon the first $4,000 and 8 per cent upon the excess over that amount. The lower rate on the first $4,000 applies to each separate individual, whether married or un- married, and should not be confused with the^ joint exemption granted married persons. In the case of non-resident alien individuals the normal tax for 1918 is 12 per cent and for subsequent years 8 per cent. In order to determine the income to which the normal tax is applied, the net income, as defined in section 212 of the statute and articles 21-26 [beginning at |[769] of the regulations, is first entitled to the credits and exemptions specified in section 216 of the statute and articles 301-307 [beginning at P516]. (Art. 2, Reg. 45, Rev., April 17, 1919.) 482 LawT|80. Surtax on Net Income: All Individuals. — ;‘‘Sec. 211. (a) That, in lieu of the taxes imposed by subdivision (b) of section 1 [surtax on individuals — income tax] of the Revenue Act of 1916 and by section 2 [surtax on individuals — war-income tax] of the Revenue Act of 1917, but in addition to the normal tax imposed by section 210 [11476] of this Act, there shall be levied, collected, and paid for each taxable, year upon the net income of every individual, a surtax equal to the sum of the following:” 483 In addition to the normal tax a surtax is imposed at the rates specified in the statute upon the net income of every ^ individual, resident or nonresident. In determining the taxable net income for the purpose of the surtax, the credits provided by section 216 [TI1513] of the statute in the case of the normal tax are not applicable. (Art. 11, Reg. 45, Rev., April 17, 1919.) INC. 56 TAX NORMAL TAX AND SURTAX ON INDIVIDUALS. 484 Full Credit for All Allowable Deductions to be Taken in Com- puting Net Income Subject to Surtax. — In reply to your second inquiry you are informed that if Item J, page 2 of Form 1040 [as prescribed for use in returning income for the taxable year 1918] shows a net loss, the amount of same may be deducted from thci total of Items K-a and K-b as shown on line I, before bringing this itemi forward to line 15, page 1 of the return. (Letter to Alexander John Lindsay, 'Jslew York, N. Y., signed by J. A. Callan, Assistant to the Commissioner, and dated May 6, 1919.) 485 Law]f81. Surtax Rates. — “1 per centum of the amount by which the net income exceeds $5,000 and does not exceed $ 6 , 000 ; 2 per centum of the amount by which the net income exceeds $6,000 and does not exceed $8,000; 3 per centum of the amount by which the net income exceeds $8,000 and does not exceed $10,000; 4 per centum of the amount by which the net income exceeds $10,000' and does not exceed $12,000; 5 per centum of the amount by which the' net income exceeds $12,000 and does not exceed $14,000; 6 per centum of the amount by which the net income exceeds $14,000 and does not exceed $16,000; 7 per centum of the amount by which the net income exceeds $16,00G and does not exceed $18,000; 8 per centum of the amount by which the net income exceeds $18,000 and does not exceed $20,000 ; 9 per centum of the amount by which the net income exceeds $20,000 and does not exceed $22,000 ; 10 per centum of the amount by which the net income exceeds $22,000 and does not exceed $24,000; 11 per centum of the amount by which the net income exceeds $24,000 and does not exceed $26,000; 12 per centum of the amount by which the net income exceeds $26,000 and does not exceed $28,000 ; 13 per centum of the amount by which the net income exceeds $28,000' and does not exceed $30,000; 14 per centum of the amount by which the net income exceeds $30,000' and does not exceed $32,000; 15 per centum of the. amount by which the net 'income exceeds $32,000 and does not exceed $34,000; 16 per centum of the amount by which the net income exceeds $34,000 and does not exceed $36,000; 17 per centum of the amount by which the net income exceeds $36,000 and does not exceed $38,000; 18 per centum of the amount by which the net income exceeds $38,000 and does not exceed $40,000; 19 per centum of the amount by which the net income exceeds $40,00Q and does not exceed $42,000; 20 per centum of the amount by which the net income exceeds $42,000 and does not exceed $44,000; 21 per centum of the amount by which the net income Exceeds $44,000 and does not exceed $46,000; INC. 57 TAX NORMAL TAX AND SURTAX ON INDIVIDUALS. ( 485 ) 22 per centum of the amount by and does not exceed $48,000 ; 23 per centum of the amount by and does not exceed $50,000; 24 per centum of the amount by and does not exceed $52,000 ; 25 per centum of the amount by and does not exceed $54,000 ; 26 per centum of the amount by and does not exceed $56,000 ; 27 per centum of the amount by and does not exceed $58,000; 28 per centum of the amount by and does not exceed $60,000; 29 per centum of the amount by and does not exceed $62,000; 30 per centum of the amount by and does not exceed $64,000; 31 per centum of the amount by and does not exceed $66,000 ; 32 per centum of the amount by and does not exceed $68,000 ; , , , 33 per centum of the amount by and does not exceed $70,000 ; 34 per centum of the amount by and does not exceed $72,000 ; 35 per centum of the amount by and does not exceed $74,000 ; 36 per centum of the amount by and does not exceed $76,000 ; 37 per centum of the amount by and does not exceed $78,000 ; 38 per centum of the amount by and does not exceed $80,000 ; 39 per centum of the amount by and does not exceed $82,000; 40 per centum of the amount by and does not exceed $84,000 ; 41 per centum of the amount by and does not exceed $86,000 ; 42 per centum of the amount by and does not exceed $88,000; 43 per centum of the amount by and does not exceed $90,000; 44 per centum of the amount by and does not exceed $92,000; 45 per centum of the amount by and does not exceed $94,000 ; 46 per centum of the amount by and does not exceed $96,000 ; 47 per centum of the amount by and does not exceed $98,000; which the net income exceeds $46,000 which the net income exceeds $48,000 which the net income exceeds $50,000 which the net income exceeds $52,000 which the net income exceeds $54,000 which the net income exceeds $56,000 which the net income exceeds $58,000 which the net income exceeds $60,000 which the net income exceeds $62,000 which the net income exceeds $64,000 which the net income exceeds $66,000 which the net income exceeds $68,000 which the net income exceeds $70,000 which the net income exceeds $72,000 which the net income exceeds $74,000 which the net income exceeds $76,000/ which the net income exceeds $78,000 which the net income exceeds $80,000 which the net income exceeds ’ $82,000 which the net income exceeds $84,000 which the net income exceeds $86,000 which the net income exceeds $88,000 which the net income exceeds $90,000 which the net income exceeds $92,000 which the net income exceeds $94,000 which the net income exceeds $96,000 58 TAX INC. NORMAL TAX AND SURTAX ON INDIVIDUALS. amount by which the net income exceeds ( 485 ) 48 per centum of the amount by which the net income exceeds $98,000 and does not exceed $100,000; 52 per centum of the amount by which the net income exceeds $100,000 and does not exceed $150,000; 56 per centum of the amount by which the net income exceeds $150,000 and does not exceed $200,000 ; 60 per centum of the amount by which the net income exceeds $200,000 and does not exceed $300,000 ; 63 per centum of the amount by which the net income exceeds $300 000 and does not exceed $500,000; 64 per centum of the amount by which the net income exceeds $500 000 and does not exceed $1,000,000; 65 per centum of the $1,000,000.’’ Application of the Rates for Fiscal Year Embracing Parts of Cal- endar Years With Differing Rates.— [Read at 11613.] Cornputation of Surtax.— The following table shows the surtax on net incomes of the specified amounts. In each instance the first figure of net income in the net income column is to be excluded and the sec- ond figure included. The percentage given opposite applies to the excess of income over the first figure in the net income column, and the sum in the next column is the tax* on the entire difference between the first figure and fhe second figure in the net income column. The final column gives the total suitax on a net income equal to the second figure in the net income column. Net Income $5,000 to $6,000 $6,000 to S8.000. .. .. . $8,000 to $10, 000 $10,000 to $12,000 $12,000 to $14, 000 $14,000 to 816,000 $16,000 to $18, 000 $18,000 to $20,000 $20,000 to $22,000 $22,000 to $24,000 $24,000 to $26,000 $26,000 to $28,000 $28,000 to $30,000 $30,000 to $32,000 $32,000 to $34, 000 $34,000 to $36, 000 $36,000 to $38,000 $38,000 to $40,000 $40,000 to $42,000 $42,000 to $44,000 $44,000 to $46,000 $46,000 to $48,000 $48,000 to $50,000 $50,000 to $52,000 $52,000 to $54, 000 $.54,000 to $56,000 Per Cent. Surtax Total surtax 1 • $10 $10 2 40 50 3 60 no 4 80 190 5 100 290 6 120 410 7 140 550 8 160 710 9 180 890 10 200 1,090 ^ 11 220 1,310' 12 240 1,550 13 260 1,810 14 280 2,090 15 300 2,390 16 320 2,710 17 340 3,050 18 360 3,410 19 380 3,790 ^ 20 400 4,190 - 21 420 4,610 22 440 5,050 23 460 5,510 24 480 5,990 25 500 6,490 26 520 7,010 INC. 59 TAX NORMAL TAX AND SURTAX ON INDIVIDUALS. Per Cent. 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 52 56 60 63 64 65... Surtax 540 560 580 600 620 640 660 680 ^ 700 ^ 720 740 760 780 800 820 840 860 880 900 920 940 960 26,000 28,000 60,000 126,000 320,000 Total Surtax 7,550 ( 486 ) Net Income $56,000 to $58,000 $58,000 to $60,000 $60,000 to $62,000 $62,000 to $64,000 $64,000 to $66,000 $66,000 to $68,000 $68,000 to $70,000 $70,000 to $72,000 $72,000 to $74,000 $74,000 to $76,000 $76,000 to $78,000 $78,000 to $80,000 $80,000 to $82,000 : $82,000 to $84,000 $84,000 to $86,000 $86,000 to $88,000 $88,000 to $90,000 $90,000 to $92,000 $92,000 to $94,000 $94,000 to $96,000 $96,000 to $98,000 $98,000 to $100,000 $100,000 to $150,000 $150,000 to $200,000 $200,000 to $300,000 $300,000 to $500,000 $500,000 to $1,000,000 $1,000,000 up The surtax for any amount of net income not shown in the above tab e is computed by adding to the total surtax for the largest amount shown which is less than the income the surtax upon the excess over that amoun at the rate indicated in the table. For example, if the amount of net i^me is $63,128, the surtax is the sum of $8,690 (the surtax upon $62,000 as shown by the table) plus 30 per cent of $1,128, or $^8.40 making a total surtax of $9,028.40. (Art.i 12, Reg. 45, Rev., April 17, 1919.) 487 Law 1182. Maximum Surtax Limitation in the Case of the Sak of Certain Mines, or Oil or Gas Wells.-" (b) In the case of a bona fide sale of mines, oil or gas wells, or any interest therein, where the principal value of the property has been demonstrated by pros- pecting or exploration and discovery work done by the taxpayer, the portion of the tax imposed by this section attributable to such sale shall not exceed 20 per centum of the selling price of such property or interest.” 488 Where the taxpayer by prospecting and locating claims, or by ex- ploring and discovering undeveloped claims, has ^ demonstrated the principal value of mines, oil or gas wells, which prior to his efforts had a merely nominal value, the portion of the surtax attributable to a sale of such property or of the taxpayer’s interest therein shall not exceed 20 per cent of the selling price. Exploration work alone without discovep^ is not sufficient to bring a case within this provision. Shares of stock in a corporation owning mines, oil or gas wells do not constitute an interest INC. 60 TAX 8,110 8.690 9,290 9.910 10.550 11,210 11,890 12.590 13,310 14.050 14,810 15.590 16,390 17,210 18.050 18.910 19,790 20.690 21,610 22.550 23.510 49.510 77.510 137.510 263.510 583.510 NORMAL TAX AND SURTAX ON INDIVIDUALS. in such property. To determine the application of this provision to a particular case, die taxpayer should first compute the surtax in the ordinary way upon his net income, including his net income from any such sale. The proportion of the surtax indicated by the ratio which the taxpayer’s net income from the sale of the property, computed as prescribed in article 715, [|[489] bears to his total net income is the portion of the surtax attribu- table to such sale, and if it exceeds 20 per cent of the selling price of the property such portion of the surtax shall be reduced to that amount. See articles 218-221, [for discovery of mine or oil or gas well, beginning at P4251. (Art. 13, Reg. 45, Rev., April 17, 1919.) 489 Allocation of Net Income to Particular Source. — Whenever it is necessary to determine the portion of the net income derived from or attributable to a particular source, the corporation shall allocate to the gross income derived from such source, and to the gross income derived from each other source, the expenses, losses and other deduc- tions properly appertaining thereto, and shall apply any general ex- penses, losses and deductions (which can not properly be otherwise apportioned) ratably to the gross income from all sources. The gross income derived from a particular source, less the deductions properly appertaining thereto and less its proportion of any general deductions, shall be the net income derived from such source. The corporation shall submit with its return a statement fully explaining the manner in which such expenses, losses and deductions were allocated or distrib- uted. (Art. 715, Reg. 45, Rev., April 17, 1919.) 490 Surtax Computed on Separate Incomes of Husband and Wife. — The regulations of the department requiring the incomes of husband and wife to be combined and authorizing the aggregate exemption * * * from such combined income are applicable for the purpose of the normal tax only. The additional, or surtax, imposed by the act will be computed on the basis of the separate income of each individual ; that is, on the amount of each individual’s income in excess of the minimum amounts upon which the surtax at the graduated rate is to be calculated. (T. D. 2090, Dec. 14, 1914.) 491 The separate incomes of husband and wife should not be combined in a return of income for the purpose of assessing the additional or surtax. (T. D. 2137, Jan. 30, 1915.) 492 All Taxable Income Received by Beneficiaries Through Fiduciar- ies is Subject to Surtax. — A beneficiary is liable for the normal tax upon the amount of net income derived by him from a taxable source through a fiduciary ^ ^ * and is also liable for the additional tax assess- able on the amount of net income received by him in excess of [$5,000], and in order to determine whether the net income of a beneficiary is or is not in excess of [$5,000] and subject to the additional tax the amount derived by him from an estate and all other taxable sources is required to be shown on his personal annual return. (T. D. 2090, Dec. 14, 1914.) 493 Corporations Are Not Subject to Surtax. — Corporations coming within the terms of this law are subject to the normal tax only; that is, a tax computed at a level rate of [10] per cent of their entire net .'income regardless of the amount of such net income [in excess of the credits] (Art. 185, Reg. 33, Jan. 5, 1914.) INC. 61 TAX NORMAL TAX AND SURTAX ON INDIVIDUALS. 494 Dividends Received by Beneficiaries Through Fiduciaries are Sub- ject to Surtax. — Dividends in the hands of a fiduciary and belong- ing to a beneficiary are not subject to the normal tax, but will be subject to the additional tax to the beneficiary whenever the beneficiary’s income from all taxable sources. is in excess of [$5,000]. (T. D. 2090, Dec. 14, 1914.) 495 Specific Exemptions in Its Relation to the Additional Tax. — Per- sonal exemptions from tax are granted in respect of the norrnal income tax only. Where the total of allowable exemptions and credits exceeds the amount of net income, the excess of such exemptions may not be availed of as against the additional tax. (Art. 14, 1[154, Reg. 33, Rev., Jan. 2, 1918.) 496 In Hyman Cohen vs. John Z. Lowe, Jr., Collector, District Court, Southern District of New York, July 18, 1916 (234 Fed. 474) *the Court held against the contention of the plaintiff, that, before assessing the additional tax on the excess of net income over $20,000, he should have been allowed an exemption of $3,000, as in the case. of the normal tax (Act of 1913). [Comment.] 497 Lawp97. Individuals May Be Subject to Normal Tax and to Surtax on Undistributed Profits of Certain Corpora- tions. — “Sec. 220. That if any corporation, however created or organ- ized, is formed or availed of for the purpose of preventing the imposition of the surtax upon its stockholders or members through the medium of permit- ting its gains and profits to accumulate instead of being divided or distrib- uted, such corporation shall not be subject to the tax imposed by section 230 [J[713], but the stockholders or members thereof shall be subject to taxation under this title in the same manner as provided in subdivision (e) of section 218 [1[593] in the case of stockholders of a personal service corporation, except that the tax imposed by Title III [war-profits and excess-profits tax] shall be deducted from the net income of the corporation before the computation of the proportionate share of each stockholder or member.” 498 LawpQS. “The fact that any corporation is a mere holding com- pany, or that the gains and profits are permitted to ac- cumulate beyond the reasonable needs of the business, shall be prima facie evidence of a purpose to escape the surtax;” 499 Law p99. “but the fact that the gains and profits are in any case permitted to accumulate and become surplus shall not be construed as evidence of a purpose to escape the tax in such case unless the Commissioner certifies that in his opinion such accumulation is un- reasonable for the purposes of the business.” 500 Law ^200. “When requested by the Commissioner, or any col- lector, every corporation shall forward to him a correct statement of such gains and profits and the names and addresses of the individuals or shareholders who would be entitled to the same if divided or distributed, and of the amounts that would be payable to each.” INC. 62 TAX NORMAL TAX AND SURTAX ON INDIVIDUALS. 601 Where a domestic or foreign corporation permits its gains and profits to accumulate for the purpose of preventing the imposition of the surtax upon such income if distributed to its stockholders, it shall not be subject to the income tax as a corporation, but its stockholders shall be subject to tax in the same way as the stockholders of a personal service corporation, except that the war profits and excess profits tax on the corporation shall first be deducted from its net income before computing the proportionate shares of the stockholders. See section 218 of the statute and articles 328-335 [for taxation of shareholders in personal service cor- porations, beginning at 1[593]. In any case the Commissioner or a col- lector may require a corporation to furnish a statement of its gains and profits and of the names, addresses and shareholdings of the stockholders. If upon the basis of such statement or other evidence the Commissioner certifies that in his opinion its accumulation of profits is unreasonable for the purposes of the business, but only if he so certilies, the corporation and its stockholders shall make their returns accordingly. (Art. 351, Reg. 45, Rev., April 17, 1919.) 502 Subdivision 2 of paragraph A, income tax-law of October 3, 1913 [^497 et seq. above], imposes no duty on the taxpayer to aseertain his distributive interest in the undivided surplus of eorporations for the purpose of making return of the amount, in addition to the amount of dividends declared on his stock, unless the [Commissioner] has certified that, in his opinion, such accumulation is unreasonable for the purpose of the business. (T. D. 2135, Jan. 23, 1915.) 503 law 1f7. “Secretary” Defined. — “The term ‘Secretary’ means the Secretary of the Treasury;” 504 Law |[8. “Commissioner” Defined. — “The term ‘Commissioner’ means the Commissioner of Internal Revenue 505 Lav/ |f9. “Collector” Defined. — “The term ‘collector’ means col- lector of internal revenue 500 Purpose to Escape Surtax. — The application of section 220 of the statute depends upon the two elements of (a) purpose! to escape the surtax and (b) unreasonable accumulation of gains and profits. Prima facie evidence of (a) exists where a corporation has practically no business except holding stocks, securities or other property and collecting the income therefrom, or where a corporation other than a mere holding com- pany permits its gains and profits to accumulate beyond the reasonable needs of the business. The business of a corporation is not limited to that which it has previously carried on, but in general includes any line of' busi- ness which it may legitimately undertake. However, a radical change of business when a considerable surplus has been accumulated may afford evi- dence of a purpose to escape the surtax. When one corporation owns the stock of another corporation in the same or a related line of business and in effect operates the other corporation, the business of the latter may be considered in substance the business of the first corporation. Gains and profits of the first corporation put into the second through the purchase of stock or otherwi.se may therefore, if a subsidiary relationship is established, constitute employment of the income in its own business. To establish that 63 TAX INC. NORMAL TAX AND SURTAX ON INDIVIDUALS. the business of one corporation can be regarded as including the business of another it is ordinarily essential that the first corporation own substan- tially all of the stock of the second. Investment by a corporation of its income in stock and securities of another corporation is not without more to be regarded as employment of the income in its business. (Art 352, Reg. 45, Rev., April 17, 1919.) 507 Unreasonable Accumulation of Profits. — An accumulation of gains and profits is unreasonable if it is not required for the pur- poses of the business, considering all the circumstances of the case. No attempt can be made to enumerate all the ways in which gains and profits of a corporation may be accumulated for the reasonable needs' of the busi- ness. Undistributed income is properly accumulated if invested in in- creased inventories or additions to plant reasonably needed by the business. It is properly accumulated if retained for working capital required by the business or in accordance with contract obligations placed to the credit of a sinking fund for the purpose of retiring bonds issued by the corporation. In the case of a banking institution the business of which is to receive and loan money, using capital, surplus and deposits for that purpose, undistri- buted income actually represented by loans or reasonably retained for future loans is not accumulated beyond the reasonable needs of the business. The nature of the investment of gains and profits is immaterial if they are hot in fact needed in the business. (Art. 353, Reg. 45, Rev., April 17, 1919.) 508 Status of Undistributed Profits, Unduly Accumulated, if Invested in United States Bonds.— In reply to your letter of March 20, 1919, you are advised that any corporation which permits its gains and ’pi’ofits to accumulate for the purpose of preventing the imposi- tion of the surtax upon its stockholders and members will be subject to the provisions of Section 220, of the Revenue Act of 1918, regardless of whether or not such gains and profits are invested by the corporation, m obligations of the United States. (Letter to The Corporation Trust Com- pany, signed by Commissioner Daniel C. Roper, and dated April 9, 1919.) 509 Obligation to Render Undistributed Profits Tax Returns by Cor- porations with Fiscal Years Ending in .1918. — ^Receipt is acknowl- edged of your letter of recent date, in which you inquire whether corporations having a fiscal year ended on July 31, 1919, are required [under Sec. 10 (b), Revenue Act of 1916 as amended by Revenue Act of 1917] to file Corporation Undistributed Net Income Tax Returns (Form 1112) and how the undistributed net income to be shown in the return is to be computed. Pn reply, you are advised that corporations having a fiscal year ended on the last day of any month subsequent to May 31, 1918, will not be required to render returns on Form 1112 for the period covered by such fiscal year. [Returns of undistributed profits were required to be made within 60 days after end of 6 months after end of taxable year. Time for making returns by corporations with fiscal years ending June 30, 1918, would have been on’ or before March 1, 1919. The Revenue Act of 1918, repealing the old law, became effective February 25, 1919.] (Letter to Oppenheim, Collins and Company, New York, N. Y., signed by Acting Deputy Commissioner P. S. Talbert, and dated May 13, 1919.) INC. 64 TAX RESIDENT AND NONRESIDENT ALIENS. 510 The 10% Undistributed Profits Tax, Being Considered an Income Tax, Is Not Deductible. — Replying to your communication of March 14, 1919, you are informed that the 10% tax which was imposed on corporations' undistributed net income by Section 10 (b) of the Revenue Act of September 8, 1916, as amended by the Revenue Act of October 3, 1917, is not an allowable deduction from the gross income of a corporation shown on an income tax return. (Letter to The Corporation Trust Company, signed by Commissioner Daniel C. Roper, and dated April 1, 1919.) 511 Individuals Liable to Tax. — Every citizen of the United States, wherever resident, is liable to the tax. It makes no difference that he may own no assets within the United States and may receive no incorne from sources within the United States. Every resident alien individual is liable to the tax, even though his income is wholly from sources outside the United States. Every non-resident alien individual is liable to the tax on his income from sources within the United States. See, section 213 (c) of the statute and articles 91-93 [for non-resident aliens, ]fl545]. Estates and trusts are also subject to the tax. See section 219 of the statute and articles 341-346 [for estates and trusts, |[636]. (Art. 3, Reg. 45, Rev., April 17, 1919.) 512 Who Is a Citizen. — Every person born in the United States sub- ject to its jurisdiction, or naturalized in the L^nited States, is a citizen. When any naturalized citizen has left the United States and resided for two years in the foreign country from, which he came, or for five years in any other foreign country, he is presumed to have lost his American citi- zenship ; but this presumption does not apply to residence abroad while the United States is at war. An Italian who has come to the United States and filed his declaration of intention of becoming a citizen, but who has not yet received his final citizenship papers, is an alien. A Swede who, after having come to the United States and become naturalized here, returned to Sweden and resided there for two years prior to April 6, 1917, is pre- sumed to be once more an alien. On the other hand, an individual born in the Ihiited States of citizen or resident alien parents, who has long since mo\e(l to a foreign country, and established a domicile there, but who has never been naturalized therein or taken an oath of allegiance thereto, is still a citizen of the United States. For the difference between resident alien individuals and nonresident alien individuals see articles 312-315 [plS]. (Art. 4, Reg. 45, Rev., April 17, 1919.) 513 American Wife of a Nonresident Alien. — An American woman who marries a foreigner takes the nationality of her husband * * * (T. D. 2090, December 14, 1914.) 514 Citizenship. — Determination by State Department of right to registry is not conclusive upon the Treasury in fixing citizenship for income tax purposes. Held that native and naturalized status remains unless changed by affirmative action or forfeited by overt act. (T. D. 2135, January 23, 1915.) 515 Non-Resident Citizens Against Whom the Presumption of Expa- triation Has Arisen. — The Department has received several in- quiries concerning the payment of the income tax under the provision of 65 ixc. TAX RESIDENT AND NONRESIDENT ALIENS. Section 2 of the Act of October 3, 1913, by persons ^^iding abroad who claim American Citizenship. These inquiries involve 'r' ‘ ^ ^ tions- (1) Whether a naturalized American citizen who has brought up hi„,.df .he pjs™.io. of ^ ?S3“t3 ta'/Sd » Ive^T: .S JeW.™’ mder ,h. ee.abli.h.d Sks t requied to pay the income tax as an American citizen, and (2) whether a naturalized American citizen residing abroad can overcome presumption of expatriation by payment of the income tax. 516 The question as to the liability of a particuiw persoi p > come tax must be determined not by this Department but by the Treasurv Department, under which the income tax law is adminis ered Persons' making inquiry concerning this point should, therefore, be advi have proviln of the second paragraph of Section 2 of the Act of March 2 190/ by protracted residence abroad, may overcome such ^ preLnting “satisfactory evidence to a diplomatic or consulai 0®“' TJnited States, under such rules and regulations as the Depai tment of State may prescribe.” The Department has not prescribed a rule tnat the pre sumption of expatriation arising under the law mentioned may ojeicome by showing that the person concerned has paid, or is ready to pay, the >ooo tax of the United States. However, if a person against whom the presumption of expatriation has arisen presents, in connection with an application to passport, or for registration in a consulate or for actual protection, evi en^ that he has paid the income tax, the fact will receive due consideration in connection with other evidence submitted to overcome the presumption of expatriation under the established rules, and particu.arly with regard o question of the intent to return to this country to reside. The payment of the income tax will be dulv considered in deciding the question ot the right to the continued protection of this Government in cases ot native American citizens who have resided abroad for a period so long that the natural presumption may be held to have arisen that they have a m one this countrv. (T.etter to the American Diplomatic and Consular Uthceis, signed by W. J. Bryan, Secretary of State, and dated March 18, 1914.) 518 Who Is a Non-resident Alien Individual.-“Non-resMent alien individual” means an individual (a) whose residence is T'nited States and (b) who is not a citizen of the Lnited states An alien living in the United States who is not a mere transient is a resident ot the United States for purposes of the income tax. ^ sient or not is determined by his intentions with regard to his sta\. It he Hves°rthe United States and has no definite intention to stay, he is a resident The best evidence of his intention is afforded by the cond , acts and declarations of the alien. The typical .f for a short time in the course of a journey through United States so limes performing labor, sometimes not, or one who enters the I-n'ted States intending only to stop long enough to carry out sorne purpose ^ not inVolvhrg an extended stay. A mere floating intention indefinite as to time, to return to another country is constitute urn sient. (Art. 312, Reg. 45, Rev., April 17, 1919.) INC. 66 TAX RESIDENT AND NONRESIDENT ALIENS. For Tax on Non-resident Aliens and Withholding of the Tax at the Source. — See p536. 519 Alien Seaman, When to Be Regarded as Residents.— In order to determine whether an alien seaman is a resident within the meaning of the income tax law, it is necessary to decide whether the presumption of non-residence is overcome by facts showing that he has established a resi- dence in the territorial United States, which consists of the States, the Dis- trict of Columbia, and the Territories of Hawaii and Alaska, and excludes other places. Residence may be established on a vessel regularly engaged in coastwise trade, but the mere fact that a sailor makes his home on a' vessel flying the United States flag and engaged in foreign trade is notjsufficient to establish residence in the United States, even though the vessel, while carry- ing on foreign trade, touches at American ports. An alien seaman may ac- quire an actual residence in the territorial United States, within the rules laid down in Art. 312 [IjSlS] although the nature of his calling requires him to be absent from the place where his residence is established for a long period. An alien seamean may ^acquire such a residence at a sailor’s boarding house or hotel, but such a claim should be carefully scrutinized in order to make sure that such residence is bona fide. The filing of Form^ 1078 (Revised), or taking out first citizenship papers, is proof of residence in the United States from the time the form is filed' or the papers taken out, unless rebutted by other evidence showing an intention to be a transient. The fact that a head tax has been paid oh behalf of an alien seaman entering the United States is no evidence that he has acquired residence, because the^ head tax is pay- able unless the alien who is entering the country is merely in transit through the country*. An alien may remain a nonresident although he is not in tran- sit through the country. As to when the wages of alien seamen are subj^t tax, see Article 92a 1111547]. (Art. 312a, Reg. 45, Rev., as added by T. D. 2869, June 20, 1919.) 520 Article 312 (a) [lf519], which is added to Regulations 45 by Treasury Decision 2869, provides in the case of alien seamen that ‘‘Residence may be established on a vessel regularly engaged in coastwise trade. This provision, however, merely places alien seamen employed on a vessel regularly engaged in coastwise trade on the same footing with an alien^^- ployed within the United States for purposes of proving residence within the United States. The employer should, therefore, be governed by the requirements of Article 315 [11523] of Regulations 45 with respect to the necessity for filing Form 1078, Revised. (Letter to Shipown^s Association of the Pacific Coast, San Francisco, Calif., signed by P. S. Talbert, Acting Assistant to the Commissioner, by C. R. Trobridge, Acting Head of Div- ision, and dater September 20, 1919.) 521 Proof of Residence of Alien. — An alien’s statements as to his in- tention with regard to residence are not conclusive, but when unequiv- ocal will determine the question of his intention, unless his conduct, acts or other surrounding circumstances contradict the statements. It sometimes occurs that an alien who genuinely intends his stay to be transient may put off his departure from time to time by reason of changed, conditions, re- maining a transient though living in the United States for a considerable time. The fact that an alien’s family is abroad does not necessarily indicate that he is a transient rather than a resident. An alien who enters this coun- try intending to make his home in a foreign country as soon as he has ac- 67 TAX INC. RESIDENT AND NONRESIDENT ALIENS. cumulated a sum of money sufficient to provide for his journey abroad is to be considered a transient, provided his expectation in this regard may rea- sonably, considering the rate of his saving, be fulfilled within a compara- tively short time. (Art. 313, Reg. 45, Rev., April 17, 1919.) Loss of Residence by Alien. — It will be presumed that an alien who has established a residence in the United States, as outlined above, continues to be a resident until he or his family evidence an intention to change their residence to another country by starting to remove. Thus, alien residents who, following the armistice agreement of November 11, 1918, take steps toward returning to their native countries, as by applying for passports, may for the purpose of withholding be regarded as residents for that portion of the taxable year which elapsed up to the time such step was taken. But the status of the alien on the last day of his taxable year or period determines his liability to tax for such year or period as a resident or non-resident. See articles 305 [for date of determining exemption status, j[1526] and 306 [for credits to non-resident alien individuals, ^[1571]. (Art. 314, Reg. 45, Rev., April 17, 1919.) 523 Duty of Employer to Determine Status of Alien Employee. — Aliens employed in the United States are prima facie regarded as non-residents. If wages are paid without withholding the tax, except as permitted in the following article, the employer should be provided with written proof of facts which overcome the presumption that such alien is a non-resident. Such facts include the following: (a) If an alien has been living in the United States for as much as one year immediately prior to the time he entered the employment of the withholding agent, or if he has been regularly employed by a resident individual or corporation in the same county for as much as three months immediately prior to any payment by the employer, he may be treated as a resident in the absence of facts known to the employer showing that he is in fact a transient, such as one of the types mentioned under article 312 [1|518]. The facts with regard to the length of time the alien has thus lived in the country or county and has been so regularly employed may be established by the certificate of the alien, (b) The employer may also obtain evidence to overcome the prima facie pre- sumption of non-residence by securing from the alien Form 1078 (revised) or an equivalent certificate of the alien establishing residence. Having se- cured such evidence from the alien, the employer may rely thereon unless the statement of the alien was false and the employer has reasonable cause to believe it false, and may continue to rely thereon until the alien ceases to be a resident under the provisions of article 314 [1[522]. An employer who seeks to account for failure to withhold in the past, if he did not at the time secure Form 1078 (revised) or its equivalent, is permitted to prove the former status of the alien by any material evidence. (Art. 315, Reg. 45, Rev., April 17, 1919.) 524 To avoid inconvenience a resident alien individual should file a cer- tificate of residence on Form 1078 (revised) with withholding agents, who shall forward such certificates to the Commissioner (Sort- ing Division) with a letter of transmittal. (Art. 363, Reg. 45., April 17, 1919.) 525 Reference is made to your letter dated June 18, 1919, in regard to Article 315 [|f523]. Regulations 45 which is quoted here: “(b) The employer may also obtain evidence to overcome the prima facie pre- INC. 68 TAX PORTO RICO AND PHILIPPINE ISLANDS. sumption of the non-residence by securing from the alien Form 1078 (revised) or an equivalent certificate of the alien establishing residence. Having secured such evidence from the alien, the employer may rely thereon unless the statement of the alien was false and the employer has reasonable cause to believe it false, and may continue to rely thereon until the(, alien ceases to be a resident under the provisions of Article 314 [^S22]” It is noted that you have been advised by the Collector of Internal Revenue at Baltimore that it will be necessary for the employer to obtain Form 1078 for each year that a non-resident alien was employed., 526 In reply you are advised that when Form 1078 is filed, with the employer, the alien may be (treated as a resident of the United States in so far as withholding of income tax at source is concerned and it is not necessary for the employer to secure from the alien employees new* cer- tificates, Form 1078, for each taxable year The ruling contained m the article quoted herein will govern, namely, that when Form 1078 is filed, the employer may continue to rely thereon until the alien ceases to be a resident under the provisions of Article 314. (Fetter to W. B. Reed, Ac- counting Secretary, National Coal Association, Washington, D. C., signed by Commissioner Daniel C. Roper, and dated July 9, 1919. )i 527 Referring to your fourth inquiry you are advised that every em- ployer with whom affidavits of claim of Form 1078 are filed by em- ployees, should make a record thereof and forward the certificates to the Commissioner of Internal Revenue, Sorting Division, Washington, D. C., not later than the twentieth day of the month succeeding that during 's^ich such certificates were received. (Fetter to The Corporation Trust Com- pany, signed by Commissioner Daniel C. Roper, and dated May 21 , 1919 .) 528 If an officer, qualified to administer oaths, is not reasonably acces- sible, Form 1078, Revised, will be accepted if signed in the pres- ence of an’ official of the employer company under whose supervision the employee’s duties are performed, and^ one other credible witless. (Fetter to Shipowners’ Association of the Pacific Coast, San Francisco, Cal., signed by P S. Talbert, Acting Assistant to the Commissioner, by C. R. Trobridge, Acting Head of Division, and dated September 20, 1919.) 529 Withholding When Resident Status Has Not Been Established and for Procedure on change of Residence Status. — Read dis- cussion at jfl597. 530 Tax on Non-resident Aliens and the Withholding of the Tax at the Source Provisions. — See 1|1536. 531 Law Ml 3. The Income of a Citizen of Any Possession of the United States Who Is not a Resident of the United States, Is Taxed Under This Title on Income Derived from United States Sources Only, the Tax Being Computed and Paid in the Same Manner and Subject to the Same Conditions as in the Case of Other Persons Liable on Such Income Only.— “Sec. 260. That any individual who is a citizen of any possession of the Fhiited States (but not other- wise a citizen of the United States) and who is not a resident of the United States, shall be subject to taxation under this^ title only as to income derived from sources within the United States,’’ INC. 69 TAX PORTO RICO AND PHILIPPINE ISLANDS. 532 Law T[414. “and in such case the tax shall be computed and paid in the same manner and subject to the same conditions as in the case of other persons who are taxable only as to income derived from such sources.” 533 Status of Citizen of United States Possession. — A citizen of a possession of the United States, who is not otherwise a citizen or a resident of the United States, including only the States, the Terri- tories of Alaska and Hawaii, and the District of Columbia, is treated for the purpose of the tax as if he were a nonresident alien individual. See articles 91-93, 271, 306, 307, 311, 316 and 404 [for general discussion of tax on non-residents, p536]. His income from sources within the United States is subject to withholding. See section 221 and articles 361-376 [for withholding of the tax at the source, |fl585]. (Art. 1121, Reg. 45, Rev., April 17, 1919.) 534 Law Tf415. Income Taxes in Porto Rico and the Philippine Islands. — “Sec. 261. That in Porto Rico and the Philippine Islands the income tax shall be levied, assessed, collected, and paid in* ac- cordance with the provisions of the Revenue Act of 1916 as amended. 535 Law Tf416. “Returns shall be made and taxes shall be paid under Title I of such Act in Porto Rico or the Philippine Islands, as the case may be, by” 536 Law 11417. “(1) every individual who is a citizen or resident of Porto Rico or the Philippine Islands or derives income- from sources therein, and” 537 Law 11418. “(2) every corporation created or organized in Porto Rico or the Philippine Islands or deriving income from sources therein.” 538 Law1[419. “An individual who is neither a citizen nor a resident of Porto Rico or the Philippine Islands but derives in- come from sources therein, shall be taxed in Porto Rico or the Philippine Islands as a non-resident alien individual,” 539 Law 1|420. “and a corporation created or organized outside Porto Rico or the Philippine Islands and deriving income from sources therein shall be taxed in Porto Rico or the Philippine Islands as a foreign corporation.” 540 Law1f421. “For the purposes of section [1[1514] and of para- graph (6) [1[1325] of subdivision (a) of section 234 a tax imposed in Porto Rico or the Philippine Islands upon the net income of a corporation shall not be deemed to be a tax under this title.” 541 Law 1[422. “The Porto Rican or Philippine Legislature shall have power by due enactment to amend, modify, or repeal the income tax laws in force in Porto Rico or the Philippine Islands, respectively.” INC. 70 TAX PORTO RICO AND PHILIPPINE ISLANDS. ^2 Law ^464. “Title I of the Revenue Act of 1916 as amended by the Revenue Act of 1917 shall remain in force for the assessment and collection of the income tax in Porto Rico and the Philippine Islands, except as may be otherwise provided by their re- spective legislatures/' 543 Income Tax in Porto Rico and Philippine Islands. — In Porto Rico and the Philippine Islands the Revenue Act of 1916, as amended, is in force and the Revenue Act of 1918 is not. See also section 1400 of the statute [542]. No credit against net income is al- lowed individuals and no deduction from gross income is allowed corporations with respect to dividends received from a foreign corpora- tion (foreign with respect to the United States) taxed in Porto Rico or the Philippines, but having no income from sources within the United States. lArt. 1131, Reg. 45, Rev., April 17, 1919.) 544 Taxation of Individuals Between United States and Porto Rico and Philippine Islands. — (a) A citizen of the United States who resides in Porto Rico, and a citizen of Porto Rico who resides in United States, are taxed in both places, but the income tax in the United States is credited with the amount of any income, war profits and excess profits taxes paid in Porto Rico. See section 222 of the statute and articles 381-384 [for credit for taxes p290]. (b) A resident of the United States, who is not a citizen of Porto Rico, is taxable in Porto Rico as a nonresident alien individual on any income derived from sources within Porto Rico, but the income tax in the United States is credited with the tax paid in Porto Rico, (c) A resident of Porto Rico, who is not a citizen of the United States, is taxable in the United States as a nonresident alien individual on any income derived from sources within the United States, and receives no credit. See also section 260 and article 1121 [for status of citizen of United States possessions, jf533]. The same principles apply in the case of the Philippine Islands. (Art. 1132, Reg. 45, Rev., April 17, 1919.) 545 Taxation of Corporations Between United States and Porto Rico and Philippine Islands. — (a) A United States corporation which de- rives income from sources within Porto Rico, (b) a Porto Rico corpora- tion which derives income from sources within the United States, and (c) a corporation of a foreign country which derives income both from sources within Porto Rico and from sources within the United States, are all taxed in both places. In the case of the United States corporation the income, war profits and excess profits taxes in the United States are credited with the amount of any income, war profits and excess profits taxes paid in Porto Rico. In the case of the Porto Rico corporation there is no such credit. See section 238 of the statute and article 611 [for credit for taxes, |[1301]. The corporation of the foreign country deriving income from both places is subject to no double taxation so far as the United States and Porto Rico are concerned. For the purpose of with- holding a Porto Rico corporation is a foreign corporation. See section 237 and article 601 [for withholding in the case of nonresident foreign corporations, p619]. The same principles apply in the case of the Phil- ippine Islands. (Art. 1133, Reg. 45, Rev., April 17, 1919.) INC 71 TAX PARTNERSHIPS AND PERSONAL SERVICE CORPORATIONS. 546 Law p68. Common-Law Partnerships Are Not Taxable as Such. — “Sec. 218, (a) That individuals carrying on business in partnership shall be liable for income tax only in their individual capacity.'’ 547 Limited Partnerships. — [For discussion of status of various types, see Tf734.] 548 Partnership Banks Considered Corporations in Certain Cases. — Read at T[731. 549 Foreign Partnerships Defined. — Read at pOlO. 550 Hawaiian Partnerships Composed of Corporations. — [Such part- nerships, permitted under the laws of Hawaii, were partnerships for Federal income tax purposes rather than joint-stock associations in Haiku Sugar Company, et ah, vs. Johnstone. Circuit Court of Appeals, Ninth Circuit. April 1, 1918 (249 Fed. 103). How- ever, “joint-stock associations” are no longer included in the definition of “corporations.” The wording now is “associations” and “joint-stock companies.” See ^736.] 551 Partnerships.— Partnerships as such are not subject to taxation under the statute, but are required to make returns of income. See section 224 of the statute and article 411 and 412 [for returns by partnerships, ^S60]. Individuals carrying on business in part- nership are, however, taxable upon their distributive shares of the, net income of such partnerships, whether distributed or not, and are re- quired to include such distributive shares in their returns. (Art. 321, Reg. 45, Rev., April 17, 1919.) 552 Law|[176. Manner of Computing Net Income by Partnerships to Determine Taxable Distributive Interests. — “(d) The net income of the partnership shall be computed in the same manner and on the same basis as provided in section 212 [1[769] except that the deduction provided in paragraph (11) [contributions, T[1447] of subdivi- sion (a) of section 214 shall not be allowed.” 553 The net income of a partnership shall be computed in the same manner and on the same basis as the net income of an individual, except that the deduction of contributions or gifts is not permitted. See section 212 and articles 21-26 [for net income generally, 11769]. (Art. 321, Reg. 45, Rev., April 17, 1919.) 554 Deduction by Members on Account of Non-Deductible Donations Made by a Partnership. — Any donation allowed as a business expense of the partnership would of course not be deductible by individ- ual members of the partnership in their personal income tax returns. Donations made by the partnership but not allowable as deductions by it may be prorated among the individual members of the partnership for the purpose of their individual income tax returns, as contributions or gifts, subject to the limitations of Section 5 of the Act of September 8, 1916, subdivision a, clause ninth, added by Section 1201 of the Act of October 3, 1917. (Letter to The Corporation Trust Company, signed by Commissioner Daniel C. Roper, and dated May 23, 1918.) 72 TAX INC. PARTNERSHIPS AND PERSONAL SERVICE CORPORATIONS. Law |[238. Returns by Partnerships. — “Sec. 224. That every part- nership shall make a return for each taxable [][798] year/’ 556 Lawf238. Return of Gross Income and Deductions. — “stating specifically the items of its gross income and the de- ductions allowed by this title [11552] and” 557 Law 1f238. Return to Disclose Names and Addresses of All Mem- ' bers. — “shall include in the return the names and ad- dresses of the individuals who would be entitled to share in the net income if distributed and” 558 Law If 238. Return to Show Distributive Share of Each Member. — — “the amount of the distributive share of each individ- ual [11564].” 559 Law 1[238. Return to Be Sworn to by One of the Partners. — “The return shall be sworn to [P788] by any one of the partners.” 560 Partnership Returns. — Every partnership must make a return of income, regardless of the amount of its net income. The return shall be on Form 1065 (revised) and shall be sworn to by one of the partners. Such return shall be made for/ the taxable year of the partnership, that is, for its annual accounting period (fiscal year or calendar year as the case may be), irrespective of the taxable years of the partners. See sections 218 of the statute and articles 321-327 I1f601 et seq.]. If the partnership makes any change in its accounting period, it shall make its return in accordance with the provisions of section 226 and article 431 [for returns when accounting period changed, ^1862]. See also article 424 [for return by receiver, 1f701]. (Art. 411, Reg. 45, Rev., April 17, 1919.) 561 Contents of Partnership Return.— The return of a partnership shall state specifically (a) the items of its gross income enumer- ated in section 213 of the statute; (b) the deductions enumerated in sec- tion 214, other than the deduction provided in paragraph (11) of sub- division (a) of that section; [contributions: see 1f554] (c) the amounts specified in subdivisions (a) and (b) of section 216 received by the partnership ; (d) the amount of any income, war profits and excess prof- its taxes of the partnership paid during the taxable year to a foreign country or to any possession of the United States, and the amount of any such taxes accrued but not paid during the taxable year; (e) the names and addresses of the individuals who would be entitled to share in the net income of the partnership if distributed; (f) the amount of the distributive share of such net income of each such individual; and (g) such other facts as are required by Form 1065 (revised). See also sec- tions 222 and 227 and articles 381-384 [for credit for taxes, 1[1290], and 441-448 [for time and place for filing returns, 111810]. (Art. 412, Reg-. 45, Rev., April 17, 1919.) ^ 562 General Law Provisions and Applicable Regulations Relative to Returns. — Read beginning at 1[1808. 73 TAX INC. PARTNERSHIPS AND PERSONAL SERVICE CORPORATIONS, 563 Returns of Information at the Source. — Read at ^1728. 564 Law]fl69. Distributive Share of Partnership’s Net Income, Whether Distributed or Not, to Be Accounted for by Each Partner. — “There shall be included in computing the net income of each partner his distributive share, whether distributed or not, of the net income of the partnership for the taxable year, or,” 565 Lawj[170. Partner’s Accounting Period Differing from That of the Partnership. — “if his net income for such taxable year is computed upon the basis of a period different from that upon the basis of which the net income of the partnership is computed, then his dis- tributive share of the net income of the partnership for any accounting period of the partnership ending within the fiscal or calendar' year upon the basis of which the partner’s net income is computed.” 566 Distributive Shares of Partners. — The distributive share of the net income of a partnership which a partner is required to include in his return is his proportionate share of the net income of the' partnephip, either (a) for the taxable year upon the basis of which the partner’s net income is computed, or (b) if the partner’s net income is computed upon the basis of a taxable year different from that upoit the basis of which the net income of the partnership is computed, for the taxable year of the part- nership ending within the taxable year upon the basis of which the partner s net income is computed. Amounts earned and distributed to a partnei by a partnership after the end of its taxable year and before the end of his cor- responding taxable year should be accounted for both by the partnership and by the partner in their returns for their next succeeding taxable years. (Art. 322, Reg. 45, Rev., April 17, 1919.) 567 Distributive Shares of Non-resident Alien Partners in the Income Accruing to a Foreign Partnership from United States Sources.— Read at ][1554. 568 Net Losses Suffered by Partnerships. — Where the result of part- nership operation is a net loss, the loss will be divisible between the partners in the same proportion as net income would have been divisible, and may be used bv the individual partners in their returns of income. (Art. 30, ^[213, Reg. 33, Rev., Jan. 2, 1918.) 569 Benefit of the Special “Net Loss” Provision Accrues to Members of a Partnership. — [Read at fllOS.] 570 Undistributed Distributable Interests Once Taxed Are Not Taxed Again When Distributed.— Undivided annual net profits of part- nerships thus returned by the individual members thereof, and tax paid thereon, shall not, when said profits are actually distributed and paid to - such' members, be again included in their annual return as a part of their J ;gros$' ificome. (Art. 14, Reg. 33, Jan. 5, 1914.) 5^1 ' Law 11171. Credits Allowed Members of Partnerships for Normal Tax Purposes.— “The partner shall, for the purpose of the fiorinSl taxj be allowed as credits, in addition to the credits allowed to him under section 216 [1[1513], his proportionate share of such amounts >ntc. 74 TAX PARTNERSHIPS AND PERSONAL SERVICE CORPORATIONS. ■specified in subdivisions (a) [dividends, 1fl514] and (b) [United States bond interest included in gross income, 111515] of section 216 as are re- ceived by the partnership.” 572 Credits Allowed Partners.— In addition to the credits ordinarily allowed to an individual, a partner is entitled to the following credits : '(a) a credit against net income for the purpose of the normal tax only of his proportionate share of such dividends from corporations subject to tax and of such interest not entirely exempt from tax upon obligations of ^ the United States and bonds of the War Finance Corporation as are received by the partnership; and (b) a credit against income tax of the partner’s proportionate share of any income, war profits and excess profits taxes of the partnership paid or accrued during the taxable year to a foreign country upon income derived from sources therein, or to any possession of the United States, subject to the limitations of section 222 of the statute [1112891. See section 216 and articles 301 [for credits against income, 1fl516] and 381-384 [for credits for taxes, 111290]. (Art. 323, Reg. 45, Rev., April 17, 1919.) 573 Law1f23. “Personal Service Corporation” Defined. — “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 regularly engaged in the active conduct of the affairs of the corporation and in which capital (whether invested or borrowed) is not a material income-producing factor;” 574 Law1f24. “but does not include any foreign corporation,” 575 Law 1[25. “nor any corporation 50 per centum or more of whose gross income consists either” 576 Law 1126. (1) of gains, profits or income derived from trading as a principal, or” 577 Law1f27. “(2) of gains, profits, commissions, or other income, derived from a government contract or contracts made between April 6, 1917, and November 11, 1918, both dates inclusive;” [Read at 1[583.] 578 Lawp3. “Government Contract” Defined.-— “The term ‘Govern- ment 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 con- trolled by any of the above if; the contract is for the benefit of the United States, or (b) a sub-contract made with a contractor performing such a contract if the products or services to be furnished under the sub-contract are for the benefit of the United States. The term ‘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 paragraph, includes all such contracts which, although entered into during such period, were originally not enforceable, but which have been or 75 TAX • INC. PARTNERSHIPS AND PERSONAL SERVICE CORPORATIONS. may become enforceable by reason of subsequent validation in pursuance of law;” Government contracts may include (a) a contract with the United States, (b) a contract with an agency of the United States, (c) a contract with an agency of such agency, and (d) a subcontract with a contractor under any such contract; provided in every case the contract or subcontract is for the benefit of the United States. Unenforceable con- tracts subsequently ratified are treated as though made when originally- executed. The Commissioner may require any contractor to file with him copies of his Government contracts entered into on or after April 6, 1917, _ and shall have access to the information in the possession of the Govern- ment relating to such contracts. See section 1408 of the statute [][580]. The realization by a corporation of income from a Government contract may- affect its status under the consolidated returns provision [^1826] and the- amount of its war profits and excess profits tax. The agreements for the operation of transportation systems while under federal control and fon the iust compensation of their owners made pursuant to the act of March 21, 1918, are not Government contracts within the meaning of this article- [T[738]. (Art. 1510, Reg. 45, Rev., April 17, 1919.) 580 “Sec. 1408 [of the Revenue Act of 1918]. That every person who on or after April 6, 1917, has entered into any contract,. undertaking, or agreement with the United States, or with any depart- ment, bureau, officer, commission, board, or agency under the United* States or acting in its behalf, or with any other person having contract relations with the United States, for the performance of any work or the- supplying of any materials or property for the use of or for the account of the United States, shall, within thirty days after a request of the Commissioner therefor, file with the Commissioner a true and correct copy of every such contract, undertaking, or agreement. 581 “Whoever fails to comply with such request of the Commissioner shall be guilty of a misdemeanor and shall be punished by a fine of not more than $1,000, or by imprisonment for not more than one year, or both. 582 “The Commissioner shall (when not violative of the technical military or naval secrets of the Government) have access to all information and data relating to any such contract, undertaking, or agreement, in the possession, control or custody of any department, bureau, board, agency, officer or commission of the United States and may call upon any such department, bureau, board, agency, officer or commission for a "full statement and description of any allowance for amortization, obsolescence, depreciation or loss, or of any valuation, appraisal, adjustment or final settlement, made in pursuance of any such contract, undertaking, or agreement.” (Sec. 1408, Revenue Act of 1918.) 583 Personal Service Corporation. — The term “personal se^ice cor- poration” means a corporation, not expressly excluded, the income of' which is derived from a profession or business (a) which consists, principally of rendering personal service, (b) the earnings of which- are to be ascribed primarily to the activities of the principal owners or stock- holders, and (c) in which the employmenti of capital is not necessary or is- only incidental. No definite and conclusive tests can be prescribed by which. 76 TAX INC. PARTNERSHIPS AND PERSONAL SERVICE CORPORATIONS. it can be finally determined in advance of an examination of the corpora- tion’s return whether or not it is a personal service corporation. In the following articles are laid down the general principles under which such, determination will be made. See also section 303 of the statute and articles 741-743 [for excess profits tax. — War Tax Service]. (Art. 1S23, Reg. 45,. Rev., April 17, 1919.) 584 Personal Service Corporation: Certain Corporations Excluded. — The following classes of corporations are expressly excluded from classification as personal service corporations: (a) foreign corporations; (b) corporations 50 per cent or more of whose gross income consists of gains, profits or income derived from trading as a principal; and (c) cor- porations 50 per cent or more of whose gross income consists of gains, profits, commissions or other income derived from a Government contract or contracts made between April 6, 1917, and November 11, 1918, inclu- sive. See article 1510 [for discussion of ‘‘Government contract,” 1[579]. A corporation is not a personal service corporation merely because less than 50 per cent of its' gross income was derived from trading as a principal or from Government contracts. A corporation can not be considered a personal service corporation when another corporation owns or controls substantially all of its stock, or when substantially all of its stock and of the stock of another corporation (not itself a personal service corporation) forming part of the same business enterprise is owned or controlled by the same interests. vSee section 240 of the statute and articles 631-638 [for consolidated returns by affiliated corporations, ^826]. (Art. 1524, Reg. 45, Rev., April 17, 1919.) 585 Personal Services Rendered by Personal Service Corporation. — In order that a corporation may be deemed to be a personal service corporation its earnings must be derived principally from compensation for personal seiwices rendered by the corporation to the persons with whom it does business. Merchandising or trading either directly or indirectly in commodities or the services of others is not rendering personal service. Con- ducting an auction, agency, brokerage or commission business strictly on the basis of a fee or commission is rendering personal service. If, how- ever, the corporation assumes any such risks as those of market fluctua- tion, bad debts, failure to accept shipments, etc., or if it guarantees the accounts of the purchaser or is in any way responsible to the seller fori the payment of the purchase price, the transaction is one of merchandising or trading, and this is true even though the goods are shipped directly from the producer to the consumer and are never actually in the possession of the corporation. The fact that earnings of the corporation are termed com- missions or fees is not controlling. The fact, that a commission or fee is based on a difference in the prices at which the seller sells and the buyer buys raises a presumption that the transaction is one of merchandising or trading, and it will be so considered in the absence of satisfactory evidence to the contrary. (Art. 1525, Reg. 45, Rev., April 17, 1919.) 586 Personal Services Rendered by Personal Service Corporation: More than One Business. — It frequently happens that corpora- tions are engaged in two or more professions or businesses which are more or less related, one of which does not consist of rendering persona! service. Thus an engineering concern may also engage in contracting, which amounts 77 TAX INC. PARTNERSHIPS AND PERSONAL SERVICE CORPORATIONS. to trading in materials and labor, a brokerage concern may guarantee some of its accounts, a photographer may sell pictures, frames, art goods and supplies or a dealer in a commodity may furnish expert advice or services with respect to its installation, use, etc. In such case the corporation is not a personal service corporation unless the non-personal service element is negligible or merely incidental and no appreciable part of its earnings are to be ascribed to such sources. See also section 303 of the statute and articles 741-743 [for excess-profits tax.- — War Tax Service]. (Art. 1526, Reg. 45, Rev., April 17, 1919.) 587 Activities of Stockholders of Personal Service Corporation. — In determining whether a corporation is a personal seiwice corpora- tion, no weight can be given to the fact that it renders personal services unless (a) the principal owners or stockholders are regularly engaged in the active conduct of its affairs and are engaged in^ such a manner that the earnings are to be ascribed primarily to their activities, and (b) its affairs are conducted principally by such owners or stockholders. (Art. 1527, Reg. 45, Rev., April 17, 1919.) 588 Activities of Stockholders of Personal Service Corporation : Con- duct of Affairs. — Where the principal owners or stockholders do not render the principal part of the services, but merely supei*vise or direct a force of employees, the corporation is not a personal service corporation. If employees contribute substantially to the services rendered by a corpora- tion, it is not a personal service corporation unless in every case in which services are so rendered the value of and the compensation charged for such services are to be attributed primarily to the experince or skill of the principal owners or stockholders and such fact is evidenced in some definite manner in the normal course of the profession or business. The fact that the principal owners or stockholders give personal attention or render valu- able services to the corporation as a result of which its earnings are greater than those of a corporation engaged in a like or similar business, the princi- pal owners or stockholders of which do not devote personal attention to the management or supervision of its affairs, does not of itself constitute the corporation a personal service corporation. (Art. 1528, Reg. 45, Rev., April 17, 1919.) 589 Activities of Stockholders of Personal Service Corporation : Stock Interest Required. — No definite percentage of stock or interest in the corporation which must be held by those engaged in the active conduct of its affairs in order that they may be deemed to be the principal owners or stockholders can be prescribed as a conclusive test, as other facts may affect any presumption so established. No corpora- tion or its owners or stockholders shall, however, make a return in the first instance on the basis of its being a personal service corporation unless at least 80 per cent of its stock is held by those regularly engaged in the active conduct of its affairs. (Art. l.')29, Reg. 45, Rev., April , 1919.) 590 Activities of Stockholders of Personal Service Corporation: Change in Ownership.— The fact that the owners or stockholders of the corporation may change during the course of the taxable year does not take a corporation which is normally in the personal service class out of that class. Frequent changes in the ownership of any sub- 78 TAX INC. % PARTNERSHIPS AND PERSONAL SERVICE CORPORATIONS. stantial interest or number of shares are, however, evidence bearing on the question as to whether the principal owners or stockholders are ac- tively engaged in the conduct of the affairs of the corporation. The incapacity, retirement or death of a principal owner or stockholder who has been actively engaged in the conduct of its affairs will not be deemed to make any change in the status of the corporation during a reasonable time thereafter. (Art. 1530, Reg. 45, Rev., April 17, 1919.) Capital of Personal Service Corporation. — In determining whether a corporation is a personal service corporation, no weight can be given to the fact that the invested capital of the corporation for the purpose of the war profits and excess profits tax or the actual invest- ment of the principal owners or stockholders is comparatively small. The test established by the statute with respect to capital is entirely different. That test is the nature of the profession or business as indicated (a) by the kind of services it renders and (b) the extent to which capital is required to carry on such profession or business. If the use of capital is necessary or more than incidental, capital is a material income-producing factor and the corporation is not a personal service corporation. No corporation is a personal service corporation if it carries on business of a kind which ordinarily requires the use of capital, irrespective of whether the owners or stockholders have actually in- vested a substantial amount of capital. (Art. 1531, Reg. 45, Rev., April 17, 1919.) 592 Capital of Personal Service Corporation: Inference from Use. — The term “capital” as used in section 200 of the statute and in articles 1523-1532 [beginning at 1f583] means not only capital actually invested by the owners or stockholders, but also capital secured in other ways. Thus if capital is borrowed either directly as shown by bonds, debentures, certificates of indebtedness, notes, bills payable or other paper, or indirectly as shown by accounts payable or other forms of credit, or if the business of the corporation is in any way financed by or through any of the owners or stockholders, these facts will be deemed evidence that the use of capital is necessary. If a substantial amount of capital is used to finance or carry the accounts of clients or customers, it will be inferred that because of competition or other reasons such practice is necessary in order to secure or hold business which other- wise would be lost, and that the corporation is not a personal service corporation. If a corporation engaged in an agency, brokerage or com- mission business regularly employs a substantial amount of capital to lend to principals, to buy and carry goods on its own account, or to buy and carry odd lots in order that it may render more satisfactory service to its principals or customers, it is not a personal service corporation. In general the larger the amount of the capital actually used the stronger is the evidence that capital is necessary and is a material income-pro- ducing factor and that the corporation is not a personal service corpora- tion. (Art. 1532, Reg. 45, Rev., April 17, 1919.) 593 Lawp77. Tax Liability of Personal Service Corporations and Their Stockholders. — “(e) Personal service corpora- tions shall not be subject to taxation under this title, but the individual stockholders thereof shall be taxed in the same manner as the members of partnerships.” INC. 79 TAX PARTNERSHIPS AND PERSONAL SERVICE CORPORATIONS. 594 Law 11178. “All the provisions of this title relating to partnerships and the members [1(546, et seq.] thereof shall so far as practicable apply to personal service corporations and the stock- liolders thereof •595 Lawp79. Amounts Distributed or Distributable by Personal Service Corporations. — “Provided, That for the pur- pose of this subdivision amounts distributed by a personal service cor- poration during its taxable year shall be accounted for by the distribu- tees* and any portion of the net income remaining undistributed at the close of its taxable year shall be accounted for by the stockholders of such corporation at the close of its taxable year in proportion to their respective shares/’ [Read at “Dividends pil.] 596 Personal service corporations are defined in section 200 of the statute. See articles 1523-1532 [beginning at 11583]. Such cor- porations are not subject to tax as corporations, unless they make returns for fiscal years beginning in 1917, but they are required to make returns of income. See sections 231 [for exempt corpomtions, 11753], 239 [for returns for income tax purposes, p778] and 304 It or exemption for excess-profits tax purposes.-— War Tax Service] of the statute and the articles thereunder. An individual stockholder oi a personal service corporation is, however, subject to tax much like a member of a partnership upon his distributive share of the net income of the corporation. The net income of a personal service corporation, as in the case of a partnership, shall be computed in the same manner and on the same basis as the net income of an individual, except that the deduc- tion of contributions or gifts is not permitted. See sectmn 212 and articles 21-26 [for net income generally, 11771]. A corporation which is taxable under section 303 [partial personal service corporations.— War Tax Service. See p86 herein] is not a personal service corporation and its stockholders are taxed like stockholders in an ordinary corpora- tion. (Art. 328, Reg. 45, Rev., April 17, 1919.) 597 Returns of Personal Service Corporations. — Every personal serv- ice corporation must make a return of income, regardless of the amount of its net income. The return shall be on Form 1065 (revised). It shall be made for the, taxable year of the personal service corporation ; that is, for its annual accounting period (fiscal year or calendar year, as the case may be), regardless of the taxable years of its stockholders. See Sections 200, 212 and 218 of the statute and articles 1523-1532 [for general discussion of personal service corporations, ‘1(583], 25, 26 [for discussion of accounting periods, 1(799] and 328-335 [for discussion of the taxation of personal service corpomtions, 1(599]. If the personal service corporation makes any change in its accounting period it shall render its return in accordance with the provisions of section 226 of the statute and article 431 [1(1862]. The return of a personal service corporation shall state specifically (a) the items of its gross income enumerated in section 213 of the statute; (b) the deduc- tions enumerated in section 214 of the statute, other than the deduction provided in paragraph (11) [contributions to charitable institutions] of subdivision (a) of that section; (c) the amounts specified in subdivisions (a) and (b) of section 216 of the statute received by the personal service corporation; (d) the amount of any income, war profits and excess 80 TAX INC. PARTNERSHIPS AND PERSONAL SERVICE CORPORATIONS. profits taxes of the personal service corporation paid during the taxable year to a foreign country or to any possession of the United States, and the amount of any such taxes accrued but not paid during the tax- able year; (e) the amounts distributed by the corporation during its taxable year with the dates of distribution ; (f ) the names and addresses •of the stockholders of the corporation at the close of its taxable year and their respective shares in such corporation; (g) such facts as tend to show whether or not the corporation is a personal service corporation; and (h) such other facts as are required by the form. A personal service corporation which makes a return for a fiscal year beginning in 1917 shall include therein all the facts required for the computation of in- come and excess profits taxes under Title I of the Revenue Act of 1916, .as amended by the Revenue Act of 1917, and under Titles I and II of the Revenue Act of 1917. See sections 205 and 335 of the statute and articles 1621-1625 [for fiscal year with different rates, lf621] and 951 [for war- profits and excess-profits taxes in the case of fiscal years ended in 1918 only. — War Tax Service. Personal service corporations having fiscal years ended in 1919 are not subject to war-profits and excess-profits taxes]. (Art. 624, Reg. 45, Rev., April 17, 1919.) 598 General Law Provisions and Applicable Regulations Relative to Returns. — Read beginning at |[1808. 599 Distributive Shares of Stockholders in Personal Service Corpora- tion.— A stockholder of a personal service corporation is required to include in his gross income for the taxable year (a) any dividends paid by the corporation in such year out of earnings or profits accumulated since February 28, 1913, and before January 1, 1918; (b) his share of any distribution made by the corporation in such year out of earnings or profits accumulated since December 31, 1917, and since the close of its taxable year ending with or during his next preceding taxable year; and (c) his distributive share of the undistributed net income of the corporation for its taxable year ending with or during his taxable year provided he was at the close of its taxable year a stock- holder in the corporation, notwithstanding he might since have ceased to be a stockholder. See section 201 of the statute and articles 1541-1543 [for dividends, |f811]. In the case of personal service corporations with taxable years other than the calendar year, however, such distributive shares or distributions may be subject to different rates of tax. [See 1[612.] (Art. 330, Reg. 45, Rev., April 17, 1919.) ^90 Credits Allowed Stockholders of Personal Service Corporation. — A stockholder of a personal service corporation is entitled to credit for the purpose of the normal tax only for amounts received in distribution of earnings or profits of the corporation accumulated since February 28, 1913, and prior to January 1, 1918. See sections 201 and 216 of the statute and articles 1541 [for dividends 1|815] and 301 [for credit for dividends for normal tax ])urposcs |[1516]. In addition to the credits ordinarily allowed to an individual a stockholder of a personal service corporation is entitled to the following credits : (a) a credit against net income for the purpose of the normal tax only of his pro- portionate share of such dividends from a corporation subject to tax and of such interest not entirely exempt from tax upon obiigations of the United States and bonds of the War Finance Corporation as are received 81 TAX INC. PARTNERSHIPS AND PERSONAL SERVICE CORPORATIONS. bv the personal service corporation, and (b) a credit against income tax of the stockholder’s proportionate share of income, war profits and excess profits taxes of the personal service corporation paid or accrued 601 Law P72. Taxable Year Embracing Parts of Two C^War Years for which the Rates Differ.— Sec. 218. (b) It a tiscai year of a partnership ends during a calendar year for which the rates of tax differ from those for the preceding calendar year, then 602 Law 11173. "(1) the rates for such preceding calendar year shall apply to an amount of each partner’s share of such partnership net income equal to the proportion which the part of such Leal year^falling within such calendar year bears to the full fiscal year, and” 603 Law 11174. “(2) the rates for the calendar year during which such- fiscal year ends shall apply to the remainder. 604 Law 11175. Credit to a Member of a Partnership Whose FiscM Year Ends in 1918, for his Proportionate Share of an^ Excess Profits Tax Imposed on the Firm for the 1917 Portion of su^ch Fiscal Year “(c) In the case of an individual member of a partnership- S mak^s returi for a fiscal year beginning in 1917 and ending m 1918 his proportionate share of any excess profits tax imposed "Pon the Sership under the Revenue Act of 1917 with respect to that part of Lch fiscalLear falling in 1917, shall, for the purpose of determining tEe tax imposed by this title, be credited against that portion of the ne income embraced in his personal return for the taxable year 19 8 which the rates for 1917 apply.” Law 1168. Special for 1917-1918 and 1918-1919 Partnership Fiscal Ywrs.— “Sec. 205. (c) If a fiscal year of a partnership begins in 1917 and ends in 1918 or begins in 1918 and L^pflfSlT notwithstanding the provisions of subdivision (b) of section [1[ ]>• 606 Law1[69. “(1) the rates for the calendar year during which such- fiscal year begins shall apply to an amount of each- partner’s share of such partnership net income (^termined under the law applicable to such year) equal to the proportion "'^ich the part o such Leal year falling within such calendar year bears to the full fiscal year, and” 605 607 Law 1170. “(2) the rates for the calendar year during which such fiscal years ends shall apply to an amount of each partner’s share of such partnership net income (determined under the Lw applicable to such calendar year) equal to the proportion which th part of such fiscal year falling within such calendar year bears to the full fiscal year INC. 82 TAX PARTNERSHIPS AND PERSONAL SERVICE CORPORATIONS. 608 Law ^71. “Provided, That in the case of a personal service cor- poration with respect to a fiscal year, beginning in 1917 and ending in 1918, the amount specified in clause (1) shall not be subject to normal tax.” 609 Taxation of Partners in Partnership with Fiscal Year Ending in 1918. — If the fiscal year of a partnership began in the calendar year 1917 and ended in the calendar year 1918, the rates of tax for the calendar year 1917 apply to the amount of each partner’s distrib- utive share of the net income of the partnership for such fiscal year attributable to the calendar year 1917, and the rates for the calendar year 1918 to the amount of each partner’s distributive share of such net income of the partnership attributable to the calendar year 1918. (a) The amount of each partner’s distributive share of the net income of the partnership for such fiscal year attributable to the calendar year 1917 is found by determining the net income of the part- nership for its entire fiscal year in accordance with the law applicable to the calendar year 1917 (see Title I of the Revenue Act of 1916 and Titles I and XII of the Revenue Act of 1917) and the distributive share thereof of each partner, and then taking such proportion of that distribu- tive share as the part of the fiscal year falling within the calendar year 1917 bears to the full fiscal year, (b) The amount of each partner's distributive share of the net income of the partnership for such fiscal year attributable to the calendar year 1918 is found by determining the net income of the partnership for its entire fiscal year in accordance with the law applicable to the calendar year 1918 and the distributive share thereof of each partner, and then taking such proportion of that distrib- utive share as the part of the fiscal year falling within the calendar year 1918 bears to the full fiscal year. See section 205 (c) of the statute [1[605] and article 1621 [1f621]. (Art. 324, Reg. 45, Rev., April 17, 1919. ) 610 Taxation of Partners in Partnership with Fiscal Year Ending in 1919. — If the fiscal year of a partnership began in the calendar year 1918 and ends in the calendar year 1919, the rates of tax for the calendar year 1918 apply to the amount of each partner’s dis- tributive share of the net income of the partnership for such fiscal year attributable to the calendar year 1918, and the rates for the calendar year 1919 to the amount of each partner’s distributive share of such net income of the partnership attributable to the calendar year 1919. (a) The amount of each partner’s distributive share ot the net income of the partnership for such fiscal year attributable to the calen- dar year 1918 is found by determining the net income of the partnership for its entire fiscal year in accordance with the law applicable to the calendar year 1918 and the distributive share thereof of each partner, and then taking such proportion of that distributive share as the part of the fiscal year falling within the calendar year 1918 bears to the full fiscal year, (b) The amount of each partner’s distributive share of the net income of the partnership for such fiscal year attributable to the calendar year 1919 is found by determining the net income of the part- nership for its entire fiscal year in accordance with the law applicable to the calendar year 1919 and the distributive share thereof of each partner, and then taking such proportion of that distributive share as the part of the fiscal year falling within the calendar year 1919 bears to INC. 83 TAX PARTNERSHIPS AND PERSONAL SERVICE CORPORATIONS. the full fiscal year. See section. ^OS (c) of the- statute and article 1621 [for fiscal year with different rates, 11621]. (Art. 326, Reg-. 45, Rev., April 17, 1919.) . - CIA Taxation of Stockholders cf Personal Service Corporation with Fiscal Year Ending in 1918. — A stockholder of aipersonal: service corporation with a fiscal year beginning in 1917 and ending in 1918 is taxed at the rates for the calendar year A918 (a) on • any divi- dends received in such calendar year out of earnings -or,' profits ac- cumulated since February 28, 1913, and before _ January 1, .1918 (except as provided under (d) below) ; (b) on any distribution made in such calendar year out of earnings or profits accumulated since Decem- ber 31, 1917; and (c) on his distribiitive share of the undistributed.net income of the corporation for its fiscal year attributable to the calendar year 1918. (d) On his distributive share of the undistributed net. in- come of the corporation for its fiscal year attributable .to., the calendar year 1917, however, the stockholder is liable, to surtax at. the rates for the calendar year 1917, but to no normal tax, and any distribution by the corporation subsequently to the close of its fiscal year out of such undistributed net income so taxed to the stockholders is free from any tax. The part of the net income of a corporation for its fiscal year attributable .to the calendar year 1918 is found by determining the net income of the corporation for its fiscal year in the same manner as if the fiscal year were the calendar year 1918, and then taking the pro- portion thereof which the part of such fiscal year falling within such calendar year bears to the full fiscal year. The part of the net income of a corporation for its fiscal yxar attributable to the calendar year 1917 is found by determining the net income of the corporation for its fiscal year in accordance v/ith the law applicable to the calendar year 1917, and then taking the proportion thereof which the part of such fiscal year falling v/ithin the calendar year 1917 bears to the full fiscal year. See section 205 (c) of the statute and article 1621 [.for fiscal year with different rates, ^[621]. (Art. 332, Reg. 45, Rev., April 17, 1919.) 61S Fiscal Year Ending in 1919. — Such part of a stocklmldeffs distrib- utive share of the net income of a personal service corporation for its fiscal y^ear ending in 1919 as is attributable to the calendar year 1919 is taxable at the rates for such calendar year, and such part of such distributive share as is attributable to the calendar year 1918 is taxable at the rates for such calendar year. The part of a stockholder’s distributive share of the net income of a corpora- tion for its fiscal, year attributable to the calendar year 1919 is found by determining his distributive share of the net income of the corporation for its fiscal year, whether distributed or not, in the same manner as if the fiscal year were the calendar year 1919, and then taking the pro- portion thereof which the part of such fiscal year falling within such calendar year bears to the full fiscal year. The part of a stockholder’s distributive share of the net income of a corporation for its ^ fiscal year attributable to the calendar year 1918 is found by determining his dis- tributive share of the net income of the corporation for its fiscal year, whether distributed or not, in the same manner as if the fiscal year were the calendar year 1918, and then taking the proportion thereof which the part of such fiscal year falling within such calendar year bears to t.he full fiscal year. The stockholder is also liable to tax on dividends 84 TAX INC. FISCAL YEARS EMBRACING PARTS OF CALENDAR YEARS. • received out af- 'tarnitigs 6r profits acctimulated sinc6 'February 28, 1913, and before January 1, 1918. See sections 201 and 205 (c) of the statute and articles 1541-1543 [for dividends, 816), and ■p621,-|foF fiscal year With different rate's^’ [[621[. ' (Art, 334, Reg’iHS,' Rev., April 17, 1919.) j - ' • - ■ ' ’ U - ^ ■ - V ' , r' 613 Lav/ tfoO. App-lication of the Rates for Fiscal Tear Embracing Parts of Calendar Years with Differing Rates.— 'See. 205. (a) That if a taxpayer makes return for a liseal year beginning in 1917 and ending in 1918, his: tax under this title for the^ first taxable year shall be the sum of.:” ' - r’ - ■ 614 Lawlfbl. "(1) the same proportion of a tax for the entire period computed under Title I of the Revenue Act of 1916 as amended by the Revenue Act of 1917 and under Title I of the Revenue Act of 1917, which the portion ofc.such period falling within tlie calen- dar year 1917 is of the entire period, aiid” ' ’! • ' 615 Law1f62. “(2) the same proportion of ‘a tax for the entire period computed under this title at the rates for the calen- dar year 1918 which the portion of such period falling ‘ wdthin the calendar year 1918 is of the entire period:” > 616 Law ][63. “Provided, That in the case of a personal service cor,- poration the amount to be paid shall be only that specified in clause (1).” 617 Law ^64. “Any amount heretofore or hereafter paid on account of the tax imposed for such fiscal year by Title I of the Revenue Act of 1916 as amended by the Revenue Act of 1917, and by Title I of the Revenue Act of 1917, shall be credited towards the payment of the tax imposed for such fiscal year by this act, and if the amount so paid exceeds the amount of such tax imposed by this act, or, in the case of a personal service corporation, the amount specified in clause (1), the excess shall be credited or refunded in accordance with the provisions of section 252 [If2i21].” 618 Law |f65. ‘'(b) If a taxpayer makes a return for a fiscal year be- ginning in 1918 and ending in 1919, the tax under this title for such fiscal year shall be the sum of:” 619 Law |[66. “(1) the same proportion of a tax for the entire period computed under this title at the rates specified for the calendar year 1918 which the portion of such pei'iod falling within the calendar year 1918 is of the entire period, and” 620 Law 1|67. “(2) the same proportion of a tax for the entire period computed under this title at the rates specified for the calendar year 1919 which the portion of such period falling within the calendar year 1919 is of the entire period.” 621 Fiscal Year with Different Rates.' — Section 205 of the statute ap- plies to income taxes. For the provisions with respect to war profits and excess profits taxes see section 335 and articles 951-955 INC. 85 TAX FISCAL YEARS EMBRACING PARTS OF CALENDAR YEARS. [War Tax Service]. Subdivision (a) [][613], which deals with fiscal years beginning in 1917 and ending in 1918, applies to corpora- tions, including personal service corporations, and to individuals. Sub- division (b) []f618], which deals with fiscal years beginning in 1918 and ending in 1919. applies to corporations other than personal service corporations and to individuals. Subdivision (c) [605], which deals with fiscal years beginning in 1917 or 1918 and ending in 1918 or 1919 applies to partnerships and to personal service corporations. See as to partnerships articles 321-327 [see 1|551], and as to personal service corporations articles 328-335 [see 1J596]. (Art. 1621, Reg. 45, Rev., April 17, 1919.) 622 Fiscal Year of Corporation Ending in 1918. — The method provided for computing the tax for a fiscal year beginning in 1917 and end- ing in 1918 is as follows : (a) the tax attributable to the calendar year 1917 is found by computing the income of the taxpayer and the tax thereon in accordance with Title I of the Revenue Act of 1916 as amended and Title I of the Revenue Act of 1917 as if the fiscal year was the calendar year 1917, and determining the proportion of such tax which the proportion of the fiscal year falling within the calendar year 1917 is of the full fiscal year; (b) the tax attributable to the calendar year 1918 is found by computing ^he income of the taxpayer and the tax thereon in accordance with the present statute as if the fiscal year, was the calendar year 1918, and deter- mining the proportion of such tax which the portion of such fiscal year falling within the calendar year is of the full fiscal year; and (c) the tax for the fiscal year is found by adding the tax attributable to the calendar year 1917 and the tax attributable to the calendar year 1918. If a cor- poration made its return for the taxable year 1917 on the calendar year basis and for the taxable year 1918 on a fiscal year basis, the tax attributa- ble to the calendar year 1917 need not again be computed and the tax attrib- utable to the calendar year 1918 computed as herein provided shall be the tax of the corporation for the portion of such fiscal year falling within the calendar year 1918. A personal service corporation is not required to pay the tax attributable to the calendar year 1918, since for that year it is treated substantially like a partnership for the purposes of taxation. See section 218 of the statute and articles 328-335 [1f611 and tf612]. (Art. 1622, Reg. 45, Rev., April 17, 1919.) 623 Deductions and Credits in the Case of Corporation Fiscal Year Ending in 1918. — Net losses deductible from net income of the fiscal year under the provisions of section 204 [net losses, p097] of the statute shall be deducted in computing the tax attributable to the calendar year 1917, as well as in computing the tax attributable to the calendar year 1918. In computing the tax attributable to the calendar year 1917 the net income cumputed for the entire period under Title I of the Revenue Act of 1916 as amended and Title I of the Revenue Act of 1917 shall be cred- ited with the excess profits tax computed for the entire period under Title II of the Revenue Act of 1917. In computing the tax attributable to the cal- endar year 1918 the net income computed for the entire period! under the present statute shall be credited with the war profits and excess profits taxes computed for the entire period under Title III of the statute; at the rates prescribed for 1918. See section 236 of the statute and article 591 [for credits allowed, p533]. Amounts previously paid by the taxpayer on INC. 86 TAX FISCAL YEARS EMBRACING PARTS OF CALENDAR YEARS. account of the income tax for such fiscal year shall be credited towards the pa 3 anent of the income tax imposed for such fiscal year by the present statute. Any excess shall be credited or refunded in accordance with the provisions of section 252. See articles 10v51 [][2115] and 1034-1036 [for claims for credit on account of taxes erroneously collected, beginning at U2123]. (Art. 1623, Reg. 45, Rev., April 17, 1919.) 624 Personal Service Corporation with Fiscal Year Ending in 1918. — If the fiscal year of a personal service corporation began in the calendar year 1917 and ended in the calendar year 1918, it is sub- ject to tax as a corporation for the part of such fiscal year which falls within the calendar year 1917. The amount for which such a corpo- ration is liable is such proportion of the tax for the entire fiscal year com- puted in accordance with Title I of the Revenue Act of 1916 as amended and with Title I of the Revenue Act of 1917 as the portion of such fiscal year falling within the calendar year 1917 is of the entire period. An amount previously paid by the corporation on account of the income tax for such fiscal 3 ^ear shall be credited toward the payment of the tax for the portion of the fiscal year falling within the calendar year 1917, and any excess shall be credited or refunded in accordance with the provisions of section 252 [][2121] of the statute. See section 205 (a) [1|613] and article 1621 [for fiscal year with different rates, 1[621]. As to the excess profits tax see section 335 Tc) [War Tax Service]. (Art. 329, Reg. 45, Rev., April 17, 1919.) <>25 Fiscal Year of Individual Ending in 1918. — Since under the law applicable to the calendar year 1917 individuals were not permitted to make returns on the fiscal year basis (see Title I of the Revenue Act of 1916 as amended), the tax of an individual for that part of a fiscal year ending in 1918 attributable to the calendar year 1917 has already been in- cluded in the tax for such calendar year and need not ordinarily again be computed. The tax for that part of the year attributable to the calendar year 1918 is found' by computing the income of the taxpayer for the taxa- ble year and the tax thereon in accordance with the present statute as if the taxable year was the calendar year 1918, and determining the propor- tion of such tax which the portion of such fiscal year falling within the calendar year is of the full fiscal vear. (Art. 1624, Reg. 45, Rev., April 17, 1919.) <>26 Fiscal Year of Corporation or Individual Ending in 1919. — The method provided for computing the tax for a fiscal year beginning in 1918 and ending in 1919 is as follows: (a) the tax attributable to the cal- endar year 1918 is found by computing the income of the taxpayer and the tax thereon in accordance with the statute as if the fiscal year was the calendar year 1918, and determining the proportion of such tax which the portion of such fiscal year falling within the calendar year is of the full fiscal year; (b) the tax attributable to the calendar year 1919 is found by cumputing the income of the taxpayer and the tax thereon in accordance with the statute as if the fiscal year was the calendar year 1919, and deter- mining the proportion of such tax which the portion of such fiscal year falling within the calendar year is of the full fiscal year; and (c) the tax for the fiscal year is found by adding the tax attributable to the calend;ar year 1918 and the tax attributable to the calendar year 1919. (Art. 1625, Keg. 45, Rev., April 17, 1919.) INC. 87 TAX FISCAL YEARS EMBRACING PARTS OF CALENDAR YEARS. 627 Re Method of Computing Tax in the Case of Fiscal Year Cor- poration. — Reference is made to your letter dated October^ 27, 1919, addressed to tRe Chairman of Committee on Appeals and Review, and by him referred to this office for reply, after full consideration had been given to the subject matter contained therein. In reply you are advised that the questions presented were carefully considered before the regulations were issued or the forms were drafted, and have since that time been the subject of most thoughtful consideration and analysis. The view of the Department is expressed in the regulations and the forms now in use. The Bureau, therefore, does not_ deem it advisable to modify the regulations or to make any change in the forms until such time as it may be required to do so by a court decision. (Letter to K. Sheridan Hayes, Washington, D. C., signed by Commissioner Daniel C. Roper, and dated November 5, 1919.) 628 Lawjf72. Parts of Income Subject to Rates for Different Yearsi —“Sec. 206. That whenever parts of a taxpayer’s income are subject to rates for different calendar years, the part subject to the rates for the most recent calendar year shall be placed in the lower brackets of the rate schedule provided in this title, the part subject to the rates tor the next preceding calendar year shall be placed in the next higner brackets of the rate schedule applicable to that year, and so on until the entiie net income has been accounted for.” 629 Law 1173. “In determining the income, any deductions, exemip- tions or credits of a kind not plainly and properly charge- able against the income taxable at rates for a preceding year shall first be applied against the income subject to rates for the most recent calendar year;” 630 Law 1174. “but any balance thereof shall be applied against the income subject to the rates of tne next preceding year or years until fully allowed.” 681 Section 206 of the statute applies to a partner’s share of partner- shio net income ; to a stockholder’s share of the net income of a personal service corporation ; and to stock dividends received by a tax- payer between janiiary 1 and November 1 918, or declared during that oeriod and received by the taxpayer after November 1, 1918, and before March 27, 1919. For the treatment of income of a partner or of a stock- holder in a personal service corporation see sections 218 [1[601] and 2Ub 1116051 of the statute and articles 3^1-335 | beginning at ^3], 1621 tel and 1624 11I6251. For the treatment of stock dividends see sec- lion Tl and artiLs 1546 ll[859] and 1642 [p60]. (Art. 1641, Reg. 45, Rev., April 17, 1919.) 632 Application of Different Tax Rates in the Case of Fiscal Year of Partnership Ending in 1918.— Any deductions, exemptions or credits to which the partner in a partnership with a fiscal year end- ing in 1918 is entitled shall first be applied against his income subject to the rates for the calendar year 1918, unless of a kind plainly and proper y chargeable against income taxable at the rates for the calendar year 19 . The proportionate share of a partner of any excess profits tax imposed upon 88 TAX INC. m FISCAL YEARS EMBRACING PARTS OF CALENDAR YEARS. the partnership under the Revenue Act of 1917 with respect to that part of the fiscal year falling within the calendar year 1917 is plainly and properly chargeable against income taxable at the rate for that year and shall be credited against such income of the partner. In determining the rates of tax applicable to the amounts of the distributive shares of the partners attributable to the calendar years. 1917 and 1918, respectively, the amounts subject to the rates for the calendar year 1918 shall be placed in the lower brackets of the rate schedule provided in the present statute and the amounts attributable to the calendar year 1917 in the next higher brackets of the rate schedule applicable to that year. See section 206 []j628] of the statute and article 1641 [for parts of income subject to rates for different years, 1|631], and also section 1 of Title I of the Rev- enue Act of 1916 and sections 1 and 2 of Title I of the Revenue Act of 1917. (Art. 325, Reg. 45, Rev., April 17, 1919.) <533 Application of Different Tax Rates in the Case of Fiscal Year of Partnership Ending in 1919. — Any deductions, exemptions or credits to which the partner in a partnership with a fiscal year ending in 1919 is entitled shTil first be applied against his income subject to the rates for the calendar year 1919, unless of a kind plainly and prop- erly chargeable against income taxable at the rates for the calendar year 1918. In determining the rates of tax applicable to the amounts of the distributive shares of the partners attributable to the calendar years 1918 and 1919, respectively, the amounts subject to the rates for the calendar year 1919 shall be placed in the lower brackets of the rate schedule pro- vided in the statute, and the amounts attributable to the calendar year 1918 in the next higher brackets of the rate schedule applicable to that year. See section 206 [tf628] of the statute and article 1641 [for parts of in- come subject to rates for different years, 11631]. (Art. 327, Reg. 45, Rev., 17, 1919.) 634 Application of Different Tax Rates in the Case of Fiscal Year of Personal Service Corporation Ending in 1918. — Any deductions, exemptions or credits to which the stockholder of a personal service corporation with a fiscal year ending in 1918 is entitled shall first be applied against his income subject to the rates for the calendar year 1918, unless of a kind plainly and properly chargeable against income taxable at the rates for the calendar year 1917. The proportionate share of a stock- holder of any excess profits tax imposed upon the corporation under the Revenue Act of 1917 with respect to that part of the fiscal year falling, within the calendar year 1917 is plainly and properly chargeable against incom.e taxable at the rates for that year and shall be credited against such income of the stockholder. In determining the rates of tax applicable to the amounts of the distributive shares of the stockholders attributable to the calendar years 1917 and 1918, respectively, the amounts subject to the rates for the calendar year 1918 shall be placed in the lower brackets of the rate schedule provided in the present statute and the amounts attributable to the calendar year 1917 in the next higher brackets of the rate schedule applicable to that year. See section 206 [^[628] of the statute and article 1641 [for parts of income subject to rates for different years, ^[631], and also section 1 of Title I of the Revenue Act of 1916 and sections 1 and 2 of Title I of the Revenue Act of 1917. (Art. 333, Reg. 45, Rev., April 17, 1919.) INC. 89 TAX ESTATES AND TRUSTS. 635 Application of Different Tax Rates in the Case of Fiscal Year of Personal Service Corporation Ending in 1919. — Any deductions, exemptions or credits to which the stockholder of a personal serv- ice corporation with a fiscal year ending in 1919 is entitled shall first be applied against his income subject to the rates for the calendar year 1919, unless of a kind plainly and properly chargeable against income taxable at the rates for the calendar year 1918. In determining the rates of tax applicable to the amounts of the distributive shares of the stock- holders attributable to the calendar years 1918 and 1919, respectively, the amounts subject to the rates for the calendar year 1919 shall be placed in the lower brackets of the rate schedule provided in the statute and the amounts attributable to the calendar year 1918 in the next higher brackets of the rate schedule applicable to that year. See section 206 [1[628] of the statute and article 1641 [for parts of income subject to rates for dif- ferent years, 1[631]. (Art. 335, Reg. 45, Rev., April 17, 1919.) '636 LawpSO. Income of Estates and Trusts is Taxable. — “Sec. 219, (a) That the tax imposed by sections 210 [normal tax on individuals] and 211 [surtax] shall apply to the income of estates or of any kind of property held in trust, including — ” 637 LawiyiSl. Income Received by Estate During Period of Settle- ment is Taxable.— “(1) Income received by estates of deceased persons during the period of administration or settlement of the estate 638 Decedent’s Estate During Administration. — The “period of ad- ministration or settlement of the estate” is the period required by the executor or administrator to perform the ordinary duties pertaining to administration, in particular the collection of assets and the payment of debts and legacies. It is the time actually required for this purpose, whether longer or shorter than the period specified in the local statute for the set- tlement of estates. Where an executor, who is also named as trustee, fails to obtain his discharge as executor, the period of administration continues up to the time when the duties of administration are complete and he actually assumes his duties as trustee, whether pursuant to an order of the court or not. No taxable income is realized from the passage of prop- erty to the executor or administrator on the death of the decedent, even though it may have appreciated in value since the decedent acquired it. In the event of delivery of property in kind to a legatee or distributee, no income is realized. Where, however, the executor sells property of the estate for more than its value at the death of the decedent, the excess is income taxable to the estate. See article 1562 [for sale of property ac- quired by bequest, P074]. (Art. 343, Reg. 45, April 17, 1919.) 639 Law 11182. Income Accumulated in Trust is Taxable. — [lf636. The taxes imposed by sections 210 and 211 apply to] (2) Income accumulated in trust for the_ benefit of unborn or unascertained persons or persons with contingent interests , 640 Law 11183. Income Held for Future Distribution Under Terms of Will or Trust is Taxable.— “(3) Income held for future distribution under the terms of the will or trust; and” 90 TAX INC. estates and trusts. 641 Law 11189. Taxes to Be Paid by Fiduciary on Income (1) Re- ceived During Period of Settlement, (2) Accumulated in Trust, and (3) Held for Future distribution under Terim Will or Trust. — “(c) In cases under paragraph (1) [637], (2) [639], or (3) [K640] of subdivision (a) the tax shall be imposed upon the net income of the estate or trust and shall be paid by the fiduciary. 642 Estates and Trusts Taxed to Fiduciary.— In the case of (a) es- tates of decedents before final settlement and of (b) trusts, whether created by will or deed, for accumulation of income, whether for unascertained persons or persons with contingent interests or otherwise, the income is taxed to the fiduciary as to any single in- dividual, except that from the income of a decedent’s estate there may first be deducted any amount of income properly paid or credited to a beneficiary. See section 200 of the statute and articles 1521 and 152Z [for definition of “fiduciary” 11671]. Where under the terms of the will or deed the trustee may in his discretion distribute the income or accumulate it, the income is taxed to the trustee, irrespective of the exercise of his discretion. The imposition of the tax is not anected by the fact that an ultimate beneficiary may be a person exempt from tax. A statutory allowance paid a widow out of the corpus of the estate is not deductible from gross income. As an intestate’s real estate does not pass to his administrator, upon a sale by the heirs, whether before or after settlement of the estate, each heir is taxed individually on any profit derived. (Art. 342, Reg. 45, Rev., April 17, 1919.) [For stock dividends taxable to estate or trust, see 1l849.J 643 Incidence of Tax on Estate or Trust.— Liability for^ payment of the tax attaches to the person of an executor or administrator up to and after his discharge, where prior to distribution and discharge he had notice of his tax obligations or failed to exercise due diligence in determining whether or not such obligations existed. Liability for the tax also follows the estate itself, and when by reason of the distribution of the estate and discharge of the executor or administrator it appears that collection of the tax can not be made from the executor or admin- istrator the legatees or distributees must account for their proportion- ate share of the tax due and unpaid. The same considerations apply to other trusts. Where the tax has been paid on the net income of an estate or trust by the fiduciary, such income is free from tax when dis- tributed to the beneficiaries. (Art. 344, Reg. 45, April 17, 1919.) 644 Law 11184. Income Received by a Fiduciary, Which is Distributa- table to Beneficiaries is Taxable.— [The taxes imposed by sections 210 and 211 apply to] “(4) Income which is to be distributed to the beneficiaries periodically, whether or not at regular intervals, and the income collected by a guardian of an infant to be held or distributed as the court may direct.” 645 Law 11192. Beneficiaries Liable on Distributable Income.— “(d) In cases under paragraph (4) [1[644] of subdivision (a), 646 Law 11193. Legatees Liable on Amount Properly Paid or Credited to Them During Period of Administration.— “and in the case of any income of an estate during the period of administiation 91 TAX INC. ESTATES AND TRUSTS. or settlement permitted, by subdivision (c) [^[653] to be deducted from the net income upon which, tax is to be paid by the fiduciary,” Law If 194. Distributable Income to Be Included in Beneficiary’s Return. — ''the tax shall not be paid by the fiduciary, but there shall be included in computing the net income of each bene- ficiary his distributive share, whether distributed or not, of the net incom e of the estate_or trust for the taxable year, or,” ^48 Law ff 195. "if his net income for such taxable year is computed upon the basis of a period different from that u-pon the basis of which the net income of the estate or trust is computed, then his distributive share of the net income of the estate or trust for any accounting period of such estate or trust ending within the fiscal or calendar year upon the basis of which such beneficiary’s net income 'is computed.” 649 Estates and Trusts Taxed to Beneficiaries. — In the case of (a) a trust the income of which is distributable periodically, (b) an ordinary guardianship of a minor, and (c) an estate of a decedent be- fore final settlement as to any income properly paid or credited as such to a beneficiary, the income is taxable directly to the beneficiary or bene- ficiaries. Each beneficiary must include in his return his distributive share of the net income, even though not yet paid him, but if the taxable year on the basis of which he makes his returns fails to coincide with the annual accounting period of the estate or trust, then he need only include in his return his distributive share for such accounting period ending within his taxable year. The regulations governing partner- ships are generally applicable to such an estate or trust. See articles 321-327 [for partnerships, IjSSl]. (Art. 345, Reg. 45, Rev., April 17, 1919.) 650 Credits to Beneficiaries. — See ^665. Law U186. Hovi^ Net Income of an Estate or Trust Is to Be Com- puted. — "The net income of the estate or trust shall be computed in the same manner and on the same basis as provided in section 212 [1[769],” 652 Lawj[187. Additional Deduction Because of Payments Made for Religious, Charitable, Educational, etc., Purposes, Pur- suant to Terms of Will or Deed of Trust. — "except that thgre shall also be allowed as a deduction (in lieu of the deduction authorized by para- graph (11) [111447] of subdivision (a) of section 214) any part of the gross income which, pursuant to the terms of the will or deed creating the trust, is during the taxable year paid to or permanently set aside for the United States, any State, Territory, or any political subdivision thereof, or the District of Columbia, or any corporation organized and operated exclusively for religious, charitable, scientific, or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private stockholder or individual;” INC. 92 TAX ESTATES AND TRUSTS. 653 LawpQO. Additional Deduction of Amounts Properly Paid or Credited to Legatee During Period of Administration. — “except that in determining the net income of the estate of any de- ceased person during the period of administration or settlement diere may be deducted the amount of any income properly paid or credited to any legatee, heir or other beneficiary/’ 654 l^et Income of Estates and Trusts. — While certain estates and trusts are subject to tax as such and others are not, the fiduciary in every case is required to make a return of income. See section 225 of the statute and articles 421-425^ [for returns by fiduciaries, beginning at ][669]. The net income of an estate or trust shall be computed in the same manner and on the same basis as the net in- come of an individual, except that in place of the deduction allowed individuals of certain gifts or contributions there may be deducted from the gross income any part of it which during the taxable year is pur- suant to the will or trust deed paid to or permanently set aside for the United States, a State, a Territory, or any political subdivision thereof, the District of Columbia, or any corporation or association of the kind described in section 231 (6) of the statute and article 517 [11760]. See section 212 and articles 21-26 [for manner and basis of computing net income generally, beginning at 1f771]. The income of a revocable trust must be included in the gross income of the grantor. (Art. 341, Reg. 45, Rev., April 17, 1919.) 655 Capital Expenditures Not Deductible. — Read at 1[1190. 656 Deductibility of Losses Sustained by Estates or Trusts and the Bearing of Such Losses on the Taxable Income of Beneficiaries. — Receipt is acknov/ledged of your letter of October 3, 1919, which reads as follows : “With reference to the letter dated August 9 ^ 1919— IT :T:RR—FMH— signed by C. P. Trobridge, Acting Head of Division, is it possible to obtain any definite reply to our letter of July 24, 1919, inquiring as to whether or not when a fiduciary sells stock or bonds of a trust estate at a loss, the beneficiary is entitled to a credit, deducting such loss against his income, only paying a tax on the net amount of his taxable income in excess of the loss? Inasmuch as your lettter of August 9 stated that the matter was at that time under consideration and we have received no other reply, we thought it possible that the matter might have been overlooked.” 1[In reply you are advised that this office holds that, under the Revenue Act of 1918, (a) any loss resulting from the sale of stocks, bonds or other property, owned by a trust, which would be an allowable deduction from the gross income of an individual, is an allowable deduction from the gross income of a trust, wTether or not the income of such trust is “to be distributed to the beneficiaries periodically, whether or not at regular intervals,” and whether or not there is any requirement in the instrument creating the trust, a decree of court, or general law, that the principal of the trust estate be kept intact at the expense of income as against such loss; that (b) such a deduction is not allowable as against the current or future gross income of the present beneficiaries or of those who will receive the property at the termination of the trust; and that (c) a beneficiary is not required to include in his personal re- turn as a part of “his distributive share, whether distributed or not, of 93 TAX INC. ESTATES AND TRUSTS. the net income of the . . . trust for the taxable year, any part of the amounts allowed to the trust as a whole as a deduction for loss re- sulting" from the sale of the property. (Letter to The Equitable Trust Company of New York, N. Y., signed by Commissioner Daniel C. Roper, and dated October 13, 1919.) 657 Deduction for Depreciation in Computing Net Income of Estates and Trusts and the Bearing of Such Deduction on the Taxable Income of Beneficiaries. — [In connection with the following, the foregoing paragraph should be read.] Reference is made to our letter of May 8, 1919, in which you refer to office letter of April 14, 1919, wherein you are informed that an individual who re- ceives her income from three trust estates is not permitted to deduct in her personal return the amount of depreciation sustained during the year on real estate which forms a part of the assets of these trusts. You now state you note that Article 164 of Preliminary Regulations 45, which had reference to this question, has been eliniinated from the last edition of the Regulations, and you ask to be advised whether the decision contained in office letter of April 14 has been^ modi- fied. Pn reply vou are advised that an individual who receives income from a trust estate is not permitted to claim a deduction in his personal in- come tax return for any depreciation sustained during the year on real estate or other assets of the estate. Under the Revenue Act of 1918, however, it is permissible for the fiduciary, in ascertaining the net income of the estate or trust for which he acts, to deduct a proper amount for the depreciation sustained during the taxable year, whether or not the terms of the will or agreement creating same or a decree of Court provides for the taking care of depreciation which may be sus- tained on the property held in trust. (Letter to William R. Conklin, New York, N. Y., signed by J. H. Callan, Assistant to the Commis- sioner, by P. S. Talbert, Head of Division, and dated October 6, 1919.) 658 Dividends Declared from Surplus Earned and Accumulated Dur- ing Life of Decedent and Subsequent to March 1, 1913, are Tax- able Income for Year.— This office is in receipt of ypur letter of October 11, 1915, requesting, as attorneys for , executor of the estate of A , a reconsideration by this office of its holding Sep- tember 25, 1915, in letter to the Collector for the Second District of New York in matter of assessment of tax upon certain dividends re- ceived by the executor as trustee in September and December, 1913, not included in his return as income. 659 It appears that the dividends in question vv’ere declared and paid in 1913 from the surplus of a bank, accumulated during a period of several years.* The dividends amounted to $20,000 and $13,666.68 was excluded from the return under the theory and belief that the amount so excluded was capital and did not have the status of income for the purposes of the income tax for the reason that this proportion of the dividends was earned by the bank, a corporation, prior to the death of , a stockholder of the bank. You cite, as authority. Matter of Osborne, 209 N. Y. App., 450. 660 You are advised that the case has been reviewed and the decision of this office, September 25, 1915, is affirmed. * For taxable status of dividends under the present law see f[811. 94 TAX INC. ESTATES AND TRUSTS. 661 The dividends in question, being a distribution in 1913 of cor- porate profits, had the status of income for income tax purposes to the stockholders of the corporation.* 662 The principle of decision in Matter of Osborne, 209 N. Y. App., 450, is that so far as possible (in the absence of testarnentary di- rection to the contrary), the corpus of a trust fund in which life tenants and remaindermen are interested should be kept at the value it possessed when the fund was originally created. The court did not attempt to change the rule that a dividend, however evidenced and paid, declared and paid from corporate surplus, has the status of income, but only that in holding evenly the balance between life tenants and remaindermen “the court should look into the fact, circumstances and nature of the trans- action and determine the nature of the dividend and the rights of the con- tending parties according to justice and equity.” 663 ' Trustees are required to make return and pay tax for the persons for whom they act. Where they act for and niake distribution within a taxable period to an individual they are required to make re- turn. * * * Where they act for an individual not determined, or for an individual not entitled to receive within the taxable period, they are held to have the status, for the purposes of the income tax, not only as a fiduciary but also that of agency for such beneficiary, and as such fiduciary and agent are required to make return and pay the tax upon the amount received and held. For the purpose of the income tax the effect of accumulation in the hands of a trustee is held to be the equiva- lent of distribution in the sum of the accumulation. 664 In this case the fiduciary received within the taxable period, re- tained and did not distribute, the sum of $39,154.50. All this sum had the status of “gains, profits and income” under the Act of October 3, 1913, and, therefore, under the provisions of T. D. 2231 [or Art. 342, U642], is taxable to the trustee. (Letter to Bowers & Sands, New York, N. Y., signed by Deputy Commissioner L. F. Speer, and dated October 19, 1915.) ♦For taxable status of dividends under the present law see pil. 665 Law 1fl96. Credits Allowed to Beneficiaries When Making Returns Including Distributable Income. — “In such cases the beneficiary shall, for the purpose of the normal tax, be allowed as credits in addition to the credits allowed to him under section 216 [p513], his proportionate share of such amounts specified in subdivisions (a) [dividends, 111514] and (b) [interest on Government bonds included in gross income 1[1515] of section 216 as are received by the estate or trust.” 666 Their Proportionate Shares of the Net Loss Suffered by an Estate or Trust During Certain Taxable Years May Be Deducted by Beneficiaries. — [Read at 1fll05]. 667 Law U191. Credits Allowed to Estate or Trust for Normal Tax. — “In such cases the estate or trust shall, for the pur- pose of the normal tax, be allowed the same credits as are allowed to single persons under Section 216 [1[1518].” INC. 95 TAX ESTATES AND TRUSTS. 668 Credits to Trust or Beneficiary.-— (a) In the case of an estate or trust taxed to the fiduciary it is allowed the same credits against net income as a single person; including a personal exemption of $1,000 but no credit for dependents. * (b) -Irr ’the case of ah estate dr trust taxed to the beneficiaries each beneficiary is alio\V^d for the purpose of the normal tax, in addition to his individual credits, his proportionate share ol such efividends from domestic and resident' foreign corporations ;and of such ihtei'Cst hot entirely exempt from tax upon obligations of the United State4 atid bonds Of the War Finance Corporation as are received by the estate dr trust. Each beneficiary is entitled to but one personal exemption, no matter from how m.any trusts he may receive income. See section '216 of the statute and articles 30U307 [for credit bn account of personal ejtemptioh, ^1516] . (Art. 346,. Reg.: 45, Rev., April 17, 1919.) . ' " , ^69 Lawp39. Fiduciary Returns. — “Sec. 225. “That every fiduciary - {except receivers appointed by authority of law' in pos- session of part only of the property Of aii individual) [shall make return, 11676 ]” ' , ‘ ■ 670' Law][21. The Term “Fiduciary” Defined. — “The term 'fiduciary’ means a guardian, trustee, executor, admintstrator, re- ceiver, conservator, or any person acting in any 'fiduciary capacity for any person, trust Or estate;” 671 “Fiduciary” is a term which applies to all persons that occupy positions of peculiar confidence toward others, such as trustees, executors and administrators, and a fiduciary for income tax pur- poses is a person who holds in trust an estate to which another has the beneficial title or in which another has a beneficial interest, or receives and controls income of another as in the case of receivers. A committee of the property of an incompetent person is a fiduciary. (Art. 1521, Reg. 45, Rev., April 17, 1919.) 672 Fiduciary Distinguished from Argent. — There may be a fiduciary relationship between an agent and a principal, but the word “agent” does not denote a fiduciary. A fiduciary relationship can not be created by a power of attorney. An agent having entire charge of property, with authority to effect and execute leases with tenants_ en- tirely on his own responsibility and without consulting his principal, merely turning over the net profits from the property periodically to his principal, by virtue of authority conferred upon him by a power of attor- ne}’’, is not a fiduciary within the meaning of the statute. In cases where no legal trust has been created in the estate controlled by the agent and attorney the liability to make a return rests with the principal. (Art. 1522, Reg. 45, Rev., April 17, 1919.) 673 Law |[237. Duly Authorized A.gent May Make Return. — “If the taxpayer is unable to make his own return, the return shall be made by a duly authorized agent or by the guardian or other person charged with the care of the person or property of such tax- payer.” ' . . , INC. 96 TAX ESTATES AND TRUSTS. ■ * ' -P G74 The return may be' made by an agent when by reason of illness, absence or nonresidence the person liable for the return is unable to make it,, the agent assuming the responsiblity for making the return and incurring liablity to the specific penalties provided for erroneous, false or fraudulent returns. See section 253 and article 1041 [for specific penalties,. 1[1903]. . (Art. 402,"Reg‘. 45/'-Rew, April 17, ,1919.) <>75 Return for Non-resident Alien by Agent. — ^^[Read at "^1579.] <>7G Law f 240. Every Fiduciary to Make Return. — “[Every fiduciary] shall make under oath [^jl 788] a return for the indi- vidual, estate or trust for which he acts’ - • • G77 Law ]j 245. Fiduciary to Make Return Under Oath as to Corrcct- J ' ness.— ‘The fiduciary shall make oath that he has suffi- cient knowledge of the 'aiiairs of , such individual, estate or trust to enable him to make the return, and. that tlpre' same^is, to the best of his knowl- edge and belief, true and correct.” : . j ^ ^ 078 Law p85. Responsibility for Making Return Rests with Fidu- ciary. — “(b) The fiduciary shall be responsible for mak- ing the return of income for the estate or trust for which he acts.” 679 Law ]f241. Return by Fiduciary When Acting for an Individual. — [The fiduciary shall make under oath a return for the individual for whom he acts] “(1) if the net income of such individual is $1,000 or over if single or if married and not living with husband or wife, or $2,000 or over if married and living with husband or wife, or” [For guardians, other fiduciaries and agents acting as attornevs-in-fact, read at 11673] 680 Lav/ ]f242. Return by Fiduciary When Acting for an Estate or Trust. — [That every fiduciary (except receivers ap- pointed by authority of law in possession of part only of the property of an individual) shall make under oath a return for the individual [][679], estate or trust for which he acts] “(2) if the net income of such estate or trust is $1,000 or over or if any beneficiary of such estate or trust is a nonresident alien,” 681 Lav/ j[244. Return by One of Two or More Joint Fiduciaries. — “LAder such regulations as the Commissioner with the approval of the Secretary may prescribe, a return made by one of two or more joint fiduciaries and filed in the office of the collector of the district where such fiduciary resides shall be a sufficient compliance with the above requirement.” 682 Law ][243. Contents of Return by Fiduciaries. — “stating specific- ally the items of the gross income and the deductions and credits allowed by this title.” 688 Lav/ p 88. Beneficiaries’ Distributive Shares to Be Listed. — “and in cases under paragraph (4) of subdivision (a) [1[644] of this section the fiduciary shall include in the return a statement of each beneficiary’s distributive share of such net income, whether or not dis- tributed before the close of the taxable year for which the return is made.” INC. 97 TAX ESTATES AND TRUSTS. 684 Every fiduciary, or at least one of joint fiduciaries, must make a return of income (a) for the individual whose income is in his charge, if the net income of such individual is $2,000 or over if married and living with husband or wife or is $1,000 or over in other cases, or (b) for the estate or trust for which he acts, if the net income of such estate or trust is $1,000 or over or if any beneficiary of such estate or trust is a nonresident alien. The return in case (a) and also in case (b) if the tax is payable by the fiduciary shall be on form 1040 (revised), except that it may be on short form 1040 A (revised) where the net income does not exceed $5,000. The return shall be on form 1041 (revised) in case (b) if the tax is payable by the beneficiaries. In such a case the fiduciary shall include in the return a statement of each bene- ficiary’s distributive share of the net income, whether or not distributed before the close of the taxable year for which the return is made. See section 219 of the statute and articles 341-346 [beginning at 1f636]. If the net income of a decedent from the beginning of the taxable year to the date of his death was $1,000, if unmarried, or $2,000, if married, the executor or administrator shall make a return for such decedent. See article 305 [for specific exemption, 1|1526]. (Art. 421, Reg. 45, Rev., April 17, 1919.) 685 Constructive Receipt of Income During the Taxable Year by a De- cedent Prior to His Death. — Reference is made to your letter of re- cent date, relative to the proper treatment, for income tax purposes, of in- come received after the death of an individual in 1918. You state that you represent a decedent who died on June 25, 1918, and whose accounts were kept upon a cash receipt and disbursement basis. On June 1, 1918, divi- dends were declared on stock which he owned but which were not paid until July 1, 1918, and interest accrued on bonds and mortgages during his lifetime was not paid until after his death. The question presented is whether the dividends and interest referred to should be reported in the return for the period from January 1, 1918, to the date of his, death or in the return for the period from the date of his death to December 31, 1918. In this connection you are advised that under Section 213 of the Revenue Act of 1918, income which is credited to the account of or set apart for a taxpayer and which may be drawn upon by him at any time is subject to tax for the year during which so credited or set apart, although not yet actually reduced to possession. Where interest coupons have matured, but have not been cashed, such interest payment, though not collected when due and payable, is nevertheless available to the taxpayer and should be included in 'his gross income for the year during which the coupons ma- tured. Dividends on corporate stock are subject to tax when set apart for the stockholder, although not yet collected by him. Similarly interest on mortgages should be included in gross income for the year in which it becomes due and payable. (Regulations 45, Articles 53 [^[946] and 54 [^[947]. Therefore, if the income referred to in your letter was made available to the decedent during 1918 so that it could have been drawn upon by him prior to his death it should be reported in the return for the period from January 1, 1918, to June 25, 1918. (I.etter to Douglas, Armitage and McCann, New York, N. Y., signed by J. H. Callan, Assistant to the Com- missioner, by P. S. Talbert, and dated May 31, 1919.) INC. 98 TAX ESTATES AND TRUSTS. 686 Appreciation in Value of Decedent’s Assets Prior to His Death. — Your Mimeograph Letter to Collectors, dated August 14, 1914, states no appreciation in value of assets due to appraisal or adjustment! is taxable income until such appreciation has been converted into cash. T. D. 2090 [see Art. 1562 of Reg. 45, Rev., novr, at jfl074] states if property ac- quired by gift is sold at price greater than appraised value at time property acquired by gift, such gain is taxable income. We assume from these rulings and request your confirmation by wire, collect, that when indi- vidual dies after March 1, 1913, leaving property, all gains or losses on subsequent sales thereof should be computed from value at date of death, not date of his acquisition, and that executor should make no return of book gains or losses up to date of death. Also that on transfer of property in question by his executor to legatee or to trustee under will or from one trustee to succeeding trustee no tax is due though there be book gain at date of such transfer. (Telegram to the Commissioner of Internal Rev- enue from Ropes, Gray, Boyden and Perkins, of Boston, dated January 31, 1917.) (Answer.) When individual dies after March 1, 1913, leaving property, all gains or losses on subsequent sales should be computed on basis of appraised value at date of death and executors should not make return of book gains or losses either up to date of death or on transfer of property to legatee or to trustee under will or from one trustee to succeeding trustee, the appraised value at date of death remaining as basis for all subsequent realization of losses or gains in cash. (Telegram to Ropes, Gray, Boyden and Perkins, Boston, Mass., signed by Commis- sioner W. H. Osborn, and dated February 3, 1917.) [Read P074.] Taxability of Income Accrued to Decedent Dying After March 1, 1913, but Before October 3, 1913. — The appended decision [Feb. 8, 1917] of the Circuit Court of Appeals, Second Circuit, in the case of Nicholas F. Brady, et al. v. Charles W. Anderson, collector of internal revenue, is published for the information of internal-revenue officers and others concerned. The United States Supreme Court on May 21, 1917, re- fused to grant a writ of certiorari in this case. (T. D. 2494, June 2, 1917.) T mited States Circuit Court of Appeals, for the Second Circuit. (240 Fed. 665.) Ward, Circuit Judge: 688 This is an action against the Collector of Internal Revenue by the executors of Anthony N. Brady, deceased, to recover taxes assessed by the Commissioner of Internal Revenue and paid by them under protest upon income received by Brady durinf his lifetime before the income tax of October 3, 1913, imposing a tax, had been passed. 089 The Sixteenth Amendment, by virtue of which the statute was enacted, was ratified February 28, 1913, and the Supreme Court has for that reason held that Congress had power to make it retroactive to March 1, 1913. Brushaber v. Union Pacific R. R. Co., 240 U. S. 1, 20 [112260]. 690 Anthony N. Brady died July 22, 1913, and his executors, in ac- cordance with the requirement of the Commissioner of Internal Revenue, made a return of the income received by him between March 1, when the act went into effect, and July 22, 1913, when he died. The Commissioner assessed a tax of $61,654.72. 99 TAX INC. ESTATES AND TRUSTS. 691 The case having come on for trial before Grubb, J., and each side having moved for the direction of a verdict, he directed a verdict for the defendant. This is a writ of error to the judgment entered thereon. 692 The questions presented are purely of law, involving only the construction of the statute. We confine ourselves to the con- sideration of the provisions relating to citizens and residents of the United States. 693 Section II of the act reads as follows : “A. Subdivision 1. That there shall be levied, assessed, collected and paid annually upon the entire net income arising or accruing from^ all sources in the preceding calendar year to every citizen of the United States, whether residing at home or abroad, and to every person residing in the United States, though not a citizen thereof, a tax of 1 per centum per annum upon such income, except as hereinafter provided ; and a like tax shall be assessed, levied, collected and paid annually upon the entire net income from all property owned and of every business, trade, or pro- fession carried on in the United States by persons residing elsewhere. “D. The said tax shall be computed upon the remainder of said net income of each person subject thereto, accruing during each preceding calendar year ending December thirty-first : ^ Provided, however, That for the year ending December thirty-first, nineteen hundred and thir- teen, said tax shall be computed on the net income accruing from March first to December thirty-first, nineteen hundred and thirteen, both dates inclusive, after deducting five-sixths only of the specific exemptions and deductions herein provided for. On or before the first day of March, nineteen hundred and fourteen, and the first day of March in each year thereafter, a true and accurate return, under oath or affirmation shall be made bv each person of lawful age, except as hereinafter provided, subject to the tax imposed by this section, and having a net income of $3,000 or over for the taxable year, to the collector of internal revenue for the district in Avhich such person resides or has his principal place of business, or, in the case of a person residing in a foreign country, in the place where his principal business is carried on v/ithin the United States, in such form as the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury, shall prescribe, setting forth specifically the gross amount of income from all separate sources and from the total thereof, deducting the aggregate items of expenses and allowances herein authorized ; guardians, trustees, executors, adminis- trators, agents, receivers, conservators, and all persons, corporations, or associations acting in any fiduciary capacity, shall make and render return of the net itrcome of the person for whom they act, subject to this tax, coming into their custody or control and managernent, and be sub- ject to all the provisions of this section which apply to individuals. * * * “E. * * Nothing in this section shall be construed to release a taxable person from liability for income tax, nor shall any contract en- tered into after this Act takes effect be valid in regard to any Federal income tax imposed upon a person liable to such peyment. * * * “The provisions of this section relating to the deduction and pay- ment of the tax at the source of income shall only apply to the normail tax hereinbefore imposed upon individuals. 5i« * * ♦ ♦ “G. (a) That the normal tax hereinbefore imposed upon individuals 100 TAX ING. ESTATES AND TRUSTS. likewise shall be levied, assessed, and paid annually upon the entire net income arising or accruing from all sources during the preceding cal- endar year to every corporation, joint-stock company or association, and every insurance company, organized in the United States, no matter how created or organized, not including partnerships ; but if organized, authorized, or existing under the laws of any foreign countiy, then upon the amiount of net income accruing from business transacted, and capital invested within the United States during such year. *** * 694 plaintiffs contend that the tax is against persons who are citizens or residents of the United States. 695 The Government contends that the tax is upon the property and not upon the persons, which was the view taken by the trial judge. 696 The plaintiffs argue that as Brady, having died July 22, was neither a citizen nor a resident of the United States October 3, 1913, at the time the act was passed, its language does not authorize collection of any tax upon income received by him. On the other hand, the Gov- ernment says that as the tax is upon the property, it makes no difference whether Brady was living or dead at that time. 697 In our opinion the tax is against citizens and residents of the United States personally. They are chargeable in respect to income received by them. The statement that the tax is upon this income does not create an obligation in rem. It is only a way of saying that the owner is taxable with reference to the income. Taxable persons are spoken of throughout the act. 698 The effect of making the act retroactive is, in our opinion, to apply it to Brady exactly as if it had been enacted March 1, 1913, and as, by reason of his death, he cannot make a return, his executors, into whose hands his estate has come, must do so. The judgment is affirmed. (240 Fed. 665.) [T. D. 2494, June 2, 1917.] 699 Time for Filing Return Upon Death or Termination of Trust. — As soon as possible after his appointment and qualification, without waiting for the close of the taxable year, an executor or administra- tor shall file a retutn of income for the decedent. Upon the completion of the administration of an estate and final accounting an executor or adminis- trator shall file a return of income of the estate for the portion of the taxable year in which the administration was closed, attaching to the return a certified copy of the order for his discharge. An ancillary administrator need make no separate return if the domiciliary administrator includes in his return the entire income of the estate. Similarly, upon the termination of any other trust the trustee shall make a return without waiting for the close of the taxable year. In any such case the requirements with respect to the payment of the tax are the same as if the return were for a full taxable year closing at the end of the month during which the decedent dies or the estate is settled or the trust is terminated, as the case may be. The payment of the tax before the end of the taxable year in such circum- stances does not relieve the taxpayer from liability for any additional tax which might subsequently be imposed upon income of the taxable vear I Art A42, Reg. 45, Rev., April 17, 1919.) ^ ^ ' 700 Returns Where Two Trusts.— In the case of two or more trusts the income of which is taxable to the beneficiaries, which were created by the same person and are in charge of the same trustee, the trustee INC. 101 TAX ESTATES AND TRUSTS. shall make a single return on form 1041 (revised) for all such trusts not- withstanding that they may.arise from different instruments. When, how- ever, a trustee holds trusts created by different persons for the beneht ot the same beneficiary, he shall make a return on form trust separately. (Art. 423, Keg. 45, Rev., Ajiiil 17, 1919.) 701 Return by Receiver. — A receiver who stands in the stead of an individual or corporation must render a return of income and 'pay the tax for his trust, but a receiver of only part of the property of an individual or corporation need not. If the receiver acts for an individual the return shall be on form 1010 (revised) or 1040A. (revised). When acting for a corporation a receiver is not treated as a fiduciary, and in such a case the return shall be made as if by the corporation itself. See Section 239 of the Statute and Article .622 [for returns by receivers in the case of cor- porations. t[l786]. A receiver in charge of the business of a partnership shall render a return on form 1065 (revised). A receiver of the rents and profits appointed to hold and operate a mortgaged parcel of real estate, but not in control of all the property or business of the mort- p-agor and a receiver in partition proceedings, are not required to render Returns of income. In general, statutory receivers and common law re- ceivers of all the property or business of an individual or corporation must make returns. See also section 256 of the statute and articles 1U71- 1080 [for returns of information at the source, ^1736]. (Art. 424, Keg. 45, Rev., April 17, 1919.) 702 Return of Income of Minor.— An individual under 21 yeais of age or under the statutory age of majority where he lives, whatever it may be, is required to render a return of income if be has a net income of his "own of SOOIX) or o^’er for the taxable year. If be is married see article 401 [lfl770i. If the aggregate of the net income of a minor froni any property which he possesses, and from any funds held in trust for him by a trustee or guardian, and from any earintigs for his own use, is at least $1,000, a return as in the case of any other individual must be made by him or’bv'his guardian or some other person charged with the care of hi^s person or property for him. See article 422 [for return by guardian T[703J. If, however, a minor is dependent upon his parent, who appropiiates or may appropriate his earnings, such earnings are income of the parent and not of the minor for the purpose of the normal tax and surtax. In the absence of proof to the contrary a parent will be assumed not to have emancipated his minor child and must include in his return any eainings of the minor. (Art. 403, Reg. 45, Rev., April 17, 1919.) Return by Guardian or Committee. — A fiduciary acting as ^the guardian of a minor having a net income of $1,000 or $2,000, accord- ing to the marital status of such person, must make a return for such minor on form 1040 (revised) or 1040 A (revised) and pay the tax, unless such minor himself makes a return or causes it to be made.' A fiduciary acting as the committee of an insane person having an income of $1,000 or $2,000, according to the marital status of such person, must make a return for such incompetent on form 1040 (revised) or 1040 A (revised) and pay the tax. (Art. 422, Reg. 45, Rev., April 17, 1919.) 102 TAX INC. ESTATES AND TRUSTS. 704 Fiduciaries acting for minors or incompetent persons are permitted to take the personal exemption as to income derived from property of which they have charge in favor of each ward or beneficiary. (Art. 14, TjlSl, Reg. 33, Rev., Jan. 2, 1918.) 705 Return for Non-resident Alien Beneficiary. — Where a citizen or resident fiduciary has the distribution of trust income for which there is a non-resident alien beneficiary, the fiduciary must make a return on form 1040 (revised) or 1040 A (revised) for such non-resident alien and pay the tax. If there are two or more beneficiaries, the fiduciary shall render a return on form 1041 (revised) and also a return on form 1040 (revised) or 1040 A (revised) for each non-resident alien beneficiary. (Art. 425, Reg. 45, Rev., April 17, 1919.) 706 Liability of Foreign Fiduciaries for Non-resident Alien Benefi- ciaries in Connection with Income Received from Sources Within the United States. — Receipt is acknov/ledged of your letter of Decem- ber 1, 1916, reading as follows: “A trust company in Canada holds certain bonds of American corpora- tions for estates, trusteeships, etc. Is it necessary for the corporation to file the annual return Form No. 1041, Revised? If so, what deductions will it be allowed against income received from the United States? * * * What form of ownership certificates shall such corporation file in order to obtain exemption from deduction at the source if it stipulates and agrees to file the annual return and account for the tax annually on payments made to beneficiaries?” 707 In reply you are advised that if the foreign trust company has charge of an estate or trust, the net income of which is distributed annually or periodically among non-resident alien beneficiaries, the fidu- ciary should execute a return on Form 1011, Revised, covering the total income of the estate or trust derived from sources within the United States, and a personal return on Form 1040 ( * ^' * * ) in behalf of each non-resident alien beneficiary, ^ =5^ * 708 If the fiduciary has charge of an estate in process of administration or settlement, or an estate or trust the net income of which is held in trust for the . benefit of unborn or unascertained persons, or for future distribution under the terms of a will or trust, the estate or trust will be considered a taxable entity and the fiduciary required to render- a return on Form 1040 ( * * * ) covering so much of its total income as is derived from sources' within the United States, * * * 709 Whether the return of the total income derived by the estate or trust from sources within the United States is made on Form 1040 (’*'**) or 1041, Revised, the benefit of such of the deductions enu- merated in Section 6 of the Act of Sept. 8, 1916, as the estate or trust is entitled to may be claimed. 710 No form of exemption certificate has been prescribed for the use of a foreign fiduciary, as it is not permitted, under the law, that such a fiduciary may assume liability for payment of the income tax found to be due on income derived by the estate or trust from sources within the United States and subject to withholding of normal tax at the source. Inter- est coupons detached from domestic bonds should be accompanied by owner- ship certificates, Form [1000], Revised, when presented for payment or collection by a foreign fiduciary, and the interest paid on such coupons will 103 TAX INC. TAX ON CORPORATIONS. be subject to withholding of normal tax at the source, ^ ^ ^ (L,etter to The Corporation Trust Company, signed by Commissioner W. H. Osborn, and dated Dec. 28, 1916.) Law U246. Law Provisions Applicable to Individuals Apply to Fiduciaries. — “Fiduciaries required to make returns under this Act shall be subject to all the provisions of this Act which apply to individuals.” 712 General Law Provisions and Applicable Regulations Relative to Returns. — [Read beginning p808.] # 713 Law |f260. Tax on Corporations. — “Sec. 230. (a) That, in lieu of the taxes imposed by section 10 of the Revenue Act of 1916, as amended by the Revenue Act of 1917, and by section 4 of the Revenue Act of 1917, there shall be levied, collected, and paid for each taxable year upon the net income of every corporation” 714 Lawj[261. Tax Rates Applicable to Corporations. — “a tax at the following rates :” % 715 Lawjf262. Tax Rates Applicable to Corporations for 1918. — “(1) For the calendar year 1918, 12 per centum of the amount of the net income in excess of the credits provided in section 236 [p527] ; and” 716 Law |f263. Tax Rates Applicable to Corporations for Years Sub- sequent to 1918. — “(2) For each calendar year there- after, 10 per centum of such excess amount.” 717 The statute imposes an income tax at a fixed rate on all corpora- tions not expressly exempt. See section 231 of the statute [for exempt corporations, 1f739]. The tax is upon net income, as defined in the statute, after deducting from gross income, as defined in the statute, the allowable deductions. Certain credits are allowed against net income and against the amount of tlie tax. The tax is payable upon the basis of returns rendered by the corporations liable thereto, except that in some cases it is to be paid at the source of the income. The statute also im- poses on corporations a war profits and excess profits tax. (Art. 501, Reg. 45, Rev., April 17, 1919.) 718 The income tax on corporations is at the rate of 12 per cent, of the net income subject to tax for the calendar year 1918 and at the rate of 10 per cent of the net income subject to tax for the calendar year 1919 and subsequent years. In order to determine the amount subject to tax the net income, as defined in section 232 of the statute and article 531 [|[772] of the regulations, is first entitled to the credits specified in sec- tion 236 of the statute and article 591 [fl533]. (Art. 502, Reg. 45, Rev April 17, 1919. 719 Application of the Rates for Fiscal Year Embracing Parts of Cal- endar Year with Different Rates. — [Read at 1[613.] INC. 104 TAX TAX ON CORPORATIONS. 720 Corporations Liable to Tax. — Every corporation, domestic or foreign, not exempt under section 231 [1[739] of the statute, is liable to the tax. It makes no difference that a domestic corporation may receive no income from sources within the United States. On the other hand, a foreign corporation is taxed only on its income from sources within the United States. See section 233 of the statute and article 550 tfor gross income of foreign corporations, p018]. For the difference between domestic and foreign corporations, see article 1509 [pOlO]. (Art. 503, Reg. 45, Rev., April 17, 1919.) 721 The tax imposed by the Federal income tax law is not imposed only upon such corporations as are organized and operated for profit. Any corporation, joint-stock company, or association, and any insurance com- pany, no matter how created or organized, or what the purposes of its or- ganization may be, unless it comes within the class of organizations spe- cifically enumerated in the act as exempt, will be required to make returns of annual net income and pay income tax upon the net income which arises and accrues to it during the year 722 A corporation is not exempt simply and only because it is primar- ily not organized and operated for profit. If income within the meaning of the law arises and accrues to a corporation which is not or- ganized and operated for profit, such income will be subject to the tax imposed by this act. 723 Jt is therefore held that commercial men’s associations, ^ * and like organizations come within the requirements of the law. (T. D. 2152, Feb. 12, 1915.) 724 Corporation Formed to Avoid Selling at a Sacrifice in Order to Partition. — A corporation formed as a family affair to hold prop- erty together and not to sacrifice in selling does not come within the class of corporations specifically enumerated as exempt from the requirements of the Federal income tax lav/, and is required to make a return of annual net income showing therein all income arising and accruing to it front all sources and to pay any income tax shown by such return to be due. (T. D. 2137, Jan. 30, 1915. ) 725 Corporations Owned by Exempt Organizations. — A stock corpo- ration all of whose stock is owned by “a corporation or association organized and operated exclusively for religious, charitable, scientific, or educational purposes, no part of whose net income inures to the benefit of any member, stockholder, or individual,” is required under the provisions of the Federal income tax law to make a return of annual net income and pay income tax. 726 q^he fact that all of the stock of the corporation, except shares quali- fying the directors, is owned by a corporation which itself comes within the class specifically enumerated as exempt, does not relieve the first-named corporation from liability under the income tax law. The liability of a corporation to the requirements of the Federal income tax law is not contingent upon the ownership of its stock. (T. D. 2137 Tan 30 1915.) ’ J ^ 727 Public Utility Corporation Intrusted with Use, Merely, of Prop- erty Owned by State.— The fact that the plaintiff was a public utilities corporation which, under the laws of the State, was not the owner INC. 105 TAX TAX ON CORPORATIONS. of the property but merely intrusted with the use thereof which it must devote to the public, does not entitle it to more favorable treatment than other corporations, it being a corporation organized for profit, having a capital stock represented by shares, and the act making no exceptions in favor of public utilities, [Caption: Union Hollyv/ood Water Co. vs. John P. Carter, Collector, case. Act Aug. 5, 1909 (238 Fed. 329).] (T. D. 2475, April 4, 1917.) 728 Law ^3. What Constitutes a Corporation Under the Income Tax Law. — “The term 'corporation’ includes associations, joint-stock companies, and insurance companies;” ’^29 Corporations include associations, joint-stock companies and in- surance companies, but not partnerships properly so-called. (Art. 1501, Reg. 45, Rev., April 17, 1919.) 730 Association. — Associations and joint-stock companies include as- sociations, common law trusts and organizations by whatever name known, which act or do business in an organized capacity, whether created under and pursuant to State laws, agreements, declarations of trust, or otherwise, the net income of which, if any, is distributed or distributable among the members or shareholders on the basis of the capital stock which each holds or, where there is no capital stock, on the basis of the proportionate share or capital which each has or has invested in the business or property of the organization. (Art. 1502, Reg. 45, Rev., April 17, 1919.) 731 Association Distinguished from Partnership. — An organization the membership interests in^ which are transferable without the con- sent of all the members, however the transfer may be otherwise restricted, and the business of which is conducted by trustees or directors and officers without the active participation of all the members as such, is an association and not a partnership A partnership bank conducted like a corporation and so organized that the interests of its members may be transferred with- out the consent of the other members is a joint-stock company or associ- ation within the meaning of the statute. [Read at ^[842.] A partnership bank the interests of whose members can not be so transferred is a partnership. (Art. 1503, Reg. 45, Rev., April 17, 1919.) 732 Association Distinguished from Trust. — Where trustees hold real estate subject to a lease and collect the rents, doing no business other than distributing the income less taxes and similar expenses to the holders of their receipt certificates, who have no control except the right of filling a vacancy among the trustees and of consenting to a modification of the terms of the trust, no association exists and the cestuis que trust are liable to tax as beneficiaries of a trust the income of which is to be distributed periodically, whether or not at regular intervals. But in such a trust if the trustees pursuant to the terms thereof have the right to hold the income for future distribution, the net income is taxed to the trustees instead of to the beneficiaries See .section 219 of the statute and articles 341-346 [for estates and trusts, 1[636]. If, however, the cestuis que trust have a voice in the conduct of the business of the trust, whether through the right peri- odically to elect trustees or otherwise, the trust is an association within the meaning of the statute. (Art. 1504, Reg. 45, Rev., April 17, 1919.) 106 TAX INC. TAX ON CORPORATIONS. 733 A Certain Massachusetts Trust Held Not to Be an Association Under the Act of October 3, 1913. — [Read at ^399.] 734 Limited Partnership as Partnership. — So-called limited partner- ships of the type authorized by the statutes of New York and most of the States are partnerships and not corporations within the meaning of the statute. Such limited partnerships, which can not limit the liability of the general partners, although the special partners enjoy limited liability so long as they observe the statutory conditions, which are dissolved by the death or attempted transfer of the interest of a general partner, and which can not take real estate or sue in the partnership name, are so like common law partnerships as to render impracticable any differentiation in their treatment for tax purposes. Michigan and Illinois limited partnerships are partnerships. A California special partnership is a partnership. [For partnerships, see 11546.] (Art. 1505, Reg. 45, Rev., April 17, 1919.) 735 Limited Partnership as Corporation. — On the other hand, lim- ited partnerships of the type of partnerships with limited liability or partnership associations authorized by the statutes of Pennsylvania and of a few other States are only nominally partnerships. Such so-called limited partnerships, offering opportunity for limiting the liability of all the mem- bers, providing for the transferability of partnership shares, and capable of holding real estate and bringing suit in the common name, are more truly corporations than partnerships and must make returns of income and pay the tax as corporations. The income, received by the members out of the earn- ings of such limited partnerships will be treated in their personal returns in the same manner as distributions on the stock of corporations. In all doubtful cases limited partnerships will be treated as corporations unless they submit satisfactory proof that they are not in effect so organized. A Michigan partnership association is a corporation. Such a corporation may or may not be a personal service corporation. See sections 200 and 218 of the statute and articles 1523-1532 [for personal service corporations, ^[573]. (Art. 1506, Reg. 45, as amended by T. D. 2943, November 6, 1919.) 736 Joint Ownership and Joint Adventure. — Joint investment in and ownership of real and personal property not used in the operation of any trade or business and not covered by any partnership agreement does not constitute a partnership. Co-owners of oil lands engaged in the joint enterprise of developing the property through a common agent are not nec- essarily partners. In the absence of special facts affirmatively showing an association or partnership, where a vessel is owned by several individuals and operated by a managing owner or agent for the account of all, the relation does not constitute either a joint-stock association or a partnership. The participation of two United States corporations in a joint enterprise or adventure does not constitute them partners [see iy550]. (Art. 1507, Reg. 45, Rev., April 17, 1919.) 737 Law jf264. Funds from^Which Taxes Imposed on Railroads Un- der Government Control Are to Be Paid. — “(b) For the purposes of the Act approved March 21, 1918, entitled ‘An Act to provide for the operation of transportation systems while under Federal control, for the just compensation of their owners, and for other purposes,' five- 107 TAX INC. TAX ON CORPORATIONS. sixths of the tax imposed by paragraph (1) of subdivision (a) and foui- fifths of the tax imposed by paragraph (2) of subdivision (a) shall be treated as levied by an Act in amendment of Title I of the Revenue Act of 1917.’^ 738 The Act to provide for the operation of transportation systems while under federal control, for the just compensation of their own- ers, and for other purposes, of March 21 , 1918 , authorizes the President to agree with carriers for their just compensation and provides. Every such agreement shall provide that any Federal taxes under the Act of October third, nineteen hundred and seventeen, or Acts in addition thereto or in amendment thereof, commonly called war taxes, assessed for tlie period of Federal control beginning January first, nineteen hundred and eighteen, or any part of such period, shall be paid by the easier out of its own funds, or shall be charged against or deducted from the just compensation; that other taxes assessed under Federal or any other government authority for the period of Federal control or any part thereof, either on the property used under such Federal control or on the right to operate as a carrier, or on the revenues or any part thereof derived from operation (not including, however, assessments for public improvements or taxes assessed on property imder construction, and chargeable under the classification of the Interstate Com- merce Commission to investment in road and equipment), shall be paid out of revenues derived from railway operations while under Federal control; that all taxes assessed under Federal or any other governmental authority for the period prior to January first, nineteen hundred and eighteen, when- ever levied or pavable, shall be paid by the carrier out of its^ own funds, or shall be charged against or deducted from the just compensation. (Art. 504, Reg. 45, Rev., April 17, 1919.) 739 Law 11265. Corporations That Are Exernpt from Tax.— “Sec. 231. That the following organizations shall be exempt from taxation under this title — 740 Law1[266. (1) Labor, agricultural, or horticultural organizations; [See 1(755.] 741 Law 1(267. (2) Mutual savings banks not having a capital stock represented by shares; [See 1(756.] 742 Law 1(268. (3) Fraternal beneficiary societies, orders, or associa- tions, (a) operating under the lodge system or for the exclusive benefit of the members of a fraternity itself operating under the lodge system, and (b) providing for the payment of life, sick, accident or other benefits to the members of such society, order, or association or their dependents; [See 757.] 743 Law 1(269. (4) Domestic building and loan associations and co- operative banks without capital stock organized and op- erated for mutual purposes and without profit; [See 1(758.] 744 Law 1(270. (5) Cemetery companies owned and operated exclu- sively for the benefit of their members; [See- 1(759.] 745 Law 1(271. (6) Corporations organized and operated exclusively for religious, charitable, |cientific, or educational pur- poses, 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; [See 1(760.] 0 0 INC 108 TAX TAX ON CORPORATIONS. 746 Law 1f272. (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; [See |[764.] 747 Law j[273. (8) Civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare; [See 1[765.] 748 Law |[274. (9) Clubs organized and operated exclusively for pleas- ure, recreation, and other nonj)rofitable purposes, no part of the net earnings of which inures to the benefit of any private stockholder or member; [See 1[766.] 749 Law|[275. (10 Farmers or other mutual hail, cyclone, or fire in- surance companies, mutual ditch or irrigation companies, mutual or cooperative telephone companies, or like organizations of a purely local character, the income of which consists solely of assessments, dues, and fees collected from members for the sole purpose of meeting expenses ; [See 11767.] 750 Law1f276. (11) Farmer’s, fruit growers’, or like associations, or- ganized and operated as sales agents for the purpose 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; [See 1f768.] 751 Law1f277. (12) Corporations organized for the exclusive purpose of holding title to property, collecting income therefrom, and turning over the entire amount thereof, less expenses, to an organiza- tion which itself is exempt from the tax imposed by this title; 7o 2 Law1f278. (p) Federal land bands and national farm-loan asso- ciations as provided in section 26 of the act approved July 17, 1916, entitled “An Act to provide capital for agricultural develop- ment, to create standard forms of investment based upon farm mortgage, to equalize rates of interest upon farm loans, to furnish a market for United States bonds, to create Government depositaries and financial agents for the United States, and for other purposes ;” 753 Law 1[279. 1[573.]” (14) Personal service corporations. [For definition see 754 Proof of Exemption. — In order to establish its exemption, and thus be relieved of the duty of filing returns of income and paying the tax, it is necessary that every organization claiming exemption, except personal service corporations, file an affidavit with the col- lector of the district in which it is located, showing the character of the organization, the purpose for which it was organized, the sources of its income and its disposition, whether or not any of its income is credited to surplus or may inure to the benefit of any private stockholder or individual, and m general all facts relating to its operations which affect its right to exemption. To such affidavit should be attached a copy of the charter or 109 TAX INC. TAX ON CORPORATIONS. articles of incorporation and by-laws of the organization. Upon leceipt of the affidavit and other papers by the collector, he will inform the organization whether or not it is exempt. If, however, the collector is in doubt as to the taxable status of the organization, he will refer the affidavit and accompany- ing papers to the Commissioner for decision. When an organization has established its right to exemption, it need not thereafter make a return; of income or any further showing with respect to its status under the law, unless it changes the character of its organization or operations or the pur- pose for which it was originally created. Collectors will keep a list of all exempt corporations, to the end that they may occasionally inquire into their status and ascertain whether or not they are observing the conditions upon which their exemption is predicated. As to personal service corporations see section 218 of the statute and articles 328-335. [Tf593]. (Art. 511, Reg. 45, Rev., April 17, 1919.) 755 Agricultural and Horticultural Organizations.— Agricultural or horticultural organizations exempt from tax do not include corpora- tions engaged in growing agricultural or horticultural products or raipng live stock or similar products for profit, but include only those organizations which, having no net income inuring to the benefit of their members, are educational or instructive in character and have for their purpose the bet- terment of the conditions of those engaged in these pursuits, the improve- ment of the grade of their products, and the encouragement and promotion of these industries to a higher degree of efficiency. Included m this class as exempt are organizations such as county fairs and lixe associations ot a quasi-public character, which through a system of awards, prizes or premi- ums are designed to encourage the production of better live stock better agri- cultural and horticultural products, and whose income, derived from gate receipts, entry fees, donations, etc., is used exclusively to meet the necessary expenses of upkeep and operation. Societies or associations which have for their purpose the holding of annual or periodical race meets, irom which profits inure or may inure to the benefit of the members or stockholders, do not come within the terms of this exemption. ^ A corporation engaged in the business of raising stock or poultry, or growing grain, fruits or othei products of this character, as a means of livelihood and for the purpose of gain, is an agricultural or horticultural society only in the sense that its name indicates the kind of business in which it is engaged, and it is not exempt from tax. (Art. 512, Reg. 45, Rev., April 17, 1919.) 756 Mutual Savings Banks.— A Massachusetts savings bank, other- wise exempt, which establishes an insurance department under the statutes of that State, does not thereby become subject to tax upon the income received by such department. (Art. 513, Reg. 4o, Rev., April 17, 1919.) 757 Fraternal Beneficiaty Societies. — A fraternal beneficiary society is exempt from tax only if operated under the ‘dodge systei^ or for the exclusive benefit of the members of a society so operating. Oper- ating under the lodge system” means carrying on its activities under a form of organization that comprises local branches, chartered by a parent organi- zation and largely self-governing, called lodges, chapters, or the like. In order to be exempt it is also necessary that the society have an established system for the payment to its members or their dependents of life, sick, accident or other benefits. (Art. 514, Reg. 45, Rev., April 17, 1919.) INC. 110 TAX TAX ON CORPORATIONS. Building and Loan Associations. — A building and loan association entitled to exemption is one organized pursuant to the laws of the United States or of some State or I'erritory thereof, which accumulates funds to be loaned to its members and to be repaid in small periodical in- stallments. The statute requires that the members of the association shall share in its profits on substantially the same footing. Subject to this require- ment, it does not prevent exemption that the association issues prepaid stock entitled to a specified percentage of the profits. Where, however, the association issues paid up stock, the holders of which are entitled to a fixed diAudend and also to share in the profits with all the other holders of stock, it is not exempt. (Art. 515, Reg. 45, Rev., April 17, 1919.) 759 Cemetery Companies. — A cemetery company having a capital stock represented by shares, or which is operated for profit or for the benefit of others than its members, does not come within the exempted class. A cemetery company of which all lot owners are members, issuing preferred stock entitling the holder to a semi-annual dividend of 4 per cent, and whose articles of incorporation provide that the preferred stock shall be retired at par as soon as sufficient funds are realized from sales and that all funds realized in addition thereto shall be used by the company for the care and improvement of the cemetery property, is within the exemption. (Art. 516, Reg. -15, Rev., April 17, 1919.) Religious, Charitable, Scientific and Educational Corporations. — The exemption applies only to a corporation or association. It does not include the case of a trust, under which the trustee is authorized to use the trust property for religious purposes. In order to be exempt the cor- poration or association must meet three tests* fa) it must be organized and operated for one or more of the specified purposes; (b) it must be organized and o])erated exclusively for such purposes ; and (c) no part tjf its income must inure to the benefit of private stockholders or indi- viduals. 761 (1) Charitable corporations include an association for the relief of the families of clergymen, even though the latter make a contribution to the fund established for this purpose; or for furnishing the services; of trained nurses to persons unable to pay for them; or for aiding the general body of litigants by improving the efficient administration of justice. Edu- cational corporations may include an association Avhose sole purpose is' the instruction of the public. This is true of an association to promote ac- quaintance with the Spanish language and literature, although it has incid- ental amusement features ; of an association to increase knowledge of the ciAulization of another country; and of a Chautauqua association whose primary purpose is to give lectures on subjects useful to the individual and beneficial to the community and whose amusement features are incidental to this purpose. But associations formed to disseminate controversal or parti- san propaganda are not educational within the meaning of the statute. .So- cieties designed to encourage the performance of first class orchestral music are not exempt, the purpose being merely to provide a high grade of enter- tainment. Sciciitific corporations include an association for the scientific study of law, to the end of imjirovement in its administration. 762 (2) Where a religious corporation owns a large quantity of farm land and works it, and also manufactures and sells clothing and other articles for profit, it is not operated exclusively for religious purposes and is 111 INC. TAX TAX ON CORPORATIONS. not exempt, even though its property is held in common and its profits dO; not inure to the benefit of individual members of the society. (3) It does not prevent exemption that private individuals, for whose benefit a charity is organized, receive the income of the corporation or association. The statute refers to individuals having a personal and private interest in the activities of the corporation, such as stockholders. If, how- ever, a corporation issues “voting shares,” which entitle the holders upon the dissolution of the corporation to receive the proceeds of its property, includ- ing accumulated income, the right to exemption does not exist, even though the by-laws provide that the shareholders shall not receive any dividend or other return upon their shares. (Art. 517, Reg. 45, Rev., April 17, 1919.) '3^64 Business Leagues. — A business league is an association of persons having some common business interest, which limits its activities to work for such common interest and does not engage in a regular business of a kind ordinarily carried on for profit. Its work need not be similar to that of a chamber of commerce or board of trade. An association engaged in furnishing information to prospective investors, to enable them to make sound investments, is not such a league, since its members have no common business interest, and it is not exempt, even though all of its income is de- voted to the purpose stated. A clearing house association, not organized for profit, no part of the net income of which inures tO any private stock- holder or individual, is exempt provided its activities are limited to the ex- change of checks and similar work for the common benefit of its members. An association of persons who are engaged in the business of carrying freight and passengers by boats propelled by steam, which is designed to promote the legitimate objects of such business, and all of the income of which is derived from membership dues and is expended for office expenses and the salary of a secretary-treasurer, is exempt from tax. An incorporated cotton exchange, whose shares carry the right to dividends, is organized for profit and is not exempt. (Art. 518, Reg. 45, Rev., April 17, 1919.) 765 Civic Leagues. — A corporation having capital stock and possess- ing a charter which authorizes it to buy, improve and sell real estate is organized for profit within the meaning of the statute and is not exempt from tax as a civic league or organization, even though it no longer ex- ercises such powers for profit and is operated exclusively for the promotion of social welfare. (Art. 519, Reg. 45, Rev., April 17, 1919.) 766 Social Clubs.— The exemption applies to practically all social and recreation clubs which are supported by membership fees, dues and assessments. If a club, by reason of the comprehensive powers granted in its charter, engages in traffic, in agriculture or horticulture, or in the sale of real estate, timber, etc., for profit, such club is not organized and operated exclusively for pleasure, recreation or social purposes, and any profit real- ized from such activities is subject to tax. (Art. 520, Reg- 45 Rev Anril 17, 1919.) " ^ 767 Mutual Insurance Companies and Like Organizations. It is nec- essary to exemption that the income of the company be derived solely from assessments, dues and fees collected from members. If income is received from other sources, the corporation is not exempt, even thout^h its additional income is tax exempt. Income, however, from sources other than 112 TAX INC NET INCOME. those specified does not prevent exemption where its receipt is a mere incident of the business of the company. Thus the receipt of interest upon a working bank balance, or of the proceeds of the sale of badges, office supplies or equipment, will not defeat the exeiuption. The' same is true of the receipt of interest upon liberty bonds, where they were purchased as a patriotic duty and were afterwards sold. Where, however, such bonds are bought as a permanent investment, the receipt of the interest destroys the exemption. Ihe receipt of what is in substance an entrance fee, charged by a mutual fire insurance company as a condition of membership, does not render the company taxable, although this fee is called a premium. But the issuance of policies for stipulated cash premiums prevents exemp- tion. A local exchange or association to insure the owners of automobiles against fire, theft, collision, public liability and property damage, is exempt, since it performs functions of the same character as a mutual fire insurance company, and is a like organization within the meaning of the statute. A local reservoir and ditch company may likewise be exempt from tax. The exemption does not include a telephone clearing association, whose business is to apportion toll rates between independent telephone companies handling the same calls and whose income consists of compensation paid by such companies and receipts from the sale of form blanks. The phrase “of a purely local character” qualifies only “like organizations.” (Art. 521, Re?. 45 Rev., April 17, 1919.) Cooperative Associations.— (a) Cooperative associations, acting as sales agents for farmers or others, in order to come within the ex- e^mption must establish that for their own account they have no net income. Cooperative dairy companies which are engaged in collecting milk and dis- posing of it or the products thereof and distributing the proceeds, less nec- essary operating expenses, among their members upon the basis of the quan- tit} of milk or of butter fat in the milk furnished by such members, are exempt from the tax. If the proceeds of the business are distributed in' any other way than on such a proportionate basis, the company will be subject to tax. farmers’ association is not exempt from taxation where in ac- counting to farmers furnishing produce for the proceeds of sales it deducts ^^j^cue than the necessary selling expenses incurred; (t*) Cooperative asso- ciations acting as purchasing agents are not exj^fessly exempt from tax and must make returns of income, but rebates made to purchasers, whether or not members of the association, in proportion to their purchases may be excluded from gross income in computing the net income subject to^ tax. Any profits made from non-members and distributed to members in the guise of rebates are, of course, subject to tax. (Art. 522 Re? 4S Rev April 17, 1919.) ’ ’ ’ Law]f 83 . Net Income of An Individual Defined.— “Sec. 212. (a) That in the case of an individual the term ‘net income’ means the gross income as defined in section 213 ri[8021, less the deduc- tions allowed by section 214 [Ifll79].” 770 Lawjf 280 . Net Income of a Corporation Defined.— “Sec. 232 . That in the case of a corporation subject to the tax im- posed by section 230 \pl?>] the term “net income” means the gross income as defined m section 233 fjfSOS] less the deductions allowed by section 234 INC. 113 TAX net income. Hi 11 801 and the net income shall be computed on the same basis as is Pro- lided in subdivision (b) of section 212 [11778] or in section 266 [retuins when accounting period is changed, p855J. 7T1 Meaning of Net Income.— The tax imposed by the statute is upon income ^ In the computation of the tax various classes of income must be considered: (a) Income (in the broad sense), meaning all wealth which flows in to the taxpayer other than as a mere ^ capital. It includes the forms of income specifically described as gams and prhts including gains derived from the sale or other disposition o- capit Lsets ’ It is not hmited to cash alone, for the statute recognizes as income- determining factors other items, among which are inventories, accounts re leihble property exhaustion and accounts payable for expenses incurred (blGro.^ income, meaning income (in the broad sense) less income wmch is bv statutorv provision or otherwise exempt from the, tax imposed by the Statute. tcIIsTt income, meaning gross income less statutory deductions. The statutory deductions are in general, though not_ excxusively, expendi tures, other dian capital expenditures, connected with the production o income, (d) Net income less credits. The surtax is imposed upon pet income; the normal tax upon net income less credits. Though taxable net income is vvhoUy a statutory conception it follows, subject to certain modih- cations as to exemptions and as to some of the deductions, the lines ot com- mercial usage. Subject to these modifications statutory ‘T.et income ^ is commercial “net income.” This appears from the fact that ordinarily it is to b^ computed in accordance with the m.ethod of accounting regularly em- ployed in heepiup- the books of the taxpayer. As to net income of corpora- rions see section 232 f^770] and article 531 [^772]. (Art. 21, Reg. 45, Rev., A.pril 17, 1919.) Net Income of Corporations. — Net income is that portion of the cross income w'hich remains after all proper deductions have been taken into account. The net income of corporations is determined in 8 Law T[40. “then such dividend shall, in the manner provided in Section 206 [lf628], he taxed to the recipient at the rates prescribed by law for the years in which the corporation accumulated the earnings or profits from which such dividend was paid, but the dividend shall be deemed to have been paid from the most recently accumulated earnings or profits.” 85® By a special exception to the general rule any stock dividend received by a taxpayer between January 1 and November 1, 1918, or declared and credited tc^ a stockholder during such period and received by him before March 27, 1919, is deemed to have been paid from the most recently accumulated earnings or profits and shall be taxed to the recipient at the 127 TAX INC. GROSS INCOME— DIVIDENDS. rates prescribed for the years in which the corporation earnings or profits so distributed. Thus, such a stock dividend will be deemed to have been paid from the earnings of 1918 the first sixty days of 1918), and the recipient, if an individual, will be lUlle to ^v surtlx at the rates for the year W18, unless at the time such dividend was paid or credited the current earnings up to that time were not sufficient to cover the distribution, in which case the excess over the earn- ings of the taxable year will be deemed to have been paid recently accumulated surplus of prior years and will be taxed at the rate or rates for the year or years in which earned. A "“--f “ f paving such a stock dividend out of earnings accumulated over a period of ULs^should make a record in its books of the amount of the d'vidend paid ^u? of each year’s undistributed profits and adv se the stockholders ac- cordingly. [Read at 11863.] (Art. 1546, Reg. 45, Rev., April 17, 1919.) 800 The method of ascertaining the precise rate applicable to such por- tions of stock dividends received or credited in 1918 as aie taxab at rates prescribed for previous years is as follows: The amount ot the income of the recipient to which the 1918 rates are applicable is first ascertained. To such amount; is then added the amount of ^ the recipient liable to tax at the 1917 rates and the table of 19 .7 fates applied to see in which brackets such income falls. The income liable to 1916 rates is then added and the table of 1916 rates apphed to it For instance an individual has $20,0(» of income bab e ^ 918 rates and $25,000 of dividends liable to 1917 rates The total woiiM be $45 (»0 o which $20,000 would be taxable at the 1918 rates and $20,000 to $4^0 at the surtax rates under the 1917 table applying to income over $20,000. In order that the correctness of the rates may be verified, taxpayers reporting stock dividends at other than 1918 rates will be required to render a state- ment at the time of filing their returns showing the corporations from which dividends taking other than 1918 rates were received, with the P^'^ulais of the dividends received from each [For the TLo parts of income subject to rates for different years, all T[628.] (Art. 1642, Reg: 45, Rev., April 17, 1919.) 861 Surtax Rates for 1913, 1914 and 1915.— No super tax or surtax on net incomes of $20,000 or less. Over $20,000 to $50,000 Over $50,000 to $75,000 2% Over $75,000 to $100,000 3 /o Over $100,000 to $250,000 4% Over $250,000 to $500,000 5% Over $500,000 862 Surtax Rates for 1916 and 1917. — Amount subject to tax. 1916. 191/. Per cent. Per cent. $5,000 to $7,500. \ $7,500 to $10, 000 2 $10,000 to $12,500 3 $12,500 to $15,000 4 $15,000 to $20,000 5 INC. 128 TAX GROSS INCOME—DIVIDENDS. Surtax Rates for 1916 and 1917.— Concluded. Amount subject to tax. 1916. 1917. Per cent. Per cent. $20,000 to $40,000 1 8 $40,000 to $60,000 2 12 $60,000 to $80,000 3 17 $80,000 to $100,000 4 22 $100,000 to $150,000. . . . 5 27 $150,000 to $200,000. . . . 6 31 $200,000 to $250,000 7 37 $250,000 to $300,000 8 42 $300,000 to $500,000 9 46 $500,000 to $750,000 10 50 $750,000 to $1, 000,000.. . . 10 55 $1,000,000 to $1,500,000. . 11 61 $1,500,000 to $2,000,000. . 12 62 On excess $2,000,000. . . 13 63 (For 1918 and 1919 see pSS.) The Taxpayer Is to Ascertain in What Year or Years Stock Divi- dends Are Deemed to Have Been Earned. — Will it be the tax- payer’s duty to advise himself what proportion of a [stock] dividend re- ceived by him is properly chargeable, * * * , to the corporate earnings or profits for each tax year? (Answer.) Yes. [Read last sentence of T[859.] (Question 43>4, 1918 Income Tax Primer.) Stock Dividends of Foreign Corporations Received in 1918 Are to Be Apportioned to Prior Years. — Supplementing office letter of February 13, 1918, and in further reference to your communication of Feb- ruary 6, 1918, requesting that you be advised whether dividends paid on stock of a foreign corporation should be shown on Form 1040, Revised, as apportioned to the year or years in which the earnings from which such dividends were distributed, accrue to the corporation, you are advised that it is held by this office that the provisions of Section 31 (b) added to the Act of September 8, 1916, by Section 1211 of the Act of October 3, 1917, apply equally to dividends paid by a foreign corporation. (Letter to The Corporation Trust Company, signed by Commissioner Daniel C. Roper, and dated March 14, 1918.) Sale of Stock Received as Dividend.— As stock dividends were taxable income under the Revenue Act of 1916, as well as the present statute, but were not under the Act of October 3, 1913, different considera- tions may apply to the sale of stock received as a dividend before 1916 and stock so received thereafter. See article 39 [tf911]. For the purpose of ascertaining the gain or loss derived from the sale of stock of a corporation received as a dividend, or from the sale of the stock in respect of which such dividend was paid, the cost (used to include also, where required, fair market price or value as of March 1, 1913) of such stock is to be deter- mined in accordance with the following rules : (1) In the case of stock (a) received as a dividend in 1913, 1914 or 1915 out of surplus however created, or (b) received as a dividend in 1916 or subsequent years out of surplus other than earnings or profits accumu- lated since February 28, 1913, the cost of each share of new stock is the quotient of the cost of the old stock divided by the number of old and new shares added together. INC. 129 TAX GROSS INCOME— DIVIDENDS. (2) In the case of the stock in respect of which any stock dividend was paid as described under (1), the cost of each share of old stock is similarly the quotient of the cost of the old stock divided by the number of old (3) In the case of stock received as a dividend in 1916 or subsequent years out of earnings or profits accumulated since February 28, 1913, the cost of each share of new stock is the quotient of the sum of (a) the cost of the old stock plus (b) the valuation at which the new stock was re- turnable as income (as shown by the transfer of surplus to capital ac- count on the books of the corporation, usually its par value), divided by the number of old and new shares added togeuher. , j- -j j (4) In the case of the stock in respect of which any stock dividend was paid as described under (3), the cost of each share of old stock is similarly *e quotient of the sum of (a) the cost of the old stock P'us (b) valu- ation at which the new stock was enable as income, divided by the number of old and new shares. (Art. 1547, Reg. 45, Rev., Apri , 1919.) 860 Law 1137. “Liquidating Dividends.” — Amounts distributed in the liquidation of a corporation shall be treated as payments in exchange for stock or shares, and any pin or profit _ realized thereby shall be taxed to the distributee as other gams or profits. 867 So-called liquidation or dissolution dividends are not dividends within the meaning of the statute, and amounts so distributed, wheth- er or not including any surplus earned sinp February 28, 1913, are to L regarded as payments for the stock of the dissolved corporation. Anv excess so received over the cost of his stock to the stockholder, or over its fair market value as of March 1, 1913, if acquired prior thereto, is a taxable profit. A distribution in liquidation of the assets and business of a corporation, which is a return to the stockholder of the value of his stock upon a surrender of his interest in the corporation, is distinguishable from a dividend paid by a going corporation out of current earnings or accumu- lated surplus when declared by the directors in their discretion which is in the nature of a recurrent return upon the stock. (Art. 1548, Reg. 4b, Rev., April 17, 1919.) 868 Distribution from Depletion or Depreciation Reserve.— A reserve set up out of gross income by a corporation and maintained for the purpose of making good any loss of capital assets of depletion or depreciation is not a part of its surplus out of whic ordinary dividends may be paid. A^ distribution made from such a reserve will be considered a liquidating dividend and will constitute ^Sable income to a stockholder only to the extent that the amount so received is in excess of the cost or fair market value of March , 1913 of his shares of stock. No distribution, however, will be deenied to have been made from such a reserve except to the extent that the amount paid exceeds the surplus and undivided profits of the corpora- tion. In general, any distribution made ^ out of earnings or profits accumulated since February 28, 1913, s to be regarded as a return to the stockholder of part of the capital repre- sented by his shares of stock, and upon a subsequent sale of such stock his profit will be the excess of the selling price over the cost of the stock or its fair market value as of March 1, 1913, after applying on such 130 TAX INC. GROSS INCOME. cost or value the amount of any such capital distribution. [For notili- cation to stockholders of distributions from depletion or depreciation reserves see ][1423.] (Art. 1549, Reg. 45, Rev., April 17, 1919.) 8«9 Federal Income Tax Paid by Obligor on Tax-Free Covenant Bond Interest. — The amount of income tax paid for a bondholder by an obligor pursuant to a tax-free covenant in its bonds is in the nature of additional interest paid the bondholder and must be included in his gross income. He is not however, entitled to deduct such income tax paid on his behalf. [For credit for taxes withheld at the source see P719.] See sections 214 (a) (3) and 221 (b) of the statute and articles 565 [P280] and 566 [P256].' (Art. 31, Reg. 45, Rev., April 17, 1919.) Receipt is acknowledged of your letter of June 20, 1919, asking for advice in regard to the office ruling which authorizes in- crease of the income by the 2 % normal tax paid by the debtor cor- poration on bonds containing a tax-free covenant clause. Pn reply you are informed that this office holds that the obligor, in pursuance of a contract voluntarily entered into, guaranteed to pay a direct liability of the taxpayer which consisted in paying a certain amount of normal tax for him to the Government. The reduction of the payment of his tax liability under such a contract constitutes income to him by reduc- ing his expenditures in that amount. The fact that the amount of the the liability was paid direct to the Government instead of to the tax- payer and by him to the Government, does not preclude such an amount from constituting income to the taxpayer. (Letter to Hugh W. Martin, Secretary, Northwestern Trust Company, St. Paul, Minnesota, signed by J. H. Callan, Assistant to the Commissioner, by Geo. V. Newton, Head of Division, and dated September 13, 1919.) Taxes, on Profits on Sale of Property, Paid by Vendee for the Vendor. — A vendee of a business agrees that in addition to the purchase price of the business he will pa)^ the income and excess profit taxes of the vendor arising from the sale of said business. Queiy. Does the payment of the said taxes by the vendee constitute income to the vendor v/hich the vendor would have to report on his income tax statement and pay a tax thereon ? As extremely urgent please reply by telegram as promptly as possible. (Answer.) Your telegram April 30. Income, excess i)rofits and war profits taxes paid by vendee for vendor on profits from sale of property to vendee constitute additional taxable income to vendor. (Telegram of inquiry from The Corporation Trust Company, and the reply thereto signed by Commissioner Daniel C. Roper, and dated May 2, 1919.) 872 Payments of Income Made in Liberty Loan Bonds. — Various questions have arisen as to the taxable status of payments of income made in the form of Liberty Loan bonds and it was thought, in fairness to all concerned, that inquiries of this nature should be sub- mitted by the Department to the Attorney General for his opinion. This has been done and, * ♦ the Attorney General holds, in part, that: [Read ^[829] : (Part of letter to Kenefick, Cooke, Mitchell & Bass, Buf- falo, signed by Deputy Commissioner L. F. Speer, dated June 22, 1917.) 131 TAX INC. GROSS INCOME. 873 Compensation for Personal Services. — Where no determination of compensation is had until the completion of the services, the amount received is income for the calendar year of its determination. Commissions paid salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, re- tired pay of federal and other officers, and pensions or retiring allow- ances paid by the United States or private persons, are income to the recipients ; as are also marriage fees, baptismal offerings, sums paid for saying masses for the dead, and other gifts and contributions received by a clergyman, evangelist or religious worker for services rendered. The salaries of federal officers and employees are subject to tax. But see article 86 [P176]. (Art. 32, Reg. 45, Rev., April 17, 1919.) 874 Compensation for Services as Trustees. — If no determination was made of the amount due the trustee of an estate as cornpensation for his services over a period of years until the trust was terminated, the amount allowed him should be returned in full subject to allowable deduc- tions, as income for the year in which paid; and should not be prorated over the length of time during which he served as trustee. (T. D. 2135, Jan. 23, 1915.) 875 Commission Determined and Credited But Not Drawn. — Refer- ence is made to your letter of March 14, 1918, relating to an in- dividual, paid on a commission basis, who during 1917 earned about $20,000 against which earnings but $4,000 has been withdrawn. You request to be advised whether the individual must account for the full amount of his income for the year 1917. Pn reply you are advised that under the regulations it is held that income credited to or made avail- able to the recipient is a constructive receipt and the amount is to be returned for income tax purposes for the year in which such income was credited or made available. Accordingly the salesman must include in his return the $20,000 commission earned by him during the year 1917. (Letter to Certified Audit Company of America, New York, N. Y., signed by Deputy Commissioner L. F. Speer, and dated April 30, 1918.) 4 % 876 When Special Compensation (Bonus) is Considered Taxable In- come. — Special payments made by a corporation as extra com- pensation to certain of its employees may be deducted from gross in- come if it is clearly shown that such payments are made as compensa- tion for services rendered and are paid in pursuance of a contract ex- pressed or implied. 877 If such so-called '‘compensation” is a gratuity or voluntary payment, for which no service is rendered, the amount so paid are not deductible. In cases wherein the payments, are made as compensa- tion for services rendered, the employee receiving the same, if he be a “taxable person,” will be required to include the amount of such com- pensation in his personal income tax return. — [Read discussion of sub- ject at paragraph 1209.] (T. D. 2152, Feb. 12, 1915.) 878 Salaries Paid by Exempt Organizations. — Salaries paid by cor- porations, which corporations have been held to be exempt from the income tax under [the provisions] of the income tax law, are subject to the income tax and should be returned as income by the individual * * * % (T. D. 2090, Dec. 14, 1914.) INC. 132 TAX gross income. Quarters, Mileage, Expenses of Government Officers and Em- ployees. Quarters: Commutation of quarters and the monev equivatet of quarters furnished in kind shall be returned as income ^ When quarters are furnished in kind, of a less number of rooms flip a*!owed by law, the money equivalent only of wCn actually assigned shall be returned as income ton th^number'^a^l/^ ® "“mber of rooms than the number allowed by law, it is to be assumed that the excess number is assigned or the convenience of the Government an^the be TeLrnTas“income.'’^ ^^all Jf hepr^nd? the money equivalent, as fixed by the Government 8S2 Mifeaee P«blic quarters, fi-i between the amount received as mile- 1 amount of actual necessary expenses incurred on a journey shall be returned as income. mcurrea on a Mileage, as such, is not gain, profit, or income to the officer as milpp ^ P^y h'® actual expenses while traveling under mileage orders. The gam, profit, or income is the difference between the amount received as mileage and the amount properly expended by the toonm on^.'sho^l^b'e retSrSid as The actual expenses to be deducted by the individual before as- the e bis gam, profit, or income on account of mileage are he expenses for which reimbursement would be made by the Govern- bas"s traveled on an actual e.xpense basis instead of a mileage Reimbursement for actual expenses : Amounts paid by the Gov- items 0 f"TcTual”e n ®«b®i®tence^and otor Items of actual expenses incurred while absent on business for the Nov 2Tl91Tr be returned as income. (T. D. 2079, OTders‘^'the'lZl""ll .of. subsistence while under traveling , .m .1 fbe total allowance is income and there may be taken as a deduction for expense the amount actually expended from such al R^,"jln.°2,'‘l918 traveling expenses. (Art. 4, 1[5S, Reg. 33, Commissions on Renewal Premium.-Commissions on renewal „ foi insurance received by agents on account of business rtavibi r .accounted for as such and for the calento [taxable] year of its receipt. (Art. 4, ^.S6, Reg. 33, Rev., Jan. 2, 1918 ) A commission retained by a life insurance agent on his own life ti *"®”(ance policy is held to be income accruing to the ag-ent and should be me uded in his return of income for the assessmenrof the income tax. (T. D. 2137, Jan. 30, 1915.) assessment ot the Compensation Paid Other Than in Cash.-Where services are of the ®°'”®fbing other than money, the fair market value of the thing taken in payment is the amount to be included as income If the services were rendered at a stipulated price, in the aLence of evidence to the contrary such price will be presumed to be the fair INC. 133 TAX GROSS INCOME. value of the compensation received. Compensation paid an employee of a corporation in its stock is to be treated as if the corporation sold the stock for its market value and paid the employee in cash When living quarters such as camps are furnished to employees for the convenience of the employer, the ratable value need not be added to the cash compensa- tion of the employee, but where a person receives as compensation for serv- ices rendered a salary and in addition thereto living quarters, the value to such person of the quarters furnished constitutes income subject to tax [For information at the source in connection with the foregoing sentence see 0739.] Premiums paid by an employer on life, accident or health policies in favor of his employees as additional compensatn^ o such employees are income to the employees. (Art. 33, Reg. 4 d, Rev., April 17, 1919.) 890 Compensation Paid in Notes.— Promissory notes received ra pay- ment for services, and not merely as security for such payment, constitute income to the amount of their fair market value. A taxpayer receiving as compensation a note regarded as good for its face value at maturity, but not bearing interest, may properly treat as income as ot the time of receipt the fair discounted value of the note at such time. Thus, if it appears that such a note is or could be discounted on a six or seven per cent basis, the recipient may include such note in his gross income to the amount of its face value less discount computed at the prevailing rate for such transactions. If the payments due on a note so accounted for are met as they become due, there should be included as income in respect of each such payment so much thereof as sents recovery for the discount originally deducted. (Art. 34, Keg. 4a, Rev., April 17, 1919.) 891 Gross Income from Business. — In the case of a manufacturing, merchandising or mining business “gross income ^ means the total sales, less the cost of goods sold, plus any income from investments and from incidental or outside operations or sources. In determining the gross income subtractions should not be made for depreciation, de- pletion, selling expenses or losses, or for items not ordinarily used in computing the cost of goods sold. Gross income includes all amounts received by the taxpayer as allowances for amortization, from what- ever source and by whatever name called. The allowance for amortiza- tion authorized by the statute must be taken by way of explicit deduc- tion from gross income. [For “Amortization see ][1376.] See also article 52 [1f945]. (Art. 35, Reg. 45, Rev., April 17, 1919.) 893 Long Term Contracts. — Persons engaged in contracting opera- tions, who have uncompleted contracts, in some cases perhaps running for periods of several years, will be allowed to prepare their returns so that the gross income will be arrived at on the basis of com- pleted work; that is, on j*obs which have been finally completed any and all moneys received in payment will be returned as incorne for the year in which the work was completed. If the gross income is arrived at by this method, the deduction from gross income should be limited to the expenditures made on account of such completed contracts. Or the percentage of profit from the contract may be estimated on the basis of percentage of completion, in which case the income to be returned each year during the performance of the contract will be computed upon INC. 134 TAX GROSS INCOME. the basis of the expenses incurred on such contract during the year; that is to say, if one-half of the estimated expenses necessary to the full performance of the contract are incurred during one year, one-half of the gross contract price should be returned as income for that year. Upon the completion of a contract if it is found that as a result of such estimate or apportionment the income of any year or years has been overstated or understated, the taxpayer should file amended returns for such year or years. (Art. 36, Reg. 45, Rev., April 17, 1919.) 893 State Contracts. — Any profit received from a State or political subdivision thereof by an independent contractor is taxable in- come. Where warrants are issued by a city, town or other political subdivision of a State, and are accepted by the contractor in payment for public work done, the face value of such warrants must be returned as income. If for any reason the contractor upon conversion of the warrants into cash does not receive and can not recover the full face value of the warrants so returned, he may allowably deduct from gross income for the year in which the warrants are converted into cash any loss sustained. (Art. 37, Reg. 45, Rev., April 17, 1919.) 894 Private Bank Owned by an Individual or by a Partnership. — When it can be clearly shown that a private bank is owned by one man, it is evident that such bank is not an association within the meaning of the Federal income tax law, and that therefore such bank will not be re- quired to make a return such as corporations and associations are required to make, but the individual owner, will be required to make a return on form 1040, showing in such return tlie income which he receives not only from the bank but from all other sources. (T. D. 2137, Jan. 30, 1915.) 895 Private banks which do not have this formal organization [para- graph 844], but which transact business, not in the name of the bank, but in the name of the individuals who compose the firm, as John Smith & Co., are held to be co-partnerships and, as such, are not required to [pay tax]. In such cases the individuals who compose the firm, if they have net incomes in excess of [$1,000 or $2,000] will be required to make individual returns of Form 1040, accounting for therein their respective incomes arising and accruing from the earnings of the bank. (Mimeograph letter No. 1271 to Collectors, Oct. 19, 1915.) 896 Gross Income of Farmers. — All gains, profits and income derived from the sale or exchange of farm products, whether produced on the farm or purchased and resold, shall be included in the return of income for the year in which the products were actually marketed and sold, unless an inventory is used. In case of the sale of machinery, and of animals purchased as draft or work animals or solely for breeding purposes and not for resale, any excess over the cost thereof reduced by all sums there- tofore deducted for depreciation shall be included as gross income in pre- paring the taxpayer’s return. Where farm produce is exchanged for mer- chandise, groceries or mill products, the market value of the article or product received in exchange is to be returned as income. Rents received in crop shares shall be returned as of the year in which the crop shares are reduced to money or a money equivalent. If a farmer is engaged in producing crops which take more than a year from the time of planting to the time of gathering and disposing, the income therefrom may be com- INC. 135 TAX GROSS INCOME. puted upon the crop basis ; but in any such case the entire cost of producing the crop must be taken as a deduction in the year in which the gross income from the crop is realized. When live stock purchased is sold, its cost is to be deducted from the sales price in ascertaining the amount of gain or profit to be returned for tax purposes. If, however, an inventory is used, the cost price of the article sold must not be taken as an additional deduc- tion in the return of income, as such cost price will be reflected in the in- ventory. As herein used the term “farm” embraces the farm in the ordi- narily accepted sense, and includes stock, dairy, poultry, fruit and truck farms, also plantations, ranches and all land used for farming operations. All individuals, partnerships or corporations that cultivate, operate or man- age farms for gain or profit, either as owners or tenants, are designated farmers. A person cultivating or operating a farm for recreation or pleas- ure, the result of which is a continual loss from year to year, is not re- garded as a farmer. (Art. 38, Reg. 45, Rev., April 17, 1919.) 897 Expenses of Farmers. — A farmer who operates a farm for profit is entitled to deduct from gross income as necessary expenses all amounts actually expended in the carrying on of the business of farming. The cost of ordinary tools, of short life or small cost, such as hand tools, including shovels, rakes, etc., may be included. The cost of feeding and raising live stock may be treated as an expense deduction, in so far as such cost represents actual outlay, but not including the value of farm produce grown upon the farm or the labor of the taxpayer. Where a farmer is engaged in producing crops which take more)' than a year from the time of planting to the process of gathering and disposal, expenses deducted may be determined upon the crop basis, and such deductions must be taken in the year in which the gross income from the crop has been realized. If a farm is operated for recreation or pleasure and not on a commercial basis, and if the expenses incurred in connection with the farm are in excess of the receipts therefrom, the entire receipts from the sale of products may be ignored in rendering a return of income, and the ex- penses incurred, being regarded as personal expenses, will not constitute allowable deductions The cost of farm machinery and farm buildings represents a capital investment and is not an allowable deduction as an item of expense. Amounts expended in the development of farms, or- chards and ranches prior to the time when the productive state is reached may be regarded as investments of capital. The amount expended in pur- chasing draft or work animals or live stock either for resale or for breed- ing purposes is regarded as an investment of capital. The purchase price of an automobile, even when wholly used in carrying on farming operations, is not deductible, but it is regarded as an investment of capital. The cost of gasoline, repairs and upkeep of an automobile if used wholly in the business of farming is deductible as an expense; if used partly for busi- ness purposes and partly for the pleasure or convenience of the taxpayer or his family, such cost may be apportioned according to the extent of the use for purposes of business and pleasure or convenience, and only the proportion of such cost justly attributable to business purposes is deductible as a necessary expense. (Art. 110, Reg. 45, Rev., April 17, 1919.) 898 Losses of Farmers. — Losses incurred in the operation of farms as business enterprises are deductible from gross income. If farm products are held for favorable markets, no deduction on account INC. 136 TAX GROSS INCOME. of shrinkage in weight or physical value or by reason of deterioration in storage shall be allowed. The total loss by frost, storm, flood or fire of a prospective crop, or of a crop which has not been sold, is not a deductible loss in computing net income. A farmer engaged in raising and selling stock, cattle, sheep, horses, etc., is not entitled to claim as a loss the value of animals that perish from among those animals that were raised on the farm. If live stock has been purchased for any purpose, and afterwards dies from disease, exposure or injury, or is killed by order of the authori- ties of a State or the United States, the actual purchase price of such stock, less any depreciation which may have been previously claimed with respect to such perished live stock, and less also any insurance or indemnity recov- ered, may be deducted as a loss. The actual cost of other property, less depreciation already allowed, destroyed by order of the authorities of a State or of the United States may in like manner be claimed as a loss; but if reimbursement is made by a State or the United States in whole or in part on account of stock killed or property destroyed, the amount received shall be reported as income for the year in which reimbursement is made. In determining the cost of stock for the purpose of ascertaining the de- ductible loss there shall be taken into account only the purchase price, and not the cost of any feed, pasturage or care which has been deducted as an expense of operation. If gross income is ascertained by inventories, no deduction can be made for live stock or products lost during the year, whether purchased for resale or produced on the farm, as such losses will be reflected in the inventory by reducing the amount of live stock or products on hand at the close of the year. If an individual owns and op- erates a farm, in addition to being engaged in another trade, business or calling, and sustains a loss from such operation of the farm, then the amount of loss sustained may be deducted from gross income received from all sources, provided the farm is not operated for recreation or pleasure. (Art. 145, Reg. 45, Rev., April 17, 1919.) 899 Depreciation in the Case of Farmers. — A reasonable allowance for depreciation may be claimed on farm buildings (other than a dwelling occupied by the owner), farm machinery and other phys- ical property, including live stock purchased for draft, dairy or breeding purposes, but no claim for depreciation on live stock raised, or purchased for resale, will be allowed. Live stock purchased for draft, breeding or dairy purposes, or for any purpose other than resale, may be included in the inventory for each year at a figure which will reflect the reduction in value estimated to have occurred during the year through increase of age or other causes. .Such a reduction in value should be based on the cost and estimated life of the live stock. If an inventory is not used, a reasonable allowance for depreciation may be claimed based upon the cost of draft and work animals and animals kept solely for breeding purposes and not for resale. (Art. 171, Reg. 45, Rev., April 17, 1919.) 900 Prevailing Rates of Exchange at Time Income on Foreign In- vestments was Credited to Govern in Computing Tax Liability on Such Income. — This office acknowledges receipt of your letter of Jan- uary 4, 1916, wherein you cite the case of a resident American citizen who had accruing to him from time to time income from foreign investments which was not remitted to the United States but was placed to his credit in INC. 137 TAX GROSS INCOME. different foreign countries, and request to be advised whether in computing income tax liability it will be proper to use the rates of exchange prevailing at the time the amounts were credited abroad. 901 In reply you are advised that, in the case cited, it will be proper for the individual to return each item of income at the rate of ex- change which prevailed on the date it was credited to his account. (Let- ter to Herbert M. Teets, New York,. N. Y., signed by Deputy Commis- sioner L. F. Speer, and dated January 11, 1916.) 902 Sinking Funds Invested In Bonds of Corporation. — If the trustees of a sinking fund established by a corporation have invested the amount of the sinking fund reserve or any portion of it in the bonds of the corporation and such corporation pays to the trustees the interest on these bonds, such corporation will be permitted to deduct such interest from its gross income, ^ ^ The interest paid to the trustees, together with all other earnings on investments made by the trustees of the sinking fund, must be included in the gross income of the corporation. (Art. 189, T1577, Reg. 33, Rev., Jan. 2, 1918.) 903 Accrued Interest on Bonds Purchased Between Interest Dates. — Interest accrued to the time of purchase (advanced by purchaser) is not to be accounted for as income by the purchaser Only the amount of interest assignable to the portion of the interest period subsequent to the purchase has a status of income for the purposes of return and tax by purchaser. 904 The amount of accrued interest so advanced by the purchaser is taxable income to be accounted for in the return of the vendor. (Art. 4, 1115-16, Reg. 33, Rev., Jan. 2, 1918.) 905 Interest Received and Paid by Brokers in Connection with Pur- chase and Carrying of Securities for Customers. — The appended decision [captions only] of the United States Circuit Court of Appeals, in the case of Altheimer & Rawlings Investment Co. v. Allen, collector, is pub- lished for the information of internal -revenue officers and other concerned. (U. S. Circuit Court of Appeals, Eighth Circuit. 248 Fed. 688.) _ .906 1 . Gross income. A corporation which did a brokerage business and bought securities for its customers, who paid only a part of the purchase price, paying interest on balances, the corporation also paying for the securities purchased only part of the purchase price and owing balances on which it paid interest, including in return of gross income the difference between the interest received and the interest paid, made incorrect return. 907 2. Interest. The interest received by plaintiff from its customers should be included in gross income. In determining net income, interest can be deducted only to an amount not exceeding the paid-up capital stock outstanding at the close of the year (i. e., under Act of Aug. 5, 1909). 908 3 . Judgment Affirmed. The judgment of the United States Dis- trict Court (246 Fed., 270; T. D. 2441) is affirmed. (248 Fed. 688.) (T. D. 2686, April 1, 1918.) 909 Discount for Cash in Relation to Income and Capital Account. — Reference is made to your letter of the 15th instant, in which you state that a corporation has purchased a large quantity of equipment and in 138 TAX INC. GROSS INCOME. consideration of making a prompt payment therefor has been allowed a cash discount. You ask to be advised whether or not this discount should be reported as income, pn reply you are informed that the discount allowed to the corporation purchasing this new equipment need not be reported as income, but the cost of the equipment as charged to capital must represent only the net cost after m.aking allowance for the discount in ques- tion. (lyetter to E. G. Shorrock & Co., Seattle, Washington, signed by Deputy Commissioner E. F. Speer, and dated November 26, 1918.) 910 Payments Made to Holders of Stock Trust Certificates. — Stock trust certificates or leased line certificates, as the case may be, issued by the lessee for the purpose of securing or holding control of the stock of the lessor are held to be issued in lieu of the certificates of capital stock, and for the purpose of this tax will be treated as capital stock and the amounts received by the holders of these certificates are dividends to the holders to be treated as rentals by both lessee and lessor and constitute an allowable deduction in the one case and an item of income in the other, accordingly as they are paid and received. (Art. 104, p71, Reg. 33, Rev., Jan. 2, 1918.) Sale of Stock and Rights. — When shares of stock in a corpora- tion are sold from lots purchased at different times and at different prices and the identity of the lots can not be determined, the stock sold shall be charged against the earliest purchases of such stock. The excess of the amount realized on the sale over the cost of the stock, of its fair market value [see p063] as of March 1, 1913, if purchased before that date, will be the profit to be accounted for as income. In the case of stock received as a stock dividend, whether or not paid out of earnings or profits accrued since February 28, 1913, and in the case of stock in respect of which any such dividend was paid, the cost of each share of such stock shall be ascertained as specified in article 1547 [i[865]. Where common stock is received as a bonus with the purchase of preferred stock or bonds, the total purchase price shall be fairly apportioned between the stock and securities purchased for the purpose of determining the portion of the con- sidemtion attributable to each class of stock or securities and so represent- ing its cost, but if that should be impracticable in any case, no profit on any subsequent sale of any part of the stock or securities will be realized until out of the proceeds of sales shall have been recovered the total cost. See article 1565 [^[1079]. The entire amount realized from the sale of rights to subscribe for stock is income. (Art. 39, Reg. 45, Rev.. April 17 1919.) ^ 012 Sale of Patents and Copyrights. — A taxpayer disposing of patents or copyrights by sale should determine the profit or loss arising therefrom by computing the difference between the selling price and the value as of March 1, 1913, if acquired prior to that date," or between the selling price and the cost, if acquired subsequently to that date. The profit or loss thus ascertained should be increased or decreased, as the case may be, by the amounts deducted on account of depreciation of such patents or copyrights since February 28, 1913, or since the date of acquisition if subsequently thereto. See article 167 [for depreciation 1[13611. (Art 40 Reg. 45, Rev., April 17, 1919.) j v • » Sale of Good Will. — Any profit or loss resulting from an invest- ment in good will can be taken only when the business, or a part of it, to which the good will attaches is sold, in which case the profit or loss INC, 139 TAX GROSS INCOME. will be determined upon the basis of the cost of the assets, including good will, or their fair market value as of March 1, 1913, if acquired prior thereto. If nothing was paid for good will acquired after February 28, 1913, no ductible loss is possible, although, on the other hand, upon the sale of the business tliere may be a profit. It is immaterial that good will may never have been carried on the books as an asset, but the burden of proof is on the taxpayer to establish the cost or fair market value on March 1, 1913, of the good will sold. (Art. 41, Reg. 45, Rev., April 17, 1919.) 914 Sale of Personal Property on Installment Plan.— Dealers in per- sonal property ordinarily sell either for cash, or on the personal credit of the buyer, or on the installment plan. Occasionally a fourth type of sale is met with, in which the buyer makes an initial payment of such a substantial nature (for example, a payment of more than 25 per cent) that the sale, though involving deferred payments, is not one on the installment plan. In sales on personal credit, and in the substantial payment type just mentioned, obligations of purchasers are to be regarded as the equivalent of cash, but a different rule applies to sales on the installment plan. Dealers in personal property who sell on the installment plan usually adopt one of four ways of protecting themselves in case of default: (a) through an agree- ment that title is to remain in the seller until the buyer has completely per- formed his part of the transaction; (b) by a form of contract in which title is conveyed to the purchaser immediately, but subject to a lien for the unpaid portion of the purchase price; (c) by a present transfer of title to the purchaser, who at the same time executes a reconveyance in the form of a chattel mortgage to the seller; or (d) by conveyance to a trustee pend- ing performance of the contract and subject to its provisions. The general purpose and effect being the same in all of these plans, it is^ desirable that a uniformly applicable rule be established. .Fhe lule pi escribed is that in the sale or contract for sale of personal property on the installment plan, whether or not title remains in the vendor until the property is^ fully paid for, the income to be returned by the vendor will be that proportion of each installment payment which the gross profit to be realized when the property is paid for bears to the gross contract price. Such income may be ascer- tained by taking that proportion of the total payments received in the tax- able year from installment sales (always including payments received in the taxable year on account of sales effected in earlier years as well as those effected in the taxable year) which the gross profit to be realized on the total installment sales made during the taxable year bears to the gross contract price of all such sales made during the taxable year. Where a change is made to this method of computing net income the taxpayer s bal- ance sheet should be adjusted conformably as of the date when the change is effected. If for any reason the vendee defaults in any of his installment payments and the vendor repossesses the property, the entire amount re- ceived on installment payments, less the profit already returned, will be income of the vendor for the year in which the property was repossessed, and the property repossessed must be included in the inventory at its original cost to himself, less proper allowance for damage and use, if any. If the vendor chooses as a matter of consistent practice to treat the obligations of purchasers as the equivalent of cash, such a course is permissible. (Art. 42, Reg. 45, Rev., April 17, 1919.) 915 Reference is made to your letters dated March 6, April 21 and July 7, 1919, relative To the proper treatment of amounts owing on in- INC. 140 TAX GROSS INCOME. stallment accounts in connection with income tax returns under the pro- visions of the Revenue Act of 1918. 916 You state that the amounts owing on installment accounts are, in the case of many concerns, made up from retail sales of various articles of merchandise, and that you wish to be advised “if the average per cent of profit marked on the retail will be sufficient information tq the Government in ascertaining the unearned profit” or whether “it will be necessary to dig out the actual cost on each and every article which remains unpaid in order to show the unearned profit in a manner which will be acceptable to the Government.” From the statements made it is assumed that you have reference to cases in which the taxpayer has been treating the obligations of purchasers as the equivalent of cash and has been treating as gross profit for each year the difference between the total amount of contract sales made during the year and the cost of goods sold, and that you wish to be advised whether in such a case it would now be acceptable to the Depart- ment to treat as gross profit for each taxable year the amount of profit as shown by the books (kept on the basis of treating each sale as, a completed transaction) less the unrealized profits included in the Accounts Receivable at ffie close of the taxable year, such unrealized profits to be determined by taking the same per cent of gross profit it has been decided is to be made on sales. In this connection you are advised that it will not be acceptable to this office for a taxpayer to arrive at his taxable profits merely by attempting to eliminate the unearned profits included in his Accounts Re- ceivable at the beginning and end of his taxable year. The following plan has been outlined for use in cases where the tax- payer has heretofore made returns upon the basis of treating the profit from installment sales as realized as at the date of sale and now wishes to change to the basis of reporting the profit as being realized as at the date of collection of the outstanding accounts. (1) In accordance with provisions of Article 42 [1[914] of Regu- lations No. 45, the first step to be taken by the taxpayer is to pre- pare and file as part of his return an amended balance sheet as at the date of the beginning of the taxable year, in which there shall be excluded from the surplus the unrealized gross profits upon the outstanding installment sales contracts at that date. Such amended balance sheet would be in substantially the following form : Balance Sheet as at Opening of Fiscal Year. Assets. Plant and Equipment. . $. Dess Depreciation Current Assets: Merchandise, as per inventory Installment sales con- tracts Notes Receivable Accounts Receivable. . Cash $ . Deferred Debit Items : Insurance Prems. paid in advance Other items Total Assets $. Riabilities Capital stock (or indi- viduaks or partner’s capital) $. Mortgage indebtedness. . Current liabilities: Bills Payable $. Accounts Payable Wages or other accrued items Deferred Credit Items : Unrealized gross profits upon installment sales contracts Surplus Total liabilities $. INC. 141 TAX GROSS INCOME. 921 922 (2) As from the beginning of the taxable year the following ac- counts should be set up: , (a) Goods Purchased, which will be charged with the amount ot inventory of the goods on hand at the beginnmg of the taxable year and with the expenditures for goods purchased during the year ; 923 (b) Goods Sold (cost value), which will be credited with the cost value of all goods sold during the year; 924 (c) Installment Sales Contracts, which will be charged with the amount of the outstanding installment sales contracts at the beginning o the year and with the amount of installment sales contracts made during the year. This account will be credited with all cash collected during the year upon installment sales contracts and with the unpaid installments ot defaulted or canceled contracts. ^ ^ i u 925 (d) Unrealized Gross Profits on Installment Sales Contracts, which will be credited with the amount of unrealized gross profit upon the outstanding installment sales contracts at the beginning of the year, and with the amount of such unrealized gross profit upon installment sales con- tracts made during the year. This amount will be computed upon the basis of the total installment sales contracts reduced by the cost or inventory value of the goods covered by the contracts, the remaining balance being the amount of the unrealized gross profits. 920 (e) RealizedProfits on Installment Sales Contracts, which will be credited from month to month, or at least at the end of the year, with the profits realized by collection upon installment sales contracts. Such profits should be computed by taking the same percentage of the total cash collections upon installment sales contracts during the period as the total unrealized profits on installment sales contracts bears to the total in- stallment sales during the same year. Corresponding debits should be made to unrealized gross profits on installment sales contracts. Any necessary corrections to produce a more accurate result can be made as at the end of the fiscal year. 927 If for any reason the vendee defaults in any of his installment pay- ments and the property is repossessed by the vendor, the unpaid installments should be credited to “installment sales contracts” account; the cost to the vendor of the property repossessed (less a reasonable allowance for damage and use, if any) should be charged to “goods purchased • ac- count* the proportionate amount of unrealized profit included m the de- faulted installments should be charged to “unrealized gross profits on installment sales contracts” account, and the difference between these debits and credits should be charged or credited, as the case may be, to “realized profits on installment sales contracts” account. ^ 928 It is believed that sufficient has been said above to indicate the use that is to be made of these special accounts and it is not necessary to discuss any of the other accounts which would normally be maintained. 929 It will be noted that the foregoing plan which will be permitted upon an explicit statement of facts made to the Commissioner of Internal Revenue by a taxpayer engaged in merchandising upon the in- stallment plan is not a change from an accrual basis to a cash received and paid basis. In the opinion of this office the income of a merchan- dising concern cannot be correctly reflected upon the latter basis, as the use of inventories is absolutely essential- The plan herein outlined is, therefore merely a modification or adaptation of the ordinary accrual method of accounting as in the opinion of this office will enable the accounts of the taxpayer to clearly reflect his net income. Where m the INC 142 TAX GROSS INCOME. past another method has been used that has failed to reflect the tax- payer’s net income an amended return or returns for such year may^ be made. For further information as to the proper method of computing’ annual net income your attention is invited to Article 23 of Regulations No. 45, as amended by Treasury Decision 2873 []f783]. (Letter to The Corporation Trust Company signed by Commissioner Daniel C. Ropei, and dated August 6, 1919.) 980 Installment Sales: Default and Inability to Repossess. — Your telegram April 23. When vendee defaults in installments payments and vendor is unable to recover personal property sold, the vendor should report as loss on the return for that year the difference between the total amount actually received and the cost plus amounts returned as profits from sale during former years. (Telegram to Grcenbaum, Wolff & Ernst, New York, N. Y., signed by Commissioner Daniel C. Roper, and dated April 26, 1919.) Sale of Real Estate in Lots. — Where a tract of land is purchased with a view to dividing it into lots or parcels of ground to be sold as such, the entire fair market value as of March 1, 1913, or tlie cost, if acquired subsequently to that date, shall be equitably apportioned to the several lots or parcels and made a matter of ixcord in the books of the taxpayer, to the end that any gain derived from the sale of any such lots or parcels may be returned as income for the year in which tlie sale was made. This rule contemplates that there will be a measure of gain or loss in every lot or parcel sold, and not that the capital invested in the entire tract shall be extinguished before any taxable income shall be returned. The sale of each lot or parcel will be treated as a separate transaction and the gain or loss will be accounted for accordingly. (Art. 43, Reg. 45, Rev., April 17, 1919.) Sale of Real Estate Involving Deferred Payments. — Deferred pay- ment sales of real estate ordinarily fall into two classes when con- sidered with respect to the terms of sale, as follows : (1) Installment transactions, in which the initial payment is rela- tively small (generally less than one-fourth of the purchase price) and the deferred payments usually numerous and of small amount. They in- clude (a) sales where there is immediate transfer of title when a small initial payment is made, the seller being protected by a mortgage or other lien as to deferred payments, and (b) agreements of purchase and sale which contemplate that a conveyance is not to be made at the outset, but only after all or a substantial portion of the agreed installments have been paid. 934 C2) Deferred payment sales not on the installment plan, in which there is a substantial initial payment (ordinarily not less than one- fourth of the purchase price), deferred payments being secured by a mort- gage or other lien. Such sales are distinguished from sales on the install- ment plan by the substantial character of the initial payment and also usu- ally by a relatively small number of deferred payments. 935 In determining how these classes shall be treated in levying the income tax, the question in each case is whether the income to be reported for taxation shall be based only on amounts actually received in a taxing year, or on the entire consideration made up in part of agreements to pay in the future. (Art. 44, Reg. 45, Rev., April 17, 1919.) INC. 143 TAX GROSS INCOME. 936 Sale of Real Estate on Installment Plan. — In the two kinds of transactions included in class (1) in the foregoing article, install- ment obligations assumed by the buyer are not ordinarily to be regarded as the equivalent of cash, and the vendor may report as his income from such transactions in any year that proportion of each payment actually received in that year which the gross profit to be realized when the property is paid for bears to the gross contract price. If the return is made on this basis and the vendor repossesses the property after default by the buyer, retaining the previous payments, the entire amount of such payments less the profit previously returned, will be income to the vendor and will be so returned for the year in which the property was repossessed, and the property re- possessed must be included in the inventory at its original cost to himself (less any depreciation as defined in articles 161 [^{1330] and 162 [P331]). If the taxpayer chooses as a matter of settled practice consistently followed to treat the obligations of the purchaser as equivalent to cash and to report the profit derived from the entire consideration, cash and deferred pay- ments, as income for the year when the sale is made, this is permissible. If so treated the rule prescribed in article 46 [937] will apply. (Art. 45, Reg. 45, Rev., April 17, 1919.) 937 Deferred Payment Sales of Real Estate Not on Installment Plan. — In class (2) in the next to the last article [][934] the obligations assumed by the buyer are much better secured because of the margin afiforded by the substantial first payment, and experience shows that the greater number of such sales are eventually carried out according to their terms. These obligations for deferred payments are therefore to be re- garded as equivalent to cash, and the profit indicated by the entire con- sideration is taxable income for the year in which the initial payment was made and the obligations assumed. If the buyer defaults and the seller regains title to the land by agreement or process of law, retaining payments previously made, he may deduct from his gross income as a loss in the year of repossession any excess of the amount previously reported as income over the amount actually received, and must include such real^ estate in his inventory at its original cost to himself (less any depreciation as defined in articles 161 [111330] and 162 [P331]). See article 153 [for worthless mortgage debt, 1|1320]. (Art. 46, Reg. 45, Rev., April 17, 1919.) 938 Annuities and Insurance Policies. — Annuities paid by religious, charitable and educational corporations under an annuity contract are subject to tax to the extent that the aggregate amount of the payments to the annuitant exceeds any amounts paid by him as consideration for the contract. An annuity charged upon devised land is income taxable to the annuitant, whether paid by the devisee out of the rents of the land or from other sources. The devisee is not required to return as taxable income the amount of rent paid to the annuitant, and he is not entitled to deduct from his taxable income any sums paid to the annuitant. Where an insured receives under life insurance, endowment or annuity contracts sums in excess of the premiums paid therefor, such excess is income for the year of its receipt. See article 72 [for proceeds of insurance, 1[1114]. Distributions on paid-up policies which are made out of earnings of the insurance company subject to tax are in the nature of corporate dividends and are income of an individual only for the purpose of the surtax. (Art, 47, Reg. 45, Rev., April 17, 1919.) INC. 144 TAX GROSS INCOME. 939 Rent and Royalties. — When improvements made by a lessee be- come part of the real estate, the value of such improvements upon the expiration of the existing term of the lease is income to the lessor. In general, sums paid by a tenant for the use of property, although to another than the landlord, are properly to be regarded as rent and con- stitute income of the landlord. See further article 109 [P231]. Royalties on patents are income. (Art. 48, Reg. 45, Rev., April 17, 1919.) 9J:0 Board, lodging or other consideration received in lieu of rental is con- sidered incomiC equal in amount to the indebtedness in payment of which it is received, and should be included in any return of annual net income its recipient is required to render under the provisions of the income-tax law. (T. D. 2135, Jan. 23, 1915.) 9-11 Compensation for Loss,— In the case of property which has been lost or destroyed in whole or in part through fire, storm, shipwreck or other casualty, or where the owner of property has lost or transferred title by reason of the exercise of the power of requisition or eminent domain, including cases where a voluntary transfer or conveyance is in- duced by reason of the fact that a technical requisition or condemnation proceeding is imminent, the amount received by the owner as compensa- tion for the property may show an excess over the value of the property on March 1, 1913, or over its cost, if it was acquired after that date (after making proper provision in either case for depreciation to the date of the loss, damage or transfer). The transaction is not regarded as completed at this stage, however, if the taxpayer proceeds immediately in good faith to replace the property, or if he makes application to establish a replace- ment fund as provided in the following article. In such a case the gain, if any, is measured by the excess of the amount received over the amount actually and reasonably expended to replace or restore the property sub- stantially in kind, exclusive of any expenditures for additions or betterments. The new or restored property effects a replacement in kind only to the extent that it serves the same purpose as the property which it replaces without added capacity or other element of additional value. Such new or restored property shall not be valued in the accounts of the taxpayer at an amount in excess of the cost or value at klarch 1, 1913, if acquired before that date (after making proper provision in either case for depre- ciation to the date of the loss, damage or transfer), of the original property, plus the cost of any actual additions and betterments. If the taxpayer does not elect to replace or restore the property, the transaction will then be deemed to be completed and the income shall be measured by the excess of the amount of the compensation received over the cost of the property or its actual value at March- 1, 1913, if acquired before that date (after making proper provision in either case for depreciation to the date of the loss, damage or transfer). See article 141 [for deductible losses, |fl305]. Article 49 [this article] and 50 [11942] have no application to property which is voluntarily sold or disposed of, (Art. 49, Reg. 45, Rev., April 17, 1919.) 942 Replacement Fund for Loss. — In any case in which the taxpayer elects to replace or restore the lost, damaged or transferred property, but where it is not practicable to do so immediately, he may obtain per- mission to establish a replacement fund in his accounts in which the entire amount of compensation so received shall be held, without deduction for 145 TAX INC. GROSS INCOME. the payment of any mortgage, and pending the disposition thereof the accounting for gain or loss thereupon may be deferred for a reasonable period of time, to be determined by the Commissioner. In such a case the taxpayer should make application to the Commissioner on form 1114 for permission to establish such a replacement fund and in his application should recite all the facts relating to the transaction and undertake that he will proceed as expeditiously as possible to replace or restore such property. The taxpayer will be required to furnish a bond with such surety as the Commissioner may require for an amount not less dian the estimated addi- tional income and war profits and excess profits taxes assessable by the United States upon the income so carried to the replacement fund. See section 1320 of the statute [U. S. bonds as security, pSOO]. ^ The esti- mated additional taxes, for the amount of which the claimant is required to furnish security, should be computed at the rates at which the claimant would have been obliged to pay, taking into consideration the remainder of his net income and resolving against him all m.atters in dispute affect- ing the amount of the tax. Only surety companies holding certificates of authority from the Secretary of the 1 reasury as acceptable sureties on federal bonds will be approved as sureties. The application should be executed in triplicate, so that the Commissioner, the applicant and the surety or depositary may each have a copy. (Art. 50, Reg. 45, Rev., April 17, 1919.) y Forgiveness of Indebtedness. — Hie cancellation and forgiveness of indebtedness is dependent on the circumsiances for its effect. _ It may amount to a payment of income or to a gift or to a capital transaction. If, for example, an individual performs services for a ci editor, who in consideration thereof cancels the debt, inconie to that amount is realized by the debtor as compensation for his services. If, however,^ a creditor merely desires to benefit a debtor and without any consideration therefor cancels the debt, the amount of the debt is a gift frorn the creditor to the debtor and need not be included m the latter’s gross income. If a stock- holder in a corporation v/hich is indebted to him gratuitously forgives the debt, the transaction amounts to a contribution to the capital of the cor- poration If however, a corporation to which a stockholder is indebted forgives’ the debt, the transaction has the effect of the payment of a divi- dend See sections 213 (b) (3) and 2^0 of the statute and articles 543 [contributions by stockholders, 11950] and 631-638 [affiliated corpora- tions 111826]. (Art. 51, Reg. 45, Rev., Aprd 17, 1919.) 944 [The Circuit Court of Appeals, Second Circuit, held in U. S ys. Oregon-Washington R. & Nav. Co. April 24, 1918 (251 Fed. 211), that a debt forgiven is not income to the debtor. -The parties in interest here were affiliated corporations. (Page 665, 1918 Income Tax Service.)] 945 When Included in Gross Income. — Gains, profits and income are to be included in the gross income for the taxable year in which they are received by the taxpayer, unless they are included when they accrue to him in accordance with the approved method of accounting followed by him. See articles 21-24 [beginning at 11780].^ Lands which are received as compensation for services in one year, the title to which is disputed and in a later year adjudged to be valid, constitute income to the grantee in the former year. On the other hand, a person may sue m one year on a 146 TAX INC. GROSS INCOME. pecuniary claim or for property, but money or property recovered on a judgment therefor rendered in a later year would be income in that year, assuming that it would have been income in the earlier year if then re- ceived. This is true of a recovery for patent infringement. Bad debts or accounts charged off because of the fact that they were determined to be worthless, which are subsequently recovered, whether or not by suit, con- stitute income for the year in which recovered, regardless of the date when the amounts were charged off. See articles 111 [when charges are de- ductible, ^792] and 151 [bad debts, ^1318]. In view of the unusual con- ditions prevailing at the close of the year 1918 it is recognized that many items of gross income such as claims for compensation under cancelled contracts, together with claims against contracting departments of the Government for amortization and other matters, while properly constituting gross income for the taxable year 1918 were undecided and not sufficiently definite in amount to be reported in the original return for that year. In every such case the taxpayer should attach to his return a full statement of such pending claims and other matters, and when the correct amount of such items is ascertained an amended return for the taxable year 1918 should be filed. (Art. 52, Reg. 45, Rev., April 17, 1919.) 946 Income Not Reduced to Possession.— Income which is credited to the account of or set apart for a taxpayer and which may be drawn upon by him at any time is subject to tax for the year during which so credited or set apart, although not then actually reduced to possession. To constitute receipt in such a case the income must be credited to the taxpayer without any substantial limitation or restriction as to the time or manner of payment or condition upon which payment is to be made. A book entry, if made, should indicate an absolute trz.isfer from one account to another. If the income is not credited, but is set apart, such income must be unqualifiedly subject to the demand of the taxpayer. Where a corporation contingently credits its employees with bonus stock, but the stock is not available to such employees until the termination of five years of employment, the mere crediting on the books of the corporation does not constitute receipt. The distinction between receipt and accrual must be kept in mind. Income may accrue to the taxpayer and yet not be sub- ject to his demand or capable of being drawn on or against by him. (Art. 53, Reg. 45, Rev., April 17, 1919.) 947 Examples of Constructive Receipt.— When interest coupons have matured, but have not been cashed, such interest payment. though not collected ’^^^hen due and payable, is nevertheless available to the taxpayer and should therefore be included in his gross income for the year during which the coupons matured. This is so if the coupons are exchanged for other property instead of eventually being cashed. Dividends on cor- porate stock are subject to tax when set apart for the stockholder, although not yet collected by him. See section 201 of the statute and articles 1541- 1549 [dividends, beginning at |[815]. The distributive share of the profits of a partner in a partnership or of a stockholder in a personal service corporation is regarded as received. See section 218 of the statute and articles 321-335 [partnerships, beginning at pSl]. Interest credited on savings bank deposits, even though the bank, nominally have a rule, seldom or never enforced, that it may require so many days’ notice in advance of cashing depositor’s checks, is income to the depositor when credited. An amount credited to shareholders of a building and loan asso- INC. 147 TAX GROSS INCOME. ciation, when such credit passes without restriction to the shareholder, has a taxable status as income for the year of the credit. Where the amount of such accumulations does not become available to the shareholder until the maturity of a share, the amount of any share in excess of the aggregate amount paid in by the shareholder is income for the year of the maturity of the share, .(^rt. 54, Reg. 45, Rev., April 17 , 1919.) 948 Bond Interest Due Prior to March 1, 1913. — [For discussion of withholding on coupon interest maturing m years 1918, coupons not being presented for payment until 1919, read at ^1631. J 949 Sale of Capital Stock. — The proceeds from the original sale by a corporation of its shares of capital stock, whether such proceeds are in excess of or less than the par value of the stock issued, constitute the capital of the company. If the stock is sold at a premium, the premium is not income. Likewise, if the stock is sold at a discount, the amount of the discount is not a loss deductible from gross income. If, for the purpose of enabling a corporation to secure working capital or for any other purpose, the stockholders donate or return to the corporation to be resold by it certain shares of stock of the company previously issued to them, or if the corporation purchases any of its stock and holds it as treasury stock, the sale of such stock will be considered a capital transaction and the proceeds of such sale will be treated as capital and will not constitiRe income of the corporation. A corporation realizes no gain or loss from the purchase of its own stock. See articles 563 [for restatement that no loss is sustained on sale of capital stock, p244], 861 and 862 [involving invested capital — War Tax Service]. (Art. 542, Reg. 45, Rev., April 17, 1919.) 950 Contributions by Stockholders. — Where a corporation requires additional funds for conducting its business and obtains such needed money through voluntary pro rata payments by its stockholders, the amounts so received being credited to its surplus account or to a special capital account, such amounts will not be considered income, although there is no increase in the outstanding shares of stock of the corporation. The pay- ments in such circumstances are in the nature of voluntary assessments upon and represent an additional price paid for, the shares of stock held by the individual stockholders, and will be treated as an addition to and as a part of the operating capital of the company.. See articles 51 [tor forgiveness of indebtedness, lj943J, 293 [for assessments, as ca^ a expenditures, 111190], 838 and 869 [involving invested capital— War lax Service]. (Art. 543, Reg. 45, Rev., April 17, 1919.) 951 Sale and Retirement of Corporate Bonds. — (1) (a) If bonds are issued by a corporation at their face value, the corporation realizes no gain or loss, (b) If thereafter the corporation purchases and retires any^of such bonds at a price in excess of the issuing price or face value, the excess of the purchase price over the issuing price or face value is a deductible expense for the taxable year. See section 234 of the statute and article 563 [for similar statement, 111244]. (c) If, however, the cor- poration purchases and retires any of such bonds at a price less than the issuing price or face value, the excess of the issuing price or face value over the purchase price is gain or income for the taxable year. INC. 148 TAX GROSS INCOME. 952 (2) (a) If bonds are issued by a corporation at a premium, the net amount of such premium is gain or income which should be pro- rated or amortized over the life of the bonds, (b) If thereafter the cor- poration purchases and retires any of such bonds at a price in excess of the issuing price minus any amount of premium already returned as income, the excess of the purchase price over the issuing price minus any amount of premium already returned as income (or over ihe face value plus any amount of premium not yet returned as income) is a deductible expense for the taxable year, (c) If, however, the corporation purchases and retires any of such bonds at a price less than the issuing price minus any amount of premium already returned as income, the excess of the issuing price minus any amount of premium already returned as income (or of the face value plus any amount of premium not yet returned as income) over the purchase price is gain or income for the taxable year. 953 (3) (a) If bonds are issued by a corporation at a discount, the net amount of such discount is deductible as interest and should be pro- rated or amortized over the life of the bonds, (b) If thereafter the cor- poration purchases and retires any of such bonds at a price in excess of the issuing price plus any amount of discount already deducted, the excess of the purchase price over the issuing price plus any amount of discount already deducted (or over the face value minus any amount of discount not yet deducted) is a deductible expense for the taxable year, (c) If, how- ever, the corporation purchases and retires any of such bonds at a price less than the issuing price plus any amount of discount already deducted, the excess of the issuing price plus any amount of discount already de- ducted (or of the face value minus any amount of discount not yet de- ducted) over the purchase price is gain or income for the taxable year. (Art. 544, Reg. 45, Rev., April 17, 1919.) 954 Discount on Bonds Issued Prior to 1909. — Discount on bonds is- sued and sold prior to the year 1909, if such discount was then charged against surplus or against the income of the year in which the bonds were sold, is held not to be deductible from the income of subse- quent years, for the reason that the charging off prior to January 1, 1909, of the entire amount of the discount constitutes a closed transaction, and such transaction can not be reopened for the purpose of reducing the tax- able income of a corporation for subsequent years by deducting therefrom an aliquot part of the discount. (Art. 149, 11461, Reg. 33, Rev., Jan. 2, 1918.) (C. & A. R. R. V. U. S., Court of Claims rjf955]). 955 Xhe appended opinion [caption only, ^956] of the Court of Claims of the United States in the case of Chicago & Alton Railroad Co. v. United States [decided Dec. 3, 1917] is published for the information of internal-revenue officers and others concerned. 956 Caption referred to in 1[955. — Where a railroad company sold bonds and equipment notes at a discount in 1906 and the books show that the loss was entirely charged off under the profit and loss account for 1906, and the company in making returns under the act of August 5, 1909, for purpose of assessment of excise tax for years 1911 and 1912, failed to deduct the proportionate amount of discount sustained, it has no right to claim refund of such amount. The petition of claimant foi' refund of tax dismissed. (T. D. 2631, Jan. 19, 1918.) (249 Fed. 280.) INC. 149 TAX GROSS INCOME. 957 Discount on Bonds Issued Subsequent to January 1, 1909. — If, however, the bonds were sold subsequent to January 1, 1909, at a discount, and the amount of the discount was then charged off on the books, either against earnings or surplus, but not deducted in the cor- poration’s return of net income, such discount as was not then deducted, may be spread over the life of the bonds, and an aliquot part of the dis- count may be deducted from the gross income of each year until the bonds mature or are redeemed. 958 In cases wherein a corporation sells its bonds at a discount plus a commission for selling, the amount of such discount and commission, together with other expenses incidental to issuing the bonds, constitutes a loss, the aggregate amount of which loss will for the purpose of an income tax return, be prorated over the life of the bonds sold, and the amount thus apportioned to each year will be deductible from the gross income of each such year until the bonds shall have been redeemed. 959 If a corporation having sold its bonds at a discount, the discount having been deducted from gross income later repurchases or redeems the bonds at a price less than par, the difference between the price at which they are redeemed and their par value will be returned as income. If bonds are sold at a premium the premium must be returned as income. (Art. 150, m2-464, Reg. 33, Rev., Jan. 2, 1918.) 960 The appended decision of the United States Circuit Court of Appeals for the Third Circuit, in the case of the Baldwin Rocomotive Works V. McCoach, collector, [221 Fed. 59, holding that if the loss sustained by selling its own bonds at a discount is an expense of the business of a cor- poration the expense will not be paid until the maturity of the bonds] is published for the information of internal revenue officers and others con- cerned. (T. D. 2185, April 1, 1915.) [Decision reported at 221 Fed. 59.] 961 Loss Due to Retirement of Bonds. — In a case wherein a corpora- tion, under the terms of its indenture, securing an issue of bonds, is required annually or at certain specified periods to purchase and retire a certain number of its bonds and in doing so pays more than par for the bonds, the loss sustained is an allowable deduction from gross income for the year in which such purchase is made, under the following conditions : 962 First. If the bonds were sold at par, then the loss is the difference between par and the price at which they were repurchased for retirement. 963 Second. If the bonds were sold at a premium and such premium was accounted for as income for the year in which issued, then the differ- ence between par and the repurchase price may be deducted as loss, but if the premiums at which the bonds were issued had not been carried into the income account then the loss to be claimed should be the difference between the price at which the bonds were sold and the price at which they were repurchased. 964 Third. If the bonds were sold at a discount and the discount was charged against the earnings of the year in which issued, the differ- ence between par and the repurchase price may be deducted as a loss, but if the discount on the bonds was prorated over the life of the bonds and the annual proportion charged against the yearly income, the amount to be charged off as a loss for the year in which the bonds are repurchased for retirement should be the difference between the price at which the bonds were sold and the repurchase price minus an allowance for the sum that 1 50 TAX INC. GROSS INCOME. had been charged off annually on account of the prorated discount on such bonds. (Art. 152, 1467-470, Reg. 33, Rev., Jan. 2, 1918.) Redemption of Stock on a Stipulated Premium Basis Considered a Capital Transaction. — The office is in receipt of your letter of the 6th instant, in which you ask for information on the following question: A corporation in 1912 issued preferred stock for par. It was provided on the certificates that said stock was redeemable at 110. The company exer- cised its option and redeemed the stock at 110 by calling it in. The differ- ence appeared on the books as a reduction of undivided profits. Is this difference a lawful deduction?’' lln reply you are informed that this office will hold that the redeeming of the stock at a price in excess of par represents a capital transaction in which there can be no gain or loss to the corporation, and therefore the difference between the selling price of the stock and the price at which it was redeemed will not be deductible in a return of annual net income. (Letter to a subscriber, signed by Deputy Commissioner G. E. Fletcher and dated April 11, 1917.) Sale of Capital Assets.— Where property is acquired and later sold for a higher price, the gain on the sale is income. If, however, the property was acquired before March 1, 1913, only such portion of the gain as accrued subsequently to February 28, 1913, is taxable. Where, then, a corporation sells its capital assets in whole or in part, it shall include in its gross income for the year in which the sale was made! the amount of the excess of the sales price over the fair market value of such assets as of March 1, 1913, if acquired prior to that date, or over their cost if acquired subsequently to that date. In every case, however, in ascertaining the gain, the cost of the assets, or the fair market value as of March 1, 1913, of the assets acquired prior thereto should first be reduced by the amount of any charges for depreciation, depletion and other losses which have been or should have been made. If the purchaser takes over all the assets and assumes the liabilities, the amount so assumed is part of the purchase price. See also article 563 [p244]. If the sale is made for stock of another corporation, the rules contained in section 202 of the statute and in articles 1561-1570 [beginning at ^1058] are particularly applicable. (Art. 545, Reg. 45, Rev., April 17, 1919.) 967 Income from Leased Property. — Where a corporation has leased its property in consideration that the lessee shall pay in lieu of other rentah an amount equivalent to a certain rate of dividend on the lessor’s capital stock or the interest on the lessor’s outstanding indebtedness, to- gether with taxes, insurance or other fixed charges, such payments shall be considered rental payments and shall be returned by the lessor cor- poration as income, notwithstanding the fact that the dividends and interest are paid by the lessee directly to the stockholders and bondholders of the lessor. The fact that a corporation has conveyed or let its property and has parted with its management and control, or has ceased to engage in the business for which it was originally organized, will not relieve it from liability to the tax. While the payments made by the lessee directly to the bondholders or stockholders of the lessor are rentals as to both the lessee and lessor (rentals paid in one case and rentals received in the other), to the bondholders and the stockholders such amounts are interest and divi- dend payments received as from the lessor and as such shall be accounted for in their returns. (Art. 546, Reg. 45, Rev., April 7, 1919.) 151 TAX INC. GROSS INCOME. 968 Gross Income of Corporation in Liquidation. — When a corpora- tion is dissolved its affairs are usually wound up by a receiver or trustees in dissolution. The corporate existence is continued for the pur- pose of liquidating the assets and paying the debts, and such receiver or trustees stand in the stead of the corporation for such purposes. Any sales of property by them are to be treated as if made by the corporation for the purpose of ascertaining the gain or loss. No gain or loss is realized by a corporation from the mere distribution of its assets qn kind upon dissolution, however they may have appreciated or depreciated in value since their acquisition. See further articles 622 [for returns by recei'^rs, 111786] and 1548 [for distributions in liquidation, 1[867]. (Art. 54/, Keg. 45, Rev., April 17, 1919.) 969 Return by Corporation for Taxable Year During Which Its Affairs Are Placed in Hands of Receiver, etc., for Purposes of Dissolution. Receipt is acknowledged of your letter dated October 16, 1919, relative to the meaning of Article 547 of Regulations 45 ^ply you are advised that your question as to whether, under Aiticle ^47 of the Regulations, any profit or loss resulting from the sale of capital assets by the trustees or receivers during the process of liquidation is to be merged wfth the p ofit or loss resulting from the regular business of he yrpora- don during the same taxable year prior to the taking over of the affairs of the corporation by the trustees or by the receiver is answered in the affirmative^ tFor information as to the meaning of the term vear” aTused in the Revenue Act of 1918 and for further information as to the reouirements of the Statute with respect to the filing of returns by Daniel C. Roper, and dated October 24, 1919.) (Decision.) (Revenue Act of 1916.) Income Tax Liability of a Trustee in Bankruptcy. In re. Heller, Hirsh & Co. . (U. S. Circuit Court of Appeals, Second Circuit.) 970 Appeal from the District Court of the United Sta es oi District of New York. In the matter of Hellei, Hush IL ^ poMioS b-rup,. A p,.i,ion bp the y„i,.b S™ directingfthe^mistee^oj o™Neiv York $2,400 as taxes on income undeTAct Sept. 8, 1916, as a preferred claim, was denied, and the govern- "^^"Be^or^Ward Rogers and Manton, Circuit Judges. 971 Per Sm tS United States attorney filed a petition for an Se/directing the t-tee of the baidt^^^^ collector of internal revenu $2,400 under Act ^’preferred claim. The trustee was not rs sd- Tr,Se::?r rTrw...bd' e,,.. 152 TAX INC. GROSS INCOME. mended that the prayer of the petition be denied, and his report, which is set but below [in part], was confirmed without opinion by Judge Hough. We are quite clear that under section 13 (c) of the act of 1916 (Comp. St Sec. 6336m) [1918 Act, p785 herein.] only net income earned by a trustee while operating th.e business of a bankrupt corporation is taxable. 972 • The order is affirmed. 973 Note. — Referee Townsend’s opinion, referred to in the opinion?- here follows [in part] : 974 “Carefully prepared briefs have been filed with the Referee by the parties. I find in the briefs no decisions which I deem decisive of the present motion, viz., no decisions where the government asserts a claim for an income tax against a trustee in bankruptcy of a corporation or individual adjudicated a bankrupt and therefore presumably insolvent. I refer below to certain decisions which in my opinion aid in deciding the present motion. 975 “In my opinion the present motion depends for its determination upon a judicial interpretation of the act of September 8, 1916, a copy of which act accompanies this report. Such interpretation should be a fair one. It is not the duty of this court or of the government authori- ties to resort to Procrustean methods of interpretation against the taxpayer. 976 “I find nothing in the act of September 8, 1910, to indicate that Congress intended to impose an income tax upon a trustee in bank- ruptcy in respect to the assets of a bankrupt corporation which he has taken over to be marshaled and distributed among, the creditors of the corporation. To my mind the text of the act of September 8, 1916, does not indicate any such purpose. This view of the act does not deprive the government of its just due. The dividends declared and distributed to the creditors are presumptively income in the hands of the latter subject to an income tax to be assessed against the latter. 977 “Great stress is laid by the government on the provisions of section 13 (c) of the act of September 8, 1916. The presence of subdivision (c) in the act of September 8, 1916, and its absence from the prior act of October 3, 1913, has to my mind no significance in the present case in view of the peculiar language of subdivision (c). 978 “The language used in subdivision (c) shows that the subdivision was not intended by Congress to apply in the case of receivers or trustees in bankruptcy or assignees who merely marshaled and distributed the assets of an insolvent corporation among its creditors. In terms subdivision (c) applies only in cases where receivers or trustees in bank- ruptcy or assignees ‘are operating the property or business of corporations’ and thus may be in the receipt of a ‘net income’ as defined in the prior sections of the act. I regard the quoted words as of marked significance. 979 “To my mind the subdivision was inserted in the act to meet the specified case of the profitable operation of the business of a corpora- tion by the officers mentioned; for instance the operation of the business of a railroad corporation by receivers or the operation of the business of a manufacturing corporation by a trustee in bankruptcy, etc. 980 “The decisions cited in the brief filed by the government, such as Edwards v. Keith, Collector, 231 Fed. Ill, 145 C. C. A. 298, L. R. A. 1918A, 498 (C. C. A., 2d Circuit), and Towne v. Eisner, Col- 153 TAX INC. TAX ON INSURANCE COMPANIES. lector, 245 U. S. 418, 38 Sup. Ct. 158, 62 L. Ed. 372, L. R. A. 1918D, 254 (January 1918) turning as they do on what is and what is not taxable income, no question arising in those cases as to the status of the taxes, are not pertinent in my view of the case before me. 981 “For like reason I have not discussed the correctness of the amount of net income upon which the government claims a tax. This amount, as well as his liability for any tax, is challenged by the trustee in bankruptcy. ^^2 ‘U am of the opinion that the trustee in bankruptcy is entitled to, an order denying the prayer of the petition filed by the United States attorney for the Southern district of New York, on behalf of the collector of internal revenue for the Second district of New York.” (258 Fed. 208.) Insurance Companies. — Insurance companies include both stock and mutual companies, as well as mutual benefit insurance com- panies. A voluntary unincorporated association of employees formed for the purpose of relieving sick and aged members and the dependents of de- ceased members is an insurance company, whether the fund for such purpose is created wholly by membership dues or partly by contributions from the employer. But a corporation which merely sets aside a fund for the insur- ance of its employees is not required to file a separate return for such fund if the income and disbursements therefrom are included in the corporation’s own return. (Art. 1508, Reg. 45, Rev., April 17, 1919.) 984 Exempt Insurance Companies. — [Read at 1f767.] 985 Gross Income of Insurance Companies. — The gross income of insurance companies consists of their total revenue from the opera- tion of the business and of their income from all other sources within the taxable year, except as otherwise provided by the statute. Gross income includes net premiums (that is, gross premiums less returned premiums on policies cancelled and premiums on policies not taken), investment in- comxe, profits from the sale of assets, and all gains, profits and income re- ported to the State insurance departments, except income specifically exempt from tax. Premiums received by mutual marine insurance companies which are paid out for reinsurance should be eliminated from gross income and the payments for reinsurance from disbursements. Deposit premiums on perpetual risks received and returned by fire insurance companies should be treated in the same manner, as no reserve will be recognized covering liability for such deposits. The earnings on such deposits must be included in the investment income. A net decrease in reserve funds required by law within the taxable year must be included in the gross income. See articles 568-572 [for deductions allowed insurance companies, 11992]. (Art. 548, Reg. 45, Rev., April 17, 1919.) 980 Law1f282. Gross Income of Life Insurance Companies. — “(1) In the case of life insurance companies there shall not be in- cluded in gross income such portion of any actual premium received from any individual policyholders as is paid back or credited to or treated as an abatement of premium of such policyholder within the taxable year.” INC. ISA TAX TAX ON INSURANCE COMPANIES. A life insurance company shall not include in gross income such por- tion of any actual premium received from any individual policy- holder as is paid back or credited to or treated as an abatement of premium of such policyholder within the taxable year, (a) “Paid back” means paid in cash, (b) “Credited to” means held to the credit of, including dividends applied to pay renewal premiums to purchase additional paid- up insurance or annuities, or to shorten the endowment or premium- paying period. It does not include dividends provisionally ascertained and apportioned upon deferred dividend policies, (c) “Treated as an abatement of premium” means of the premium for the taxable year. Where the divi- dend paid back is in excess of the premium received from the policyholder within the taxable year there may be excluded from gross income only the amount of such premium received, and where no premium is received from the policyholder within the taxable year the company is not entitled to ex- clude from its premiums received from other policyholders any amount in respect of such dividend payment. (Art. 549, Reg. 45, Rev., April 17, 1919.) 988 The appended decision of the United States Circuit Court of Appeals for the Third Circuit in the case of Uederer, collector v. Penn Mutual Life Insurance Co., is published for the information of internal-revenue officers and others concerned. [Captions only.] 989 1, Dividends Excluded from Gross Income. — Under the provisions of paragraph G, subdivision (b) of section 2 of the act of October 3, 1913, that “life insurance companies shall not include as income in any year such portion of any actual premium received from any individual policy- holder as shall have been paid back or credited to such individual policy- holder within such year,” a life insurance company is not entitled to exclude from its total income during the taxable year, for the purpose of ascertain- ing its gross income, any dividends paid or credited to policyholders from whom it did not receive any premium during that year; and as to such policyholders as it did receive premiums from that year it is entitled to exclude only such part of the dividends paid to those policyholders as did not exceed the amount received from them, respectively, by way of pre- miums during that year. 990 2. Dividends Consisting of Redundancies in Previous Premium Payments. — None of the cash dividends paid by a life insurance com- pany to its policyholders which represent redundancies in previous premium payments are deductible^ from gross income in annual tax returns as “sums other than dividends paid within the year on policv * * * contracts ” (T. D. 2899, July 24, 1919.) 991 Law|[315. Special Deductions Allowed to Insurance Companies in General. — “(^0) In the case of insurance companies, in addition to the above [i. e., the general deductions allowed to all cor- porations] : (a) The net addition required by law to be made within the taxable year to reserve funds (including in the case of assessment insurance companies the actual deposit of sums with State or Territorial officers pur- suant 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 contracts ;” INC. 155 TAX TAX ON INSURANCE COMPANIES. 993 Insurance companies are entitled to the same deductions from gross income as other corporations, and also to the deduction of the net addition required by law to be made within the taxable year to reserve funds and of the sums other than dividends paid within the taxable year on policy and annuity contracts. “Paid’' includes “accrued” or “incurred” (construed according to the method of accounting upon the basis of which the net income is computed) during the taxable year, hnt does not include any estimate for losses incurred but not reported during the taxable year. As payments on policies there should be reported all death, disability and other policy claims (other than dividends as above specified) paid within the year, including fire, accident and liability losses, matured endowments, annuities, payments on installment policies and surrender values actually paid. See also article 566 [for taxes on stock assessed to stockholders, ^1256]. (Art. 568, Reg. 45, Rev., April 17, 1919.) 993 Required Addition to Reserve Funds of Insurance Companies. — Insurance companies may deduct from gross income the net addition required by law to be made within the taxable year to leserve funds, including 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. This is considered to mean the net addition required by the specific statutes of the States within which the^ taxpayer transacts business. A requirement by a State insurance commissioner that a net addition shall be made to certain amounts retained to meet specified liabilities is not a net addition required by law to be made to reserve funds within the meaning of the statute. Only reserves commonly recognized as reserve funds in insurance accounting are to be taken into consideration in computing the net addition to reserve funds required by law. In the case of a fire insurance company the only reserve fund commonly recognized is the “unearned-premium” fund. Casualty companies may deduct losses incurred within the taxable year; but unless the net addition to the unpaid loss reserve required by law exceeds such losses incurred, no deduction for the net addition to the unpaid loss reserve may be taken. In any event only the excess of such net addition over such losses may be deducted. In the ^ case of life insurance companies the net addition to the “reinsurance reseive and the “reserve for supplementary contracts not involving life contingencies and the net addition to any other reserve funds necessarily niaintained for the purpose of liquidating policies at maturity, are legally deductible. An in- crease in the reserve maintained by a life insurance company to pay divi- dends on deferred dividend policies may not be deducted from gross in- come. Mutual hail and mutual cyclone insurance companies are entitled to deduct from gross income the net addition which they required to make to the “guaranty surplus” fund or similar fund. (Art. 569, Re^. Rev., April 17, 1919.) 994 Law pie. Life, Health and Accident Insurance Combined in One Policy. — “(11) In the case of corporations issuing pol- icies covering life, health, and accident insurance combined in one policy issued on the weekly premium payment plan continuing for life and not subject to cancellation, in addition to the above fj. e., the general deductions allowed to all corporations and the special deduction allowed to all insurance companies, P9l], such portion of the net addition (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 ; INC. 156 TAX TAX ON INSURANCE COMPANIES. 995 Corporations which issue combination policies of life, health and accident insurance on the Vs^eekly premium payment plan, continuing for life and not subject to cancellation, may deduct from gross income only such portion of the net addition not required by law made within the taxable year to reserve funds as is needed for the protection of the holders of such combination policies. In general the net addition to any fund especially maintained for the protection of such policyholders may be deducted The determination by the company of the need for such addition is subject to review by the Commissioner, and the return of income should be accom- panied by a full explanation of the basis upon which such fund and the additions to it are determined. (Art. 570, Reg. 45, Rev., April 17, 1919.) j[283. Mutual Marine Insurance Companies — Gross Income. — “(2) Mutual marine insurance companies shall include in gross income the gross premiums collected and received by them less amounts paid for reinsurance.” 997 Law|[317. Mutual Marine Insurance Companies— Special Deduc- tion Authorized.— “(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, amounts repaid to policy- holders on account of premiums previously paid by them, and interest paid upon such amounts between the ascertainment and the payment thereof;” 998 Mutual marine insurance companies should include in gross income the gross premiums collected and received by them less amounts paid for reinsurance. See section 233 of the statute and article 548 [11985]. They may deduct from gross income amounts repaid to policyholders on account of premiums previously paid by them, together with the interest actually paid upon such amounts between the date of ascertainment and the date of payment thereof. The remainder of the premiums accordingly form part of the net income of the company, except to the extent that they are subject to the deductions allowed insurance companies in general and other corporations. (Art. 571, Reg. 45, Rev., April 17, 1919.) 999 LawplS. Mutual Insurance Companies Other Than Mutual Life and Mutual Marine. — “(1^) the case of mutual insurance companies (other than mutual life or mutual marine insurance 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, (unless otherwise allowed under such paragraphs) the amount of premium deposits returned to their policyholders and the amount of premium deposits retained for the pay- ment of losses, expenses, and reinsurance reserves ;” 1000 Special Deductions Allowed Mutual Insurance Companies. — Mutual insurance companies (other than mutual life and mutual marine insurance companies), which require their members to make pre- *(1) to (9) — General deductions allowed to all corporations, begin- ning at j[1180. (10) — Special deductions allowed to all insurance com- panies, ^991. INC. 157 TAX TAX ON FOREIGN CORPORATIONS. mium deposits to provide for losses and expenses, are allowed to deduct from gross income the aggregate amount of premium deposits returned to their policyholders or retained for the payment of losses, expenses and reinsurance reserves. If, however, any portion of such amount is applied during the taxable year to the payment of losses, expenses or reinsurance reserves, for which a separate allowance is taken, then such portion is not deductible ; and if any portion of such amount for which an allowance is taken is subsequently applied to the payment of expenses, losses or reinsur- ance reserves, then such payment cannot be separately deducted. An amount of premium deposits retained for the payment of expenses, and losses, and the amount of such expenses and losses, may not both be deducted. A com- pany which invests part of the premium deposits so retained by it in interest- bearing securities may nevertheless deduct such part, but not the interest received on such securities. A mutual fire insurance company which has a guaranty capital is taxed like other mutual fire insurance companies. A stock fire insurance company, operated on the mutual plan to the extent of paying dividends to certain classes of policyholders, may make a return on the same basis as a mutual fire insurance company with I'espect to its busi- ness conducted on the mutual plan. (Art. 5/2, Reg. 45, Rev., April 17, 9 .) 1001 Gross Income of Foreign Insurance Companies. — [Read at ^[1018.] 1002 Returns of Insurance Companies.— Insurance companies trans- acting business in the United States or deriving an income i^^m sources therein are required to file returns of income. The return shall be on form 1120. As an aid in auditing the returns, wherever possible a copy of the report to the State insurance department should be submitted with the return. Otherwise a copy of schedule D, parts 1, 3 and 4, of the report should be attached to the return, showing the federal. State and municipal obligations- from which the interest omitted from gross income was derived, and a copy of the complete report should be furnished as soon as ready for filing. (Art. 623, Reg. 45, Rev., April 17, 1919.) 1003 Assessment Life and Accident Insurance Companies; Stock Fire Insurance Companies ; Stock Casualty, Fidelity and Surety Insur- ance Companies; Miscellaneous Stock Companies.— Companies of the foregoing classes will make their returns f cable to insurance companies in general. (Art. 245, 11713, Reg. , Jan. 2, 1918.) 1004 Returns by Foreign Insurance Companies. — [Read at 1044.] 100.5 General Law Provisions and Applicable Regulations Relating to Returns. — [Read at 1|1808.] 1006 General Law Provisions and Applicable Regulations Relating to the Payment of the tax. — [Read at 1(2,000.] 1007 Tax on Foreign Corporations.— [The rate is the same as for domestic corporations, for which see lf713.] 1008 Law US. What Constitutes a Foreign Corporation. The teim ‘foreign’ when applied to a corporation or partnership means created or organized outside the United States ; 158 TAX INC. TAX ON FOREIGN CORPORATIONS. 1009 Law 1[6. ‘‘The term ‘United States’ when used in a geographical ^ .. , sense includes only the States, the Territories of Alaska and Hawaii, and the District of Columbia;” 1010 Doniestic and Foreign Persons. — A domestic corporation or part- nership is one organized or created in the United States, including ^ 1 ^ States, the territories of Alaska and Hawaii, and the District of Columbia, and a foreign corporation or partnership is one organized or created outside the United States as so defined. * ^ ^ foreign corporation engaged in trade or business within the United States or having an office or place of business therein is sometimes referred to in the regulations as a resident foreign corporation and a foreign corporation not e^aged in trade or business within the United States and not having any office or place of business therein as a nonresident foreign corporation (Art. 1509, Reg. 45, Rev., April 17, 1919.) Foreign Corporations Not Engaged in Trade or Business Within .u • United States and Not Having Any Office or Place of Business source"' measure, withheld at the as Well as Domestic Corporations.— This office is in receipt of your letter of the 30th '".wh'ch you ask whether or not foreign corporations of the nature specified m Section 11, under the heading "Conditional and Other Exemp- tions [1[739] will also come within that heading, you are informed that the section referred to provides that the income of the corporations enumerated therein shall not be taxed, and therefore it follows that if the corporations U ‘S' *7 '■equiied to file corporate returns, and It IS held by this office that the exemption applies to foreign as well as to domestic corporations. Corporations similar to those enumerated in the several subsections of Section 11 are not necessarily exempt from making returns of annual net income and can not be classed as exempt corporations until they have set out, in the form of an affidavit, either to the Collector of Internal Revenue for their districts or to this office the purpose and nature of the organization, the source of its income, the disposition of the same and whether or not any of its net income will ever inure to the benefit of any private stockholder or individual. Upon receipt of such affidavit the cor- poration, either domestic or foreign, will be definitely advised as to its status, under the requirements of the law. (Letter to The Central Trust Company of New York, New York, signed by Commissioner W. H. Osborn and dated November 1, 1916.) Receipt IS acknowledged of your letter of November 17 1916 and . K 'S Federal Income Tax Law of Sep- tember 8, 1916, provides that every organization enumerated in Section II of that statute is exempt from Federal Income Tax on its net earnines profits or income, and the office holds that the provisions applv whether the organization be domestic or foreign. In a case where a foreign organization desires to be held exempt from Federal income tax, and a doubt exists as to whether or not It comes within the class of organizations enumerated in Section II, It will be required to file a copy of its charter and by-laws, and an affidavit executed by its principal officer showing the disposition made INC. 159 TAX TAX ON FOREIGN CORPORATIONS. of such income as it receives, and stating specifically, whether or not any of the income so received inures to the benefit of any individual stockholder. The question of whether or not the office will hold the organization to be “exempt” will be determined by the facts shown in its charter, by-laws and affidavit. (Letter to The Corporation Trust Company, signed by Com- missioner W. H. Osborn, and dated December 6, 1916.) 1015 Law |[280. Net Income of a Foreign Corporation Defined.--“Sec. 232. That in the case of a corporation subject to the tax imposed by section 230* [lf713] the term ‘net income’ means the gross in- come as defined in section 233 [pOlb] less the deductions allowed by section 234 [^11801, and the net income shall be computed on the same ba^s as is provided in subdivision (b) of section 212_^ {V69] or in section 226 [ Returns when accounting period is changed,’ 1fl855].” ^ * [The tax imposed by section 230 is “upon the net income of every corporation” simply.] 1016 LawT[281. Gross Income of a Foreign Corporation Defined. “Sec. 233. (a) That in the case of a corporation subject to the tax imposed by section 230^ [1[713] the term ‘gross income’ means the gross income as defined in section 213 [^802], 1017 Law U284. Gross Incom.e of a Foreign Corporation Is That from Sources Within the United States Only.— “(b) In the case of a foreign corporation gross income includes only the gross income from sources within the United States,” 1018 Gross Income of Foreign Corporations. — The gross income of a foreign corporation or insurance company means its gross ^ incorne from sources within the United States, as defined and described in articles 91-93 [beginning at 1[1545] relating to nonresident alien indi- viduals. The income from business relating to a foreign country which is transacted by a United States branch or agency of a foreign insurance com- pany must be returned as gross income. (Art. 550, Reg. 45, Rev., April 17, 1919.) 1019 Foreign Corporations Doing Business by Agents. — [Note that the wording of the present Act is “income from sources within the United States.”] The Federal income tax law provides that the normal tax imposed by it shall be levied, assessed, and collected upon the entire net income arising and accruing to foreign corporations from business trans- acted or capital invested in this country. Such a corporation may transact business or have capital invested in this country through and by an agent as completely as if it were transacting the business or investing the capital direct from its home office or through a duly established branch office^ m the United States. An agent who is doing business in this country, buying and selling certain products of the foreign corporation, is to all intents and purposes a branch of the foreign corporation, as through and by him the foreign corporation is transacting business m this country. 1020 The buying and selling of a product in this country through a local agency or branch for and on behalf of a foreign corporation is d^i'^Y transacting business in this country within the meaning of the Fed- eral income tax law, and any net income arising and accruing because of the business to be transacted will be held to be subject to the tax irnposed by the Federal income tax law, and every foreign corporation carrying on 160 TAX INC. TAX ON FOREIGN CORPORATIONS. business in the manner indicated will be required to make a return of annual net income covering the business so transacted. (T. D. 2137, Tan. 30, 1915.) 1021 When a foreign corporation sends a representative to this country to solicit business, the merchandise thus sold to be shipped direct to the consignee, it will be held that such corporation is transacting business in this country. The fact that the solicitor or representative has only a mailing address in this country is immaterial ; he is none the less an agent of the foreign corporation. To the extent that he sells in this country goods or merchandise for the foreign corporation, to that extent the foreign corpora- tion is transacting business in the United States, and the net income arising and accruing to the corporation by reason of the business so transacted will be subject to the income tax imposed by section 2, act of October 3, 1913. 1022 Any foreign corporation transacting business in this country in the manner hereinbefore indicated will make a return of annual net income to the collector of the district in which its representative has his mailing address, showing in such return the net income accruing to it from the business so transacted. (T. D. 2161, Feb. 19, 1915.) 1023 Taxable Income of Foreign Steamship Companies. — This office is in receipt of your letter of the 17th instant, in which you quote what purports to be a ruling of this office with respect to the manner of computing the income, taxable under the federal income tax law (Section 2, Act of October 3, 913), against foreign steamship companies doing business in and from this country, and you ask if the ruling quoted “represents the stand of the Bureau of Internal Revenue on the subject in question.” In reply you are informed that the ruling referred to is quoted from a letter written by this office and, in the main, represents the position of this Bureau in regard to the question raised. * ❖ * qj. position of this office with respect to the method of ascertaining the taxable income of foreign steam- ship companies, whose steamships touch at American ports and which carry therefrom freight and passengers for hire, could perhaps be better stated as follows : The returns made by such corporations, for the purpose of the income tax imposed by the act cited, should include as gross income the total receipts of all outgoing business, whether freight or passengers. With the gross income thus ascertained, the ratio existing between it and the gross income from all ports, both within and without the United States, . should be determined as the basis upon which allowable deductions may be computed, the principle being that allowable deductions shall be computed upon a basis which recognizes that the income arising and accruing from business done in and from this country shall bear its share, and no more, of expense, incident to the earning or creation of such income, in the ratio that the gross income arising in and from this country bears to the entire gross income arising from business done both within and without this coun- try. In other words, the net income of a foreign steamship company doing business in or from this country, for the purpose of the income tax assessable and payable to the United ^States, will be ascertained by deducting from the gross receipts from outgoing business such a portion of the aggregate ex- penses, losses, etc., as such receipts bear to the aggregate receipts from all ports. * * [See T|1034.j (I.etter to The Cor])oration Trust Company, signed by Acting Commissioner David A. Gates, 'ind dated July 18, 1916.) 1024 General expenses, such as coal, ship stores, etc., of foreign steamship companies shall 1)e prorated as ])rovided in ['111034 * * * i ^Art 116, Reg. 33, Jan. 5, 1914.) INC. 161 TAX TAX ON FOREIGN CORPORATIONS. 1025 Lawt[285. “Gross Income” of a Foreign Corporation Includes Interest on the Obligations of All Residents and Divi- dends on Stock of Resident Corporations. — “including the interest on bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise, dividends from resident corporations, and” 1026 Gross income from sources within the United. States as applied to foreign corporations shall include interest received on bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise, as well as income derived from dividends on capital stock or from the net earnings of resident corporations, joint-stock companies, or associations, or insurance companies, subject to tax under this title, and likewise income from rentals and royalties, from business transacted or capital invested in the United States. (Art. 89, p50, Reg. 33, Rev., Jan. 2, 1918.) 1027 Lawj[286. “Gross Income” of a Foreign Corporation Includes Amounts Received as Profits on the Manufacture and Disposition of Goods Within the United States. — “including all amounts received (although paid under a contract for the sale of goods or other- wise) representing profits on the manufacture and disposition of goods within the United States.” [Reg. 45 reads “manufacture or disposition,” 111545.] Comment. — [The following ruling is based on the old law which did not carry the specific provision found at |fl027, above.] 1028 A Foreign Corporation Having no Office or Agent in the U. S., Collecting Commissions Only on Account of Sales of American Goods Abroad, Is Not Liable to Tax on Amounts so Earned.— Reference is made to your letter of the 12th instant, in v/hich you state that a corpora- tion located at Singapore, incorporated under the laws of that country, which has no office or agent in the United States, and is engaged in the commission business has, during the year 1917, sold in Singapore and nearby countries certain products of manufacturing establishments in the United States. The purchase price of these goods is transmitted by the purchasers to the manufacturers and American houses direct. When the money is received in the United States a commission is paid out of the proceeds of sale to this ♦ foreign corporation. jjRelative to your inquiries, you are advised that under the above statement of facts the commission earned by the Singapore corporation is not considered to be income derived from sources within the United States, and the Singapore corporation is not required to report such commissions as income under the provisions of the Act of September 8, 1916, and Titles I and II of the Act of October 3, 1917. Ifin regard to your second inquiry, you state that a corporation in this country receives from the manufacturer these commissions and transmits the same to the Singa- pore corporation, and ask to be advised whether this corporation which so receives and transmits these commissions is under obligations to report such commissions in its return of annual net income. Tfin reply, you are informed that if the American corporation in question simply acts as the agent for the Singapore corporation in receiving and transmitting such commissions, and does not retain for its own use any part thereof, it is held that such commissions need not be reported as income by the domestic corporation referred to. (Letter to Brower, Brower and Brower, Brook- lyn, New York, signed by Deputy Commissioner L. F. Speer, and dated April 20, 1918.) TAX ON FOREIGN CORPORATIONS. 1029 Law |f287. Deductions Allowed Foreign Corporations. — “Sec. 234. (a) That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as de- ductions .’I* 1030 Comment. — [The deductions which may be allowed to foreign corporations are in character the same as those allowed to domestic corporations. These shall be allowed only to the extent indicated below in paragraphs 1031, 1032, and 1033.] 1031 Law ][293. Interest Allowed as a Deduction to Foreign Corpo- rations. — [Same as for domestic corporations, P234, qualified as follow’S — ] “or, in the case of a foreign corporation, the propor- tion of such interest which the amount of its gross income from sources within the United States bears to the amount of its gross income from all sources within and without the United States;’' 1032 Law]j300. Taxes Allowed as a Deduction to Foreign Corpora- tions. — [Same as for domestic corporations, P249, qualified as follows — ] “(e) in the case of a foreign corporation, by the authority of any foreign country (except income, war-profits and excess- profits taxes, and taxes assessed against local benefits of a kind tending to increase the value of the property assessed), upon the property or business:” 1033 Law|[324. The Apportionment and Allocation of Deductions Allowed Foreign Corporations Other Than Interest and Taxes. — “(b) In the case of a foreign corporation the deductions allowed in subdivision (a) [P180], except those allowed in paragraph (2) [P234] and in clauses (a) [P250], (b) [111251], and (c) [p252] of paragraph (3), shall be allov/ed only if and to the extent that they are con- nected with income arising from a source within the United States;” 1034 Law1f325. “and the proper apportionment and allocation of the deductions with respect to sources of income within and without the United States shall be determined under rules and regulations prescribed by the Commissioner with the approval of the Secretary.” 1035 Deductions Allowed Foreign Corporations. — Foreign corporations are allowed the same deductions from their gross income arising from sources within the United States as are allowed to domestic corporations, to the extent that such deductions are connected with such gross income, with the exception that the interest deductible is that proportion of so much of the entire interest paid on the corporate indebted- ness as would be deductible if paid by a domestic corporation which the gross income from sources within the United States bears to the total gross income, and that full deduction may be made for taxes imposed by the United States or any of its possessions, or by any State, Territory or po- litical subdivision thereof, except taxes for local benefits and income, war profits and excess profits taxes. A Canadian manufacturing corporation which sells part of its product in the United States and part in Canada should report its deductions for cost of manufacture, exclusive of interest paid on its indebtedness, in the same proportion as the quantity of its product sold in the United States bears to the total quantity sold. (Art. 573, Reg. 45, Rev., April 17, 1919.) INC. 163 TAX TAX ON FOREIGN CORPORATIONS. 1036 Deductions Permitted to Foreign Corporations Deriving Their Taxable Income Solely from Stock or Bonds of Domestic Corpo- rations. — [Under the present law the dividends themselves would con- stitute an allowable deduction. The tax on the bond interest should be withheld at the source [111614] unless the corporation had an “office’’ within the United States. Under the present law gross income of a foreign cor- poration includes “only the gross income from sources within the United States.”] This office is in receipt of your letter of the 20th ultimo, in which you refer to office letter of April 8 [10], 1916, in which it was held that a non-resident corporation, holding stock of a domestic corporation, will be chargeable with such income tax as may be assessable upon the dividends on said stock and will be Subject to all provisions of the law and the regulations for making return and paying tax. You also point out the fact that the income tax law provides, in paragraph 2 [G], that the normal tax shall be imposed upon the net income accruing to a foreign corporation from business transacted and capital invested v/ithin the United States during the year and prescribes the deductions to which such foreign cor- porations are entitled. 1037 You therefore ask: “if the foreign corporation is not engaged in business, but derives its income from the United States solely in the form of dividends or interest, to v/hat extent is it entitled to take advantage of the deductions prescribed by lav/.” 1038 In reply you are informed that, if a foreign corporation is liable under the present income tax law to the tax imposed by it, it is liable for the reason that such corporation is either transacting busi- ness or has capital invested in the United States. The liability of a foreign corporation to income tax on the income received by it from ^ocks and bonds of domestic corporations exists because of the fact that such corpora- tion has capital invested in the securities the income from which its source in the United States. In other words, a foreign corporation which derives its income from the United States solely in the form of dividends or interest has capital invested in the United States, and, under the ruing hereinbefore referred to, the liability of the corporation to tax attaches by reason of the source of the income bein^ in the United States, the domici e of the securities as well as of the corporation owning them being immatena . 1039 It therefore follows that, as the income arising and accruing to a foreign corporation from capital invested in stoAs and bonds o domestic corporations is subject to the tax imposed by Section 2, Act o October 3, 1913, it will be permissible for such a foreign corporation although its income from the United States is derived “solely in the form of dividends and interest” on domestic stocks and bonds, to deduct from the gross income so received any or all of the items scheduled in the law as proper deductions in the case of a foreign corporation, regardless of the source of the income, provided the amounts so deducted will not exceed the limit defined in the schedule of allowable deyictions In other words fact that the income arising or accruing m the United States to a corporation is “derived solely from dividends or interest on domestic stocks and bonds will not operate to deprive such 'TU™” deducting from the gross income from th's source such items of disburse menb lofs, etc., as would be properly deductible were the income derived from any other source. t f f f f INC. 164 TAX TAX ON FOREIGN CORPORATIONS. 1040 It is contemplated by this ruling, however, that, in as far as prac- ticable, the deductions shall comprehend only such expenditures, losses, etc., as are incurred in, or are incidental to, the creation of the income against which they are charged and in all cases the deductible amounts must be within the limit fixed by the law. (Letter to The,. Cor- poration Trust Company, signed by Commissioner W. H. Osborn, and dated June 6, 1916.) 1041 Credits Against Income Allowed Foreign Corporations. — A for- eign corporation is allowed the same credits [as a domestic corpora- tion, see [^1533] other than the sum of $2,000. (Art. 591, Reg. 45, Rev., April 17, 1919.) 1042 Credit to Foreign Corporation for Foreign Taxes Paid. — [This credit is not allowed to foreign corporations except in cases where the foreign corporation is affiliated with a domestic corporation.] For credit where taxes are paid by a foreign corporation controlled by a domestic corporation see article 636 [[[1845]. A claim for credit in such a case is also be made on form 1118. (Art. 611, Reg. 45, Rev., April 7, 1919.) 104^^ Domestic Corporation Affiliated With Foreign Corporation. — [See Art. 636, [[1845.] 1044 Returns of Foreign Corporations. — Every foreign corporation hav- ing income from sources within the United States must make a return of income on Form 1120. If such a corporation has no office or place of business here, but has a resident agent, he shall make the return. It is not necessary, however, for it to be required to make a return that the foreign corporation shall be engaged in business in this country or that it have any office, branch or agency in the United States. See articles 404 [for return of income by nonresident alien, [[1579], 550 [for gross income of foreign corporationns, [[1018] and 573 [for deductions allowed foreign corporations, ["1035]. (Art. 625, Reg. 45, Rev., April 17, 1919.) 1045 Law [[359. ‘'(b) Returns shall be made to the collector of the district in which is located the principal place of busi- ness or principal office or agency of the corporation,” 1040 Law [[345. “If any foreign corporation has no office or place of business in the United States but has an agent in the United States, the return shall be made by the agent.” 1047 Law [[360. ‘ffir, if it has no principal place of business or principal office or agency in the United States, then to the collector at Baltimore, Maryland. [In connection with the above read at [[1816.] 1048 Foreign Corporation Having Several Branch Offices in the United States. — A foreign corporation having several branch offices in the United States should designate one of such branches as its principal office, and should also designate the proper officers to make the required return. (Art. 83, Reg. 33, Jan. 5, 1914.) • 1049 Consolidated Returns. — [Read at [[1845.] 165 TAX INC. BASIS FOR DETERMINING GAIN OR LOSS. 1050 General Law Provisions and Applicable Regulations Relative to Returns by Corporations. — [Read at If 1808.] 1051 Credit for Amount of Tax Withheld at the Source. — [Sec. 237, ]fl614, provides that a 10 per cent or a 2 per cent tax is to be withheld at the source in the case of foreign corporations not engaged in trade or business within the United States and not having any office or place of business therein, in the same manner as is provided in Sec. 221, ]fl585, and “subject to the same conditions as provided in that section.” One condi- tion provided for in Sec. 221 at 1fl719, is that any amount of tax withheld is to be credited against the income tax shown in the taxpayer’s return, the income on which the tax has been withheld being included in such return. Read 1fl722.] 1052 Replying to 3 ^our further inquiries you are informed : jfThat it will be sufficient for foreign corporations against whom income tax is withheld at the source to give the name of the withholding agent and the amount so withheld. Ifin the case of bonds which contain the so-called ^'tax-free” covenant, the bondholders have the right to assume that the fiscal agent of the corporation has withheld and paid over to the proper officers of the United States Government the tax due on the bond interest due the bondholders, though this assumption will not relieve the bondholder from tax should it develop that the debtor corporation did not so withhold it or pay it overUo the proper United States officer. IfClearly, when the tax has been withheld and remitted to the Government and the bondholder is advised of that fact, such bondholder may take credit in his or its return against the full amount of tax due as shown by the return, for the amount so withheld and paid over to the United States officer. In other words, when withholding agents have paid the tax on account of nonresident alien corporations having income from interest and * ♦ ♦ from sources within the United States, they, are entitled to the benefit of a credit for such payments as against the tax due and assessable on the basis of the income which they received from all sources within the United States. 1053 As to the case you cite in which a nonresident ajien corporation, through you as its American agent, had over-paid its tax by reason of its not having been able to take credit for the amount of tax withheld at the source, you are informed that a claim for refund [112133] of the 'amount overpaid may be filed with the Collector to whom such arnount was paid. With the claim a statement setting out all the facts should be filed and the matter will have proper consideration and as prompt attenLon as possible. [Read also at [[1579.] (Letter to Lee, Higgmson & Co., Boston Mass., signed by Commissioner Daniel C. Roper, and dated Novem- ber 10, 1917.) 1054 Payment of Tax, if Any, Not Withheld at the Source. — [Read at pooo.] 1055 Law [[43. Basis for Determining Gain or Loss. — “Sec. 202. (a) That for the purpose of ascertaining the gam derived or loss sustained from the sale or other disposition of property, real, personal, or mixed, the basis shall be — ” 1056 Law [[44. Basis for Determining Gain or Loss in the Case of Property Acquired Prior to March 1, 1913. — (1) In the case of property acquired.before March^l, 1913, the fair market price or value of such property as of that date ; and” 166 TAX INC. BASIS FOR DETERMINING GAIN OR LOSS. 1057 Law 45. Basis for Determining Gain or Loss in the Case of Property Acquired Subsequent to March 1, 1913. — “(2) In the case of property acquired on or after that date [March 1, 1913], the cost thereof; or the inventory value, if the inventory is made in ac- cordance with section 203 [P090].’' 1058 Basis for Determining Gain or Loss from Sale.— For the purpose of ascertaining the gain or loss from the sale or exchange of prop- erty the basis is (a) its fair market price or value as of March 1, 1913, if acquired prior thereto, or (b), if acquired on or after that date, its cost or its approved inventory value. In both cases proper adjust- ment must be made for any depreciation or depletion sustained. What the fair-market price or value of property was on March 1, 1913, is a question of fact to be established by any evidence which will reasonably and ade- quately make it appear. As to inventories see section 203 of the statute and articles 1581-1585 [beginning at P091]. The fair market value as of March 1, 1913, has no bearing on the determination of the invested capital of a corporation for the purpose of the war profits and excess profits tax. See section 326 and article 831 [for invested capital — War Tax Service]. (Art. 1561, Reg. 45, Rev., April 17, 1919.) 1059 Method of Determining Value as of March 1, 1913. — No method of determining this value can be stated by the department which will adequately meet all circumstances. What that value was is a question of fact to be established by any evidence which will reasonably and ade- quately make it appear. (Art. 4, %3, Reg. 33, Rev., Jan. 2, 1918.) 1060 Determination, in the Case of Stock, of “Fair Market Price or Value” as of March 1, 1913.— This office is in receipt of your letter of November 20, 1916, in matter of computing gain or loss on sale of property acquired prior to March 1, 1913, and asking whether “In case of the sale of stock traded in on the exchange, shall the opening price on March 1st, or the closing price, or the average price for the day, be taken as the basis ?” 1061 Under paragraph (c) of Section 2 and paragraph (4) of Section 5, Act of September 8, 1916, in case of property acquired prior to March 1, 1913, “the fair market price or value of such property as of March 1, 1913, shall be the basis for determining the amount of gain or loss” upon sale or other disposition of the property. 1062 “The fair market price or value as of March 1” is held to be the fair market price or value as of the entire day of March 1, which in the case of variation between “opening and closing price” for the day, would mean the average price for the day. This, however, would be conffitioned upon showing that the exchange quotation represented the fair market price or value of the stock, as it is this “fair market price or value” which is to control, however that fact may be ascertained. (Letter to The Corpo- ration Trust Company, signed by Commissioner W. H. Osborn, and dated November 21, 1916.) 106.3 In Determining Value of Stock as of March 1, 1913, the Good- will of the Corporation is to be Taken Into Consideration. — Receipt is acknowledged of your letter of July 2, 1919, in which you refer to the consideration to be given to the value of goodwill of a cor- poration where it is desired to establish the fair market value of its out- 167 TAX INC. BASIS FOR DETERMINING GAIN OR LOSS. standing capital stock on March 1, 1913, ^n reply, you are advised that the value of the tangible and intangible assets of a corporation, inclusive of the value of goodwill, as of March 1, 1913, is to be taken into consid- eration, together with such other facts as may be necessary, where it is desired to establish the market value of its outstanding capital stock on March 1, 1913, for income tax purposes. (Letter to The Corporation Trust Company, signed by Commissioner Daniel C. Roper, and dated July 22, 1919.) 1064 Determination of Cost: Real Estate.— The cost of property acquired subsequent to tlie incidence of the tax will be the actual price paid for it, together with the expense incident to the procurement of the property in the first instance, and its sale thereafter, and the cost of improvement or betterment, if any. (T. D. 2005, July 8, 1914.) 1065 In determining the cost of the property for the purpose of arriving at the profit realized upon the sale it will be permissible for the corporation to add to the initial cost such carrying charges as interest, taxes, insurance, etc., provided such carrying charges have not been de- ducted from net income which the corporation may have had and returned for years subsequent to January 1, 1909, and prior to the date of sale of the property. ^ ^ . . 1066 T. D. 2005 is not intended to be so construed that carrying charges, if they consist of such expenditures as constitute allowable deduc- tions from gross incomes, are to be added to the cost of the property if there is a gross income from which such charges as constitute allowable deduc- tions may be deducted. It is intended, however, that in the case of a holding or developing company which has not yet reached the stage of having any income of consequence resulting from its corporate operations, the carry- ing charges or other excess over the incidental income received may be added to and made a part of the cost of the property. (i.D. 2137, Jan. 30, 1915.) 1067 In reply, you are informed that special assessments, if any, actually paid as ’local benefits in connection with real estate are held to be expenditures which add to the value of the property and should be capi- talized whether such expenditures were made prior to, or subsequent to, the incidence of the tax; that is to say, such expenditures, no matter when paid, became, in effect, a part of the cost of the property. 1068 All carrying charges in excess of the income whicn may have been received prior to the sale of the property may be included from the gross proceeds of the sale when the property is sold and the excess of such cost will be returned as income. . , , • 1069 This ruling is based upon the presumption that the corporation is doing business, and, having income as a result of the business done, must use such income to offset in as far as it uill do so, the expense nec- essary to the operation and maintenance of the business. 1070 If the carrying charges are less than the income, such caiiying charges, unless they be for improvements and betterments, wil not be added to and made a part of the cost of the property but will be deducted from the gross income received, in which case it would appear tha the return of the corporation would show a net income subject to tax. 1071 The Treasury Decision (T. D. 2005) referred to is not intend^ed to be so construed that the carrying charges, if ihey consist of such expen- 168 TAX INC. BASIS FOR DETERMINING GAIN OR LOSS. ditures as constitute allowable deductions from gross income, are to be added to the cost of the property, if there is a gross income from which such charges as constitute allowable deductions may be deducted. It is intended, however, that in the case of a holding or developing company which has not yet reached the stage of having an}^ income of consequence resulting from its corporate operations, the excess of the carrying charges over the incidental income received may be added to and made a part 6i the cost of the property. (Letter to The Corporation Trust Company, signed by Commissioner W. H. Osborn, and dated December 22, 1914.) 1072 Method of Computing Profit or Loss from Sale of Standing Tim- ber or of Lumber Manufactured Therefrom. — In compliance with your request of the 1st instant, you are advised ihat the following informa- tion is furnished you in regard to the preparation of your returns of annual net income under the provisions of the Act of September 8, 1916, as far as the calculation of the value of standing timber as of March 1, 1913, is concerned, and it also represents the regulations of this office in regard to allowances to be deducted from gross income for the value of stumpage: ^Corporations owning timber land and logging oft the timber and manufac- turing it into lumber, will, if the timber was acquired prior to March 1, 1913, be permitted to exclude from gross income either through a deduction from gross receipts or through a charge into the cost of manufacturing the timber into lumber, an amount equivalent to the fair market price or value of the standing timber as of March 1, 1913. jjln order to secure the benefit of this deduction such corporations must set up on their books as of March 1, 1913, the fair market price en bloc, of all the timber then owned by them, and then, by dividing this eit bloc value by the estimated number of feet (board measure) in the entire timber holdings, the per unit value or price as of March 1, 1913, will be ascertained, which per unit price or value will be the basis for measuring the amo'unt which may be added to the cost of manufacture, or deducted from gross income, until the en bloc value of the entire holdings as of March 1, 1913, shall have been extin- guished, after which no further deduction on this account shall be allowed. l[The same rule will apply in the case of timber or timber lands purchased subsequent to March 1, 1913, the only difference being that actual cost, that is the gross purchase price, shall, in making the computations, be substi- tuted for en bloc price or value as of that date. If the entire market price or value of both timber and lands as of March 1, 1913, or the entire cost, if acquired subsequent to that date, is extinguished through a deduction from gross income for timber used, or through a per unit charge to cost of manufacturing lumber, then the entire amount realized from the logged- off lands or for other salvage, will be returned as income of the year in which such lands are sold or disposed of. ^If the timber or timber lands are sold en bloc, the gain or loss will be ascertained on the basis of the differ- ence between the fair market price or cost and the selling price, accordingly as the property was acquired prior or subsequent to March 1, 1913. IjThe fair market price or value of timber or timber lands, as of March 1, 1913, is the price at which the property in its then condition and with the circum- stances then surrounding it, could have been sold, for cash or its equiva- lent. This value must not be speculative, but must be determined without taking into account any prospective profits that may result from the manu- facture of the timber into lumber. It must he, as the law contemplates, a fair- market value, and, once determined, must be set up on the books, 169 TAX INC. BASIS FOR DETERMINING GAIN OR LOSS. and as the measure of a stumpage deduction for income tax purposes must remain constant and cannot be increased. The value so set up as of March 1, 1913, -will be subject to the approval of the Commissioner of Internal Revenue. ^[You are also informed that this office is not prepared to express an opinion at the present time as to what stumpage value would constitute a fair value of short leaf North Carolina pine as of March 1, 1913, and in regard to your further request you are informed that the ruling contained in the above regulation will refer equally as well to the years 1913, 1914 and 1915, with the exception that the cost of the timber shall be the governing basis instead of its value as of March 1, 1913. (Letter to a subscriber, signed by Deputy Commissioner L. F. Speer, and dated March 3, 1917.) 1073 In reply [to your further inquiry] you are informed that in prepar- ing returns of annual income of your corporation you should state therein your opinion of the fair market price or value of your timber as of March 1, 1913, and calculate your income based on that estimate. When an examination of your return is made, the figure given therein which represents the fair market price or value of your timber as of March 1, 1913, will be given due consideration, and in the event that it appears to this office that it does not represent a fair market price or value of your timber as of March 1, 1913, you will be advised and be given an opportunity to present reasons and facts as to why the figures given in your returns should be accepted. (Letter to a subscriber — same as in P072 — , signed by Deputy Commissioner L. F. Speer, and dated March 10, 1917.) [Read at ^1445.] 1074 Sale of Property Acquired by Gift or Bequest. — In the case of property acquired by gift, bequest, devise or descent the basis for computing gain or loss on a sale is the fair market price or value of the property at the date of acquisition or as of March 1, 1913, if acquired prior thereto. For the purpose of determining the profit or loss from the sale of property acquired by bequest, devise or descent since February 28,^ 1913, its value as appraised for the purpose of the federal estate tax, or in the case of estates not subject to that tax its value as appraised in the State court for the purpose of State inheritance taxes, should be deemed to be its fair market value when acquired. See section 213 (b) (3) of the statute and article 73 [for nontaxability of gifts and bequests, 111129]. (Art. 1562, Reg. 45, Rev., April 17, 1919.) 1075 Sale of Stock Acquired by Gift. — The fair market price or value of stock acquired by gift subsequent to March 1, 1913, is the basis for computing gain derived or loss sustained by the sale thereof. If ac- quired by gift prior to March 1, 1913, the fair market price or value as of that date is the basis for computation. (Art. 4, lf41, Reg. 33, Rev., Jan. 2, 1918.) 1076 Lawlf46. Property Exchanged for Other Property. — ''{h) When property is exchanged for other property, the property received in exchange shall for the purpose of determining gain or loss be treated as the equivalent of cash to the amount of its fair market value, if any;” 1077 Exchanges of Property.— Gain or loss arising from the acquisi- tion and subsequent disposition of property is realized when as the result of a transaction between the owner and another person the 170 TAX INC. BASIS FOR DETERMINING GAIN OR LOSS. property is converted into cash or into property (a) that is essen- tially different from the property disposed ot and {b) that has a market value. In other words, both (a) a change in substance and not merely in torm, and (b) a change into the equivalent of cash, are required to com- plete or close a transaction from which income may be realized. By way of illustration, if a man owning ten shares of listed stock exchanges his stock certificate for a voting trust certificate, no income is realized, because the conversion is merely in form; or if he exchanges his stock for stock in a small, closely held corporation, no income is realized if the new stock has no market value, although the conversion is more than formal; but if he ex- changes his stock for a liberty bond, income may be realized, because the conversion is into independent property having a market value. The prop- erty received m exchange may be real estate, personal property, or a chose m action. The exchange of a so-called convertible bond for stock pursuant to such a privilege granted in the bond will produce income if the stock received m exchange has a fair market value in excess of the cost of fair market value as of March 1, 1913, of the bond. (Art. 1563 Re? 45 Rev April 17, 1919.) ^ ^ 1078 Determination of Gain or Loss from Exchange of Property. (a) The amount of income derived in the case of an exchange of*prV erty, as of stock for a bond, is the excess of the fair market value at the time of exchange of the bond received in exchange over the original cost of the stock exchanged for it, or over the fair market price or value of such stock as of March 1, 1913, if acquired before that date. The amount of income derived from a subsequent sale of the bond for cash is the excess of the amount so received over the fair market value of such bond when ac- quired in exchange for the stock, (b) On the other hand, if the property received in exchange is substantially the same property or has no market value, then no gain or loss is realized, but the new property is to be regarded as substituted for the old and upon a sale of the new property the amount of income derived is the excess of the amount so received over the cost or fair market value as of March 1, 1913, of the old. (Art. 1564 Re? 45 Rev., April 17, 1919.) > s* » 1079 Exchange for Different Kinds of Property.— (a) If property is ex- changed for two different kinds of property, such as bonds and stock, the bonds having a market value and the stock none, the value of the bonds is to be compared with the cost or fair market value as of March 1, 1913, of the original property, as the case may be. If the market value of the bonds is less than such cost or value, the difference represents the cost of the stock. If the market value of the bonds is greater than such cost or value, the difference is taxable income at the time of the exchange and whenever sold the entire proceeds of the stock will be taxable, (b) If property is ex- changed for two different kinds of property, such as bonds and stock, neither having a market value, the cost or fair market value as of March 1, 1913, of the original property should be apportioned, if possible, between the bonds and stock for the purpose of determining gain or loss on subsequent sales. If no fair apportionment is practicable, no profit on any subsequent sale of any part of the bonds or stock is realized until out of the proceeds of sales shall have been recovered the entire cost or fair market value as of March 1, 1913, of the original property. (Art. 1565, Reg. 45, Rev., April 17, 1919.) INC. 171 TAX BASIS FOR DETERMINING GAIN OR LOSS. 1080 Exchange of Property and Stock.— Article 1566 of Regulations 45, first authorized April 17, 1919, is considered as not being war- ranted in law, and is hereby modified to read : Exchange of property and stock . — Where property is transferred to a corporation in exchange for its stock, the exchange constitutes a closed transaction and the former owner of the property realizes a gain or loss if the stock has a market value, and such market value is greater or less than the cost or the fair market value as of March 1, 1913 (if acquired prior thereto), of the property given in exchange. Foi* the rule applicable where a corporation, in connection with a reorganization, rnerger or consolidation, exchanges property for stock, see Article 1567 []|1085]. (Art. 1566, of Reg. 45, Rev., as amended by T. D. 2924, Sept. 26, 1919.) 1081 Meaning of “Market Value.” — Article 1566, as amended, provides that where property is transferred to a corporation in exchange foi its stock the exchange constitutes a closed transaction and the former owner of the property realizes a gain or loss if the stock has a ^ market value, and such market value” is greater or less than the cost or the fair market value as of March 1, 1913 (if acquired prior thereto), of the property given in exchange. The question raised is whether the words ‘ market value, and such market value” permit a presumption that the decision contemplates an actual market before the case would be brought within the provision as to pront or loss, or the words “market value, and such market value are intended by the Treasury Department to mean “fair value.” The use of the words “Lir market value as of March 1, 1913” immediately following that part of the Decision under discussion would indicate that the word fair was deliberately omitted in the first instance and that the words “market value were intended to convey the thought that there must be an actual market. This interpretation is further borne out by the fact that if the word laii be inserted before the word “market” in the first instance, the sentence mieht properly have been concluded with the w'ord lop. We can con- ceive of no situation in which property could be transferred m exchange for corporate stock which, under the rulings of the Bupau, would be con- sidered to have no “fair value.” (Answer.) In your letter of October , 1919 you ask whether the words “market value as used m Treasury De- cision 2924 are used as an equivalent of “fair market value or whether it is intended that an exchange of property for stock shall not be regarded as a closed transaction unless there was an actual nprkp for the^ptock so acquired. ^.In reply I beg to say that the words ‘market value as usea in^that Treasury Decision are used as the equivalent of fair market value, and that stock is to be regarded as ordinarily having a mp-ket value, even though no actual market for it can be established. .\Iarket value m this sense^may. therefore, be regarded as the price whicn might reasonably be presumed would be agreed upon between a r Letter embodying inquiries, from Baker and Baker, W phmgton, lJ. C., and the letter of reply signed by Commissioner Daniel C. Roper, and dated October 16, 1919.) 1082 Law 1147. Stocks or Bonds Exchanged for Stocks or Bonds of Equal Aggregate Face Value in Connection with Re- organizations Mergers or Consolidations.— “but when in connection with the reorganization, merger, or consolidation of a corporation a person receives in place of stock or securities owned by him new stock or securi- ties of no greater aggregate par or face value,” INC. 172 TAX BASIS FOR DETERMINING GAIN OR LOSS. 1083 Law j[48. “no gain or loss shall be deemed to occur from the exchange, and the new stock or securities received shall be treated as taking the place of the stock, securities, or property ex- changed.” 1084 Law ][49. Securities Exchanged for Securities of Greater Par or Face Value. — “When in the case of any such reorgan- ization, merger or consolidation the aggregate par or face value of the new stock or securities received is in excess of the aggregate par or face value of the stock or securities exchanged a like amount in par or face value of the new stock or securities received shall be treated as taking the place of the stock or securities exchanged, and the amount of the excess in par or face value shall be treated as a gain to the extent that the fair market value of the new stock or securities is greater than the cost (or if acquired prior to March 1, 1913, the fair market value as of that date) of the stock or securities exchanged.” 1085 Exchange of Stock for Other Stock of no Greater Par Value. — Article 1567 of Regulations 45, as amended by Treasury Decision 2870, is amended to read as follows : In general, where two (or more) corpoiations unite their properties by either (a) the dissolution of corporation B and the sale of its assets to cor- poration A, or (b) the sale of its property by B to A and the dissolution of B, or (c) the sale of the stock of B to A and the dissolution of B, or (d) the merger of B into A, or (e) the consolidation of the corporations, no taxable income is received from the transaction by A or B or the stockhold- ers of either, provided the sole consideration received by B and its stock- holders in (a), (b), (c), and (d) is stock or securities of A, and by A and B and their stockholders in (e) is stock or securities of the consolidated corporation, in any case of no greater aggregate par or face value than the old stock and securities surrendered. The term ‘reorganization’, as used in Section 202 of the statute, includes cases of corporate readjustment where stockholders exchange their stock for the stock of a holding corporation, provided the holding corporation and the original corporation, in which it holds stock, are so closely related that the two corporations are affiliated as defined in Section 240 (b) of the statute and article 633 [P838], and are thus required to file consolidated returns. So-called ‘no-par-value stock’ issued under a statute or statutes which require the corporation to fix in a certificate or on its books of account or otherwise an amount of capital or an amount of stock issued which may not be impaired by the distribution of dividends, will for the purpose of this section be deemed to have a par value representing an aliquot part of such amount, proper account being taken of any preferred stock issued with a preference as to principal. In the case (if any) in which no such amount of capital or issued stock is so required, ‘no-par-value stock’ received in exchange will be regarded for purposes of this section as having in fact no par or face value, and conse- quently as having ‘no greater aggregate par or face value’ than the stock or securities exchanged therefor. (Art. 1567 of Reg. 45, Rev., as amended, as further amended by T. D. 2924, Sept 26, 1919.) 1080 Application of the Limitation as to “No Greater Aggregate Par or Face Value.” — In interpreting Article 1567, as amended, the opinion has been expressed that the phrase “in any case of no greater aggre- gate par or face value than the old stock and securities surrendered” is a 173 TAX INC. BASIS FOR DETERMINING GAIN OR LOSS. limitation governing only “(e) the consolidation of the corporations/' and not a limitation with respect to (a), (b), (c) and (d). The statute indicates that the limitation intended by the Regulations is applicable to (a), (b), (c), (d) and (e). (Answer.) You also ask whether in interpreting Article 1567 of Regulations No. 45, as amended, the phrase “in any case of no greater aggregate par or face value than the old stock and securities surrendered” is a limitation governing only “(e) the consolidation of the corporation/’ or a limitation applying to each of the subdivisions (a), (b), (c), (d) and (e) . tin reply you are advised that this phrase limits not only subdivision (e), but also the preceding subdivisions. This article of the regulations is founded on Section 202 (b) of the Revenue Act of 1918, which would afford no basis for attaching this qualification to subdivision (e) only. (Letter, embodying inquiries, from Baker and Baker, Washington, D. C., and the letter of reply signed by Commissioner Daniel C. Roper, and dated October 16, 1919.) 1087 Determination of Gain or Loss from Subsequent Sale. — The new stock and securities received as described in the preceding article [1ll085] take the place of the old stock and securities. For the purpose, there- for, of ascertaining the gain derived or loss sustained from the subsequent sale of any stock of A or of the consolidated corporation so received,, the original cost to the taxpayer or the fair market value as of March 1, 1913, of the stock of B or A in respect of which the new stock was issued, less any untaxed distribution made to the taxpayer by A out of the former capital or surplus of B, or by the consolidated corporation out of the for- mer capital or surplus of A or B, is the basis for determining the amount of such gain or loss. Similarly, the cost after reorganization, merger or consolidation of the assets of A or of the consolidated corporation is the sum of the cost (or the fair market value as of March 1, 1913) of the assets of A and of B for the purpose of ascertaining the gain or loss upon a subse- quent sale. The new invested capital of A or of the consolidated corpora- tion is to be determined as if A and B were rendering a consolidated return as affiliated corporations. See sections 240 and 326 of the statute and 3^rti- cles 631-638 [for consolidated returns, beginning at If 1826 ] and 864-869 [for invested capital of affiliated corporations for excess-profits tax pur- poses— War Tax Service]. (Art. 1568, Reg. 45, Rev., April 17, 1919.) 1088 Exchange of Stock for Other Stock of Greater Par Value. — If in the case of any reorganization, merger or consolidation the aggregate par or face value of the new stock or securities received is in excess of the aggregate par or face value of the stock and securities exchanged, income will be realized from the transaction by the recipients of the new stock or securities to an amount limited by (a) the excess of the par or face value of the new stock or securities over the par or face value of the old and (b) the excess of the fair market value of the new stock or securities over the cost or fair market value as of March 1, 1913, of the old In other words, the taxable profit will be (a) or (b), whichever is less. Upon a subsequent sale of the new stock or securities their cost to the taxpayer will be the cost or fair market value as of March 1, 1913, of- the old stock and securities, plus the profit taxed on the exchange. (Art. 1509 , Reg. 45, Rev., April 17, 1919.) % % (9 INC. 174 TAX INVENTORIES. lOSO Readjustment of Partnership Interests. — When a partner retires from a partnership, or it is dissolved, he realizes a gain or loss meas- ured by the difference between the price received for his interest and the cost to him or (if acquired prior thereto) the fair market value as of March 1, 1913, of his interest in the partnership, including in such cost or value the amount of his share in any undistributed partnership net income earned since February 28, 1913, on which the income tax has been paid. If, how- ever, the partnership distributes its assets in kind and not in cash, the part- ner realizes no gain or loss until he disposes of the property received on distribution. Whenever a new partner is admitted to a partnership, or any existing partnership is reorganized, the facts as to such change or reorgani- zation should be fully set forth in the next return of income, in order that the Commissioner may determine whether any gain or loss has been real- ized bv any partner. See also article 1563 [for exchanges of property, P077]. (Art. 1570, Reg. 45, Rev., April 17, 1919.) 1090 Law ^50. Inventories. — “Sec. 203. That whenever in the opinion of the Commissioner the use of inventories is necessary in order clearly to determine the income of any taxpayer, inventories shall be taken by such taxpayer upon such basis as the Commissioner, with the approval of the Secretary, may prescribe as conforming as nearly as may be to the best accounting practice in the trade or business and as most clearly reflecting the income.” 1091 Need of Inventories. — In order to reflect the net income correctly, inventories at the beginning and ending of each year are necessary in every case in which the production, purchase or sale of merchandise is an income -producing factor. The inventory should include raw materials and supplies on hand that have been acquired for sale, consumption or use in productive processes, together with all finished or partly finished goods. Title to the merchandise included in the inventory should be vested in the taxpayer and goods merely ordered for future delivery and for which no transfer of title has been effected should be excluded. The inventory should include merchandise sold but not shipped to the customer at the date of the inventory, together with any merchandise out upon con- signment, but if such goods have been included in the sales of the taxable year they should not be taken in the inventory. It should also include mer- chandise purchased, although not actually received, to which title has passed to the purchaser. In this regard care should be exercised to take into the accounts all invoices or other charges in respect of merchandise properly included in the inventory, but which is in transit or for other reasons has not been reduced to physical possession. (Art. 1581, Reg. 45, Rev., April 17, 1919.) 1092 Valuation of Inventories. — Inventories should be valued at (a) cost or (b) cost or market whichever is lower. Whichever basis is adopted must be applied to each item and not merely to the total of the inventory; that is, if for instance basis (b) is I’dopted, the value of each item in the inventory will be measured by market if that is lower than cost, or by cost if that is lower than market. A taxpayer may, regardless of his past practice, adopt the basis of cost or market, whichever is lower, for his 1918 inventory, provided a disclosure of the fact and that it repre- sents a change is made in the return. Thereafter changes can be made 175 TAX INC. INVENTORIES. only after permission is secured from the Commissioner. But see article 1585 [P095] for inventories by dealers in securities. Inventories should be recorded in a legible manner and properly computed and summarized and should be preserved as a part of the accounting records of the taxpayer. Goods taken in the inventory which have been so intermingled that they can not be identified with specific invoices will be deemed to be the goods most recently purchased. (Art. 1582, Reg. 45, Rev., April 17, 1919.) 1093 Inventories at Cost. — Cost means : (1) In the case of merchandise purchased, the invoice price less trade or otlier discounts except strictly cash discounts approximating a fair interest rate, which may be deducted or not at the option of the taxpayer provided a consistent course is followed. To this net invoice price should be added transportation or other necessary charges incurred in acquiring possession of the goods. (2) In the case of merchandise produced by the taxpayer, (a) the cost of raw materials and supplies entering into or consumed in connection with the product, (b) expenditures for direct labor, (c) indirect expenses incident to and necessary for the production of the particular article, including in such indirect expenses a reasonable proportion of management expenses, but not including any cost of selling or return on capital whether by way of interest or profit. In any industry in which the usual rules for computation of cost of pro- duction are inapplicable, costs inay be approximated upon such basis as may be reasonable and in conformity with established trade practice in the par- ticular industry. (Art. 1583, Reg. 45, Rev., April 17, 1919.) 1094 Inventories at Market. — Market means the current bid price pre- vailing at the date of the inventory for the particular merchandise, and is applicable to goods purchased and on hand and to basic materials in goods in process of manufacture and in finished goods on hand,^ exclusive, however, of goods on hand or in process of manufacture for delivery upon firm sales contracts at fixed prices entered into before the date of the inven- tory. Where no open market quotations are available the taxpayer must use such evidence of a fair market price at the date or dates nearest the inventory as may be available to him, such as specific transactions in rea- sonable volume entered into in good faith, or compensation paid for can- cellation of contracts for purchase commitments. The burden of proof will rest upon the taxpayer in each case to satisfy the Commissioner of the correctness of the prices adopted. It is recognized that in the latter part of 1918, by reason among other things of governmental control not haying been relinquished, conditions were abnormal and in many commodities there was no such scale of trading as to establish a free market. In such a case, when a market has been established during the succeeding year, a claim may be filed for any loss sustained in accordance with the provisions of section 214 (a) (12) or section 234 (a) (14) of the statute. See articles 261-268 [for losses in 1918 inventories and from rebates, 111477]. (Art. 1584, Reg. 45, Rev., April 17, 1919.) 1095 Inventories by Dealers in Securities. — A dealer in securities, who in his books of account regularly inventories unsold securities on hand either (a) at cost or (b) at cost or market value whichever is lower, may make his return upon the basis upon which his accounts are kept; pro- vided that a description of the method employed shall be included in or 176 TAX INC. NET LOSSES. attached to the return, that all the securities must be inventoried by the same method, and that such method must be adhered to in subsequent years unless another be authorized by the Commissioner. For the purpose of this rule a dealer in securities is a merchant of securities, whether an individual partnership or corporation, with an established place of business, regularly in the purchase of securities and their resale to customers, that is, one who as a merchant buys securities and sells them to customers with a view to the gains and profits that may be derived therefrom. If such business is simply a branch of the activities carried on by such person, the securities inventoried as here provided may include only those held for pur- poses of resale and not for investment. Taxpayers who buy and sell or hold securities for investment or speculation, and not in the course of an established business, and officers of corporations and members of partner- ships, vvffio in their individual capacities buy and sell securities, are not dealers in securities within the meaning of this rule. (Art 1585 ^Re^- 45 Rev., April 17, 1919.) . . , 1096 Inventories of Securities by a Bank Maintaining a Department for the Merchandising thereof.— Reference is made to your letter of May 26, 1919, wherein you ask whether a bank that maintains a branch for the purpose of buying and selling securities has the full status of a recognized dealer in securities. %ln reply, you are advised that a bank or other institution having a regularly established department for the mer- chandising of securities, even though that department is subordinate in im- portance to other departments, is entitled to the same benefit of using the basis provided for in Article 1585 [P095] of inventorying securities ac- quired and held for resale, as one Avho is solely a dealer in securities, jfin so far as the bank or other institution carry on, with an established place of business, a department for the merchandising of securities, it is in respect of such department treated in the same way as any other security merchant. It should be noted, however, that the method of inventorying provided for in Article 1585 has no application and can not be extended to taxpayers simply buying and selling securities for investment or speculation. (Let- ter to The Corporation Trust Company, signed by Commissioner Daniel C. Roper, and dated June 28, 1919.) Law|T51. A Net Loss Suffered in One Year to Be Allowed as a Deduction in Computing Net Income of the Previous or Succeeding Year— *‘Net Loss” Defined.— “Sec. 204. (a) That as used in this section the term “net loss” refers only to net losses resulting^ from either” ^ 1098 Law ^52. “(1) the operation of any business regularly carried on by the taxpayer, or” 1099 Law ^53. “(2) the bona fide sale by the taxpayer of plant, build- ings, machinery, equipm.ent or other facilities, con- structed, installed or acquired by the taxpayer on or after April 6, 1917, for the production of articles contributing to the prosecution of the present war ;” INC. 177 TAX NET LOSSES. 1100 Law ^54. “and when so resulting means the excess of the deduc- tions allowed by law (excluding in the case of corpora- tions amounts allowed as a deduction under paragraph (6) [dividends, j[1325] of subdivision (a) of section 234) over the sum of the gross in- come plus any interest received free from taxation both under this title and under Title III [Excess-profits tax]. 1101 Law][55. Net Loss as a Deduction for the Preceding Taxable Year. — “(b) If for any taxable year beginning after October 31, 1918, and ending prior to January 1, 1920, it appears upon the production of evidence satisfactory to the Commissioner that any taxpayer has sustained a net loss, the amount of such net loss shall under regulations prescribed by the Commissioner with the approval of the Secretary be deducted from the net income of the taxpayer for the preceding taxable year 1102 Law][56. Redetermination of Income Tax and War Excess Tax for the Preceding Year. — “and the taxes imposed by this title and by Title III [excess-profits tax] for such preceding taxable year shall be redetermined accordingly.” 1103 Law j[57. Credit for or Refund of Amount Found to Be Due the Taxpayer by Redetermination of Taxes for Prior Year. —“Any amount found to be due to the taxpayer upon the basis of such redetermination shall be credited or refunded to the taxpayer in accord- ance with the provisions of section 252 []j2121].” 1104 Law ]|58. If the Net Loss to Be Deducted Be Greater Than the Net Income of the Preceding Year, the Excess May be Deducted from the Net Income of the Succeeding Year. — “If such net loss is in excess of the net income for such preceding taxable year, the amount of such excess shall under regulations prescribed by the Commis- sioner with the approval of the Secretary be allowed as^a deduction in com- puting the net income for the succeeding taxable year.” 1105 Law 1|59. Benefit of the Net Loss Provision Accrues to Members of a Partnership and to Beneficiaries of an Estate or Trust.— “(c) The benefit of this section shall be allowed to the members of a partnership and the beneficiaries of an estate or trust under regulations prescribed by the Commissioner with the approval of the Secretary.” 1106 Scope of Net Losses.— As used in the statute the term “net loss” means either a business operating loss or a loss realized by a bona fide sale of property constructed, installed or acquired on or after April 6, 1917, for the production of articles contributing to the prosecution of the war. The amount of net loss claimed must represent an actual net less over and above all income, including tax-free income. Such losses will be alW- able only in respect of a taxpayer having a taxable year beginning after Oc- tober 31, 1918, and ending prior to January 1, 1920, and after one claim has been allowed no further claim can be considered. (Art. 1601, Reg. 45, Rev., April 17, 1919.) 178 TAX EXEMPT INCOME. 1107 Claim for Allowance of Net Loss. — A taxpayer having such a net loss may file a claim on form 46 with his return of income for the taxable year 1919. Such claim should contain a concise statement setting forth the amount of the loss sustained, in accordance with the accompanying return, the nature of the loss, the amount of the taxpayer’s net income for the taxable year 1918, the taxes paid by him v/ith respect thereto, and all pertinent facts necessary to enable the Commissioner to determine the allow- ability of the claim. (Art. 1602, Reg. 45, Rev., April 17, 1919.) 1108 Allowance of Net Loss. — The amount allowed by the Commis- sioner in respect of any such claim shall be deducted from the net income for the taxable year 1918 and the income and the war profits and excess profits tax, if any, for such year shall be recomputed accordingly. Any amount found to be due him shall be credited or refunded to the tax- payer. See section 252 of the statute and articles 1034-1036 [for claims for credit or refund of taxes erroneously assessed, beginning at j[2123]. In any case in which it is found by the Commissioner that such net loss is in excess of the net income of such preceding taxable year, the taxpayer may carry forward the amount of such excess and claim it as a deduction in computing net income for the succeeding taxable year. (Art. 1603, Reg. 45, Rev., April 17, 1919.) 1109 Law ^94. Certain Items Are Excluded from Gross Income. — “(b) [Gross income] Does not include the following items, which shall be exempt from taxation under this title 1110 What Excluded from Gross Income. — Gross income excludes the items of income specifically exempted by the statute and also cer- tain other kinds of income by statute or fundamental law free from tax. Such tax-free income should not be included in the return of income and need not be mentioned in the return, unless information regard- ing it is specifically called for, as in the case, for example, of interest on municipal bonds. See article 402 [jfl773]. The exclusion of such income should not be confused with the reduction of taxable income by the applica- tion of allowable deductions. See section 212 of the statute and article 21 [for statement as to statutory deductions, 1|771]. As to exclusions from gross income bv corporations, see section 233 and article 541 [|f809]. (Art. 71, Reg. 45, Rev., April 17, 1919.) 1111 Law 105. Accident and Health Insurance and “Damages” Re- ceived. — “(6) [Gross income does not include] Amounts received, through accident or health insurance or under work- men’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;” 1112 Law 1195. Proceeds of Certain Life Insurance Policies on Death of Insured are Exempt. — “(1) [Gross income does not include] The proceeds of life insurance policies paid upon the death of the insured to individual beneficiaries or to the estate of the insured ms Law lf96. Returns to Insured of Premiums Paid Under Life Insurance, Endowment or Annuity Contracts Are Exempt. — ”(2) [Gross income does not include] The amount received 179 TAX INC. EXEMPT INCOME. by the insured as a return of premium or premiums paid by him imder 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 1114 Proceeds of Insurance. — (a) Upon the death of an insured the proceeds of his life insurance policies, whether paid to his estate or to individual beneficiaries, directly or in trust are excluded from the gross income of the beneficiary. See article 541 [for insurance pay- able to a corporation T[809]. (b) During his life only so much of the amount received by an insured under life, endowment or annuity contracts as represents a return, without interest, of premiums paid by him therefor is excluded from his gross income. See article 47 [for annuities and insur- ance policies, 11938]. (c) Whether he be alive or dead, the amounts re- ceived by an insured or his estate or other beneficiaries through accident^ or health insurance or under workmen’s compensation acts as compensation for personal injuries or sickness are excluded from the gross income of the insured, his estate and other beneficiaries. Any damages recovered by suit or agreement on account of such injuries or sickness are similarly excluded from the gross income of the individual injured or sick, if living, or of his estate or other beneficiaries entitled to receive such damages, if dead. See further article 294 [for premiums on business insurance, pi97]. Since June 25, 1918, no assessment of any federal tax may be made on any allotments, family allowances, compensation, or death or disability insur- ance payable under the War Risk Insurance Act of September 2, 1917, as amended, even though the benefit accrued before that date. (Art. 72, Reg. 45, Rev., April 17, 1919.) 1115 There are two matters relating to Income Tax on Individuals regard- ing which I am unable to find any mention in the Law itself or in the Treasury Decisions, and would be glad to have you inform me about them at this time. First. 1116 Second. Cancelled Life Insurance : An Endowment Policy and a Straight Life Policy are surrendered by the Policyholder to the Insurance Company and cancelled, not at maturity but at an arbitrary date, and the “cash surrender value” is paid by the com- pany to the policyholder. This amount exceeds the total of premiums there- tofore paid on the respective policies. Is any portion of this difference regarded as Taxable Income? If so, what proportion, seeing that the payment of premiums and conse- quent earning thereon by the Company began several years before the in- ception of the Income Tax Law? (Answer.) You are further advised that the difference between the amount received by an insurance policy- holder upon the maturity or surrender of the policy and the aggregate amount of premiums paid during the lifetime of the policy, constitutes tax- able income which should be included in any personal return the individual may be required to render for the year during which the proceeds' of the policy are received. (Part of letter of inquiry to the Commissioner of Internal Revenue, from W. W. Bacon, Philadelphia, dated Jan. 19, 191^ and the answer thereto, signed by Deputy Commissioner L. F. Speer, and dated Feb. 8, 1917.) INC. 180 TAX EXEMPT INCOME. 1118 Dividends paid on life insurance policies that have not matured, whether such dividends are drawn in cash by the insured or applied to the reduction of the annual premium due, are not considered items of --taxable income under the law, and should be excluded from a return of income. (T. D. 2137, Jan. 30, 1915.) 1119 Dividends on paid-up policies are in the nature of corporate divi- dends and are to be accounted for as income for the purposes of the additional tax only. (Art. 4, ^[46, Reg. 33, Rev., Jan. 2, 1918.) 1120 Dear Sir: It has been my judgment that annuities sold by the Na- tional Life Insurance Company and othei insurance companies were not subject to tax under the Income Tax Law, but I realize that the statute is not entirely free from doubt, so far as relates to such portion of annuity payments as may be treated as income, though such P 9 htions are com- paratively small and the determination of their amount is difficult and almost impracticable. I would like to know, however, whether the Department has made any ruling relative to the taxation of annuities and if any ruling has been made, would be glad to receive a copy of it W. H. Osborn, signed by Fred. A. Howland, Counsel National Life In- surance Company and dated Feb. 5, 1914.) (Answer.) Sir: In ^epty to your letter of Feb. 5, relative to the taxation of annuities kx Law, you are informed that life insurance annuities ^hall not be m eluded as income. (Signed by Deputy Commissioner L. F. Speer, ana dated Feb. 17, 1914.) 1121 Dear Sir : I should have made earlier acknowledgment of your tele- gram of December 27th reading as follov/s: “As at present advised, this office holds that proceeds of life insurance policies paid pursuant to terms of contract, whether upon maturity of policy, death of insured or as annuities are not subject to tax m hands ot beneficiaries * * * . Payment of deferred dividends in so far as they represent portions of actual premiums received are proceeds of insurance policy within the meaning of law.” 1122 I thank you very much for advising of the ruling on the subjects mentioned and in communicating with the counsel of other insurance companies I find that it cleared up in their minds some important points. There is, however, one further question which I raised in my letter of November 17th and possibly your telegram of the 27th covers it. The question is one of considerable importance and one which we are called upon to deal with at once. I am taking the liberty of bringing the matter to your attention at this time and state a concrete case with which we must deal very shortly. On February 1, 1914, this company will be called upon to pay an annuity instalment of $3,448.46 under annuity contract No. . This annuity contract was purchased for cash February 1, 1903, the con- sideration being $40,985. Annually on February 1st, under the terms of the annuity contract, the sum of $3,448.46 is payable to the annuitant. 1123 The query is : Is this instalment of $3,448.46 which the company must pay to the annuitant on February 1, 1914, and future annual instal- ments, subject to the income tax? It is my opinion, as I expressed it in my letter to you of November 17th, that the proper construction of the income tax law of 1913 imposes no tax in such a case. 181 TAX INC. EXEMPT INCOME. 1124 I would thank you very much indeed if you would give me a ruling in the matter. As the company is constantly having to answer in- quiries of annuitants in such cases, I would appreciate very much if you would send me a wire on the subject at my expense. (Letter to Commis- sioner W. H. Osborn, signed by Frederick L. Allen, General Solicitor, Mutual Life Insurance Company and dated Jan. 8, 1914.) (Answer.) So much of annuities paid to annuitant as represents payment made iDy him on annuity contract and paid back to him shall not be included in income of annuitant. Any increment on purchase price of annuity is taxable in- come. * * * (Signed by Commissioner W. H. Osborn, and dated Jan. 12, 1914.) 1125 Sir: In reply to your letter of January 28th, in which you request to be advised whether income received from or credited to policy- holders of life insurance, as dividends, shall be included as income, you are informed that dividends paid on life insurance policies that have not matured, whether such dividends are paid by the company in cash or added to the face value of the policy, are not considered items of taxable income under the law, and should be excluded in making the annual return. 1126 Dividends from paid-up policies are considered income to the recip- ient, and must be included in the annual return. (Letter to Robert Lynn Cox, General Counsel and Manager, Association of Life Insurance Presidents, signed by Deputy Commissioner L. F. Speer, and dated March 5, 1914.) 1127 Reimbursement of Expenses Incident to an Accident. — Amounts received from a railroad company by way of reimbursement for ex- penses incident to an accident are not subject to the income tax. (T. D. 2135, Jan. 23, 1915.) 1128 Law ^97. Value of Property Acquired by Gift, Bequest, etc., is Exempt. — “(^) [Gross income does not include] The value of property acquired by gift, bequest, devise, or descent (but the income from such property shall be included in gross income) 1129 Gifts and Bequests. — Money and real or personal property re- ceived as gifts, or received under a will or under statutes of descent and distribution, are exempt from tax, although the income there- from derived from investment, sale or otherwise is not. See section 202 of the statute and articles 32 [for pensions, retiring allowances, etc., 1^873], 51 [for forgiveness of a debt as a gift, 1f943] and 1562 [for sale of property acquired by gift or bequest, 111074]. An amount of principal paid under a marriage settlement is a gift. Neither alimony nor an allowance based on a separation agreement is taxable income. See article 291 [for non-deductibility of such items as expense, pl86]. (Art. 73, Reg. 45, Rev., April 17, 1919.) 1180 Law 1|98. Interest on United States Bonds, etc.. Except as Other- wise Provided in the Act of Authorization, and on Bonds of State or Political Subdivision Thereof is Exempt. — “(4) [Gross income does not include] Interest upon (a) the obliptions of a State, Territorv, or any political subdivision thereof, or the District of Columbia ; or” INC. 182 TAX EXEMPT INCOME. 1131 Law |[99. “(b) securities issued under the provisions of the Federal Farm Loan Act of July 17 , 1916; oF' 1132 Law poo. “(c) the obligations of the United States or its pos- sessions [Read pi38 below] ; oF' 1133 Law |[101. “(d) bonds issued by the War Finance Corporation [Read pi38 below] 1134 Lawp02. “Provided, That every person owning any of the obli- gations, securities or bonds enumerated in clauses (a), (b), (c) and (d) shall, in the return required by this title, submit a statement showing the number and amount of such obligations, securi- ties and bonds owned by him and the income received therefrom, in such form and with such information as the Commissioner may require.’' 1135 Interest Upon State Obligations. — Among income exempt from tax is interest upon the obligations of a State, Territory, or any poli- tical subdivision thereof, or the District of Columbia. Obligations issued for a public purpose by or on behalf of the State or Territory or a duly organized political subdivision acting by constituted authorities duly empowered to issue such obligations are the obligations of a State or Territory or a political subdivision thereof. The term “political subdivision” denotes any division of the State or Territory made by the proper authorities thereof acting within their constitutional powers for the purpose of carry- ing out a portion of those functions of the State or Territory which by long usage and the inherent necessities of government have always been regarded as public. Political subdivisions of a State or Territory, within the meaning of the exemption, include special assessment districts so created, such as road, water, sewer, gas, light, reclamation, drainage, irrigation, levee, school, harbor, port improvement, and similar districts and divisions of a State or Territory. The purchase by a State of property subject to a mort- gage executed to secure an issue of bonds does not render the bonds obliga- tions of the State, and the interest upon them does not become exempt from taxation, whether or not the State assumes the payment of the bonds. (Art. 74, Reg. 45, Rev., April 17, 1919.) 1136 Dividends and Interest from Federal Land Bank and National Farm Loan Association. — As section 26 of the Federal Farm Loan Act of July 17, 1916, provides that every federal land bank and every national farm loan association, including the capital and reserve or sur- plus therein and the income derived therefrom, shall be exempt from tax- ation, except taxes upon real estate, and that farm loan bonds, with the in- come therefrom, shall be exempt from taxation, the income derived from dividend^ on stock of federal land banks and national farm loan associa- tions and from interest on such farm loan bonds is not subject to the in- come tax. See also section 231 (13) of the statute [for exemption of the Farm Land Banks and the Farm-Loan Associations, 11752]. (Art. 75, Reg. 45, Rev., April 17, 1919.) . 1137 Dividends from Federal Reserve Bank.— As section 7 of the Fed- eral Reserve Act of December 23, 1913, provides that federal reserve banks, including the capital stock and surplus therein and the income de- rived therefrom, shall be exempt from taxation, except taxes upon real 183 TAX INC. EXEMPT INCOME. estate such exemption attaches to and follows the income derived from dividends on stock of federal reserve banks m.the hands of the stockholders^ si thaf tirdiv^dends received on the stock of federal reserve banks are not subject to the income tax. Dividends paid by member banks, however, ari tS like dividends of ordinary corporations. (Art. 76, Reg. 45, Rev., April 17, 1919.) 1138 Law P03. Taxable Status of Interest o” Obligations °f the United States Issued After September 1, 1917.— In the case of- oblieations of the United States issued after September 1, 1917, “<1 i tile casfof boilds issued by the War Finance. Corporation, the 'ff^st shall L exempt only if and to the extent provided in Acts au* izing the issue thereof as amended and supplemented ^dl te from gross income only if and to the extent it is. wholly exempt from ation fo the taxpayer both under this title and under Title III, 1139 Interest Upon United States Obligations.— Although intere^ upon the obUgations of the United States is in general exempt fr tax in Ae case of such obligations issued after September 1 1917 which include Treasury certificates of indebtedness war savings cei- "es and the liberty bond issues .^rst Jerty .“.nd to the bond, of th. fir,, liberty loan converted. (Art. 77. Reg. 45, Rev., April 17, 1919.) L“.5E?SS;33I.SrSSi s srLSprirs r b'eSes!— by any individual, partnership, subdivision (b) of this section, exempt from the ‘axe^provided for in subdm^^^^^ trbotdrwhkh s £t l^rt7lln^e7on7coSvert^^^^ 4/4 per cent bonds, second liberty loan 184 TAX INC. EXEMPT INCOME. 4 per cent bonds, second liberty loan converted 4j4 cent bonds, third liberty loan 4%. per cent bonds, and fourth liberty loan 4% per cent bonds, together with all interest on United States certificates of indebtedness and war saving certificates, is exempt from the normal tax. Such interest in excess of the interest on not exceeding $5,000 principal amount of such bonds and certificates may, however, be subject to surtax and to the war profits and excess profits tax and may accordingly require to be included in gross income. (Art. 78, Reg. 45, Rev., April 17, 1919.) 1142 Liberty Bond Exemption from Surtax and War Profits and Excess Profits Tax in 1918. — Section 7 of the Second Liberty Bond Act provides that the interest on i an aggregate of not exceeding $5,000 principal amount of liberty bonds of issues after the first, owned by any person, including in such later issues bonds of the first liberty loan con- verted, Treasury certificates and war savings certificates shall be exempt from surtaxes and war profits and excess profits taxes, as well as the normal tax. The Supplement to Second Liberty Bond Act, approved Sep- tember 24, 1918, provides: That until the expiration of two years after the date of the termina- tion of the war between the United States and the Imperial German Government, as fixed by "proclamation of the President — ■ (1) The interest on an amount of bonds cf the Fourth Liberty Loan the principal of which does not exceed $30,000 owned by any individ- ual, partnership, association, or corporation, shall be exempt from graduated additional income taxes, commonly Lnown as surtaxes, and excess-profits and war-profits taxes, now or hereafter imposed by the United States, upon the income or profits of individuals, partnerships, associations, or corporations; (2) The interest received after January 1, 1918, on an amount of bonds of the First Liberty Loan Converted, dated either November 15, 1917, or May 9, 1918, the Second Liberty Loan, converted and uncon- verted, and the Third Liberty Loan, the principal of which does not exceed $45,000 in the aggregate, owned by any individual, partnership, association, or corporation, shall be exempt from such taxes: Pro- vided, however. That no owner of such bonds shall be entitled to such exemption in respect to the interest on an aggregate principal amount of such bonds exceeding one and one-half times the principal amount of bonds of the Fourth Liberty Loan originally subscribed for by such owner and still owned by him at the date of his tax return; and (3) The interest on an amount of bonds, the principal of which does not exceed $30,000, owned by any individual, partnership, association, or corporation, issued upon conversion of 31^ per centum bonds of the First Liberty Loan in the exercise of any privilege arising as a conse- quence of the issue of bonds of the Fourth Liberty Loan, shall be ex- exempt from such taxes. The exemptions provided in this section shall be in addition to the exemption provided in section 7 of the Second Liberty Bond Act in re- spect to the interest on an amount of bonds and certificates, authorized by such Act and amendments thereto, the principal of which does not exceed in the aggregate $5,000, and in addition to all other exemptions provided in the Second Liberty Bond Act. 1143 Accordingly, the exemption from surtaxes and war profits and excess profits taxes covers, and there may be excluded from gross income, the interest received on not exceeding $5,000 principal amount in the aggre- 185 TAX INC. EXEMPT INCOME. gate of first liberty loan converted 4 per cent bonds, first liberty loan con- verted per cent bonds, first liberty loan second converted per cent bonds, second liberty loan 4 per cent bonds, second liberty loan converted 4}i per cent bonds, third liberty loan 4^ per cent bonds, fourth liberty loan 4>4 per cent bonds, and treasury certificates and war savings certifi- cates, apportioned as the taxpayer may choose; and in addition, until the expiration of two years after the termination of the war, (a) the interest received on not exceeding $30,000 principal amount of fourth liberty loan 4}i per cent bonds; plus (b) the interest received on an aggregate princi- pal amount of first liberty loan converted 4 per cent bonds, first liberty loan converted 4]4. per cent bonds (dated May 9, 1918), second liberty loan bonds, converted and unconverted, and third liberty loan 4)4 per cent bonds, not exceeding $45,000 and not exceeding 150 per cent of the principal amount of bonds of the fourth liberty loan both originally subscribed for by the taxpayer and still owned by him at the date of his return; plus (c) the interest received on not exceeding $30,000 principal amount of first liberty loan second converted 4)4 cent bonds (dated October 24, 1918). (Art. 79, Reg. 45, Rev., April 17, 1919.) 1144 Liberty Bond Exemption After December 31, 1918. — The Vic- tory Liberty Loan Act of March 3, 1919, provides: Sec. 2. (a) That until the expiration of five years after the date of the termination of the war between the United States and the Ger- man Government, as fixed by proclamation of the President, in addition to the exemptions provided in section 7 of the Second Liberty Bond Act in respect to the interest on an amount of bonds and certificates, authorized by such Act and amendments thereto, the principal of which does not exceed in the aggregate $5,000, and in addition to all other exemptions provided in the Second Liberty Bond Act or the Supple- ment to Second Liberty Bond Act, the interest received on an after January 1 1919, on an amount of bonds of the First Liberty Loan converted, dated November 15, 1917, May 9, 1918, or October 24, 1918, the Second Liberty Loan converted and unconverted, the Third Liberty ! Loan and the Fourth Liberty Loan, the principal of which does not exceed $30,000 in the aggregate, owned by any individual, partnership association, or corporation, shall be exempt from graduated acWitional income taxes, commonly known as surtaxes, and excess-profits and war-profits taxes, now or hereafter imposed by the United States upon the income or profits of individuals, partnerships, associations, or cor- ^°(b) In addition to the exemption provided in subdivision (a), and m addition to the other exemptions therein referred to, the interest re- ceived on and after January 1, 1919, on an amount of the bonds therein specified the principal of which does not exceed $20,000 in the aggre- gate, owned by any individual, partnership, association, or cor^ration, shall be exempt from the taxes therein specified: Provided, That no owner of such bonds shall be entitled to such exemption in respect to the interest on an aggregate principal amount of such bonds exceeding . three times the principal amount of notes of the Victory Liberty Loan originally subscribed for by such owner, and still owned by him at the date of his tax return. , . . 1145 Accordinglv, with respect to the interest on liberty bouds received after. December 31, 1918, the exemption from surtaxes and war profits and excess profits taxes covers, and there may be excluded from 'i8i5 TAX INC. EXEMPT INCOME. gross income, in addition to the exemptions specified in articles 77, 78 and 79, (a) the interest received on and after January 1, 1919, until the expira- tion of five years after the termination of the war, on not exceeding $30,000 principal amount in the aggregate of first liberty loan converted 4 per cent bonds, first liberty loan converted per cent bonds, first liberty loan second converted 4j4 per cent bonds, second liberty loan 4 per ( ent bonds, second liberty loan converted 4^4 per cent bonds, third liberty loan 4j4 per cent bonds, and fourth liberty loan 4j4 per cent bonds, apportioned as the taxpayer may choose : and in addition (b) the interest received on and after January 1, 1919, during the life of the notes of the victory liberty loan, on an aggregate principal amount of the bonds described in subdivision ’ (a) not exceeding $20,000 and not exceeding three times the principal amount of notes of the victory liberty loan originally subscribed for by the tax- payer and still owned by him at the date of his return. The specific exemp- tions of notes of the victory liberty loan will be prescribed by the Secretary of the Treasury pursuant to the 'Victory Liberty Loan Act. [See Tfll46 for the exemption provisions.] (Art. 80, Reg. 45, Rev., April 17, 1919.) 1146 Exempt Status of Interest on Victory Liberty Loan Notes. The Victory Liberty Loan, which will be offered for popular subscription on April 21, will take the form of 4J4% three-four year Convertible Gold Notes of the United States, exempt from State and local taxes, except estate and inheritance taxes, and from normal * Federal income taxes. The Notes will be convertible, at the option of ihe holder, throughout their life into three/four year Convertible Gold Notes of the United States exempt from all Federal, State and local taxes, except estate and inheri- tance taxes. In like manner the 3J4% Notes will be convertible into the 4J4% Notes. 1147 The amount of the issue will be $4,500,000,000, which, with the deferred installments of income and profits taxes payable, in respect to last year’s income and profits, during the period covered by the maturity dates of Treasury certificates of indebtedness now outstanding, will fully provide for the retirement of such certificates. The issue will be limited to $4,500,000,000 except as it may be necessary to increase or decrease the amount to facilitate allotment. Oversubscriptions will be rejected and allot- ments made on a graduated scale similar in its general plan to that adopted in connection with the First Liberty Loan. Allotment will be made in full on subscriptions up to and including $10,000. * In answer to inquiries the Treasury Department to-day stated that the interest on the 4j4 per cent notes of the Victory Liberty Loan is exempt from the income tax on corporations, as well as from the normal Federal income tax on individuals. The 4% per cent notes are exempt, under the terms of the Department Circular offering the Victory Liberty Loan for subscription, “both as to principal and interest, from all taxation now or hereafter imposed by the United States, any State, or any of the possessions of the United States, or by any local taxing authority, except (a) estate or inheritance taxes, and (b) graduated additional income taxes, commonly known as surtaxes, and excess-profits and war-profits taxes, now or hereafter imposed by the United States, upon the income or profits of individuals, partnerships, associations, or corporations.” (Official announce- ment by the Treasury Department, April 23, 1919.) TNO'. 187 TAX EXEMPT INCOME. 1148 The notes of both series will be dated and bear interest from Ma)r 20, 1919, and will mature on May 20, 1923. Interest will be payable on December 15, 1919, and tliereafter semi-annually on June 15 and Decem- ber 15, and at maturity. All or any of the Notes may be redeemed before ' maturity at the option of the United States on June 15 or December 15, 1922, at par and accrued interest. (Official statement by Secretary of the. Treasury Carter Glass, April 14, 1919.) 1149 Original Subscription to Victory Notes.— For the purposes of the additional tax exemption for Liberty Bonds granted by Section 2 (b) of the Victory Liberty Loan Act, approved March 3, 1919, Victory notes of either series issued upon conversion of Victory notes of the other series which were originally subscribed for by any taxpayer wdl be deemed to have been originally subscribed for by such taxpayer. (1. U, 2857, June 7, 1919.) - 1150 Interest on Victory Notes.— All interest accrued on 4)4 per cent. Victory notes at the date of any conversion by the taxpayer into 6/4 ner cent. Victory notes will, for the purposes of computing net income te deemed to be interest upon 434 per cent. Victory notes, and will be entitled only to the exemptions from taxation to which interest on 4)4 per cent. Victory notes is entitled. Any and all amounts received by any taxpayer from the United States by way of adjustment of accrued mte^ est^upon conversion of 4)4 per cent. Victoy notes into 3)4 per cent Victory notes^ will be deemed to be interest upon 4)4 per cent. Victo^ riotes. llh All interest accrued on 3)4 per cent. Victory notes at the date of any conversion by the taxpayer into 4)4 per cent. Victory notes will, for the purposes of computing net income, be deemed to be interest per cent Victory notes, and will be entitled to the pemp ions tax|tio« to which interest on 3)4 per cent. Victory notes is entitled. (T. D. 2865,. June 14, 1919.) INC. 188 TAX- EXEMPT INCOME. 11^2 Summary of Tax Exemptions of Liberty Bonds and Victory Notes. — The appended circular, issued under date of April 23, 1919, with reference to the tax exemptions of Liberty Bonds and Victory Notes, is published for Jthe - information of internal-revenue officers and others concerned. (T. D. 2836, May 7, 1919.) 1153 Tax Exemptions of Liberty Bonds and Victory Notes. — Liberty Bonds and Victory notes issued under authority of the acts of Con- gress approved April 24, 1917, September 24, 1917, April 4, 1918, July 9, 1918, September 24, 1918, and March 3, 1919, are entitled, respectively, to the exemptions from taxation set forth in said acts, from which the state- ments in this circular are summarized and to which they are subject. I. 4 per cent and 4)4 per cent bonds are exempt from all Federal, State, and local taxation, except (a) estate or inheritance taxes and (b) Federal income surtaxes and profits taxes, as follows: 1. First Liberty loan converted 4 per cent bonds of 1932-1947 (first 4s). 2. First Liberty loan converted 4)4 per cent bonds of 1932-1947 (first 4)4 s, issue of May 9, 1918). 3. First Liberty loan second con- verted 4J4 per cent, bonds of 1932-1947 (first 4)4s, issue of October 24, 1918). 4. Second Liberty loan 4 per cent bonds of 1927-1942 (second ► 4s). 5. Second Liberty loan converted 4)4 per cent bonds of 1927-1942 (second 4)4s). 6. Third Liberty loan 4)4 per cent bonds of 1928 (third 4)4s). 7. Fourth Liberty loan 4)4 per cent bonds of 1933-1938 (fourth 4)4s). 8. Victory Liberty loan 4J4 per cent convertible gold notes of 1922- 1923 (4J4 per cent Victory notes). Are exempt, both as to principal and interest, from all taxation now or hereafter imposed by the United States, any State, or any of the possessions of^Jhe United States, or by any local taxing authority except (a) estate or inheritance taxes, and (b) graduated addi- tional income taxes, commonly known as surtaxes, and excess- profits and war-profits taxes, now or hereafter imposed by the United States, upon the income or profits of individuals, partner- ships, associations, or corpora- tions. INC. 189 TAX EXEMPT INCOME. ^(1153) II. 4 per cent and per cent bonds are entitled to limited exemp- tions from Federal income surtaxes and profits taxes, as follows: 4 per cent and 4^ per cent Liberty bonds (but not per cent Victory notes) are entitled to certain limited exemptions from graduated addi- tional income taxes, commonly known as surtaxes, and excess-profits and war-profits taxes, now or hereafter imposed by the United States, upon the income or profits of individuals, partnerships, associations, or corporations, in respect to the interest on principal amounts thereof, as follows: $5,000 in the aggregate of first 4s, first 4)4 s (issues of May 9 and Octo- ber 24, 1918) second 4s and 434s, third 434s, fourth 434s, Treasury certificates, and war-savings certificates. 30,000 of first 4)4s (issue of October 24, 1918, only), until the expira- tion of two years after the termination of the war. 30,000 of fourth 434s, until the expiration of two years after the termim ation of the war. 30.000 in the aggregate of first 4s, first 434s (issues of May 9 and Octo- ber 24, 1918), second 4s and 434s, third 434s, and fourth 434s, as to the interest received on and after January 1, 1919, until the expiration of five years after the termination of the war. 45.000 in the aggregate of first 4s, first 434s (issue of May 9, 1918, only), second 4s and 434s, and third 434s, as to the interest received after January 1, 1918, until the expiration of two years after the termination of the war; this exemption conditional on original subscription to, and continued holding at the date of the tax return of two-thirds as many bonds of the fourth Liberty loan. 20.000 in the aggregate of first 4s, first 434s (issues of May 9, and Octo- ber 24, 1918), second 4s and 434s, third 434s, and fourth 434s, as to the interest received on and after January 1, 1919; this exemption conditional upon original subscription to, and con- tinued holding at the date of the tax return of one-third as many notes, of the Victory Liberty loan, and extending through the ^ life of such notes of’ the Victory Liberty loan. $160,000 total possible exemptions from Federal Income surtaxes and profits taxes, subject to conditions above summarized. III. 3J^ per cent bonds and 3)4 per cent notes are exempt from all Federal, State, and local taxation, except estate or inheritance taxes, as follows 1. First Liberty loan 3)4 per cent bonds of 1932-1947. 2. Victory Liberty loan 3)4 per cent con- vertible gold notes of 1922-1923. Are exempt, both as to principal and interest, from all taxation (except estate or inheritance taxes) now or hereafter imposed by the > United States, any State, or any of the posses- sions of the L^nited States, or by any local tax- ing authority. (Circular appended to T. D. 2836.) i INC. 'Qr 190 TAX EXEMPT INCOME. 1154 Effect of Conversion in Determining Amount of Exempt Interest from Liberty Bond Holdings. — Referring to our letter March 9" and your telegraphic reply dated March 15, also to Instructions K (b) at bottom of page 2, Form 1040 [for calendar year 1918], particu- larly to that portion of paragraph 2 reading “Periods during which your holdings of that class of obligations remained unchanged/^ Are we to understand that taxpayers are deemed to have owned bonds of various classes during the periods covered by coupons clipped from such classes^ of bonds? Example. Taxpayer bought First S^^s in 1917 and has bought no bonds since. On May 15, 191S, he converted his 3><% Bonds into First Lib- erty 4s held First Liberty 4s for entire year 1918 for purposes of income'^ tax. Any amount paid at time of conversion for adjustment of interest to- be subtracted from amount received at first interest payment after con- version and only the difference between amount received and amount paid' to be included in return of taxpayer. (Telegram from Chas. H. Hubbell, First National Bank, Cleveland, Ohio, and the answer thereto, signed by Commissioner Daniel C. Roper, and dated March 25, 1919.) 1155 Exempt Status of Interest on Liberty Bonds When Purchased on- . Plan and Not Fully Paid for on December 31 1918 [Applicable to Victory Loan in case of certain fiscal year taxpayers 1 ph- erence is made to your telegram dated December 14, 1918- “Please wire collect your ruling is exemption from tax on interest Second and Third! yberty Bonds based on holdings Fourth Liberty Bonds dependent on fourth subscription being fully paid and bonds delivered prior to end De- cember or subscription paid on government plan sufficient.” Ifin reply you are advised that an individual who originally subscribed to bonds of the hourth Liberty Loan to an amount not exceeding $30,000 in accordance with the government plan and made payments in accordance with such plan is not required to pay for such bonds in full on or before December 31 1918 in order to obtain the exemption provided in Section 1 of the Supplement to the Second Liberty Bond Act, or of interest on bonds of the previous issues referred to in subdivision 2 of said Section 1. ^Likewise if an individual subscribed for bonds of the Lourth Liberty Loan through a bank 1^ agreeing to pay the subscription price in installments acceptable to the bank, and made payments in accordance with this plan, it will not be necessary for such individual to pay for the bonds in full on or before December 31, 1918, in order to obtain the exemption mentioned in the preceding paragraph. (Letter to Clark J. Milliron, Los Angeles, Cal., signed by Acting Deputy Commissioner Homer S. Pace, and dated fan- uary3, 1919.) Application of Exemption When Several Members of Family In- vest in Liberty Bonds. — (Question.) Please answer by wire at once if possible our telegram, October second, as follows: “If husband, wife and minor children each hold new Liberty fours and make joint in- return will each member of such family be tax exempt as to* $5,000 bonds each. Wire answer to-day if possible.” Information very' 191 TNC. TAX exempt income. in n.,.p.ign Lib.;J “ ^An„.;) « Wife each owning m ?^xem provided by Sec- exceeding five thousand dollar each enth ^ estates each tion Seven B, Loan Act. f^^ram to Commisfioner of Internal Reve- entitled to same ^emption. (^elegr^m t L nue from Lee. Higgmson & Co Boston J dated signed, by Acting Secretary of the treasury October 8, 1917.) 1157 Liberty Bond Exemption in the tSSome such proportionate part ^ ^ liberty loan, or notes of the victory tion by a trustee for bonds of at the time of such sub- liberty loan, constitutes proportionate part of such bonds scription an original subscriber P P beneficiary to the appropriate or notes, as the case may be, and entitles^^^^^ ^j^^^ber collateral exemption of writer tj.„stee as if the beneficiary had him- owned by such beneficiary or by the , bonds or notes; self originally subscribed for such propor i fourth liberty loan and a subscription by such benefaciary ^ entitles him to the or notes of the victory bberty loan as previous issues - appropriate collateral exemp lo other hand, income is taxable to held by the trustee, (b) f on the oAer^ha^^;^^ accumulated for the trustee, as in the case of a trust ^be trustee is regarded as the benefit of unborn ot unascertained p ^ entitled to the owner of all the bonds „prchip In such a case a subscription exemption on account of such o^nersh p^ ^ original subscriber and en- by a trustee constitutes the trustee us ®u e g ^ j exemption titles the trust, on account of such suteyiption to^tn ^ ^ of interest on bonds of previous issues. ( 17, 1919.) the individual Partners, each p ^rtnership and is entitled to exemption tionate part of the bonds held by t p P gj guch proportionate on account of such ownership as if such par ner ow ^ part of the bonds directly. Such partner if apt original subscription by case may be, is treated as loan or notes of the victory I'^erty notes sub- an original subscriber for a pr P entitled to the appropriate collateral scribed for by the partnership u"^.“ '£t^Vn accoLt of such original sSiptfon^'^ronror notes as ’{ p°ersontl „» Liberty Bond Bde«P«=n » «“ » *5 Z^fr“ro,i-.ri.“reS!l..‘S ^'r^fo. .b. bondAeld by .be INC. 192 tax EXEMPT INCOME. -corporation and entitled to exemption on account of such ownership. When bonds of the Fourth Liberty Loan are subscribed for by the corporation it, and not the stockholders, is the original subscriber and entitled to the colla- teral exemption of interest on bonds of previous issues on account of such original subscription. [See ^1158.] (T. D. 2762, Oct. 21, 1918.) 1160 Interest on Food Administration Grain Corporation Notes.— Inter- est on Food Administration Grain Corporation notes is not exempt from income and excess profits taxes. (Telegram to The Corporation Trust Company, signed by Commissioner Daniel C. Roper, and dated April 13, 1919.) 1161 No Ownership Certificates Required in Connection With United States Bond Interest. — [Read at p659.] 1162 Lawp04. Income of Foreign Governments from United States Sources. — “(5) [Gross income does not include] The income of foreign governments received from investments in the United States in stocks, bonds, or other domestic securities, owned by such foreign governments, or from interest on deposits in banks in the United-otates of moneys belonging to such foreign governments, or from any other source within the United States C 1163 The exemption of income of foreign governments applies also to their political subdivisions. Any income collected by foreign gov- •ernments from investments in the United States in stocks, bonds or other 'domestic securities, which are not actually owned by but are loaned to such foreign governments, is subject to tax. The income of for- eign ambassadors and ministers from investments in bonds and stocks and from interest on bank balances, and the fees of foreign consuls, are exempt from tax but income of such foreign officials from any business carried on by them in the United States would be taxable. The compensation of citi- zens of the United States who are officers or employees of a foreign gov- ernment is, however, not exempt from tax. (Art. 8^ Reg. 45, Rev., April 17, 1919.) 1164 Lawp06. Income Arising Through the Exercise of an Essential Governmental Function and Accruing to Any State, etc. — “(7) [Gross income does not include] Income derived from any public utility or the exercise of any essential governmental function and accruing to any State, Territory, or the District of Columbia, or any politi- cal subdivision of a State or Territory, or income accruing to the govern- ment of any possession of the United States, or any political subdivision thereof.” 1165 Law 1jl07. “Whenever any State, Territory, or the District of Columbia, or any political subdivision of a State or Terri- tory, prior to September 8, 1916, entered in good faith into a contract with any person, the object and purpose of which is to acquire, construct, operate, or maintain a public utility, no tax shall be levied under the provisions of this title upon the income derived from the operation of such public utility, so far as the payment thereof will impose a loss or burden upon such State, Ter- ritory, District of Columbia, or political subdivision; but this provision is 1 93 TAX INC. EXEMPT INCOME. not intended to confer upon such person any financial gain or exemption or to relieve such person 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 contract;” 1166 Income of States. — In general income accruing to any State, Territory or possession of the United States, or to any political subdivision thereof, or to the District of Columbia, is exempt from tax. See article 74 [for political subdivisions pi35]. The income of .State workmen s compensation insurance funds established by State statutes is not taxable. In the case of a public utility acquired, constructed, operated or maintained by a taxpayer under contract with any State, Territory, or political subdivis- ion thereof, or with the District of Columbia, containing an agreement that a portion of the net earnings of such public utility shall be paid to the State, Territory, or political subdivision thereof, or the District of Columbia, the amount so paid may be deducted by the taxpayer as a necessary expense in transacting business. (Art. 84, Reg. 45, Rev., April 17, 1919.) 1167 Compensation of State Officers.— Compensation paid its officers and employees by a State or political subdivision thereof, including fees received by notaries public commissioned by States and the commis- sions of receivers appointed by State courts, are not taxable. Employees of universities receiving salaries paid in part or in whole from funds avail- able under the Smith-Lever Act of May 8, 1914, who are officers or em- ployees of a State, are not required to return as taxable incomes so received. This is also true with respect to the Act of August 30, 1890 , relating to colleges for the benefit of agriculture and the mechanic arts, and to the Act of March 2, 1887, relating to agricultural experiment stations in such colleges. (Art. 85, Reg. 45, Rev., April 17, 1919.) 1168 Section 213 (a) of the Revenue Act of 1918 provides that gross income shall include “gains, profits, and income derived from salaries, wages, or compensation for personal service * * * of whatever kind and in whatever form paid.” 1169 In accordance with an opinion of the Attorney-General, dated May 6, 1919, and based on the\vell-settled rule that governmental agencies of the States are not subject to taxation by the Federal Government, it is held that salaries of State officials and salaries and wages of employees of a State are not subject to the income tax imposed by the said Revenue Act of 1918. (T. D. 2843, May 17, 1919.) 1170 Compensation as Special Counsel, Received from a Municipality, is Not Exempt Income. — A counsellor at law is engaged by a municipality as special counsel, to act in connection with the regular City Attorney in handling a certain piece of litigation. Is he regarded as an officer or employee of a political subdivision of a state, so that his compensation for his services are not taxable under Article 71 of Regulations 45, sentence 2 [now Art. 85] ? (Answer.) In reply to the first question, you are advised that under the ruling of this office, the corn- pensation paid by a State to “special counsel,” such as described above, is taxable income, and not exempt from income tax. (Part of letter from Collins & Corbin, Jersey City, N. J., and the answer thereto, signed by J. H. Callan, Assistant to the Commissioner, and dated April 15, 1919.) 194 TAX INC. EXEMPT INCOME. 1171 State or Municipal Contract Work. — [Read at 1[893.] 1172 Law p 08. Compensation of Soldiers and Sailors. — “(8) [Gross income does not include] So much of the amount received during the present war by a person in the military or naval forces of the United States as salary or compensation in any form from the United States for active services in such forces, as does not exceed $3,500.” 1173 Law]fl4. “Military and Naval Forces of the United States” De- fined. — “The term ‘military or naval forces of the United States’ includes 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 term ;” 1174 Law][15. The “Present War” Defined. — “The term ‘present war’ means the war in which the United States is now engaged against the German Government.” 1175 Lawj[16. The “Termination of the War.” — For the purposes of this Act the date of the termination of the present war shall be fixed by proclamation of the President.” 1176 A person of either sex in active service in the military or naval forces of the United States may exclude from gross income his or her compensation received from the United States up to the amount of $3,500 in any taxable year, except that this exemption does not apply to compensation received either before or after the present war. The date of the termination of the war for the purpose of the statute will be fixed by proclamation of the President. The military and naval forces of the United States include, among others, army contract surgeons and the individuals named in section 1 of the statute [P173]. A person is in active service if he is actually serving in such forces’", not necessarily in the field or in the theatre of war, and is not merely on the retired or reserve list. Accord- ingly, if such a person receives compensation from the United States of $3,o00 or less and has no other income of an amount sufficient in itself to require him to render a return of income, he need make no return. Mem- bers of draft boards are not as such entitled to this exemption. (Art 86 Reg. 45, Rev., April 17, 1919.) v > 1177 Income Accruing Prior to March 1, 1913.— Property held by the taxpayer on March 1, 1913, is capital. Included in this capital are all claims, whether evidenced by writing or not, and all interest which had accrued thereon before that date. [No withholding, p631.] Interest accruing on or after that date is taxable income. Where an interest-bearing claim contracted prior to March 1, 1913, is paid in whole or in part after that date, any gain derived from the conversion of the claim into money is taxable. The amount of such gain is the excess of the proceeds of the claim (both principal and interest), exclusive of any interest accrued since February 28, 1913, already returned as income, over the fair market value of the claim as of March 1, 1913 (both principal and interest then accrued). In the case of an insurance policy its surrender value as of March 1, 1913* may be used as a basis for the purpose of ascertaining the gain derived from the sale or other disposition of Such policy. Where services were 195 INC. TAX DEDUCTIONS— EXPENSES. rendered prior to March 1, 1913, but paid for thereafter, the J®: ceived is taxable income to the extent of the excess of such amount over the fair market value on March 1, 1913, of the principal of the claim and anv interest which had then accrued. A claim for the purpose of this article means a right existing unconditionally on March 1, 1913, and then assign- able whether presently payable or not. Interest does not, of course, include dividends on corporate stock. See section 201 of the statute and articles 1541-1549 [for dividends, 1[815]. (Art. 87, Reg. 45, Rev., April 17, 1919.) 1178 Subtraction for Redemption of Trading Stamps.—Where a taxpayer, for the purpose of promoting his business, issues with sales trading stamps or premium coupons redeemable in merchandis or cash, he should in computing the income from such sales subtract only the amount received or receivable which will be required for demption of such part of the total issue of trading stamps or Premium coupons issued during the taxable year as will eventually be presented fo redemption This amount will be determined in the light of the experience of the taxpayer in his particular business and of other users engaged in similar businesses. The taxpayer shall file for each of the five preceding years, or such number of these years as stamps or coupons have been is- Led by him, a statement showing (a) the total issue of stamps during each year (b) the total stamps redeemed in each year, and (c) the percentage for each year of the stamps redeemd to the stamps issued in such year. A similar statement shall also be presented showing the experiences of ot er users of stamps or coupons whose experience is relied upon by the tax- payer to determine the amount to be subtracted from the proceeds of sales. The Commissioner will examine the basis used in each return, and in any case in which the amount subtracted in respect of such stamps or coupons is found to be excessive an amended return or amended returns will be re- quired. (Art. 88, Reg. 45, Rev., April 17, 1919.) Law 11112. Deductions Allowed.— “Sec. 214. (a) That in com- puting net income there shall be allowed as deductions . 1179 1180 Law 11287. Items Deducted in Computing Net Income of a Cor- poration.— “Sec. 234. (a) That in computing Ae net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions 1181 In general the deductions from gross income allowed corporations are the same as allov/ed individuals except that deduct dividends received from other corporations subject to the tax UlUZtiJ and mav not deduct charitable contributions [P447] and that insurance companies are permitted special deductions. [For insurance companies generally see 11988.] (Art. 561, Reg. 45, Rev., April 17, 1919.) 1182 LawfllS. All Ordinary and Necessary Business Expenses Are Deductible. — “(1) All the ordinary and necessary ex- penses paid or incurred during the taxable year in carrying on any trade or 1183 Law 11288. [Corporations.] “(1) All the ordinary and neces- sary expenses paid or incurred during the taxable yeai in carrying on any trade or business, INC. 196 TAX DEDUCTIONS— EXPENSES. 1184 Law p 51. Certain Items of “Expense” Not Deductible. — “Sec. 215. That in computing net income no deduction shall in any case be allowed in respect of — ” 1184a Law j[326. [Corporations.] “Sec. 235. That in computing net in- come no deduction shall in any case be allowed in respect of any of the items specified in section 215 [pi84].” 1185 Lawp52. Personal Expenses Are Not Deductible. — “(a) Per- sonal, living, or family expenses;” 1186 Personal and Family Expenses. — Insurance paid on a dwelling owned and occupied by a taxpayer is a personal expense. Premiums paid for life insurance by the insured are not deductible. In the case of a professional man who rents a property for residential purposes, but inci- dentally receives there clients, patients, or callers in connection with his professional work (his place of business being elsewhere), no part of the rent is deductible as a business expense. If, however, he uses part of the house for his office, such portion of the rent as is properly attributable to such office is deductible. The father is legally entitled to the services of his minor children, and allowances which he gives them, whether said to be in consideration of servi^s or otherwise, are not allowable deductions in his return of income. Alimony and an allowance paid under a separation agreement are not deductible from gross income. See article 73 [for alimony as exempt income, ]I1129]. The cost of the equipment of an army officer to the extent only that it is specially required by his profession and does not merely take the place of articles required in civilian life is deductible. Accordingly, the cost of a sword is an allowable deduction, but the cost of a uniform is not. (Art. 291, Reg. 45, Rev., April 1187 Traveling Expenses. — Traveling expenses as ordinarily under- stood, include railroad fares and meals and lodging. If the trip is undertaken for other than business purposes such railroad fares are per- sonal expenses and such meals and lodging are living expenses. If the trip is on business the railroad fares become business instead of personal ex- penses but the meals and lodging continue to be living expenses and are not deductible in computing net income, (a) If, then, an individual whose business requires him to travel receives a salary as full compensation for his services, without reimbursement of traveling expenses, his expenses for railroad fares, but not for meals and lodging, are deductible from gross income, (b) If such an individual receives a salary and is also repaid his actual traveling expenses, no part of such expenses, is deductible from gross- income and no part of such repayment is returnable as income, (c) If such an individual receives a salary and also an allowance for meals and lodg- ing, as, for example, a per diem allowance in lieu of subsistence, any ex- cess of the cost of such meals and lodging over the allowance is not deducti- ble, but any excess of the allowance over the actual expenses is taxable income. Congressmen and others who receive a mileage allowance for railroad fares should return as income any excess of such allowance over their actual expenses for such fares. A payment for the use of a sample room at a hotel for the display of goods is a business expense. (Art. 292, Reg. 45, Rev., April 17, 1919.) INC. 1 97 TAX DEDUCTIONS— EXPENSES. 1188 Lawp53. Amounts Paid Out for New Buildings or for Per- manent Improvements Are Not Deductible. — “(b) Any amount paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate f 1189 Law 154. Expenditures Covered by Depreciation Allowance Are Not Deductible.— “(c) Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made ; or” 1190 Amounts paid for increasing the capital value or for restoring the depreciated value of property are not deductible from gross income. See section 214 (a) (8) of the statute and article 161 [for depreciation P330]. Amounts expended for securing a copyright and plates, which remain the property of the person making the payments, are investments of capital. The cost of defending or perfecting title to property constitutes a part of the cost of property and is not a deductible expense. The amount expended for architect’s services is part of the cost of the building. Commissions paid in purchasing securities are a part of the price of such securities. Commissions paid in selling securities are an offset against the selling price. Expenses of the administration of an estate, such as court costs, attorney’s fees and executor’s commissions, are chargeable against the corpus of me estate and are not allowable deductions. Amounts to be assessed and paid under an agreement between bondholders or stock- holders of a corporation, to be used in a reorganization of the corporation, are investments of capital and not deductible for any purpose in returns of income. See article 543 [for assessm.ents received not income to corpora- tion, ^950]. An assessment paid by a stockholder of a national bank on account of his statutory liability is similarly not deductible. As to items not deductible by corporations, see section 235 and articles 581 [[[1191] and 582 [[[1192]. (Art. 293, Reg. 45, Rev., April 17, 1919.) 1191 Nfo deduction from gross income may be made for any amounts paid out for new buildings or for permanent improvements or better- ments made to increase the value of any property, or for any amounts ex- pended in restoring property or in making good the exhaustion thereof for which an allowance for depreciation or depletion or other allowance is or has been made, or for any amounts paid for premiums on any life insurance policy covering the life of an officer or employee or of any person financially interested in the business of the corporation when the corporation is directly or indirectly a beneficiary under such policy. (Art. 581, Reg. 45, Rev., April 17 , 1919 .) ■ 1192 Expenses of the organization of a corporation, such as incorporation fees and attorneys’ and accountants’ charges, constitute investments of capital and are not deductible from gross income See article 818 [for invested capital— War Tax Service]. A holding company which guarantees dividends at a specified rate on the stock of a subsidiary corporation for the purpose of securing new capital for the subsidiary and increasing the value of its stock holdings in the subsidiary may not deduct amounts paid in carrying out this guaranty in computing its net income, but such payments may be added to the cost of its stock in the subsidiary. But see article 868 [for stock of subsidiary acquired for stock: Consoli- INC. 198 TAX 1 - 19 - 20 . DEDUCTIONS— EXPENSES. Service]. (Art. 582, Reg. 45, Rev., 1193 Expenses Incurred in Sale of Capital Stock. — Any and all ex- penses incidental to or connected with the selling of the capital stock (c(^inon or preferred) of a corporation for the purpose of raising capital ta be by It invested in property or employed in the business for which the cor- poration is organized^ are not an “expense of operation and mainten- ance within the meaning of this title and such expense is not an allowable deduction from the gross income for the reason that such an expense is incurred in a capital transaction ; that is, the raising of capital to be invested or employed in the business. 1194 Such expense, like the discount at which the shares of stock may be ^ sold, has the effect only to reduce the available capital of the cor- poration and can not be used to reduce the income from operations * that IS to say, any expense incident to the bringing of capital into the company, whether it be a new or going concern, can not be recouped out of or charged against the operating income. It is a capital loss or expense prop- erly chargeable against the proceeds of the sale of the stock and reduces Reg^33^ Re^^Jan company. (Art. 145, 1f453-454, 1195 Retirement of Bonds at a Discount.— [Read at 1[953 and P244.] 1196 Law j[155. Premiums Paid on Business Life Insurance Are Not . I^^ductible. ‘'(d) Premiums paid on any life insur- ance policy covering the life of any officer or employee or of any person financially interested m any trade or business carried on by the taxpayer when the taxpayer is directly or indirectly a beneficiary under such policy.’’ 9' Preniiums on Business Insurance. — Where the taxpayer pays ^ premiums on an insurance policy on the life of an officer, employee or individual financially interested in the taxpayer’s business, for the purpose of protecting himself from loss in the event of the death of any ^ic 1 person, such premiums are not deductible from his gross income. ut it the taxpayer is in no sense a beneficiary under such a policy, except as he may derive advantage from the increased efficiency of the employee, and pays the premiums purely as reasonable additional compensation of such employee, they are allowable deductions. See articles 33 [for such as income to employee, 118891 and 105-108 [for compensation for personal services, beginning at U1210]. In either case whether the proceeds of such policies paid upon the death of the insured may be excluded from gross income or must be included therein depends upon whether the beneficiary is an individual or a corporation. See section 213 (b) (1) and articles [for proceeds of insurance to individual P114] and 541 [for proceeds of insurance to corporation, 1(809]. (Art. 294, Reg. 45, Rev., April 17 1919 ) •>« Business Expenses.— Business expenses, whether subtracted from total receipts in computing gross income or deducted from gross income in computing net income, include all items entering into what is oidinanly known as the cost of goods sold, together with selling and management expenses, except such classes of items as are treated in aiticle; . 2 \ to 268 [interest, taxes, losses, etc.]. Among the items to be INC. 199 TAX DEDUCTIONS— EXPENSES. treated as business expenses are material, labor, supplies and repairs in the case of a manufacturer, while a merchant would include his purchases of goods bought for resale. In either case the amount to be taken as a deduc- tion in any year should be determined by taking into consideration the in- ventory at the beginning and end of the year. Other items that may^ be included as business expenses are reasonable compensation for the services of officers and employees, advertising and other selling expenses, together with insurance premiums against fire, storm, theft, accident or other similar losses in the case of a business, and rental for the use of business property. A taxpayer is entitled to deduct the necessary expenses paid in carrying on his business from his gross income from whatever source. See section 215 of the statute and articles 291-294 [for items not deductible, beginning at pi86]. As to deductions by corporations see section 234 [P180 and all of the discussion immediately following under the head of deduc- tions]. (Art. 101, Reg. 45, Rev., April 17, 1919.) 1199 Cost of Materials. — Taxpayers carrying materials and supplies on hand should include in expenses the charges for materials and supplies only to the amount that they are actually consumed and used m operation during the year for which the return is made, provided that the cost of such material and supplies has not been taken into account in de- termining the net income for any previous year. If a taxpayer carries materials or supplies on hand for which no record of consumption is kept or of which physical inventories at the beginning and end of the year are not taken, it will be permissible for the taxpayer to include in his expenses and deduct from gross income the total cost of such supplies and materials as were purchased during the year for which the return is made, provided the net income is clearly reflected by this method. (Art. 102, Reg. 45, Rev., April 17, 1919.) 1200 Repairs.— The cost of incidental repairs which neither materially add to the value of the property nor apprecial)ly prolong its life, but keep it in an ordinarily efficient operating condition, may be deducted as expense, provided the plant or property account is not increased by the amount of such expenditures. Repairs in the nature of replacements, to the extent that they arrest deterioration and appreciably prolong the life of the property, should be charged against the depreciation reserve. See articles 161-171 [for depreciation, beginning at ^1330]. (Art. 103, Reg. 45, Rev., April 17, 1919.) 1201 Professional Expenses. — A professional man may claim as deduc- tions the cost of supplies used by him in the practice of his profes- sion, expenses paid in the operation and repair of an automobile used in making professional calls, dues to professional societies and subscriptions to professional journals, the rent paid for office rooms, the expense of the fuel, light, water, telephone, etc., used in such offices, and the hire of office assistants. Amounts expended for books, furniture and professional instruments and equipment of a permanent character are not allowable as deductions. See section 215 and articles 291-294 [for items not deductible, beginning at pi86]. (Art. 104, Reg. 45, Rev., April 17, 1919.) 1202 Premium on Fidelity Bond.— Where an employee is required to furnish bond and pay the premium on such bond, as a necessary incident of his employment, the premium on the bond will constitute an al- lowable deduction in computing net income. (T. D. 2090, Dec. 14, 1914.) 200 TAX INC. DEDUCTIONS— EXPENSES. 1203 Business Insurance. — Premiums paid in advance, covering a period of several years, are to be taken as a deduction on the basis of one of two methods ; when the books are kept on a cash basis, the entire amount is deductible in the year in which the premium is paid. Where the books are kept on an accrual basis the premium is to be prorated over the period covered by the insurance. Art. 8, TjllO, Reg. 33, Rev., Jan. 2, 1918.) 1204 Reserves for Insurance. — Funds set aside by a corporation for in- suring its own property are not a proper deduction, but if such funds are set aside, or a reserve therefor is set up, any loss actually sustained and charged to such funds or reserves may be deducted. (Art. 144, ^[452, Reg. 33, Rev., Jan. 2, 1918.) 1205 Service Connections and Pipe Extensions by Public Utility. — Moneys so received for seiwice connections and pipe extensions are not permitted to be deducted from the gross amount of the income, for they do not come within any of the permitted classes of deductions men- tioned in the statute. Moneys so expended are invested in permanent im- provements, which tend to enhance the rental and the market value of the water system. (Caption: Union Hollywood Water Co. vs. John P. Carter, collector, case. Act of Aug. 5, 1909 (238 Fed. 329). (T. D. 2475, April 4, 1917.) 1206 Certain Deductible and Non-Deductible Expenses of Railroads. — The appended decision [summary] of the United States District Court for the Western District of Michigan, .Southern Division, in the case of the Grand Rapids & Indiana Railway Company v. Doyle, Collector. (245 Fed. 792.) 1. Deductions from Gross Income. Deductions for expenditures for addition and betterments to the property, such as expenditures for sidings or spur tracks, are not authorized. 2. Operating Expenses Deductible. The payment for labor and materials which go into the actual oper- ating of the road and the property are deductible. 3. Expenses of Maintenance Deductible. Maintenance means the upkeep or preserving of the condition of the property to be operated and does not mean additions to the equipment, additions to the property, or improvements of former condition of the road. 4. Cost of Improvements. Where old rails are replaced with new and heavier rails, wooden bridges and culverts with concrete and steel bridges and culverts, the rule is that the cost of renewals with like kind and quality is allowable, but excess cost is not allowable as deduction. 5. Expenditures Included in Income. Amounts expended for improving and adding to the j‘''opefty, such as building new stations and new shops, installing new n.dchinery, and making additions to equipment, are included in income. i is published for the information of internal revenue officers and others con- cerned (T. D. 2210, June 1, 1915.) (245 Fed. 792.) 1207 Depositors’ Guaranty Fund. — Banking corporations, which pur- suant to the laws of the States in which they are doing business are required to set apart, keep and maintain in their banks the INC. 201 TAX DEDUCTIONS— EXPENSES. amount levied and assessed against them by the State authorities as a ^‘Depositors’ guaranty fund,” may deduct from their gross income the amount so set apart each year to this fund, provided that such fund, when set aside and carried to the credit of the State banking board or duly author- ized State officer, ceases to be an asset of the bank and may be withdrawn in whole or in part upon demand by such board or State officer to meet the needs of these officers in reimbursing depositors in insolvent banks, and provided further that no portion of the amount thus set aside and credited is returnable under the laws of the State to the assets of the banking cc^- poration. If, however, such amount is simply set up on the books of the bank as a reserve to meet a contingent liability and remains an asset on^ the bank, it will not be deductible except as it is actually paid out as ^quired by law and upon demand of the proper State officers. (Art. 567, Reg. 45, Rev., April 17, 1919.) 1208 Law ^114. A Reasonable Allowance for Salaries is Deductible. —“including a reasonable allowance for salaries or other compensation for personal services actually rendered, and 1209 LawT[289. [Corporations.] — “including a reasonable allowance for salaries or other compensation for personal serv- ices actually rendered,” 1210 Compensation for Personal Services.— Among the ordinary and necessary expenses paid or incurred in carrying on any trade or business may be included a reasonable allowance for salaries or other compensation for personal services actually rendered. The test ot deductibility in the case of compensation payments is whether they are reasonable and are in fact payments purely for services. This test and its practical application may be further stated and illustrated as follows . 1211 (1) Any amount paid in the form of compensation, but not in tact as the purchase price of services, is not deductible. ( 3 -) An osten- sible salarv paid by a corporation may be a distribution of a dividend on stock. This is likely to occur in the case of a corporation having few stockholders, practically all of whom draw salaries. If m such a case the salaries are based upon or bear a close relationship to the stockholdings of the officers or employees, it would seem likely that the salaries, if m excess of those ordinarily paid for similar services, are not paid wholly for services rendered, but in part as a distribution of earnings upon the stock, (b) An ostensible salary paid by a corporation may be in part a waste or appropria- tion of assets of the corporation. This may occur where salaried em- •ployees are in control of the corporation through holding directly or in- ffirectly a majority of its stock or, in the case of a large corporation with many stockholders, owning a substantial minority of its stock, and the tendency of the officers unduly to inflate their salaries must be taken into account (c) An ostensible salary may be in part payment for property. This may occur, for example, where a partnership sells out to a corporation, the former partners agreeing to continue in the service of the corporation. In such a case it mav be found that the salaries of the former partners are not merely for services but in part constitute payment for the transfer of their business. . . ^ i • • 1212 (2) The form or method of fixing compensation is not decisive as to deductibility. While any form^ of contingent compensation in- vites scrutiny as a possible distribution of earnings of the enter- 202 TAX TNC. DEDUCTIONS— EXPENSES. prise, it does not follow that payments on a contingent basis are to be treated fundamentally on any basis different from that applying to com- pensation at a flat rate. Generally speaking, if contingent compensation is paid pursuant to a free bargain between the enterprise and the individual made before the services are rendered, not influenced by any consideration on the part of the employer other than that of securing on fair and advant- ageous terms the services of the individual, it should be allowed as a de- duction even though in the actual working out of the contract it may prove to be greater than the amount which would ordinarily be paid. 1213 (3) In any event the allowance for compensation paid may not exceed what is reasonable in all the circumstances. It is in general just to assume that reasonable and true compensation is only such amount as would ordinarily be paid for like services by like enterprises in like circumstances. The circumstances to be taken into consideration are those existing at the date when the contract for services was made, not those existing at the date when the contract is questioned. See article 32 [for compensation for personal services, as income, 1[873]. (Art. 105, Reg. 45, Rev., April 17, 1919.) 1214 Treatment of Excessive Compensation. — As to the treatment of amounts ostensibly paid as compensation but not allowed to be deducted as such, the following rules apply : 1215 fi) In the case of excessive payments by corporations, if such payments correspond or bear a close relationship to stockholdings, the amount of the excess should be treated as dividends and would thus be exempt from the normal tax in the hands of the recipients ; or if such payments represent an appropriation of assets of the corporation by officers who control it and fix their compensation in violation of the rights of the corporation, the amount of the excess, Avhile disallowed as a deduc- tion by the corporation, should be treated as compensation of the individuals subject to the normal tax, compensation illegally secured being none the less subject to tax in all respects ; or if such payments constitute in part payment for property, the amount of the excess should be treated by the corpora- tion as a capital expenditure and by the recipient as part of the purchase price. 1216 ^2) In case of excessive payments by individuals or partner- ships, the amounts disallowed should ordinarily be treated as shares of the profits of a partnership, except that a payment for property should be treated by the individual or partnership as a capital expenditure and by the recipient as part of the purchase price. (Art. 106, Reg. 45, Rev., April 17, 1919.) Salaries of officers or employees who are stockholders will be sub- ject to careful analysis, and if they are found to be out of proportion to the volume of business transacted, or excessive when compared with the salaries of like officers or employees of other corporations doing a similar kind or volume of business, the amount so paid in excess of reasonable compensation for the services will not be deductible from gross income, but will be treated as a distribution of profits. [Read at jfl215.] (Art. 138, ^^443, Reg. 33, Rev., Jan. 2, 1918.) 1218 The appended decision of the United States Circuit Court of Ap- peals for the Second Circuit in the case of Jacobs & Davies (Inc.) v. Anderson, collector of internal revenue, is published for the informa- tion of internal-revenue officers and others concerned. 203 TAX TNT, DEDUCTIONS— EXPENSES. Jacobs and Davies (Inc.) v. Anderson. (228 Fed. SOS.) 1. Deductions from Gross Income. divided the profits When a company composed of two stockholders d deducted as an between them, calling it compensation, the same' can not be deducted expense of business. '“ey paid out under these circumstances is equivalent to dividend and must be treated as income of the corporatmn. »• Appeals- D 2262, Nov. IS, 1919.) 1319 Bonuses to Employees.-Gifts or bonuses to employees will constitute allowabk deductions from gross income when such pay do have 'i„ ST £,iT?rr“.'T. "a-.. 10^. taWronVepoirSh the company to »««" 'k' “;“'’“yrS' „eh iLse, .1 may be b, Tf ^mia'et'"' ’ ofdeSftfh rSSnfm f t ber 30, 1917.) 1333 Compensation Paid in Stock-Compensation paid an enrp^^^^^^^ so charletlto^ks it^’lL^araf;^^^^ |Jfoctand the Jcipient INC. 204 TAX DEDUCTIONS— EXPENSES. Commissions Paid to Salesmen. — Commissions paid to salesmen as a part of the expense of conducting business are allowable de- ductions to the payer of the commission. (T. D. 2090, Dec. 14, 1914.) 1224 Commissions Paid Real Estate Agents.— A commission paid to a real estate agent for collecting rents and management of property is a legitimate business expense and constitutes an allowable deduction m computing net income. (T. D. 2090, Dec. 14, 1914.) 1225 Commissions to Salesmen Paid in Stock.— Commissions allowed salesmen, paid in stock, may be deducted as expense if so charg-ed 1914)°^* the actual value of such stock. (Art. 117, Reg. 33, Jan! 5, 1226 Pensions.— Amounts paid for pensions to retired employees or to their families or others dependent upon them, or on account of injuries received by employees, and lump sum amounts paid as compen- sation for injuries, are proper deductions as ordinary and necessary ex- penses. Such deductions are limited to the amount not compensated for by insurance or otherwise. No deduction shall be made for contribu- tions to a pension fund held by the corporation, the amount deductible in such case being the amount actually paid to the employee. When the amount of the salary of an officer or employee is paid for a limited period after his death to his widow or heirs in recognition of the services rend- ered by the individual such payments may be deducted. Salaries paid by employers during the continuance of the war to employees who are absent in the military or naval service or are serving the Government in other ways at a nominal compensation, but who intend to return at the ReT TprU 17 191 ^)'^’ a^owable deductions. (Art. 108, Reg. 45, 1227 Donations by Corporations. — Donations made by a corporation for ir.H r s '^o.^^ected with the operation of its business, when lim- d,!r f hospitals or educational institutions con- ij* 5 ^ benefit of its emplo}^ees or their dependents, are a proper deduction as oidmary and necessary expenses. Donations which legit- imately represent a consideration for a benefit flowing directly to the corporation as an incident of its business are allowable deductions income, hor example, a street railway corporation may donate a sum of money to an organization intending to hold a convention in the city in which it operates, with the reasonable expectation that the °f such conyentioii will augment its income through a greater number of peop e using the cars. Expenses incurred in advertising and piornoting the sale of liberty bonds and war savings stamps over the cofpora- deductible. Sums of money expended for lobbying m r- ^anda O’-, defeat of le,gislation, the exploitation of propa- bon« fo advertising other than trade advertising, and contriL- donatffins expenses, are not deductible from gross income. [For STe” S, Ee. Ap?™'. S',''"'’' ' "•» « (An. Donations by Agricultural Corporations to Fairs.-A corporation HpH agricultural business cannot be allowed to make a deduction from gross income on account of donations to fairs, churches INC. 205 TAX DEDUCTIONS— INTEREST. and associations, such donations being tnade for tte purpose of obtam- ine and preserving the good will of the farmers who raise crops for it, “Lfthe amounts so expended are clearly in the nature of gratuities and are not necessary expenses of operation and no such consideration in this case as is contemplated [122/b ( tract from letter to Carey, Piper and Hall, Attorneys at Law, Balti more, Maryland, signed by Acting Commissioner G. E. Fletcher, and dated March 25, 1915.) 1329 Law mis. Certain Rentals Are Deductible.— “including rentals or other payments required to be made as a condi- tion to the continued use or possession, for purposes business, of property to which the taxpayer has not taken or not taking title or in which he has no equity ; 1230 Law 11290. [Corporations.] — “and including rentals or other pay- ments required to be made as a condition to the con- tinned use or possession of property to which the corporation has not taken or is not taking title, or in which it has no equity, 1231 Rentals.— Where a leasehold is acquired for a specified term, the purchaser may take as a deduction in his return an abquot part of such sum each year, based on the number of years the lease has to ru . XaLs paid by a tenant to or for a landlord for business property are ad- ditional rent and constitute a deductible item to the tenant and “e to the landlord, the amount of the tax being deductible by the latter. The cost of erecting buildings or permanent im provements on ground leased by a taxpayer ^ is additional rental Ld is therefore a proper deduction from gross income, provided such ddinS and improvements under the terms of the ease rever to the owner of the ground at the expiration of the lease. In such a case the cost will be prorated according to the number of years constituting the term of the lease. The lessee will not ^e Permitted o deduct froni e-ross income any depreciation with respect to such buildmgs, but t Sm of incklental repMrs necessary to keep them in an efficient condi- tion for the purposes of their use may be deducted. If, however, the life of ffie Uprovement is less than the life of the lease, depreciation may be taken by the lessee instead of treating the cost as rent See arte 48 [for improvements made by the lessee as income to lessoi, [[939]. ( 109, Reg. 45, Rev., April 17, 1919.) 1232 Law 111 16 All Interest Paid or Accrued on Indebtedness With Law 11116. Deductible.-" (2) All interest paid or accrued within the taxable year on indebtedness,” 1333 Law [[117. Interest Paid in Connection With Holdings m Certain Tax-Free Obligations and Securities Is Not Deducti- ble.-“except on indebtedness incurred or continued ^ carry obligations or securities (other than obligations of the United StatL Tss^d after September 24, 1917), the interest ^pon which is wholly exempt from taxation under this title as income to the ta payer/^ 1234 Law 1[291. [Corporations.]-" (2) All interest paid or accrued within the taxable year on its indebtedness, 206 TAX INC. DEDUCTIONS— INTEREST. 1235 Law |f292. [Corporations.] — “except on indebtedness incurred or continued to purchase or carry obligations or securi- ties (other than obligations of the United States issued after September 24, 1917) the interest upon which is wholly exempt from taxation under this title as income to the taxpayer/' 1236 Interest paid or accrued within the year on indebtedness may be deducted from gross income. But interest on indebtedness in- curred or continued to purchase or carry securities, such as municipal bonds, the interest upon which is exempt from tax, is not deductible. However, this exception does not apply to obligations of the United States issued after September 24, 1917, which include the lib- erty bonds of the second and subsequent issues, and interest on in- debtedness incurred to purchase such obligations is deductible pursuant to the general rule. See articles 77-80 [for interest on Liberty Bonds and Victory Notes, ^1139]. Interest paid by the taxpayer on a mort- gage upon real estate of which he is the legal or equitable owner, even though the taxpayer is not directly liable upon the bond or note secured by such mortgage, may be deducted as interest on his indebtedness. Payments made for Maryland or Pennsylvania ground rents are not deductible as interest. (Art. 121, Reg. 45, Rev., April 17, 1919.) 1237 Interest on Indebtedness Incurred for the Payment of Dividend Paying Stock Is Deductible for Both Normal Tax and Supertax Purposes. — Would you be good enough to advise us by telegram at our expense, whether interest upon a note the proceeds of which were used for the purchase of dividend-paying stock would be allowed as a full deduction or only as a deduction in arriving at the amount of income subject to the surtax? (Answer.) Interest upon a note the proceeds of which are used to purchase dividend-paying stock allow- able as a deduction for normal and additional tax purposes. (Letter of inquiry from Harris, Forbes & Company, New York, N. Y., and telegram of reply thereto signed by Commissioner Daniel C. Roper, and dated Nov. 19, 1917.) 1238 Interest paid by a corporation on scrip dividends is an allowable deduction. So-called interest on preferred stock, which is in reality a dividend thereon, cannot be deducted in arriving at net income. In the case of banks and loan or trust companies interest paid within the year on deposits or on moneys received for investment and secured by interest- bearing certificates of indebtedness issued by such bank or loan or trust company may be deducted from gross income. (Art. 564, Reg. 45, Rev., April 17, 1919. 1239 Car-Trust Certificates. — Equipment or car-trust certificates issued by or for railroad companies are a means by which such com- panies secure cars or other equipment, or the money with which such equipment is purchased. 1240 The equipment becomes at once an asset of the company and the trust certificates secured by such assets are obligations of the railroad companies, similar to corporate bonds, mortgages, and like obli- gations. The trustees in whose names legal title to the equipment stands, are not an association within the meaning of tliis title, and are therefore not a taxable entity, but they are, for the purpose of this title, a fiscal agenb INC. 207 TAX DEDUCTIONS— TAXES. paying off the obligations, both principal and interest, of the railroad com- panies with funds appropriated by such companies. ^ 1241 The railroad companies * * include these trust certificatt^s in the amount of their bonded or other indebtedness » and the interest paid thereon, * * * , will be deductible, * \ * ; 1242 If the certificates contain a contract or provision by wnicti me obligor agrees to pay any portion of the tax imposed by this title upon the obligee or reimburse the obligee for any portion oi the tax, or to pay the interest without deduction for any tax which the obligor may be required to pay, the trustees in such cases, in making interest payments on these certificates, will, in the absence of claims for exemption when interest payments are made to individual's, withhold the normal income tax on such parents amount thereof. (Art. 188, 11573-576, Reg. 33, Rev., Jan. 2, 1918.) 1243 Interest on Capital. — Interest calculated as being a charge against income on account of capital or surplus invested in t e business but which does not represent a payment on an interest- bearing’ obligation, is not an allowable deduction from gross mcorne; that is to say, the interest which the money might earn invested is not a deductible charge against income. (Art. 122, Keg. 4a, Rev., April 17, 1919.) 1244 Sale of Capital Stock, Bonds and Capital Assets.— A corporation sustains no deductible loss from the sale of its capital stock See article 542 [for sale of capital stock generally, 11949J. it it sells its bonds at a discount, the amount of such ^ discount is treated as interest paid, and if it retires its bonds at a price in excess of the issuing price, such excess may usually be deducted as expense See articles 544 [for sale and retirement of corporate bonds, li^IJ and 848 [discount on bonds in relation to invested capital— War Tax Service! If the corporation sells its capital assets for less than their cost or fair market value as of March 1, 1913, deductible. See article 545 [for sale of capital assets, 1[966]. (Art. 563, Reg. 45, Rev., April 17, 1919.) 1245 Law 11119. Taxes Paid or Accrued Are Deductible. — “(3) Taxes paid or accrued within the taxable year imposed 1246 Law 11120. United States Taxes Except Income and Excess- Profits Taxes, Are Deductible.— “(a) by the author- ity of the United States, except income, war-profits and excess-profits taxes ; or” 1247 Law ^121. Taxes Imposed by United States Possessions Are “ Deductible or Allowed as a Credit.— ‘(b) by the au- thority of any of its possessions, except the amount of income, war- profits and excess-profits taxes allowed as a credit under section [1[1283] ; or” 1248 Lawp22. State and Municipal Taxes Are Deductible. — “(c) by the authoritv of any State or Territory, or any county, school district, municipality, or other taxing subdivision of any State or Territory,” INC 208 TAX DEDUCTIONS— TAXES. 1249 Law ][294. [Corporations.] — ‘'(3) Taxes paid or accrued within the taxable year imposed” 1250 Law jf295. [Corporations.] — ‘'(a) by the authority of the United States, except income, war-profits and excess-profits taxes [P529] ; or” 1251 Law][296. [Corporations.]— “(b) by the authority of any of its possessions, except the amount of income, war-profits and excess-profits taxes allowed as a credit under section 238 [P295] ; or” l2o2 Lawj[297. [Corporations.] — “(c) by the authority of any State or Territory, or any county, school district, munici- pality, or other taxing subdivision of any State or Territory,” 1253 Federal taxes (except income, war profits and excess profits taxes), State^ and local taxes (except taxes assessed against local benefits of a kind tending to increase the value of the property as- sessed) , and taxes imposed by possessions of the United .States or by foreign countries (except the amount of income, war profits and excess profits taxes allowed as a credit against the tax), are deductible from gross income. See section 222 of the statute and articles 381-384 as to tax credits [P290]. Postage is not a tax. Amounts paid to States under secured debts laws in order to render securities tax exempt are deductible. Automobile license fees are ordinarily taxes. (Art. 131, Reg. 45, Rev., April 17, 1919.) 1254 Federal Duties and Excise Taxes. — Import or tariff duties paid to the proper customs officers, and business, license, privilege, excise ^ and stamp taxes paid to internal revenue collectors, are deductible as taxes imposed by the authority of the United States, pro- vided they are not added to and made a part of the expenses of the business or the cost of articles of merchandise with respect to which they are paid, in which case they can not be separately deducted. (Art. 132, Reg. 45, Rev., April 17, 1919.) i25o Additional Capital Stock Tax Imposed by Revenue Act of 1918 as a Deduction.— In reply to your letter of May 21, 1919, you are advised that the capital stock tax imposed by Section 1000 (a) of the Revenue Act of 1918, may, for the purpose of computing other income subject to income, excess profits and war profits taxes, be deducted from the gross income for the year for which such taxes accrue, if accounts of the corporate taxpayers are kept on the accrual basis, or may be deducted from gross income for the year in which paid, if accounts are kept on the disbursements basis. (Letter to The Corporation Trust Company, signed by Commissioner Daniel C. Roper, and dated June 7, 1919.) i2o6 Tax on Bank Stock. — Banks paying taxes assessed against their stockholders on account of their ownership of the shares of stock issued by such banks can not deduct the amount of taxes so paid. The shares of stock being the property of the stockholders, to the extent that the taxes assessed on the value of the shares of stock are propeity taxes the holders arc primarily liable for their payment. As federal statutes prohibit States from imposing any tax upon na- 209 TAX INC. DEDUCTIONS— TAXES. tional banks except upon the value of their real estate, in cases where States levy a tax on the stock of such banks and make it the duty of the banks to pay such tax for me stockholders it is clear that such pay- ments are not deductible from the gross income of such banks. This rule applies also in the case of corporations other than banks, upon the value of whose stock taxes are assessed to the stockholders. Such payments by banks or other corporations are regarded as in the nature of ^additional dividends and must be included by the stockholder in his dividends received, if he deducts the taxes paid on his behalf. See articles 565 [P280] and 134 [P264, for further discussion of taxes paid for another”]. (Art. 566, Reg. 45, Rev., April 17, 1919.) 1257 A bank in Massachusetts held not authorized to deduct from its s-ross income taxes paid on its shares on behalf of its stockholders under Rev. Laws, Mass. c. 14, Secs. 9-18, in ascertaining its net income subject to special excise tax under Tariff Act ^ng. 5, 1909, c. 6, Sec. 38, par. 2, 36 Stat. 112.— Eliot Nat. Bank y. (Ell, 210 F. 833 (Affirmed by Circuit Court of Appeals, First Circuit, December 21, 1914 [218 Fed. 600].) 1258 The United States Circuit Court of Appeals, Eighth Circuit (No. 4260, December Term, 1914), in error to the District (.ourt of the United States for the Eastern District of Missouri [March 25 1919] in the case of the National Bank of Commerce m St. Louis, plaintiff in error, v. E. B. Allen, U. S. Collector of Internal Revenue for the First District of Missouri, defendant in error, attirms the decision of the court below (211 Fed. 743) in which judgment was rendered by the Court against the bank 1259 The Court of Appeals held that (233 Fed. 472) : 1. Under the State law, where banks pay the State tax imposed on share- holders, but have a lien until reimbursed on the shares of stock and ail dividends, the tax is not imposed on the banks; 2. State taxes so paid can not be legally deducted from gross income on returns made by banks under the corporation tax act; 3. The commissioner has power to make a new assessment within three years in case an incor- rect return has been made ; 4. There is no necessity of construing the word “false,” where it is used with reference to the time in which the commissioner shall act, to mean fraudulently false. (T. D. 2198, May 5, United States Supreme (Tourt for a writ of cer- tiorari to the Court of Appeals for the Eighth District denied. October 25, 1915.] 1260 Lawp23. Certain Assessments Against Local Benefits Are Not Deductible. — “not including those assessed against local benefits of a kind tending to increase the value of the property assessed; or” 1261 Lawp98. [Corporations.] — “not including those assessed against local benefits of a kind tending to increase the value of the property assessed ; or” 1262 Article 133 of Regulations 45 is hereby amended to read as fol- lows : So-called taxes, more properly assessments, paid for local benefits, such as street, sidewalk and other like improvements, 210 TAX INC. DEDUCTIONS— TAXES. imposed because of and measured by some benefit inuring directly to the property against which the assessment is levied, do not constitute an allowable deduction from gross income. A tax is considered assessed against local benefits when the property subject to the tax is limited to the property benefited. Special assessments are not deductible, even though an incidental benefit may inure to the public welfare. The taxes deductible are those levied for the general public welfare by the proper taxing authorities at a like rate against all property in the territory over which such authorities have jurisdiction. Assessments under the statutes of California relating to irrigation and of Iowa relating to drainage, and under certain statutes of Tennessee relating to levees, are limited to property benefited, and when it is clear that the assess- ments are so limited, the amounts paid thereunder are not deductible as taxes. When assessments are made for the purpose of maintenance or repair of local benefits, the taxpayer may deduct the assessments paid as an expense incurred in business, if the payment of such assess- ments is necessary to the conduct of his business. When the assess- ments are made for the purpose of constructing local benefits, the payments by the taxpayer are in the nature of capital expenditures and are not deductible. Where assessments are made for the purpose of both construction and maintenance or repairs, the burden is on the taxpayer to show the allocation of the amounts assessed to the dif- ferent purposes. If the allocation can not be made, none of the amounts so paid is deductible. (T. D. 2937, October 16, 1919, amending Art. 133, Reg. 45, Rev.) 1263 Taxable Status of Amount Refunded by Government in One Year, Representing Tax Paid for Which Credit Has Been Taken as a Deduction in a Previous Year. — Receipt is acknowledged of your letter of December 16, 1918, in which you ask whether an individual who has claimed a deduction for taxes [such as Federal Excise Taxes] paid during the year in his income tax return for 1917 and in the fol- lowing year it develops that these taxes were improperly assessed and collected, and a refund is made to the taxpayer in 1918, should consider “the amount of such refund gross income for the year 1918, or is it in the nature of additional income for 1917 and should the additional tax liability on the amount of the refund be taken care of as 1917 income by means of an amended return for 1917 and by an additional tax payment as of that year?” ^Iln reply you are advised that this taxpayer will not be required to include in his return for 1918 the amount re- ceived as refund of taxes erroneously paid in the preceding year. He should, however, file an amended return for 1917 and claim a deduction therein for the correct amount of taxes due for that year. The further amount of income tax due for 1917 as a result of the reduction in the item of taxes paid during the year and a letter of explanation should accompany the amended return when it is forwarded the Collector of Internal Revenue. (Letter to The Corporation Trust Company, signed by Commissioner Daniel C. Roper, and dated January 8, 1919.) 1264 Inheritance and Federal Estate Taxes. — State inheritance taxes paid by the executor or administrator of an estate of a deceased person, which are provided by law to be deducted from the respective legacies or distributive shares, are not allowable deductions in com- puting the net income of such estate subject to tax, even though the INC. 211 TAX DEDUCTIONS— TAXES. will contains a direction to pay inheritance taxes out of the residue. An inheritance tax is upon the transfer of the property and not upon the estate of the decedent or upon the executor or administrator, al- though the latter is required to pay it. In general, taxes paid or accrued within the year imposed by the authority of any State, or otherwise, are limited to those imposed upon the taxpayer and do not include taxes paid by him on behalf of another, even though he is required by law to make such payment. See articles 565 and 566. [for further discussion of “taxes paid by another,’’ j[1280, and ]fl256]. Since, moreover, the tax is imposed upon the transfer before the prop- erty reaches the legatee or distributee, and merely diminishes the capital share of the estate received by him, such tax is not imposed upon the legatee or distributee and is not an allowable deduction from his income. Similarly, Federal estate taxes are not deductible. (Art. 134, Reg. 45, Rev., April 17, 1919.) 1265 New York State Transfer (Inheritance) Tax Not Deductible as a “Tax”. — The appended decision of the United States District Court for the Southern District of New York in the case of Elizabeth S. Prentiss vs. Mark Eisner, Collector of Internal Revenue, is published for the information of internal-revenue officers and others concerned. The decision confirms and supports the ruling contained in Article 134 [^1264] of Regulations No. 45. (T. D. 2933, October 9, 1919.) Decision of United States District Court. [Act of Oct. 3, 1913.] Elizabeth S. Prentiss vs. Mark Eisner, Collector. 1. The tax imposed by the laws of New York upon the transfer of property by will or under the intestate laws is not deductible in ascer- taining the taxable net income of the legatee or distributee under the act of October 3, 1913. It is not a “tax”, within the meaning of the provision permitting the deduction of “all national, State, county, school, and municipal taxes paid within the year”. (Sec. II, par. B). 2. A tax upon the right to receive an interest in the estate of a decedent is not a charge either against the person receiving the interest or the property or right accruing to him. The legatee or distributee merely receives the balance due after payment of the tax. He does not receive the entire interest, and then pay the tax ; and he is consequently not entitled to deduct the amount as a tax paid by him. 1266 Augustus N. Hand, District Judge: This is a^ demurrer to a complaint whereby the plaintiff seeks to recover income taxes for the year 1913, paid under protest. The objection urged is that the Commissioner refused to allow as a deduction transfer taxes which were paid to the State of New York on December 12, 1913, upon an inheritance which vested June 25, 1913. 1267 Paragraph B, Section H of the Act of October 3, 1913, [Revenue Act of 1918, Sec. 213 (A) (3)-(C) 111248], provides: “That in computing net income for the purpose of the normal tax there shall be allowed as deductions ^ Third, all national, state, county, school and municipal taxes paid within ^ the year, not including those assessed against local benefits; * ” 1268 The Commissioner of Internal Revenue has ruled that: “A collateral inheritance tax levied under the laws of the State of New York being, as it is, a charge against the corpus of the 212 TAX TXC. DEDUCTIONS— TAXES. estate, does not constitute such an item as can be allowed as a deduction in computing income tax liability to either the estate or a beneficiary thereof.’^ 1269 The plaintiff contends that the New York transfer taxes are excise taxes imposed by the State upon the right to receive an interest in a decedent’s estate, and as such, are within the deductions allowed by statute. The Government, on the other hand, says that these taxes are an appropriation by the State of a portion of the de- cedent’s estate before the remainder vests in the legatee. This latter contention is in accordance with the decision in United States v. Perkins, 163 U. S. 625, where the Court said at page 630 : ‘‘The legacy becomes the property of the United States only after it has suffered a diminution to the amount of the tax and it is only upon this condition that the legislature consents to a bequest of it.” 1270 This decision, which so far as I know has not been questioned, cannot be reconciled with any theory that the tax is refused a right of succession already vested in the legatee. 1271 At the outset we have the important fact that property inherited or transmitted by will is not treated as income in the income tax act, but, on the contrary, is not only not included, but specifically ex- empted. In other words, in the hands of a legatee, devisee, heir or distributee, such property is capital and not income. Under these cir- cumstances, it would seem inconsistent with charges against this capi- tal, which accrued prior to, or simultaneously with, the devolution of it could be deducted from income tax returns. Notwithstanding this, the language of the Act would apparently make the transfer taxes a necessary deduction if they are charges against the person receiving the property, or against either the property or the right accruing to him. 1272 The cases are extremely confused and their reasoning is unsatis- factory. It is admitted by them all that the tax is not upon the property itself which is transmitted. To avoid the unconstitutionality of a direct tax upon the property itself which was not apportioned among the States, the Court of Appeals of New York said as to the Federal Tax of 1898, in Matter of Gihon, 169 N. Y. 443: * * * l^he full amount of the legacy is in law paid to the legatee and the deduction made from it and paid to the State or federal government is paid on account of the legatee from the legacy which he receives.” 1273 It is argued that the personal liability of the executor or adminis- trator under the New York law for the payment of the tax makes the view taken by the foregoing case erroneous, but, as Judge Cullen there said, the obligation of the executor or administrator to nay the tax IS a mere rule of administration to insure its payment, and not proof that the tax is either on the right to transmit or upon the oropertv itself. I IT j 1274 I think it follows because the right to transmit or the right to receive the property of a decedent is a privilege granted by the State, and not a common right, that the tax is imposed upon either right. Judge Gray’s statement in Matter of Swift, 137 N. Y. 77 is an accurate description of what occurs: “WhaJ has the State done, in effect, by the enactment of this tax law.-^ It reaches out and appropriates for its use a portion of 213 INC. TAX DEDUCTIONS— TAXES. the property at the moment of its owner s decease , allowing" only the balance to pass in the way directed by the testator, or per- mitted by its intestate law.” ^ • t, 1275 To say that the legatee, devisee, heir or distributee receives the property without any deduction and then pays the tax is really a most artificial way of viewing the transaction. In the case of personal property he really only gets the balance with a credit as a matter of con- venient bookkeeping to the amount of the tax. In the case of real est^e he receives properly speaking an equity. He can pay the tax and get the land unencumbered, or the State can foreclose the lien and he wi^ receive the balance. In either case the only natural way to treat hun is as a recipient of a net amount. The condition of the devolution of the property is the receipt of the transfer tax b}^ the State. 1276 In United States v. Perkins, 163 U. S. 625, the testator bequeathed his property to the United States. The Supreme Court held tkat the New York transfer tax was upon the testator’s right to dispose of his property, and thus sustained the tax_ for, if it had been treated as upon any right of succession of the United States, the tax could not have been lawfully imposed. This case has been cited with approval in New York decisions both under the old and new transfer tax acts. 1277 I have carefully examined the interesting briefs submitted by counsel and am convinced that the tax cannot properly be re- garded as an imposition upon either the property or the right to receive a gross amount of the property of a decedent represented by a legacy, devise or distributive share, but that the property and the right to re- ceive it passed, reduced by the amount of the tax measured by a centage of the value of the gross share. It is impossible to reconcile the conflicting expressions in judicial opinions, but this treatment of the situation will, I think, accord with the results reached by the various cases. I can see no substantial difference between the New York Transfer Tax Act in operation in 1913, and the earlier Act, and I do not regard any of the Acts as imposing a tax upon the plaintiff s right of succession which is deductible in her income tax return. 1278 The demurrer is sustained. (Opinion appended to and made a part of T. D. 2933, October 9, 1919. 1279 LawpOl. Taxes Withheld at the Source on Account of Tax- Free-Covenant Obligations Are Not Deductible. — “Provided, That in the case of obligors specified in subdivision (b) of section 221 [TflSSS] 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 subdivision, shall be allowed 1280 Effect of Tax-Free Covenant in Bonds.— Corporations may deduct taxes from gross income to the same extent as individuals, except that in the case of corporate bonds or obligations containing a tax-free covenant clause the corporation paying a Federal tax, or any part of it, for someone else pursuant to its agreement, is not entitled to deduct such pay- ment from gross income on any ground. In the case, however, of corporate bonds or obligations containing an appropriate tax-free covenant clause, the corporation paying a State tax or any other than a Federal tax for someone else pursuant to its agreement may deduct such payment as interest paid on indebtedness. (Art. 565, Reg. 45, Rev., April 17, 1919.) 214 TAX INC. CREDIT FOR TAXES. 1281 Lawp24. Taxes Imposed by Foreign Countries Are Either De- ductible by or Allowed as a Credit to Citizens and Residents. — “(d) in the case of a citizen or resident of the United States, by the authority of any foreign country, except the amount of income, war-profits and excess-profits taxes allowed as a credit under section 222 [P283] 1282 Lawjf299. All Foreign Taxes Are Deductible or Allowed as a Credit to Domestic Corporations. — “(d) in the case of a domestic corporation, by the authority of any foreign country, except the amount of income, war-profits and excess-profits taxes al- lowed as a credit under section 238 []fl295] ; or” 1283 Law |[226. Credit for Taxes. — “Sec. 222. (a) That the tax com- puted under Part II [individual normal and surtax] of this title shall be credited with 1284 Law \221. Certain Income and Excess-Profits Taxes Paid to Foreign Countries and All Such Taxes Paid to Pos- sessions of the United States by Citizens to be Credited. — “(1) In the case of a citizen of the United States, the amount of any income, war- profits and excess-profits taxes paid during the taxable year to any foreign country, upon income derived from sources therein, or to any possession of the United States; and” 1285 Law j[228. Income and Excess-Profits Taxes Paid to Possessions of the United States by Residents Are to be Credited. — “(2) In the case of a resident of the United States, the amount of any such taxes paid during the taxable year to any possession of the United States; and” 1286 Law T[229. Certain Income and Excess-Profits Taxes Paid to For- eign Countries by Alien Residents Are to be Credited. —“(3) In the case of an alien resident of the United States who is a citizen or subject of a foreign country, the amount of any such taxes paid during the taxable year to such country, upon income derived from sources therein, if such country, in imposing such taxes, allows a similar credit to citizens of the United States residing in such country; and” 1287 Law 1(230. Proportionate Parts of Certain Income and Excess- Profits Taxes Paid to Foreign Countries and of All Such Taxes Paid to Possessions of the United States to be Credited to Members of Partnerships and to Beneficiaries of Estates or Trusts. — “(4) In the case of any such individual who is a member of a part- nership or a beneficiary of an estate or trust, his proportionate 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.” 1288 Law|[231. Adjustment of Any Difference Between Amount of Tax Paid and Amount Accrued. — “(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 215 INC. TAX CREDIT FOR TAXES. 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 [^2121]. In the case of such a tax accrued but not paid, the Commissioner as a condition pre- cedent to the allowance of this credit may require the taxpayer to give a bond with sureties satisfactory to and to be approved by the Com- missioner in such penal sum as the Commissioner may require, con- ditioned for the payment by the taxpayer of any amount of tax found due upon any such redetermination ; and the bond herein prescribed shall contain such further conditions as the Commissioner may require/’ 1289 Law lf232. Credits for Income and Excess-Profits Taxes Paid to Foreign Countries and to Possessions of the United States to be Allowed Only if Satisfactory Evidence be Furnished. — ‘'(c) These credits shall be allowed only if the taxpayer furnishes evidence satisfactory to the Commissioner showing the amount of income derived from sources within such foreign country or such possession of the United States, and all other information necessary for the computation of such credits.” 1290 Analysis of Credit for Taxes.— (1) In the case of a citizen of the United States, whether resident or nonresident, the basis of the credit for taxes is as follows: (a) ‘‘The amount of any income, war-profits and excess-profits taxes paid” or accrued “during the taxable year * * * to any possession of the United States”; (b) “the amount of any” such taxes paid or accrued, “during the taxable year to any foreign country, upon income derived from sources therein’^ ; and (c) the “pro- portionate share of” any “such taxes of” a partnership of which he is a partner or of an estate or trust of which he is a beneficiary paid or accrued, “during the taxable year to a foreign country or to any posses- sion of the United States, as the case may be.” 1291 (2) In the case of an alien resident of the United States the basis of the credit for taxes is as follows: (a) “The amount of any income, war-profits and excess-profits taxes paid” or accrued “during the taxable year * * * possession of the United States” (identical with (1) (a) above); (b) “the amount of any such taxes paid” or accrued “during the taxable year to” the country of which he is a citizen or subject, “upon income derived from sources therein, if such country, in imposing such taxes, allows a similar credit to citizens of the United States residing in such country”; and (c) the “proportionate share of” any “such taxes of” a partnership of which he is a partner or of an estate or trust of which he is a beneficiary paid or accrued “during the taxable year to” the country of which he is a citizen or subject (“if such country, in imposing such taxes, allows a similar credit to citizens of the United States residing in such country”), “or to any possession of the United States, as the case may be.” (Art. 381, Reg. 45, Rev., April 17, 1919.) 1292 Meaning of Terms. — “Amount of * * * taxes paid during the taxable year” means taxes proper (no credit being given for amounts representing interest or penalties) paid or accrued during the taxable year INC. 216 TAX CREDIT FOR TAXES. on behalf of the individual claiming credit. “Foreign country” includes within its meaning any foreign sovereign state or self-governing colony (for example, the Dominion of Canada), but does not include a foreign municipality (for example, Montreal) unless itself a sovereign State (for example, Hamburg). “Any possession of the United States” includes, among others, Porto Rico, the Philippines and the Virgin Islands. As to the meaning of “sources,” see articles 91-93 [beginning at jfl545]. See also Section 1 of the statute. (Art. 382, Reg. 45, Rev., April 17, 1919.) 1293 Conditions of Allo^vance of Credit. — (a) When credit is sought for income, war profits or excess profits taxes paid other than to the United States, the income tax return of the individual must be accom- panied by form 1116, carefully filled out with all the information there called for and with the calculation of credits there indicated, and duly signed and sworn to. or affirmed. When credit is sought for taxes already paid the form must have attached to it the receipt for each such tax payment. When credit is sought for taxes accrued the form must have attached to it the return on which each such accrued tax was based. This receipt or return so attached must be either the original, a duplicate original, a duly certified or authenticated copy, or a sworn copy. In case only a sworn copy of a receipt or return is attached, there must be kept readily available for comparison on request the original, a duplicate original or a duly certified or authenticated copy, (b) In the case of a credit sought for a tax accrued but not paid, the Commissioner may require as a condition, precedent to the allowance of credit a bond from the taxpayer in addition to form 1116. If such a bond is required, form 1117 shall be used for iU It shall be in such penal sum as the Commissioner may prescribe, and shall be conditioned for the payment by the taxpayer of any amount of tax found due upon any redetermination of tax made necessary by such credit proving incorrect, with such further conditions as the Commissioner may require This bond shall be executed by the taxpayer, his agent or repre- sentative, as principal, and by sureties satisfactory to and approved by the Commissioner. See also section 1320 of the statute [for acceptance of United States bonds in lieu of sureties, p500]. (Art. 383, Reg. 45, Rev., April 17, 1919.) 1294 Redetermination of Tax When Credit Proves Incorrect. — In case credit has been given for taxes accrued, or a proportionate share thereof, and the amount that is actually paid on account of such taxes, or a proportionate share thereof, is not the same as the amount of such credit, or in case any tax payment credited is refunded in whole or in part, the taxpayer shall immediately notify the Commissioner. The Commis- sioner will thereupon redetermine the amount of the income tax of such taxpayer for the year. or years for which such incorrect credit was granted. The amount of tax, if any, due upon such redetermination shall be paid by the taxpayer upon notice and demand by the collector. The amount of tax, if any, shown by such redetermination to have been overpaid shall be credited against any income, war profits or excess profits taxes, or install- ment thereof, then due from such taxpayer under any other return, and any balance of such amount shall be immediately refunded to him. See section 252 of the statute and articles 1031-1038 [for abatement, credit and refund of taxes, 1J2115]. (Art. 384, Reg. 45, Rev., April 17, 1919.) INC. 217 TAX CREDIT FOR TAXES. 1295 Law T|337. Credit to a Domestic Corporation Against Federal In- come and War and Excess-Profits Taxes for Certain Income and Excess-Profits Taxes paid to Foreign Countries and for all Such Taxes Paid to United States Possessions During the Taxable Year. — “Sec. 238. (a) That in the case of a domestic corporation the total taxes imposed for the taxable year by this title and by Title III [war and excess-profits tax] shall be credited with the amount of any income, war- profits and excess-profits taxes paid during the taxable year ” 1296 Law T[338. “to any foreign country, upon income derived from sources therein,” 1297 Law ]f339. “or to any possession of the United States.” 1298 Law ^340. “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 Commissioner who shall redetermine the amount of the taxes due under this title and under Title III 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 section 252 [j[2121]. In the case of such a tax accrued but not paid, the Commissioner as a condition pre- cedent to the allowance of this credit may require the corporation 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 Com- missioner may require.” [For United States bonds as security see p500.] 1299 Lawp41. “(b) This credit shall be allowed only is the taxpayer furnishes evidence satis factoi*y to the Commissioner showing the amount of income derived from sources within such foreign country or such possession of the United States, as the case may be, and all other information necessary for the computation of such credit.” 1300 Lawp42. Credit to a Domestic Corporation Making Return for Fiscal (Not Calendar) Year Ending in 1918. — “(c) If a domestic corporation makes a return for a fiscal year beginning in 1917 and ending in 1918, only that proportion of this credit shall be allowed which the part of such period within the calendar year 1918 bears to the entire period.” 1301 Credit for Foreign Taxes. — For the meaning of the terms used in section 238 of the statute see section 1 and article 382 [^292]. To secure such a credit a domestic corporation must pursue the same course as that prescribed for an individual by article 383 [][1293], ex- cept that form 1118 is to be used for claiming credit and form 1119 for the bond, if a bond be required. For the redetermination of the tax, when a credit for such taxes has been rendered incorrect by later develop- ments, see article 384 [P294], all of the provisions of which apply with equal force to a corporation taxpayer. For credit where taxes are paid bv a foreign corporation controlled by a domestic corporation see article 636 [1T18451. A claim for credit in such a case is also to be made on form 1118. (Art. 611, Reg. 45, Rev., April 17, 1919.) INC. 218 TAX DEDUCTIONS— LOSSES. 1302 Credit for Taxes Paid at the Source.— Read p719. 1303 Lawp26. All Business Losses Not Compensated For Are De- ductible by Individuals. — “(4) Losses sustained dur- ing the taxable year and not compensated for by insurance or otherwise if incurred in trade or business”; ' Losses Sustained by Corporations Are Deducted.— Losses sustained during the taxable year and not compensated tor by insurance or otherwise,” 1305 Losses.— Losses_ sustained during the taxable year and not com- pensated for by insurance or otherwise are fully deductible (except by noniesident aliens) if (a) incurred in the taxpayer’s trade or busi- ness, or (b) incurred in any transaction entered into for profit, or (c) arising from fires, storms, shipwreck or other casualty, or from theft. They must usually be evidenced by closed and completed transactions. In the case of the sale of assets the' loss will be the difference between the cost thereof, less depreciation sustained since acquisition, or the fair market value as of March 1, 1913, if acquired before that date, less depreciation since sustained, and the price at which they were disposed of. See Section ^oiii statute and articles 39-46 [for .sale of certain assets, beginning at and 1561 [for basis for determining gain or loss from sale, IflOSSl. v\ hen the loss is claimed through the destruction of property by fire flood or other casualty, the amount deductible will be the difference between the cost of the property, or its fair market value as of March 1, 1913, and the salvage value thereof, after deducting from the cost or value as of March 1 1913 the amount, if any, which has been or should have been set aside and deducted in the current year and previous years from gross income on account of depreciation and which has not been paid out in making good the depreciation sustained. But the loss should be reduced by the amount of any insurance or other compensation received. See articles 49 [for com- pensation for loss, T[941] and 50 [for replacement fund for loss ^[9421 A loss in the sale of an individual’s residence is not deductible. Losses in “p^^l^jansactions are not deductible. (Art. 141, Reg. 45, Rev., April 1306 Voluntary Removal of Buildings.— Loss due to the voluntary re- moval or demolition of old buildings, the scrapping of old ma- chmery equipment, etc., incident to renewals and replacements will be deductible from gross income in a sum representing the difference be- tween the cost of such property demolished or scrapped and the amount of a reasonable allowance for the depreciation which the property had undergone prior to its demolition or scrapping; that is to say, the deductible loss IS only so much of the original cost of the property, less salvage, as would have remained unextinguished had a reasonable allowance been charged off for depreciation during each year prior to its destruction When a taxpayer buys real estate upon which is located a building which he proceeds to raze with a view to erecting thereon another building, it will be considered that the taxpayer has sustained no deductible loss by reason of the demolition of the old building, and no deductible expense on account of the cost of such removal, the value of the real estate, exclusive of old improvements, being presumably equal to the purchase price of the land INC. 219 TAX DEDUCTIONS— LOSSES. and building plus the cost of removing the useless building. (Art. 142, Reg. 45, Rev., April 17, 1919.) 1307 Loss of Useful Value.— When through some change in business conditions ,th.Q usefulness in the business of some or all of the capital assets is suddenly terminated, so that the taxpayer discontinues the business or discards such assets permanently from use in the busii^ss, he may claim as a loss for the year in which he takes such action the differ- ence between the cost or the fair market value as of March 1, 1913, of any asset so discarded (less any depreciation allowances) and its salvage value remaining. This exception to the rule requiring a sale or other disposition of property in order to establish a loss requires proof of some unforeseen cause by reason of which the property must be prematurely discarded, as, for example, where machinery or other property must be replaced by a new invention, or where an increase in the cost of or other change in the manu- facture of any product makes it necessary to abandon such manufacture, to which special machinery is exclusively devoted, or where new legislation directly or indirectly makes the continued profitable use of the property im- possible. This exception does not extend to a case where the useful fife of property terminates solely as a result of those gradual processes for which depreciation allowances are authorized. It does not apply to inventories or to other than capital assets. The exception applies to buildings only when they are permanently abandoned or permanently devoted to a radically different use, and to machinery only when its use as such is permanently abandoned. Any loss to be deductible under this exception must be charged off on the books and fully explained in returns of income. But see articles 181-188 [for the special amortization provisions, P385]. (Art. 143, Reg. 45, Rev., April 17, 1919.) 1308 Shrinkage in Securities and Stocks. — A person possessing securi- ties. such as stocks and bonds, can not deduct from gross income any amount claimed as a loss on account of the shrinkage in value of such securities through fluctuation of the market or otherwise. The loss allowable in such cases is that actually suffered when the securities mature or are disposed of. See, however, article 154 [for worthless securities as bad debts, 111323]. In the case of banks or other corpora- tions which are subject to supervision by State or federal authorities, and which in obedience to the orders of such supervisory officers charge off as losses amounts representing an alleged shrinkage in the value of property, the amounts so charged off do not constitute allowable deduc- tions. The foregoing applies only to owners and investors, and not to dealers in securities, as to whom see article 1585 [If 1095]. However, if stock of a corporation becomes worthless, its cost or its fair market value as of March 1, 1913, if acquired prior thereto, may be deducted by the owner in the taxable year in which the stock was ascertained to be worth- less and charged off, provided a satisfactory showing of its worthlessness be made as in the C 3 se of bad debts. See article 151 [for bad debts, 111318]. (Art. 144, Reg. 45, Rev., April 17, 1919.) 1309 Irrigation Bonds. — District irrigation bonds generally are a lien upon the real estate affected by the irrigation project, and until a corporation holding such bonds has taken the necessary action to^ protect its interest and enforce the collection of the bonds the corporation will 220 TAX % INC. DEDUCTIONS— BAD DEBTS. pnv income, as a loss, the face value or value orsurh ^ represent a loss or shrinkage in the value of such bonds. Any estimated shrinkage in the value of bonds or other securities does not constitute a loss within the meaning of^this can not hi°T j security is uncertain or unknown a loss ;?ri?7iV.?;5 ^aSTras'*)"'* “ 1810 Law1[127. Losses in Transaction Entered Into for Profit Out- ductible T Business, if Not Compensated for, Are De- auctiDle. (5) Losses sustained durine the taxable 4- pensated for by insurance or otherwisf ^ inctmred fn hv t-” runhf connected with the trade L busfnes^-^ se^e P304.]° general provisions applicable to corporations 1311 Law p29. Property Losses Outside of Business, if not Com- dmdng the taxable fear'^ol prS’er'trnJt'SrnecteTwUh the'trade'orZ?. 13- LawpSL “H^ari.ng^from fires -™s ^ to IVEake Return Even ThnncrVi Mrt t Deductible Losses SustaiLZ-RSl "t P772 1314 Basis of Determining Gain or Loss. — Read at flOSS. 1315 Net Losses.— Read at P097. 1316 Lawp32. Worthless Debts Are Deductible.-“(7) Debts ascer- able year”; worthless and charged off within the tax- indicate that a debt is worthless and^ and attendant circumstances sufficient evidence of the worthlessness of Z k! *®®\f^cts will be IS sometimes possible before nnrl Lmessness in such a case bankruptcy shall have been had Where ^ ^ settlement in be worLe^ss and changed it Sin -^Tear, proceedings mstituted against the debhr ^re terSnaZ in a confirming the conclusion that the debt is worthless wiZnt E. INC. 221 TAX DEDUCTIONS— BAD DEBTS. March 1, 1913, only their value on that date may be deducted upon sub- sequently ascertaining them to be worthless. See article 52 [for recoveries of bad debts, 11945]. If a taxpayer computes his income upon the basis of valuing his notes or accounts receivable at their fair market value when received, which may be less than their face value, the aniount deductible for bad debts in any case is limited to such original valuation. (Art. 151, Reg. 45, Rev., April 17, 1919.) 1319 Examples of Bad Debts.— Worthless debts arising from unpaid v/ages, salaries, rents and similar items of taxable income will not be allowed as a deduction unless the income such items represent has been included in the return of income for the year in which the deduction as a bad debt is sought to be made or in a previous year. Only the difference between the amount received in distribution of the assets of a baimmpt and the amount of the claim may be deducted as a bad debt. The differ- ence between the amount received by a creditor of a decedent m distribution of the assets of the decedent’s estate and the amount of his claim may be considered a worthless debt. A purchaser of accounts receivable which can not be collected and are consequently charged off the books as bad debts is entitled to deduct them, the amount of deduction to be based ig)on the price he paid for them and not upon their face value. (Art. 152, Reg. 45, Rev., April 17, 1919.) 1320 Worthless Mortgage Debt. — Where under foreclosure a mortgagee buys in the mortgaged property and credits the indebtedness with the purchase price, the difference between the purchase price and the indebted- ness will not be allowable as a deduction for a bad debt, for the property which was security for the debt stands in the place of the debt. The determ- ination of loss in such a situation is deferred until the property is disposed of, except where a purchase money mortgage is foreclosed by the vendor of the property. See article 46 [for losses in connection with deferred payments on sales of real estate on the installment plan, [[937]. Only where a purchaser for less than the debt is another than the mortgagee may the difference between the debt and the net proceeds from the sale be deducted as a bad debt. (Art. 153, Reg. 45, Rev., April 17, 1919.) 1331 Compromise.— Where an indebtedness is claimed and contested and a settlement is had by way of compromise whereby an amount, less than the debt claimed, is accepted in full payment and satisfaction of the debt the difference between the amount paid and that claimed is not allowable as a deduction for bad debts. Where the settlement in com- promise consists of a promise to pay an amount lep than the debt claimed the amount promised to be paid forms the basis of a ne'w trans- action, and upon failure to make good this promise the question will arise as to the deductibility of the new amount only. (Art. 8, ]|93, Reg. 33, Rev., Jan. 2, 1918.) 1322 Reserves for Losses Not Deductible.— Reserves to take care of anticipated or probable losses are not a proper deduction from gross income. (Art. 126, Reg. .33, Jan. 5, 1914.) 1323 Worthless Securities. — Where bonds purchased before March 1, 1913 depreciated in value between the date of 'purchase and that date, and were in a later year ascertained to be worthless and charged off. INC. 222 TAX DEDUCTIONS— DEPRECIATION. the owner IS entitled to a deduction in that year equal to the value of the bonds on March 1, 1913. Bonds purchased since February 28, 1913 when ascertained to be worthless, may be treated as bad debts to the amount actually paid for them, but not exceeding their amortized value if purchased at a prernium. Bonds of an insolvent corporation secured only by a mort- from which on foreclosure nothing is realized for the bondholders are re- garded as ascertained to be worthless not later than the year of the fore- c osure sale, and no deduction for a bad debt is allowable in computing a j ^ income for a subsequent year. To authorize a deduction for a bad debt on account of notes held prior to March 1, 1913, their) value on that date must be established. (Art. 154, Reg. 45, Rev., April 17, 1919.) 1324 1325 Amounts Received as Dividends by Individuals as a Credit for Normal Tax Purposes.— [p 5 16.] Law p04. Amounts Received as Dividends by Corporations Are Deductible. ‘(6) Amounts received as dividends from a corporation which is taxable under this title upon its net income, and” 1326 Law P05. ‘‘amounts received as dividends from a personal service corporation out of earnings or profits upon which income tax has been imposed by Act of Congress [read at j|813] 1327 Earnings of Subsidiary Company. — In a case wherein a holding company actually takes up each month on its books and credits sur- plus or profit and loss with its proportionate share of the earnings of the underlying companies, such holding company will be required to- include in its gross income the amounts thus taken up, regardless of the fact that the same may not have been actually paid to or received by it in cash. The fact that the underlying companies credit the holding company with the amount of earnings to which it is entitled on the basis of the stock it holds together with the fact that the holding company takes up on its books the amount thus ci edited, renders it incumbent upon the holding company to ^ income. [But see “Consolidated returns,” P821.] (Art. 115, T[386, Reg. 33, Rev., Jan. 2, 1918.) 1328 Lawp33. Reasonable Allowance for Depreciation of Business Property is Deductible.— “(8) A reasonable allowance tor the exhaustion, wear and tear of property used in the trade or business including a reasonable allowance for obsolescence;’ 1329 LawpOe. [Corporations.]-‘'(7) A reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence;” 1.330 Depreciation.— A reasonable allowance for the exhaustion, wear and tear and obsolescence of property used in the trade or business may be deducted from gross income. For convenience such an allow- ance will usually be referred to as covering depreciation, excluding from the terrn any idea of a mere reduction in market value not resulting from exhaustion, wear and tear or obsolescence. The proper allowance for such depreciation of any property used in the trade or business is that amount which should be set aside for the taxable vear in accordance with a consistent plan by which the aggregate of such amounts for the useful life of the property in the business will suffice, with the salvage value, at INC. 223 TAX DEDUCTIONS— DEPRECIATION. the end of such useful life to provide in place of the property its cost, or its value as of March 1, 1913, if acquired by the taxpayer before that date. See further articles 839 and 844 [for depreciation in connection with in- vested capital. — War Tax Service]. (Art. 161, Reg. 45, Rev., April 17, 1919). 1331 Depreciable Property. — The necessity for a depreciation allow- ance arises from the fact that certain property used in the business gradually approaches a point where its usefulness is exhausted. The al- lowance should be confined to property of this nature. In the case of tangible property, it applies to that which is subject to wear and tear, to de- cay or decline from natural causes, to exhaustion, and to obsolescence due to the normal progress of the art or to becoming inadequate to the growing needs of the business. It does not apply to inventories or to stock in trade; nor to land apart from the improvements or physical development added to it. It does not apply to bodies of minerals which through the process of removal suffer depletion, other provision for this being made in the statute. See articles 201-233 [for depletion p407]. Property kept in repair may, nevertheless, be the subject of a depreciation allowance. See article 103 [for repairs, ][1200]. The deduction of an allowance for depreciation is limited to property used in the taxpayer’s trade or business. No such al- lowance may be made in respect of automobiles or other vehicles used chiefly for pleasure, a building used by the taxpayer solely as his residence, nor in respect of furniture or furnishings therein, personal effects, or clothing; but properties and costumes used exclusively in a business, such as a theatrical business, mav be the subject of a depreciation allowance. (Art. 162, Reg. 45, Rev., April 17, 1919.) 1332 Depreciation of Intangible Property. — Articles 163, Regulations No. 45, is modified to read as follows by eliminating therefrom the last sentence reading. “There can be no such allowance in respect of good will, trade names, trademarks, trade brands, secret formulae or processes” : Art. 163. Depreciation of intangible property. Intangibles, the use of which in the trade or business is definitely limited in duration, may be the subject of a depreciation allowance. Examples are patents and copyrights, licenses and franchises. Intangibles, the use of which in the business or trade is not so limited, will not usually be a proper subject of such an allowance. If, however, an intangible asset acquired through capital outlay is known from experience to be of value in the business for only a limited period, the length of which can be estimated from experience with reasonable certainty, such intangible asset may be the subject of a depreciation allowance, pro- vided the facts are fully shown in the return or prior thereto to the satis- faction of the Commissioner. (T. D. 2929, October 7, 1919, amending Art. 163, Reg. 45, Rev.) 1333 Allowance for Obsolescence of Good-will, Trade-marks, and Trade Brands in the Case of Distillers, Dealers in Liquors, etc. — Receipt is acknowledged of your letter of March 12, 1919, in which you re- quest a ruling to the effect that distillers and dealers in liquors may for the year 1918 take a reasonable amount of obsolescence of good- will, trade-marks, and trade brands, the value of which has been impaired or destroyed by prohibition legislation. In reply you are advised that a 224 TAX INC. DEDUCTIONS— DEPRECIATION. reasonable allowance for obsolescence of such assets may be taken by dis- tillers and dealers in liquors against earnings between November 21, 1918, the date upon which the Agricultural Appropriation act, providing for war- time prohibition was enacted, and July 1, 1919, the date upon which the war- time prohibition is to become effective. To sustain a claim for a deduction for obsolescence in respect of good-will, trade-marks, or trade brands, the taxpayer must show that the value of the property in question has been destroyed or will be destroyed not later than June 30, 1919, and that the taxpayer is not continuing in any similar trade or business. An allowance will be made only in respect of such assets as are assignable as distinguished from those attaching to the individuals owning or conducting the business or to the premises at which it is being or has been conducted. No allowance for obsolescence will be made in any case where, in connection with the operation of his previous business, the taxpayer has developed a good-will, trade-mark, or trade brand that will be valuable in continuing a lawful business after June 30, 1919. 1334 The values will be based on those as at March 1, 1913, if the good- will, trade-marks, or trade brands were acquired or established prior to that date, or atMie actual cost thereof, if acquired subsequent to February 28, 1913. 133o Information helpful in establishing the values would be of the fol- lowing general character : 1336 A. Where the good-will, trade-marks, or trade brands were ac- quired prior to March 1, 1913: 1. The nature of business (whether distillers, wholesalers, or retailers, or a combination thereof.) 2 . Date of foundation of business and whether organized as an individual, partnership, or corporation. Also date and par- ticulars of each change in the ownership or form of organiza- tion of the business, such as the admission or retirement of a partner or partners; the incorporation of a company and of each reorganization thereof. 3. In respect to the trade-marks or trade brands for which a deduction is claimed : (a) The date established and by whom. (b) The date of acquisition by the present owners. (c) The price paid therefor and whether paid in cash or stock; if the latter, state the basis of the valuation on which the purchase price was determined. (d) For each year from 1900 or the date of the establish- ment of the trade-mark or trade brand, if subsequent to that year to 1919 inclusive: (I) Annual sales (quantity and amount). (TT) The gross profit on sales (i. e., the difference be- tween the selling price and the cost price of the mer- chandise sold). nil) The total expenses and losses of the business which, when deducted from the gross profit on sales, will produce — fIV) The net income. Where the records permit, the sales and gross profit on sales should be submitted for each class of merchandise INC. 225 TAX DEDUCTIONS— DEPRECIATION. (1336) sold and, if possible, for each trade-mark or trade brand in respect of which a deduction is claimed. (V) The amount of capital invested in the business (i. e., capital or capital stock and paid in or earned surplus and undivided profits) as at the beginning of each year. (VI) The amount included in the invested capital at the beginning of the period in respect of good-will, trade- marks, or trade brands and the date and amount of each subsequent addition to the good-will, trade-marks, or trade brands. (e) Full details of each offer to purchase any of the trade- marks or trade brands, setting forth in particular the date of each offer, by whom and on whose behalf made; the amount of each offer, and whether payable in cash or stock ; and the date or dates on which the purchase price was proposed to be paid, and the amounts to be paid on each such date. 4. Where a deduction is claimed in respect of good-will, as distinct from trade-marks or trade brands, the following informa- tion should be submitted : (a) The date of acquisition, and from whom acquired. (b) The amount paid therefor and whether paid in cash or in stock. If the latter, state the basis of the valuation on which the purchase price was arrived at. (c) For each year from 1900 or the date of acquisition, if subsequent to that year, to 1919, inclusive: (I) The annual sales of the business (quantity and amount) classified, if possible, as to the various kinds of merchandise sold. (II) Gross profit on each class of merchandise sold, or if the records do not disclose the information, the gross profit of the business as a whole. (III) Total yearly expenses and losses of the business which, when deducted from the gross profit on sales, will produce — (IV) The net income from the business. (V) The amount of capital invested in the business (i. e., capital or capital stock and paid in or earned surplus and undivided profits), as at the beginning of each year. (VI) The amount included in invested capital at the beginning of the period in respect of good-will and the date and amount of each subsequent addition to good- will, trade-marks, or trade brands. (d) Full details of each offer to purchase the good-will, setting forth in particular the date of each offer; by whom and in whose behalf made; the amount of each offer and whether payable in cash or in stock, and the date or dates on which the purchase price was proposed to be paid, and if on more than one date, the amount payable on each such date. 1337 B. Where good-will, trade-marks, or trade brands were acuired subsequent to February 28, 1913 : (1) Dates of acquisition of good-will or of each trade-mark or trade brand. (2) From whom acquired. INC. 226 TAX arlj : si: vioiTAio3Hq3a--aMOiT3uaaa DEDUCTIONS— DEPRECIATION. Lin aib ,8JQI Jc \ '£ijnrJ lO 3JBb -d^^cje-niark ar.-Uad^ r-vrf ^ brand? rrfr * 3LrmfffCA2rb am vinoiA 37£D iLi> ^ '4'f ^?the^yaluatipn 0 Qnj\v^^ was -arrived cax.2t 3f{7 bInoi!£ plxjb 'isjhna n£ 7n ’lo GbPi 8231:; % j20D 5Li^^ lu^: 3fb msb -13 b'!,.:: : ;^ 34:. ^nd in .''i •j.pamarjg. airb aamiitrrooaib 73v.nq;^£7 - . }f ears prior to -T ., ac- mm. rr T.,^Sii|S .p;?^ b^jq7?13^E^t^tenifintps3io^i &e;subm snbWin'g’ the' aeveiOptnent of pfoHihitionr^nd iQeal^pptidnJaws within the territory of the taxpayer during the fiVe years VrededingriVIarcH ^ Sup^jStatepjipnt shouM sl^w eac4::ProhiH ptr local opriO:Q Jaw ..enacted of t^payet; and'shotddal^b'^sfate th% unsifccessdui ^e ff o r f s r at ‘ s'u cH legis- ^i5c4bP«^dd.^^^^(Eetirerrit)'Wr/L4^^^ Washington, D- Gipsl^hedtbrC-oinniissidni^iIJa^^ antf dated tiihe 21; iPlP.V yt 3:;b ,23i7;7n332 s:;:! bnc &>do :2 , 2 Dn:::i ■ ..: ::• ^. , mm.ia ^ considered: th§. request: Gpntained in your letter of June 23 last for a modificati on . tjf the rulmg" relative to - obso- lescence^ of^ good-will, trade-marks, and trade brands of distillers and dealers .in liquors,: ;the value^of which has beep rimpa^^^^^ destroyed by prohibition legislatidn,: contained in Jhis: departmeiLt’s letter to you. of June P^rdonlar modification yQU'>desire is an .extension of the period set fprdl jq, the ruling- ^ajbq^^ referred - to againsri the^ earnings ; of which; the obsojescence may ! be. taken as ^ deduction. Jg- : / foplyg>^ou atO:adYised? (IJ4haridi.std-lefs and' dealers in. liquors are entitled to make a deduction (hasedgupon; actual cost or fair mar- ket value as of March 1, 1913) from gross income, on account of deprecia- ^hsolescencc ok, their intangibles, such as : good will, trade:-marl<:s, trade; brands^, etc.i -such deduction- being limited to a^ignable assets, the value of which hasybeen- destroyed by prohibition legislation, and (2) that in arriving at the taxable income for the, first taxable year ending on or after January 31^ 1918, tfie obsolescence -fully accrued on that dateris to be allowed as a deduction in computing the income subject to. taxation under the Jievenue Act of 1918,., plus a further, deduction .o£ suchl proportion of the remaining value of the intangible assets as the interval between; January 31,- lr918,-and the end of thcriaxable year ‘bears to the total interval between January 31, 1918, and January lh, ,1920, (unless at anbearlier date the tax- payer discontinues his business:, in which case such earlier date shall mark the close of the periodj; and (3). that for any taxable year following the taxable year -just referred to. a deduction in respect, of the v<ie of such intangible assets on January 31, 191<8, based upon^'a ratable distribution will be permissible. ' i ' < ■ J,.342 the opinion of the-department that the; ratification of. the 18th amendment in thernonth of January, 1918, by the States of Massa- chusetts, Maryland, and Kentucky, was the first definite indication that the prohihititMi aAiendment . would he ratifieckbyr^he -requisite- qumben. of State Legislatures,, and therefore that osi January 31, 1918, a computable portion of the cost of good will, trade-marks, trade iH-ands, or‘ the value thereof, on March: 1, 1913 if acquired prior thereto (excluding any intangibles acquired mnce that date, the expenditures of which \Vere deductible and had been deducterl in computing income for tax purposes) had become obsolescent. INC. 227 TAX DEDUCTIONS—DEPRECIATION. On January 31, 1918, the intangible assets had an actual value, viz : the then present value of the income to be derived therefrom between that date and January 16, 1920, or at an earlier date should the taxpayer discontinue his business prior thereto. This value as stated above should be distributed ratably over the period from January 31, 1918, to January 16, 1920 (unless at an earlier date the taxpayer discontinues his business, in which case such earlier date shall mark the close of the period). The excess of the cost of the intangibles or the value thereof, on March 1, 1913, if acquired prior thereto (subject to the exclusions mentioned above), over the value thereof, as of January 31, 1918, determined as outlined above, will represent the amount of obsolescence that was fully accrued on January 31, 1918. (I^etter to Mr. Levi Cooke, Washington, D C., signed by Acting Commissioner J. H. Callan, and dated August 19, 1919.) 1343 Depreciation in the Value of Stocks, Bonds* etc. [Read ]fl308 and jfl323.] [For inventories of securities by dealers therein, read at ]fl095.] — The depreciation referred to in the income tax law does not relate to evidence of a right or interest in property and hence, any shrink- age in the value of bonds, stocks, and like securities, due to fluctuations in their market value, is not deductible in a return of income as depreciation or loss. (T. D. 2005, July 8, 1914.) 1344 sK « jk depreciation, applies only to such tangible property as is subject to wear and tear, exhaustion and obsolescence, and is not to be construed as recognizing any gain or loss due to fluctuations in the market value or arbitrary changes in the book value of securities and like assets, the gain or loss with respect to which will be determined only when such assets mature, or are sold or disposed of — that is, when there is a completed, a closed transaction. (T. D. 2077, Nov. 21, 1914.) 1345 Bonds and securities are not subject to wear and tear within the meaning of the Federal income tax law, and therefore depreciation does not apply to any shrinkage in their value. Shrinkage in the value of securities, as such, does not constitute a loss actually sustained within the year, the amount of which is definitely ascertained. Therefore, under the rules of this office and consistent with the provisions of the law, a shrinkage in the value of bonds or like securities does not constitute an allowable de- duction from gross income either as loss or depreciation. 1346 xhe fact that bonds and similar securities were written off at the direction of the Comptroller of the Currency or the State banking department is not material. A mere book entry does not constitute either a loss or gain for the purpose of the income tax. The fact that bonds were written off does not necessarily imply that they are a total loss, nor is this act a conclusive proof that any loss accurred during the year for which the return is made. [See P308.] -^347 Losses of this character are only ascertainable when the securities mature, are disposed of, or cancelled. (T. D. 2152, Feb., 12, 1915.) 1348 Capital Sum Recoverable Through Depreciation Allowances. — The capital sum to be replaced by depreciation allowances is the cost of the property in respect of which the allowance is made, except that in the case of property acquired by the taxpayer prior to March 1, 1913, the capital sum to be replaced is the fair market value of the property as of 228 TAX INC. 8 - 28 . 20 . DEDUCTIONS— DEPRECIATION. that date. In the absence of proof to the contrary, it will be assumec^ that such value as of March 1, 1913, is the cost of the property less depreciation up to that date. To this sum should be added from time to time the cost of improvements, additions and betterments, the cost of which is not deducted as an expense in the taxpayer’s return, and from it should be deducted from time to time the amount of any definite loss or damage sustained by the property through casualty, as distinguished from the gradual exhaustion of its utility which is the basis of the depreciation allowance. In the case of the acquisition after March 1, 1913, of a combination of depreciable and nondepreciable property for a lump price, as, for example, land and build- ings the capital sum to be replaced is limited to that part of the lump price which represents the value of the depreciable property at the time of such acquisition. (Art. 164, Reg. 45, Rev., April 17, 1919.) 1349 Value of Purchased Buildings May Have to be Estimated. — In determining the cost of the real estate upon which depreciable prop- erty is located it frequently occurs that no segregation is made of the cost of buildings as separate and distinct from the cost of the ground upon which such buildings stand. In such cases where the actual cost of the buildings or improvements at the time they were taken over by the corporation can not be definitely determined, it will be sufficient for the purpose of determining the rate of depreciation to be used in computing the amount which will be deductible from gross income to estimate the actual value at the time ac- quired, of buildings or improvements if acquired after March 1, 1913, or the fair market price or value as of that date if the property was acquired prior to March 1, 1913, the value in either case to be reduced by the amount of depreciation previously sustained. (Art. 163, ^488, Reg. 33, Rev., Jan. 2, 1918.) 1350 Method of Computing Depreciation Allowance. — The capital sum to be replaced should be charged off over the useful life of the prop- erty either in equal annual installments or in accordance with any othei recognized trade practice, such as an apportionment of the capital sum over units of production. Whatever plan or method of apportionment is adopted must be reasonable and should be described in the return. (Art. 165, Reg. 45, Rev., April 17, 1919.) 1351 Unearned Increment.— Unearned increment will not be considered in fixing the value on which depreciation shall be based. (Art. 146, Reg. 33, Jan. 3, 1914.) 1352 Rate for Computing. — No definite rate has been fixed by which an allowable deduction on account of depreciation in the value of any class of property subject to wear and tear is to be computed, but it is contemplated that this allowance shall be computed upon the basis of the cost of the property and the probable number of years constituting its life. (Art. 162, 1[485, Reg. 33, Rev., Jan. 2, 1918.) 1353 At what rates may depreciation be claimed and under what condi- tions? (Answer.) As the rate at which depreciation may be claimed is dependent, in a greater or less extent, upon local conditions, the use to which the property is put, and its probable lifetime under normal business conditions, no specific rates at which it may be claimed have ever been es- 229 TAX INC. DEDUCTIONS—DEPRECIATION. tablished. The Law states that a “reasonable allowance’’ may be claimed taxpayer to determine what constitutes a “reasonable allow- ance.” To compute the amount which may be claimed, a taxpayer should determine the probable lifetime of the property, then divide its cost to him by the number of years it will be usable in a business in which employed, and the result thus obtained will represent the amount which may be claimed each year as a deduction, e. g., a frame building, the probable lifetime of which, without repair or replacement, is 25 years, cost $5,000. Divide $5,000 by 25, and claim $200 each year as depreciation. 1854 While each taxpayer must determine the probable lifetime of his property without regard to the following figures, it has been esti- mated that the average usable lifetime of a frame building is 25 years, a brick building 35 years ; a stone building or steel and concrete building, 50 to 100 years. The estimated lifetime of ordinary machinery is ten years, that of automobiles used for business or farm purposes and farm tractors, four to five years. (Question 80, 1918 Income Tax Primer.) 1355 Xhe appended chaige of the court to the jury in the District Court of the United States for the Southern District of New York, in the case of Hyman Cohen v. John Z. Lowe, collector, is published for the in- formation of internal-revenue officers and others concerned. (T. D. 2343, June 14, 1916.) Summary of Charge. 1. Depreciation Depends on Life of Building. The physical loss or deterioration a building suffers during the tax year depends on the life of the building; how many years it would remain so as to be habitable for general purposes for which it was constructed. 2. Yearly Deductions. The average amount of deduction each year covers the annual percentage. 3. Deductions for Improvements. When allowance is made for depreciation of a building no deduction shall be allowed for expense of restoring the building or making good the ex- haustion thereof. 4. Exhaustion, Wear and Tear. The word “exhaustion, wear and tear” of a building contemplate only depreciation of the physical property itself, irrespective of its adaptability to the use originally intended or the changing environments. 5. Decrease in Rental Value. No allowance can be made for depreciation by reason of decrease in rental value nor in value arising from lack of modern improvements. Opinion of the Court in the Above Case. [234 Fed. 474.] 1857 The plaintiff was allowed 3 per cent for depreciation on an apartment house owned by him. The burden is on him to show that the depre- ciation so allowed was too small. This allowance is for the wear and tear suffered by the building during the tax year, which means the physical de- terioration that the building suffered during that period. It does not take into account depreciation in value due to a loss in rental value because of the construction of more modern buildings with improved facilities or due to a change in the neighborhood. It is to be based upon the life of the building in the sense of the number of years the building would remain in a condition to be habitable for the use for which it was constructed and used; and which was in the instant case for an apartment house, and not 230 TAX INC. ^^ •the nuriibei-^ 5 ^ it Uoum^^M 'BeH^^abitenit^d anci mM ^d6\\iji; anritfat W^^Vid be^atf 'aJi^buntd-apra^^^^ by d^^cti^m/baving-biie JoT-tbe^n^imyt^ap %e'iitin3)er of ^arsV’reijm^n^bb^'r^^^r^itt^^ Hfe^bPlbebuildfrig Wtje^^ehbffiiri^^ Thi^assbines^Haft-thl^e woukffe^aStJaV^fap^feteiiic^ti^'ltfffa^d^cli’yestf dunhgdHeS’Iifet'OraeybtitJdffig] 4i»^at W^lMitttiiFwotiia^a^liie^buiM^ mg m good repair during the This rih^-law eMtW b™ tlies^ ^assumptions^ and, giving :ttfe^.u^niri^ ¥€a-^najh^,:aljb>vancf th,^ g-:^Ba,us^c^> ri^aai-oi^itbenproperty, prising o^r<9-f;- r-pse rpV e^n)Bteyni^intYin,9thg b;Ugine$:53,”3the£ ab^junt^oriihe dednot^n^aUp{^^^ed rby lfep': <5^y^rpp|^nri.j:^^r,d^7piainrii0E:. ongthia. account- d^n?.^d‘ tOi •bg:;'.i^'^asonabj€.[)3^2^^x'^Odi ^3:if?7 ('iis orlT* .oioisiii 7oiic| rloiiriV: io ei; orrisv i57f7JB.rfi gji lo io jdgrivqoD lo ^notsq oAl io tdoo ddi 135^0. .j^gj^j-ecMtibii^ Ohafa'ta.d^in .9d veT.,^^6SK1fts26r^4bntiku^sl^,^^^eri$nd0'T^r‘mkdb^-h(^d^^8 dMie-frshriMaWin-S^ditah^^ tW^sHiPmIding^0orb3fafidh’hn^d M»^%imM?iah:h»erfts ^hai^^be6n50npfe diMi^hldn^ay to' ^fHethef■ 6r ' hbf -dr?$n]3eba'r Wih/ inbeoi^hricftiibfP^dth’' the'’medhie^dhd dxcOfe’s^' b^ofifs alfeW^d^ ^ d"e^Richoh9d0bf0o?a'tfon^1^%ighdriffi^h fatbs in cas^s^'mefe^^o sMffspa^re b^hgCH^ri&(|dt^ji^ fhe^pfaiti lhachiherf 'and equrph^nt dtri^bpdraf(^d‘^xleen'ib¥ t^ni^-fah^^millrl^^ W|rdrP^l§^ 6f'-*e usual; b^glh V^hme 'hbMgbf ki^ ih^rhi^cf ^hM^if ii^mvibus #iat ‘rh i \^^fe‘^achthr‘;7. ; '.: = romr >7 'v.- , ;'d.:, .7 'ffr i-.' ,. . Mpdiiication of |det1ic^d, of CprnpuUn^ Deprgc^'ri^^ it devel- ,'1 d dsefvil tifcr b{^'(hed^rpj^ bas been underesfjmated, the pfan of conTpiifirig depfeciahon s non Id be' modified and me balance of, fhe cost of the ])roperty, or its fair market value as of March 1, 19Li/not already prQf\dded, ior , through: -^t depreciation reserve on.; deduqted from book vahie,-' should :he spread over the. estii'nated remaining life of- due prop- erty.- A taxpay-er; who in Computing .depreciation ailovrances in retiinis for yearS' prior to 191;8,= has not taken ordinary ohsiolescencedinto .consideration Diayrior the year l91cS- a.ncl subsconent wears rerdsefthe estimate of the use-^ ful life oEanv property so as to aliow for si-ijch future obsolescence as may he CKpected. from :expe.rienGe to- result from thei normal progress of thei art. No mbdrficajt'ion of .the i method shouid be made on account of. ,. changes in -the iimrlcet -value of 'the .pa-f)]>er11y from, time to time, such as,;iOvn' the one hand-, los.s in rentali value jof-huildings*due .to deterioration of dhe neighborr hoody'or, on the other, appreciation; due to ‘increased demanxl,; The condi-r tion 8 affecting; such market values ; should be, 'taken .bito cohridcration only so- far as they affect- the estimatoof the useftiTlife bf ahelpropertv. - (Art. 166, Kdg: 45, ■- It ev/,i "April 17; 1 19101). d ^ v' ; ,t ?.eo\ )■ ; - fid ^ ^ Ti^'c.‘ T'if rAk* DEDUCTIONS— DEPRECIATION. 1360 Depreciation in Excess of Cost. — If it develops that by reason of underestimating the life of the property or by overestimating the rate of deterioration an amount in excess of the yearly depreciation has been taken, tlie rate applicable to future years should at once be reduced and Uie balance of the cost of the property not provided for through a depreciation reserve should be spread over the estimated remaining life of the property. (Art. 165, 11491, Reg. 33, Rev., Jan. 2, 1918.) 1361 Depreciation of Patent or Copyright. — In computing a deprecia- tion allowance in the case of a patent or copyright, the capital sum to be replaced is the cost (not already deducted as current expense) of the patent or copyright or its fair market value as of March 1, 1913, if acquired prior thereto. The allowance should be computed by an apportionment of the cost of the patent or copyright or of its fair market value as of March 1, 1913, over the life of the patent or copyright since; its grant, or since its acquisition by the taxpayer, or since March 1, 1913, as the case may be. If the patent or copyright was acquired from the Government, its cost consists of the various Government fees, cost of drawings, experimental models, attorney’s fees, etc., actually paid. If a corporation purchased a patent and paid for it in stock or securities, its cost is the fair market value of the stock or securities at the time of the purchase. Depreciation of a patent can be taken on the basis of the fair market value as of March 1, 1913, only when affirmative and satisfactory evidence of such value^ is of- fered. Such evidence should whenever practicable be submitted with the return. If the patent becomes obsolete prior to its expiration such propor- tion of the amount on which its depreciation may be based as the number of years of its remaining life bears to the whole number of years intervening between the date when it was acquired and the date when it legally expires may be deducted, if permission so to do is specifically secured from the Commissioner. Owing to the difficulty of allocating to a particular year the obsolescence of a patent, such permission Vv^ill be granted only if affirmative and satisfactory evidence that the obsolescence occurred in the year for which the return is made is submitted to the Commissioner. The fact that depreciation has not been taken in prior years does not entitle the taxpayer to deduct in any taxable vear a greater amount for depreciation than would otherwise be allowable. ' [See 1T1373.] See articles 40 [for sale of patents and copvrights, 1j912] and 843 [for valuing patents for purposes of in- vested capital.— War Tax Service]. (Art. 167, Reg. 45, Rev., April 17, 1919.) 1362 Depreciation of Drawings and Models.— A taxpayer who has in- curred expenses in his business for designs, drawings, patterns, models, or work of an experimental nature calculated to result in improve- ment of his facilities or his product, may at his option deduct such expenses from gross income for the taxable year in which they are incurred or treat such articles as a capital asset to the extent of the amount so expended. In the latter case, if the period of usefulness of any such asset may be esti- mated from experience with reasonable accuracy, it may be the subject of depreciation allowances spread over such estimated period of usefulness. The facts must be fully shown in the return or prior thereto to the satis- faction of the Commissioner. Except for such depreciation allowances no deduction shall be made by the taxpayer^ against any sum so set up as an asset except on the sale or other disposition of such assets at a loss or on proof of a total loss thereof. (Art. 168, Reg. 45, Rev., April 17, 1919.) INC. 232 TAX DEDUCTIONS— DEPRECIATION. 1363 Charging Off Depreciation. — A depreciation allowance, in order u allowable deduction from gross income, must be charged off. The particular manner in which it shall be charged off is not material, except that the amount measuring a reasonable allowance for de- preciation must be either deducted directly from the book value of the as- sets or preferably credited to a depreciation reserve account, which must be reflected in the annual balance sheet. The allowances should be computed and charged off with express reference to specific items, units or groups of property, each item or unit being considered separately or specifically in- cluded m a group with others to which the same factors apply. The tax- payer should keep such records as to each item or unit of depreciable property as will permit the ready verification of the factors used in comput- TsR ^ a ^1919^)^ group. (Art. 169, Reg. 1364 In view of the fact that it has been the practice of examining offi- cers to disallow a deduction for depreciation or depletion if not charged off on the books of the corporation at the time of the investigation it IS deemed necessary to clarify the interpretation of this provision of the 1365 A corporation is not entitled to a deduction from the amount of its ^ gross income of any amount for depreciation, depletion, or other loss sustained within the taxable year unless the amount of such depreciation, j’ charged off on the books of the corporation before such deduction is allowed. The purpose of this requirement that depreci- ation depletion, and other losses be charged off on the books of the corpora- tion before allowance is to insure that the returns of such corporation are m accord with its books of account, and that thereby error and fraud with respect to the facts are prevented. The statute is not, however, to be con- strued as requiring that depreciation, depletion, and other losses be charged ott within the taxable year. It is sufficient that they are charged off before they are allowed as deductions. Consequently at the time of an examina- lon of a corporation it should be given an opportunity to reopen its books and charge off depreciation, depletion and other losses which it actually sustained during the taxable year. 1366 The depreciation, depletion, and other losses must be charged off in ^ the manner prescribed by the regulations. If the books of the cor- poration are reopened for the purpose of charging off depreciation, deple- tion or other losses, corresponding corrections must be made in the other book entiles; and if for any reason the facts do not warrant such other changes, depreciation, depletion, and other losses can not be charged off and, therefore, can not be allowed as deductions. Thus, for example, if by reason of a distribution of earnings there is nothing from which to credit a reserve for depreciation no allowance for depreciation can be credited to a depreciation reserve account. [See 1f868.] 1367 Whenper, therefore, a corporation has clearly suffered allowable _ depreciation, depletion, or other loss which has not been charged off on Its books, and on reopening its books at the time of an examination charges off such depreciation, depletion, or other loss by proper entries, it is entitled to the benefit of the deduction of such depreciation, depletion or other loss subject to the general provisions of law. INC. 233 TAX 1368 'i 3hio li36&_iJ Y op^'^wrl'l :pfe^s^' aElPiid wlMge^tlip Xo 5on 0! ^Ifttemal .R'e^enW' A^e&^/^signfediSv GpRooef, “”„::Sg;*1'g”f S jSSS >0 eqLiOTtg 'to ^}':nn DflioDqa ol aonaiaisi 823 *rqx 9 riliw tio bagiBfb bnc l37liij:CT^Xii^ DepreciMtloh !^(;c^unfi^l^ffi§^u|e * - - -,,,. .;j, basis upoil Which the a -:<£i sf'titusm^&'is^p’eWhan^fflW WMcontiriue^ 4ist!l-l©'s^4 -m' the^^Scp^y^rb Wetu'rri' for ihe year ihbA\ is made and a full statement of the facts and the computation is calculated must be attached to the return. Upon a sale woodier .dpspQsi^io^^;pi,,.the , property; eqq§ide^at^p }l=e'E^'^ednShalt)-t)e 'cpmpare^t^^j|.]:T^^ t% anxqup^-,q| 5 thp,;es]^aj:-€f:^^ otjse^sw com- puting: ;t|T,e pW o 3?94 rih^fc^lLc^ptnO flight. eppp Jh^li^-'^pTji;i%ate^^ yte^t* lib which' 'the ^ale of other disposition was made. ' See articles 141.-^X45 [for deductions, for losses, beginningr at • J113051. bArU^h^Q^. Regc>i'45^ 4i |o ^forUuo:^ b obbojirjns -;od zi hb.o.t>iOp =oo ■ ” TO ,uoit3iq9D urodBbarqob '^ol tnuoffis yrm lo arnooni yaoip ‘ ' ' 225[rtrj Tr,3’' sidcxBt 9/1+ nidtfv/ --if of ^ob^ole,^ Key; ;,;ol 13ft to 13^^ ' ^ ^ 9^' Rroli h f e p'fp iph ti Hgf Ip s sp| ^pm4 c c ^un f 'aoU(l Wa Ud^as a ' mmiwmikmrM, tfilf fs .2 Dip. the Cpst; pfothp^ pr^ppyty^ihe^^fata^^a^ hfe' hdeh ’ pf ?\bjjuSiv rct^hieS' ahcL dedticted" Wn ’ acdojuiih Q^kthWieBrefiWfop 'ihe?ufqpeff£; p^u6'^res'ihphr9;vakte.,au of .phs'dle^ph^ .fpr •pluW fee L5:,^ *. ^i-u ' 2*.2'L3 > a bi a- b Vb I? . - -^{ph bus 1373 If j-io depreciation has been chargefe dff^ig'afnsf &ch^pfopS'ty ^aM ;;: 'h' 'dexlncted(f rGmrgEOssdbcohie dfipriorWeat^, bhe'lambUiit^ahbWabie'as a deddctiom for ^ the jyear in . whrchythe' pro:;^f’^- bicorties DObs'olete-' shall be asceftamedsby Adeductingafrombthe cost; of j the ‘ prdpebty-~d'tSD'fe§i^uaP4alue, plus' an'ambuht equal to: the -depreciatron'; actually sustained-' durhlg' the prim' period and which niight have been J deductedowhenf conipUted^ Ut the Vate applicable' tosdieo samen or. siihilar ' propeityro : fi^he » amount' of tdepfeci adbu thus arriYed cat- aspappricable to former years mtay be made 'the ba^id' ttf amended detums'.ahd claim Dfor. the refund?t)f YaJtesf'd'berpaid by reason eif: ; the:' fact ridiatriiOi ’depgeciatidnsxledaGtlono was ' fctainted - iilA'-fhOSe oyearg. (Art. 179, T|557, Reg. 33, I^eV)gJan.22, 1:9.1:8,>3S 3 x 10231 noitsiDOiriab £ ot '.;do-xof:r: bo"o‘;^rr2 viiBslo 2 B:i noitBioqiOD B ,01o}313rft ,13V3n3riV/ 1374 ^, Sinking Fund.Reserve.-^Whenf a corpofatipil sets asideia-part of io--:^£ftiW3i^4rpm^& fee rthf^fpunpo^e .of xsifeattug'P^shiking fund' 'with 2 ^hich to- ‘uetW-e; riU- boudeddor?. pthet;dnic|ehtedueqsi) the ; ^annual ; additiohs* toysueh fund^iat'e'nQtrcalloyfeble) dfedjuchonQofoomoigrg^s jnco'meiasobr dn flieiiitif dep^-iation or on aayBPterFf^td^duutq iShbeo^mfegsr thuhisetaasidcoite 234 E8S TAX .OUl INC. XAT {S'^Rkhh I§j53d^{frie^bj9j03Bi5jP«V 70 u P 32 oqmr aaxsl ^f^^ ^iD^TioDni asw bsv/oUjB ^ilBni k’i :.li I iZ^,\^U deposits initbfi 166, .' r V . - ^lOlDSl ‘*;JISiS|f] SbS r:obD3a lo ^iiOidivu A -4 ; iL* ^-jiiBbiODDB ni •l^vBqx£^ srlJ ot 13<6 Law|fl34. A Reasonable Amount for the Amortization of Certain amu^sH b9bn3fnl:r Ji^a5Mn^yy-.iequtpiTtet;i,4i'§Qlihec A/f^cilities, ^^s^^Ol^s^iA^ed^rfnstall^^tibsiac^tiired^obn’ (:gnaft€ai>A.piii'S, }917, for Q^i-Qdui^i^nsLQ^f^wMclesj Qont^butrngBtoqth® )pii€^cjik^m tb 6: rthe^ icppesenit te: c(l)hstru^tied :T6goai(^£i8ied)MiKbn:diteri%i^ date for the transportatioi]e*£sf'ia|b:£iesooErnten;rfcdhQ'ibhtm^tdltl^[jpcdseeui-i o^v-t^^^pi^djatjL’wac^'tl^ be alk}wedc;a j^asoTmbeleiA^eihieldonSi^^ to^', tizhtion iipi',s.uqh9p.arfco^!';:theI«50S^ roftsubhofacilit-iesridrij/e^sels as bem-b(jifrie:b^ dae taxpay-ei'qhut 3ibt agaiii: including] an>i:am©i8iit?26th,erx wsjsfi f aBo 0 uneler.‘;tlu s otitle /bit; pr'eyibius Acts' saf rCongaiesB'O^; iaridediidfiohi i^I^mputing^ijet-ins^dt^^ n*mt3-i srh ni nadBt ad ton ^sm il niaiarh sbx/oiq llBfia ,(?1Q1 ibsy sldBxrd sdt lot mirist sdT “77 3tow.gi35.rAb Redeterminatioja dAoiA; t&e;?AmoriizatiOft nDbthictiotf -woH ,r:f arrqhBrMajf Be ^t:Pi3iihe!-iMmiiin^i0«i®:^the ^rbs£ktBwan,f die IGoinihissioberaMa^r, xdndsat^ (iiidhe Aaxpa^egi:®ha^Ui?!reexauTihe-rfe rekii^ip mkl rifi/heb thefi'^ Wdfe:aftraige§:ultvMv^japprai>salror»Mnomoib>i'vthis'vYite;ah'd:^to bt»eslili^/[r\^^.ipccessSrMdfitSf^a:?4:£QrsiihenyeaT:oTl:yearsi^^^^^^ Etdeter^ifted! ; MndVle ,am;B[D noitBsbiomB ot bsltitna 3'rB aisqBqxBJ -dna Yi hns glqBigBrBa ^nrboooiq 3rb ni bebhoiq 2 B haniBj-r 332 £ -^-ruBb ¥7^rn. towi gi 36. Adjustment of Under4 lor Over-Payitient of) Taxes Due sbsfTi 30 bii/orf? -.torRedeterminatioh 6f AmoTtization Deduction.^nthe; ameiintvof Itaxbdiie.^upon suckTedetenhination; ifeacy,o^haM:ibe^'l)aid- •lipbii netice and demand bv: the :colfector,(^ar3the amount oMax merpdidpif^any^; shall be credited or refunded to the taxpayer in accordance with the pro- yistk^i:^ qfrSecttqn-253 [g212L]:;l^rj£i.'i7omA lol noiaivoi^ lo socob " T- 'ft' ‘ ' '' 00;'3B-:t'; 0 K yB ISY-^OXL: - A- , h'awgSQ?. {CorporationSi]-frr'.‘(8-)- Indhe case of jbuildings^ machin- .' - ■ ■ ' • : r : ery, equipmerLt>,©r other facilities constructed, rbfectedo mBtalled, on, acquired, , pn oio after April ,4 191.7, foxbthp^production of articAes^Gox^lluting^ta tl;ie-;prpB€cu,tion of^.the :p[re$ent warq-aild In the case, of: vessels;, constructed or acquired .op or after sucli>rdate , for the of,arti,c]es or men contributing, todhe.prosecution- of the' present war,, there qbaU be allovred a reasonable deduetiou:fpr the - a^^^^ Y^l^h.qi.sqcb part of the cpst pi, such facilities.- -or ;vesse(s,, gtS has beeiv borne by.; the,. taxpayer, . but nob again. ppelucling -any amounfhqthcryeise- aJlowxd.utKler thas. titlc.qr previousbVb^s of Congress as. a d^^^^ction. in computing net income/" - A . '. b'^' : ■ .v ‘ = 1^0 Law g30^.,|;*At:any fi^hc .witjiin three., yeai^rrai ter bte/rtcriuip^tipn, ^-:,/ / b'-’ %:Pl'^sent,war:'Ahe,.(2q^^ the request of the taxpayer shall, reexamme/fh4^i^Uiq;^n^| ^^JFr Wi DEDUCTIONS— AMORTIZATION. as a result of an appraisal or from other evidence that the deduction orig- inally allowed was incorrect, the taxes imposed by this title and by Title III [war excess-profits tax] for the year or years affected shall be re- determined and'' 1381 Law U309. “The amount of tax due upon such redetermination, if any, shall be paid upon notice and demand by the col- lector, or the amount of tax overpaid, if any, shall be credited or refunded to the taxpayer in accordance with the provisions of section 252 [][2121] 1382 Amortization Claims for 1918 and for 1919: Amended Returns Involving Amortization. — Reference is made to your letter of May 21, 1919, requesting information relative to the application of the provisions of Section 214 (a) paragraph 9, of the Revenue Act of 1918, and Articles 181 to 188 [beginning at p385] of Regulations 45, final edi- tion, to the 1918 and 1919 returns of taxpayers. 1383 Your questions are answered in the order submitted as follows: (1) A claim for amortization applicable to the portion of the calendar year 1918 covered by the return of the taxpayer for the taxable year 1918 shall be included in such return, and if such amortization is not claimed therein it may not be taken in the return covering the taxable year 1919. The return for the taxable 3 ^ear 1919, shall provide only for the proper amortization applicable to such taxable year ascertained in accordance with the provisions contained in Article 185 [^1393] of Regulations 45. How- ever, in cases where it will be impracticable to accurately determine the amortization during the calendar year 1919, any returns made during such period should include amortization allowances tentatively determined in accordance with Articles 184 [][1388] and 185 [^1393] of Regulations 45. 1384 (2) Returns made for the taxable year 1918, in cases where the taxpayers are entitled to amortization claims, should include such claims ascertained as provided in the preceding paragraph, and if sub- sequently the amortization as finally determined differs essentially from the amount claimed in the returns filed, then amended returns should be made [j[945]. (Letter to The Corporation Trust Company, signed by Com- missioner Daniel C. Roper, and dated June 9, 1919.) 1385 Scope of Provision for Amortization. — Any allowance made to a taxpayer by a contracting Department of the Government or by any other contractor for amortization or fall in the value of prop- erty, either as a part of the cost of production or as a part of the price of the product, shall be included in gross income See article 52 [amended returns for 1918, ^[945]. The amount to be allowed as a deduction from gross income for amortization for the purpose of the tax is to be based upon the provisions of articles 181 to 188 [this paragraph and the paragraphs following], pursuant to which the deduction should be made instead of upon the basis of any amounts contractually or otherwise deter- mined. The allowance for amortization covers the decline in value of the property subject thereto and is inclusive of the depreciation which would ordinarily be allowed separately. Depreciation for any taxable period after December 31, 1917, should, therefore not be claimed with respect to prop- erty as to which an allowance for amortization is claimed. See also sec- tion 204 of the statute and articles 1601-1603 [for net losses, pi06]. (Art, 181, Reg. 45, Rev., April 17, 1919.) INC. 236 TAX DEDUCTIONS—AMORTIZATION. Property Cost of Which May Be Amortized. — The taxpayer may make a reasonable deduction from gross income not in excess of a surn sufficient to extinguish the cost of buildings, machinery, equipment or other facilities constructed, erected, installed or acquired on or after April 6, 1917, for the production of articles contributing to the prosecution of the present war, and of vessels constructed or acquired on or after such date for the transportation of articles or men contributing to the prosecution of the present war. In the case of property the construction or installation of which was commenced before April 6, 1917, and com- pleted subsequently to that date, amortization will be allowed with respect only to the cost incurred on or after April 6, 1917. (Art 182 Reg- 45 Rev., April 17, 1919.) ^ ^ ' 1387 Cost Recoverable Through Amortization.— The total amount to ^ be extinguished by amortization, in general, is the excess of the un- extinguished or unrecovered cost of the property over its maximum value (either for sale or for use as part of the plant or equipment of a going business) under stable postwar conditions. Under the provisions of the statute authorizing reexamination of the claim at any time within three years after the termination of the present war, the allowance will be finally determined upon such basis. However, in many cases it will be impractic- able during the calendar year 1919 to make final determination either of the length of the amortization period or of the value of the' property under stable postwar conditions. Consequently, in returns made during the cal- endar year 1919 the amortization allowance will tentatively be determined in accordance with articles 184 [1[1388] and 185 \n393]. (Art 183 Reg. 45, Rev., April 17, 1919.) 1388 Cost Which May Be Amortized. — For the purpose of making re- turns in 1919 the total amount to be extinguished by amortization is the difference between the value of the property on the basis indicated below and the original cost of the property less any amounts otherwise de- ducted for depreciation, losses, etc., prior to January 1, 1918; or in the case of property acquired or completed after December 31, 1917, it is the differ- ence between the value of the property on the basis indicated below and the cost of such property at the date of acquisition or completion. (1) In the case of property useful only during the war period and permanently discarded at the date of the return the basis is the sal- vage value as of the date when the property was discarded. 1390 (2) In the case of property still in use which will not be required for the future use of the business and which is certain to be per- manently discarded before the last installment payment of the tax covered by the return the basis is the salvage value as of the date when the prop- erty will be permanently discarded. 1391 ( 3 ) In the case of other property the basis for amortization calcu- lation shall be the estimated value of the property to the taxpayer in terms of its actual use or employment in his going business, such value in no case to be less than the sale or salvage value of the property. Provided, however, that in no case shall the preliminary estimate (for purposes of returns to be made in 1919) of the amount of such amortiza- tion exceed 25 per cent of the cost of the property. In the final deter- mination the amount of the amoitization allowance Avill be ascertained upon the basis of stable postwar conditions under regulations to be promulgated when these conditions become apparent. INC. 237 TAX A<%p 5 .g?aP %¥ a? mus'^ 4a^SM-?a>' -!f '^.tiatit‘fare,aertV4's te|69ed3i(!. ifeg'-S'tli'f tfil; &t{air|>*y''if 198 ® 'I noiiiu'f ^:noD srit ^8-t nl .iby/ inaas'iq sdl io fiohuDsaoiq b£dAkiQyti^mlbh‘-^'I^T-^‘th^'^utf itt> jD9qa9 q9fl ^ tb^ be ^ in^i'’bf>brtibn^ to^ tlib^ net'^i:TKbr]^*(^b 0 ^ Wlthfbut'-t>^bfiV bf<>dib^ abibrfi;^^ tion allowance) between January 1, 1918, and the fdllb’U^bg xJatesqAjay^i^ sub- ancc: ' -JWi ^rV ?af98 rfi'f 1918 ; "(b) Axh rany eomp,i;iJatioq Msed upqn in 1918 ahd^ ending' in l ‘^19 shall' use the ip^rt^ti^?. based^upp^l 19,48 ratfs apportioned to the catendar year 1919 rates for a year beginning ,, _ aiWhhtdbf ^ such^’ alibw'tin'ce' apportto^^d4'^:to■‘^^edc4eMad^c^^ tL^I9; %tid zatioh ‘.must ’ be ^ 'uhn?is tak'ablj^ t^tiate^ .qri. ^tbe^ yetmdi '^1(1 ptnei': claims 'tqr‘‘\vear.;- feav, bbsolepcence^^^mi , 1^^^^ !^o^t^uc^”daim yvillie a|ibwe3' tf-fj^-cfed , in ^an^,' ^■cp.upS^‘sufe^^ fey dpe taxpayer to stock1iblcfers’'and^in .^ny.'ci-gfeitbsiate^ ta^p‘^pr to pank^,' and. is, giyen full^eft'eQt on tiiS;':!^^^ booSfS.pf, apj:bpmt.'-,|](^. df o^bep contractdtaixen'fey the taxpayer Vontdined recogm^ p^^pibrti^atipp as an derpent in^^tie. yost oi producijou;, gopies. Q^^spc^ bqntr^^cts . sbah jfee,^^^^^ with the taxpayer’s return,' together with; a s^^tefeieht^ and, d^scriptio^^^ qf any sums received od account of amorti.za.tIpp|,and ,tj^e , basis, upop^.whiqh they^y^erp; 48 ^eripined. ; In :^py , ease ^ iq^^yfliidy ap, lof anaorpzatipp bf^.cps.t thpdafXLp^ be plf.p\ved;tQjje:ptOr^ to his ipy^s.tedp^^itaj fpf; the purp,o^se; ot the ,y(ay; prqfet^ ^rtipppf the apiqvipt yqY-ered by.fuchsailOjWpnce.ypi^Aft. Aphi i;^A:^lA) 7 'TSfrta‘r iloTo c i i o.^-so orr ai tBill ,';0 ; / . '.I ..^ubr^o'P L ia 95 i RedetbTmm^tiori of Arhattizatibn Aiildwanbe.^^ redeterminatmn; of. qhe- dbdtohtion' alldwed^'oh kcbhm antmtization niay, ^or/at dhe i^bdhesf ‘ t>'f ' - the ' t&payef ' shall, ' ' bepMade- the> iXmiYniiissioner oab any i -time.- vvithhi a^ftbb the -thiW^^ if as-a' result of an appraisalWker 6 m mehdviSvstqThei’'pird- sdittcticOrboifeiirtklQ^ (:05hiii $he 9a$^Io^lvq^s€^Tthp tfamportation of articles mr;m^0:]) hi^ithgiproM^tttibrypix.the: ptt§ent-i^ara^!(d>ThphpQs$ construction, erection, installation or acquisitiPh 5 -.j{ 5 p)ii^e mh§ 9 t£di^pir 0 p- l^ty l^t9f‘otd5miliatiQii5:x)§ithQiaiJMxt'fe^ibhi'ipq^li‘^Ji'.((f“)^^* of il-lie /piro^^-tjy:fpermanently(X%Qarddd,vdrlof-^^ which win be perman- entJlyK discarde^^ before-^thp^lasl: insIlllmenti^aym^Bt iDp>Y;^red,b3^'ithe3'iati|irit ; “()g^^.ailv dedlIctjy.fQfi:se ix^ \^mch ^ c “5130 J2 ^let'fen-^bP tt&i 8 ft cpmS^teS , rtfip M^ited; the. less^b ' mlf Commissioner to show that the cost or price al'wmch^the \Vas iy).ngh^ ^wa^f j^teS'a fyliiM ,ff?oP59P^ltyiPa^§M9iat\5P}®nef5 i|\> f^cloagriyelhias-.M-j^iMidifferent .tip «y???&^qelN Q-^9|4ipmj(ax Jixfeted rQO-st oi^ prlcf: be-ipfermittediio ^ 91 *^ thi^ba^sf-^^fTiaHj^kM^rdati^pitiPLf oaqd^^ ;pr, depr^d^tfen . idedtic pMiPl^t^IpfiefzMiCost^al whitii ^&i^’|)i 4 ic]p[aseMr .^]khj.y^s|,p)afey 9 Mfi^A^AitkGp^el^^liQaaT^^ Q£li|h^(^Qpe^i:- 6 ol 1^- sp.^dfed .4at9,4n.4kUoOioA^ Co^t ^fgerepf , flie. basis, ;|o,ni d^pHAPiiapxJ jdepi’ecMipp); dpdMCtipn^-^ fttA value' must be 'd^termined^^pbj^ctji^ ;app]royk.''?i'^3i^yi-^W)by.Afe'P9*?^^^^" sioner, by the owner 01 the prbperty^in the IT^ht of the conditions ahd^cir- 'icumst^ieest knovm-atutMt -dafey MteP'^Mb^^fes' W^'^ev^ldA ments in diet propoi^ drdpismeAods'cpfbliimng;' w €idr^btrok? 28 q^^ value isoiight; -should be i that restablbhed-^ssd'nhi'hg a kails febd^tiyeeh -a '^Hhiig seller; andia -mlhng-'HuyerlaS ob thai pattkular dateh Nb M 5r method of deteraiiniri^ the dak' rnar-kelt'^afeet Oi- nlineral property q^ ‘'prescribed, btit dhe domniissionerotvill iendodhei keight ' and-^bohsideratiod'to any aiid dil f a'ctdf S and: '.evi deride, havihgqa hbeaiinguori atlie^' bnrirlcet va^ue, 'Stteh. ' as ^ atrial ‘isalesLand-transfers bf similkr'probertiesS Market valiie^ Pf^stdck A- febaids, royalties; rand' tentaiky value hxed h^ dhe lowrier for pu^f^sdskf thesea^tal Stock lax,,, ivairrati-onq ford Ibcal r>or ' cStaid thxMonf •' parMershipy accouiitirigs, ;records^f hligatiom iri^^^^W the yalueoof khe property "yrasi the -amourit) at which-' Ae.prdp'^iriy Mky 'haVeebeeMinyentofiediMupfobate-iebtirt, •disinterested;! apprais-alslcbv'iapproved Imethuds^^eandlidthei! fiactbf^. 2069R^ d5v;-Eev.?34VA^bd^t^9.)riA) noMqab lol anohonbob dgnoirl) ^i4i^ ■ ^e^rilu'Afori J cf 9^^ dil (A^oiPf oP'S^ A • qts^''faipMaffi^|jV^lri .A9i9^%(-,may be;,^plus Fdf VAdh^^eai;''4uiipk'''tbe ^ co^firiuMeeJ^olkb^^^^ .‘pwriersliM ptipiier r wni cJpiMe Farr Ma peel value 61 posf yras_ fixed, and during ^u^cb Qw^ejt^ip,- P^ ;rio^r^3lukfij6n ‘|o4 of' AisAedhdto '^i^^puiA’^iU pot fpibid Ae;'redistributiBn^bf tfie/yalit^T'accbAnriPoverrtlTfe^e^^ 3^ yldcliiros ^ * ' ^ - i . =;0i1ib 9 yi< breftdved- A ‘HkW'&Sed iri fhe ’gloMAbn^MaM 1 . ’atqliisftfombT thep)ldperty,*''ym49MrP'6D 'da9s afterAhe^ dat% |^i '^i^oyery, as the case may be. In estimating the total units of ores arid iriiilerals tor ikd. ^42 DEDUCTIONS— DEPLETION. purposes of depletion the property must be considered in the condition in which it was on March 1, 1913, or the date of acquisition, or within 30 days after the date of discovery, but if subsequently during the ownership of the taxpayer making the return additional recoverable mineral deposits have been discovered or developed which were not taken into account in estimating the number of units for purposes of depletion, or if it shall be discovered by working, development or exploration that ground previously estimated to contain commercially recoverable mineral is barren or con- tains only commercially unworkable mineral, a new estimate of the recov- erable units of ores or minerals (but not of the cost or fair market value at a specified date) shall be made and when made shall thereafter constitute a basis for depletion. In the selection of the unit of estimate the custom or practice applicable to the type of mineral deposit and the ^^haracter of the operations thereon should be considered. The estimate of the recover- able units of ores or minerals for the purpose of depletion shall include (a) the ores and minerals “in sight,” “blocked out,” “developed,” or “assured,” in the usual or conventional meaning of these terms in respect to the type of deposit, and may also include (b) “prospective” or “probable” ores and min- erals (in the same sense), that is, ores and minerals that are believed to exist on the basis of good evidence, although not actually known to occur on the basis of existing development; but “probable” or “prospective” ores and minerals may be computed for purposes of depletion only as exten- sions of known deposits into undeveloped ground. (Art. 208, Reg. 45 Rev April 17, 1919.) ^ 1415 Determination of Quantity of Oil in Ground.— In the case of either an owner or lessee it will be required that an estimate, subject to the approval of the Commissioner, shall be made of the probable recoverable oil contained in the territory with respect to which the investment is made as of the time of purchase, or as of March 1, 1913, if acquired prior to that date, or within 30 days after the date of discovery, as the case may be. The oil reserves must be estimated for all undeveloped proven land as well as producing land. If information subsequently obtained clearly shows the estimate to have been materially erroneous,, it may be revised with the ap- proval of the Commissioner. (Art. 209, Reg. 45, Rev., April 17, 1919.) 1416 Computation of Allowance for Depletion of Mines and Oil Wells r. “ ]he cost or value as of March 1, 1913, or within 30 days atter the date of discovery of the property shall have been determined, and the number of mineral units in the property as of the date of acquisition or valuation shall have been estimated, the division of the former amount by the latter figure will give the unit value for purposes of depletion, and the depletion allowance for the taxable year may be computed by multiplying such unit value by the number of units of mineral extracted during the however, proper additions are made to the capital account repre- sented by the original cost or value of the property, or unforeseen circum- stances necessitate a revised estimate of the number of mineral units in the ground, a new unit value for purposes of depletion may be found by divid- ing the capital account at the end of the year, less deductions for depletion to the beginning of the taxable year which have or should have been taken, by the number of units in the ground at the beginning of the taxable year. This number, unless a revision of the original estimate has been necessary will equal the number of units in the ground at the date of original ac- INC. 243 TAX DEDUCTIONS— DEPLETION. quisition or valuation less the number extracted prior to the taxable year. If, however, a recalculation is needed, the number of units at the beginning of the year will be the sum of the gross production of the year and the estimated mineral reserves in the property at the end of the year. (Art. 210, Reg. 45, Rev., April 17, 1919.) 1417 Computation of Allowance for Depletion of Gas Wells. — On account of the peculiar conditions surrounding the production of natural gas it will be necessary to compute the depletion allowances for gas properties by methods suitable to the particular cases in question and ac- ceptable to the Commissioner. Usually, the depletion of natural gas prop- erties should be computed on the basis of decline in closed or rock pressure, taking into account the effects of water encroachment and any other modi- fying factors. The gas producer will be expected to compute the depletion as accurately as possible and submit with his return a description of the method by which the computation was made. The following formula, in which the units of gas are pounds per square, inch of closed pressure may be used and is recommended: the quotient of the capital account recover- able through depletion allowances to the end of the taxable year, divided by the sum. of the pressures at the beginning of the year less the sum of the pressures at the time of expected adandonment (which quotient is the unit cost), multiplied by the sum of the pressures at 'the beginning of the taxable year plus the sum of the pressures of new wells less the sum of the pressures at the end of the tax year, equals the depletion allowance. (Art. 211, Reg. 45, Rev., April 17, 1919.) 1418 Gas Well Pressure Records to be Kept.— Beginning with 1919 closed pressure readings of representative wells, if not of all wells, must be carefully made and kept. In order to standardize pressure read- ings the well should remain closed until the pressure does not build up more than 1 per cent of the total pressure in 10 minutes. Ordinarily 24 hours will suffice for this purpose, but some wells will need to remain closed for a longer period. If there is any water in the well it should be blown or pumped off before the well is closed. A closed pressure reading of a gas well which has been producing, or is near gas wells that have beeri produc- ing, is lower than the actual pressure of the gas in the reservoir by an amount depending on the well’s location with reference to other producing wells and the length of time it has been closed in. It is necessaiy to record the length of time the well has been closed and to show how the pressure built up during this period. Successive readings will indicate the pomt at which the pressure becomes approximately stationary, that is, the point at which the closed pressure approaches as nearly as possible the maximurn pressure which would be shown if all wells in the^ pool were closed loi several months. The length of time required varies with the character of the sand, position of the packer, the location of the well with reference to other wells, the limits of the pool, and other factors. The depth the well, di- ameter of tubing, and line pressure when the well was shut off, should be noted. Since readings at the exact end of the taxable year will ordinarily not be available, the pressure of that date may be obtained by interpolation or extrapolation. In certain cases readings taken regularly m September or some other month may be applicable to the end of the taxable year As a general rule September closed pressure readings furnish the best indication of depletion and it is recommended that such readings be made with regu- 244 TAX INC DEDUCTIONS— DEPLETION. larity and care. Where interpolated or extrapolated readings are used the data from which they are obtained should be given. Gauges should be of appropriate capacity and should be frequently tested. A record should be kept of the number of gauges, ’date each was tested, names of men testing, and other significant details. (Art. 212, Reg. 45, Rev., April 17, 1919.) 1419 Computation of Allowance Where Quantity of Oil or Gas Un- certain. — If by reason of the youth of the field, the restricted pro- duction, or for any other cause, it is not possible to determine with any degree of certainty the quantity of oil or gas in a property, it will be neces- ary to make a tentative estimate which will apply until production figures are available from which an accurate determination may be made. (Art. 213 Reg. 45, Rev., April 17, 1919.) 1420 Computation of Depletion Allowance for Combined Holdings of Oil and Gas Wells. — (1) The recoverable oil belonging to the taxpayer shall be estimated separately on the smallest unit on which data are available, such as individual wells or tracts, and these added together into a grand total to be applied to the total capital account returnable through depletion. The capital account shall include the cost or value, as ! the case may be, of all oil or gas leases or rights within the United States and its possessions, plus all incidental cost of development not charged as expense nor returnable through depreciation. The unit value of the total recover- able oil or gas is the quotient obtained by dividing the total capital account recoverable through depletion by the total estimated recoverable oil or gas. This unit multiplied by the total number of units of oil or gas produced by the taxpayer during the taxable year from all of the oil and gas properties will determine the amount which may be allowably deducted from the gross income of that year. 1421 ( 2 ) In the case of the gas properties of a taxpayer the depletion al- lowance for each pool may be computed by using the combined capital account returnable through depletion of all the tracts of gas land owned by the taxpayer in the pool and the average decline in rock pressures of all the taxpayer’s wells in such pool in the formula given in article 211 [][1417]. The total allowance for depletion of the gas properties of the taxpayer will he the sum of the amounts computed for each pool. (Art. 214, Res’. 45 Rev., April 17, 1919.) 1422 Depletion of Mine Based on Advance Royalties. Where the owner has leased a mining property for a term of years with a requirernent m the lease that the lessee shall mine and pay for annually a specified number of tons or other agreed units of measurement of such mmeral,^ or shall pay annually a specified sum of money which shall be applied in payment of the purchase price or agreed royalty per unit of such mineral whenever the same shall thereafter be mined and removed from the leased premises, the value in the ground to the lessor for purposes of de- pletion of the number of units so paid for in advance of mining will con- stitute an allowable deduction from the gross income of the year in which such payment or payments shall be made; but no deduction for depletion by the lessor shall be claimed or allowed in any subsequent year on account of the mining or removal in such year of any ore or mineral so paid for in advance and for which deduction has been once made. If for any reason 245 INC. TAX DEDUCTIONS— DEPLETION. any such mining lease shall be terminated before the ore or mineral therein which has been paid for in advance has been mined and removed, and the lessor repossesses the leased property, an amount equal to the aggregate deductions for depletion allowed in respect of ore or mineral not mined and removed by the lessee, but still in the ground, will be deemed income to the lessor and will be returned as such for the year in which the property is re- possessed. (Art. 215, Reg. 45, Rev., April 17, 1919.) 1423 Depletion and Depreciation Accounts on Books. — Every taxpayer claiming and making a deduction for depletion and depreciation of mineral property shall keep accurate ledger accounts in which shall be charged the fair market value as of March 1, 1913, 'or within 30 days after the date of discovery, or the cost, as the case may be, (a) of the property, and (b) of the plant and equipment, together with such amounts expended for development of the property or additions to plant and equipment since that date as have not been deducted as expense in his returns. These ac- counts shall be credited with the amount of the depreciation and depletion deductions claimed and allowed each year, or the amount of the depreciation and depletion shall be credited to depletion and depreciation reserve accounts, to the end that when the sum of the credits for depletion and depreciation equals the value or cost of the property, plus the amount added thereto for development or additional plant and equipment, less salvage value of the physical property, no further deduction for depletion and depreciation with respect to the property will be allowed. If dividends are paid out of a depletion or depreciation reserve, the stockholders must be expressly noti- fied that the dividend is a return of capital and not an ordinary dividend out of profits. See article 1549 [for discussion of such dividends, ^868]. (Art. 216, Reg. 45, Rev., April 17, 1919.) 1424 Statement to be Attached to Return Where Depletion of Mine Claimed. — To the return of the taxpayer claiming a deduction for depletion or depreciation or both there should be attached a statement setting out: (a) whether the owner is a free owner or lessee or both; (b) a description of the property owned iu fee, if any, and a description of the leasehold property, if any, including the date of acquisition and the date of expiration of the lease; (c) the fair market value as of March 1, 1913, or within 30 days of the date of discovery, or the cost, as the case may be, of the property owned in fee and the leasehold property, together with a statement of the precise method by which the value or the cost of freehold and leasehold property was determined; (d) the estimated number of units of mineral or ore at the date of acquisition or of valuation in the property owned in fee and in the leasehold property separately, .'together with an ex- planation of the method used in estimating in each case the number of units of mineral or ore for purposes of depletion; (e) the amount of capital applicable to each unit; (f) the number of units removed and sold during the year for which the return was made; (g) the total amount deducted on account of depletion and on account of depreciation, stated separately, up to the taxable year during the ownership of the taxpayer; andi(h) any other data which would be helpful in determining the reasonableness of the deple- tion and depreciation deductions claimed in the return. (Art. 217, Reg. 45, Rev., April 17, 1919.) INC. 246 TAX DEDUCTIONS— DEPLETION. 1425 Statement to be Attached to Return Where Depletion of Oil or Gas Claimed. — To each return made by a person owning or op- erating oil or gas properties, there should be attached a statement showing for each property the following information, which may be given in the form of a table, if desired by taxpayers owning more than one property: (a) the fair market value of the property (exclusive of machinery, equip- ment, etc., and the value of the surface rights) as of March 1, 1913, if ac- quired prior to that date ; or the fair market value of the property within 30 days after the date of discovery ; or the actual cost of the property, if acquired subsequently to February 28, 1913, and not covered by the fore- going clause; (b) how the fair market value was ascertained, if the property came under the first or second head under (a) ; (c) the estimated quantity of oil or gas in the property at the time that the value or cost was deter- mined; (d) the name and address of the person making the estimate and the manner in which this estimate was made, including a summary of the calculations ; (e) the amount of capital applicable to each unit (this being found by dividing the value or cost, as the case may be, by the estimated number of units of oil or gas in the property at the time the value or cost was determined) ; (f) the quantity of oil or gas produced during the year for which the return is made (in the case; of new properties 'it is desirable that this information be furnished by months) ; (g) the number of acres of producing and proven oil or gas land; (h) the number of wells producing at the beginning and end of the taxable year; (i) the date of completion of wells finished during the taxable year; (j) the date of abandonment of all wells abandoned during the taxable year; (k) a property map showing the location of the property and of the producing and abandoned wells, dry holes, and proven oil and gas land; (1) the average gravity of the oil produced,' on the tract; (m) the number of pay sands and average thickness of each pay sand or zone on the property ; (n) the average depth to the top of each of the different pay sands; (o) any data regarding change in operating conditions, such as flooding, use of compressed air, vacuum, shooting, etc., which have a direct effect on the production of the property; (p) the monthly or annual production of individual wells and the initial daily production of new wells (this is highly desirable information and should be furnished wher- ever possible) ; (q) (for the first year in which the above information is filed for a property which was producing prior to the taxable year covered by the above statement the following information must be furnished) annual production of the tract or of the individual wells, if the latter in- formation is available, from the beginning of its productivity to the begin- ning of the taxable year for which the return was filed ; the average number of wells producing during each year; and the initial daily production of each well; and (r) any other data which will be helpful in determining the reasonableness of the depletion deduction. When a taxpayer has filed adequate maps with the Commissioner he may be relieved of filing further maps of the same properties, provided all additional information necessary for keeping the maps up to date is filed each year. This includes records of dry holes, as well as producing wells, together with logs, depth and thick- ness of sands, location of new wells, etc. By “production” is meant the net production of oil or gas belonging to the taxpayer. In those leases where no account is kept of the oil or gas used for fuel, the production will nec- essarily be that remaining after the fuel used in the property has been taken out. In cases of this kind an estimate of the fuel used from each tract should be given for each year. (Art. 218, Reg. 45, Rev., April 17, 1919.) INC. 247 TAX DEDUCTIONS— DEPLETION. 1426 Discovery of Mine. — The discovery of a mine or a natural deposit of mineral, whether it be made by an owner of the land or by a lessee, shall be deemed to mean (a) the bona fide discovery of a com- mercially valuable deposit of ore or mineral of a value materially in excess of the cost of discovery in natural exposure or by drilling or other exploration conducted above or below ground, or (b) the development and proving of a mineral or ore deposit which has been abandoned or appar- ently worked out, or sold, leased or otherwise disposed of, by an owner or lessee prior to the development of a body of ore or mineral of sufficient size, quality and character to determine it, in connection with the physical and geological conditions of its occurrence, to be a mineable deposit of ore^ or mineral having a value materially in excess of the cost of the proving and development. In determining whether a discovery has been made the Commissioner will take into account the peculiar conditions of the case, and every taxpayer claiming the value of a mineral deposit on the date of dis- covery or within 30 days thereafter for purposes of depletion will be re- quired to attach to his return a statement setting forth the conditions and circumstances of the discovery and the size, character and location of the deposit, together with the cost of discovery, its value and the precise method used in determining the value. (Art. 219, Reg. 45, Rev., April 17, 1919.) 1427 Oil and Gas Wells. Section 214 (a) (10) and Section 234 (a) (9) provide that taxpayers who discover oil and gas wells on or after March 1, 1913, may, under the circumstances therein prescribed, de- termine the fair market value of such property at the date of discovery or within 30 days thereafter for the purpose of ascertaining allowable de- ductions for depletion. Before such valuation may be made the statute requires that two conditions precedent be satisfied, (1) that the fair market value of such property (oil and gas wells) on the date of discovery or within 30 days thereafter became materially disproportionate to the cost, by virtue of the discovery, and (2) that such oil and gas wells were not acquired as the result of purchase of a proven tract or lease. (Art. 220, Reg. 45, Rev., as amended by T. D. 2956, Dec. 2, 1919.) 1428 Discovery— Proven Tract or Lease— Property Disproportionate Value.— (1) For the purpose of these sections of the Revenue Act of 1918, an oil or gas well may be said to be discovered when therd is either a natural exposure of oil or gas, or a drilling that discloses the actual and physical presence of oil or gas in quantities sufficient to justify com- mercial exploitation. Quantities sufficient to justify commercial exploita- tion are deemed to exist when the quantity and quality of the oil or gas so recovered from the well are such as to afford a reasonable expectation of at least returning the capital invested in such well through the sale of the oil or gas, or both, to be derived therefrom. (2) A proven tract or lease may be a part or the whole of a proven area. A proven area for the purposes of this statute shall be^ pre- sumed to be that portion of the productive sand or zone or reservoir in- cluded in a square surface area of 160 acres having as its center the mouth of a well producing oil or gas in commercial quantities. In other words, a producing well shall be presumed to prove that portion of a given sand, zone or reservoir which is included in an area of 160 acres of land, regard^ less of private boundaries. The center of such square area shall be the 248 TAX INC. DEDUCTIONS— DEPLETION. tT“’ to the section lines estab- li^ed by the United States system of public land surveys in the district in which It IS located. Where a district is not covered by the United States Land surveys, the sides of said area shall run north and south, east and west. So much of a taxpayer s tract or lease which lies within an area proven either y iimself or by another is “a proven tract or lease” as contemplated by the statute, and the discovery of a well thereon will not entitle such tax- payer to revalue such well for the purpose of depletion allowances, unless the tract or lea,se had been acquired before it became proven. And even though a well IS brought in on a tract or lease not included in a proven area as heretofore defined, nevertheless it may not entitle the owner of the tract or lease m which such well is located to revaluation for depletion purposes, if such tract or lease lies within a compact area which is immedi- ately surrounded by proven land, and the geologic structural conditions on or under the land so inclosed may reasonably warrant the belief that the oil or gas of the proven areas extends thereunder. Under such circum- stances the entire area is to be regarded as proven land. (3) "^e property” which may be valued after discovery is the “well” purposes of these sections the “well” is the drill hole, the surface necessary for the driHing and operation of the well, the oil or gas content of the par icular sand, zone or reservoir (limestone, breccia, crevice etc f m which the discovery was made by the drilling and from which the pro- duction IS drawn to the limit of the taxpayer’s private bounding lines but not beyond the limits of the proven area as heretofore providfd! ' be entitled to revalue his property after March 1, the purpose of depletion allowances must make a discovery after said date and such discovery must result in the fair market value of the property becoming disproportionate to the cost. The fair market value of if deemed to have become disproportionate to the cost Tf returnbJ'to tf "^-“ble expectation if ihi f * 1 * an amount materially in excess of the cost of the land or lease if acquired since March 1, 1913, or its fair market value on March 1, 1913, if acquired prior thereti, plus the cost of ^xpS 2?n r the time the well was brought in. (Art 220 (a), Reg. 45, Rev., added by T. D. 2956, Dec. 2, 1919.) ^ 1429 Proof of Discovery of Oil and Gas Wells.— In order to meet the the requirements of the preceding article to the satisfaction of the thi the taxpayer will be required, among other things, to submit Z SZiZfZr'TJ- ^ “"P convenient sctk, showing the location of the tract and discovery well in question and of the nearest producing well, and the development for a radius of at least three miles from the tract in question, both on the date of discovery and on the date when the fair market value was set; (b) a certified cop/ of Ae"og oflhe discovery \vell, showing the location, the date drilling began, the date of com- production, the formations penetrated, the oil ® f penetrated, the casing record, including the record of perforations, and any other information tending to show the conditi/n of the well and the location of the sand or zone from which the oil or gas n .the discovery was claimed; (c) a sworn recordPf production, clearly proving the commercial productivity of the discovery well; (d) a sworn copy of the records, showing the cost of the proZZ and (e) a full explanation of the method of determining the value on the INC. 249 TAX DEDUCTIONS— DEPLETION. date of discovery or within 30 days thereafter, supported by satisfactory evidence of the fairness of this value. (Art. 221, Reg. 45, Rev., as amended by T. D. 2956, Dec. 2, 1919.) 1430 Charges to Capital and to Expense in the Case of Mine. — In the case of mining operations all expenditures for plant, equipment, de- velopment, rent and royalty prior to production, and thereafter all major items of plant and equipment, shall be charged to capital account for pur- poses of depletion and depreciation. After a mine has been developed and equipped to its normal and regular output capacity, however, the cost of additional minor items of equipment and plant, including mules, motors, mine cars, trackage, cables, trolley wire, fans, small tools, etc., necessary to maintain the normal output because of increased length of haul or depth of working consequent on the extraction of mineral, and the cost of replace- ments of these and similar minor items of worn-out and discarded plant and equipment, may be charged to current expense of operations, unless the taxpayer elects to write off such expenditures through charges for deprecia- tion. (Art. 222, Reg. 45, Rev., April 17, 1919.) 1431 Charges to Capital and to Expense in the Case of Oil and Gas Wells. — Such incidental expenses as are paid for wages, fuel, repairs, hauling, etc., in connection with the exploration of the property, drilling of wells, building of pipe lines, and development of the property may at the option of the taxpayer be deducted as an operating expense or charged to the capital account returnable through depletion. If in exercising this option the taxpayer charges these incidental expenses to capital account, in so far as such expense is represented by physical property it rnay be taken into account in determining a reasonable allowance for depreciation. The cost of drilling nonproductive wells may at the option of the operator be deducted from gross income as an operating expense or charged to capital account returnable through depletion and depreciation as in the case of productive wells. An election once made under this option will control the taxpayer’s returns for all subsequent years. Casinghead-gas contracts have been construed to be tangible assets and their cost may be added to the capital account returnable through depletion, following the rate set by the oil wells from which the gas is derived, or, if the life of the contract is shorter than the reasonable expectation of the life of the wells furnishing the gas, the capital invested in the contract may be written off through yearly allowances equitably distributed over the life of the contract. All oil pro- duced during the taxable year, whether sold or unsold, must be considered in the computation of the depletion allowance for that year. In com- puting net income all oil in storage at the beginning and at the end ^ of the taxable year must be inventoried at cost, that is, unit cost plus lifting cost. Where deductions for depreciation or depletion have either on the books of the taxpayer or in his returns of net income been included in the past in expense or other accounts, rather than specifically as depreciation or depletion, or where capital expenditures have been charged to expense in lieu of depreciation or depletion, a statement indicating the extent to which this practice has been carried should accompany the return. (Art. 223, Reg. 45, Rev., April 17, 1919.) 1432 Depreciation of Improvements in the Case of Mine. — It shall be optional with the taxpayer, subject to the approval of the Commis- sioner, (a) whether the cost or value of the mining property, including ores 250 TAX INC. DEDUCTIONS— DEPLETION. equipment, and charges and additions to capital of thp f 1 ° deducted as expense on the returns of the taxpayer, shall be recovered at a rate established by current exhaus- tion of rnineral, or (b) whether the cost or value of the mineral and charges to capital account of expenditures other than for physical property shall be recovered by appropriate charges , based on depletion and the cost or value of plant and equipment shall be recovered by reasonable charges for depre- ciation calculated by the usual rules for depreciation or according to the peculiar conditions of the taxpayer’s case by a method satisfactory to the Commissioner. Nothing m these regulations shall be interpreted to mean that the value of a mining plant and equiqment may be reduced by depre- ciation or dep etion deductions to a sum below the value of the' salvag-e when the property shall have become obsolete or shall have been abandoned for the purpose of mining or that any part of the value of land for purposes other 22X RTi,“.v.^prin 7 ;*s 1433 Depreciation of Improvement in the Case of Oil and Gas Wells. —Both owners and lessees operating oil or gas properties will, iii addition to and apart from the deduction allowable for the depletion or return of capital as hereinbefore provided, be permitted to deduct a reason- able allowance for_ depreciation of physical property, such as machinery tools, equipment, pipes, etc., so far as not in conflict with the option exer- cised by the taxpayer under article 223. The amount deductible on this ac- count shall be such an amount based upon its cost or fair market value as of March 1, 1913, equitably distributed over its useful life as will bring such property to its true salvage value when no longer useful for the purpose for which such property was acquired. Accordingly, where it can be shown to the satisfaction of the Commissioner that the reasonable expectation of the economic life of the oil or gas deposit with which the property is con- nected is shorter than the normal useful life of the physical property, the amount annually deductible for depreciation may for such property be based upon the length of life of the deposit. See articles 161-170 Ifor.the subject ![1330]. (Art. 225, Reg. 45, Rev., Depreciation of Oil and Gas Wells in Years Before .• i ur “ examination it is found that in respect of the ‘'Tr* s '"eluding physical property and incidental ex- penses, between March 1, 1913, and December 31, 1915, a taxpayer has been allowed a reasonable deduction suflScient to provide for the elements of ex- haustion, wear and tear, and depletion, it will not be necessary to reopen the returns for years prior to 1916 in order to show separately in these years the portions of such deduction representing depletion and depreciation, respec- tively. _ .Such separation will be required to be made of the reserves for depreciation at January 1, 1916, and proper allocation between depreciation and depletion must be maintained after that date. In any case in which it IS found that the deductions taken between March 1, 1913, and Dcember 31 1913, are not reasonable, amended returns may be required for these years’ See article §39 (for invested capital.— War Tax Service], (Art. 226, Reg. 45, Rev., April 17, 1919.) » s 1435 Form A Revised (Mining) and Form N (Oil and Gas).— ICor- • 2^ Schedule A, page 2 of Form 1120.] Form A revised (Mining) and Form N (Oil and Gas) have been prepared for the INC. 251 TAX DEDUCTIONS— DEPLETION. use of taxpayers engaged in mining or in the production of oil and gas. A sufficient supply will be sent to Collectors of Internal Revenue for dis* tribution. 1436 These forms are prescribed to facilitate the compilation and presen- tation of certain information required for the audit and examination of the returns of these classes of taxpayers. If, however, it is more con- venient to use other methods of tabulation, the information so furnished, if complete, will be accepted in lieu of those forms. 1487 The information called for by these forms should be filed \vith th« returns in complete detail, either on the forms prescribed or in other suitable manner. This requirement is necessary for the reason that deple- tion sustained must be taken into consideration in the computation of in- vested capital, regardless of whether or not a deduction for it is claimed or has been claimed for it in the past by the taxpayer. This requirement applies to individual as well as corporate taxpayers. (T. D. 2849, May 27, 1919.) 1438 Depletion of Timber.— A reasonable deduction from gross income for the depletion of timber and for the depreciation of improvements is permitted, based (a) upon cost if acquired after Febrpry 28, 1913, or (b) upon the fair market value as of March 1, 1913, if acquired prior thereto. The essence of this provision is that the owner of timber property, whether it be a leasehold or a freehold, shall secure through an aggregate of annual depletion and depreciation deductions a return of the amount of capital invested by him in the property, or in lieu thereof an amount equal to its fair market value as of March 1, 1913, plus in any case the subsequent cost of plant, equipment and development which is not chargeable to cuirent operating expenses, but not including cut-over land values. (Art. 227, Reg. 45, Rev., April 17, 1919.) 1439 Capital Recoverable Through Depletion Allowance In the Case of Timber.— In general, the capital remaining in any year recover- able through depletion allowances may be determined as indicated in articles 202 [t[1408] and 203 [1fl409]. In the case of leases the apportionment of deductions between the lessor and lessee should be made as specified m article 204 [^410]. Where it becomes necessary to determine the cost or fair market value as of March 1, 1913, of the property, the rules laid down in articles 205 [P411] and 206 [P412] should be followed so far as pos- sible. (Art. 228, Reg. 45, Rev., April 17, 1919.) 1440 Computation of Allowance for Depletion of Timber. An allow- ance for the depletion of timber in any taxable year shall be based upon the number of feet of stumpage cut during the year and the unit cost of the stumpage at the date of acquisition or the unit market value on March 1, 1913, if acquired prior thereto. The unit market value as of March 1, 1913, shall be the unit price at which the standing timber in its then condition and in view of its then environment could have been sold for cash or its equivalent. The amount of the deduction for depletion in any taxable year shall be the product of the number of feet of stumpage cut during the year multiplied by such unit cost or market value of the stump- age. (Art. 229, Reg. 45, Rev., April 17, 1919.) 1441 Revaluation of Stumpage Not Allowed. — The fair market value of, stumpage when determined as of March 1, 1913,^ for the purpose of depletion allowances in the case of timber acquired prior thereto, shall INC. 252 TAX DEDUCTIONS— DEPLETION. be the basis for determining the depletion deduction for each year during the continuance of the ownership under which the fair market 4lue of the stumpage was fixed and during such ownership there can be no redetermin- tion of the fair market value of the stumpage for such purpose. However the «nit market value of stumpage adopted by the taxpayer may subse- quently be chan^ged If from any cause such value, if continued as a basis of depletion, should upon evidence satisfactorv to the Commissioner be found inadequate or excessive for the extinguishment of the fair market ST 919 .) “ 45. Rev., April 1442 Charges to Capital and to Expense in the Case of Timber —In the case of tirnber operations all expenditures for plant, equipment development, rent and royalty prior to production, and thereafter all maTor Items of plant and equipinent, shall be charged to capital account for pur- poses of depreciation. After a timber operation and plant has been deveh oped and equipped to its normal and regular output capacity, the cost of additional minor items of equipment and the cost of replacement of mLor Items of worn-out and discarded plant and equipment may be charged to current expenses of operations. (Art. 231, Reg. 45, Rev., April 17, f919 ) 1443 Depreciation of Improvements in the Case of Timber.— The cost or value as of March 1, 1913, as the case may be, of development no represented by physical property having an inventory value and Tuch cost or value of all physical property which has not been deducted and allowed as expense in the returns of the taxoaver ^ m through depreciation. It shall be optional with the taxoaver^uhw/r^n^ approval of the Commissioner, (aWhether the cosro'rTalu: aftL c2^^ property subject to depreciation shall be recovered at a rate established by current exhaustion of stumpage or Ibl whet-hor T * value shall be recovered by appropriate ch^rfe^ To/ deprecl£„ calculate°d by the usual rules for depreciation or accordincr tn r j* • of the taxpayer’s case by a method satisfactory T the^Commisslo/TTnTo case may charps for depreciation be based on a rate which TTT inguish * 1 " the terminatioTofTts useful I\othing in these regulations shall be interpreted to mean tknf i i a timber plant and equipment, so far as itT represeTed f erty having an inventory value, may be reduced hv denr^ Pyop- Claim'^dTT Attached to Return Where Depletion of Timber hold property; (d) the number of feet of timbe^ Removed an^lldV^^*^^’ the year for which the return was made- (e) the ^ ^ during account of depletion and on account of' iepTciatlT! s^terseSStery'; up INC. 253 TAX DEDUCTIONS— DEPLETION. to the taxable year during the ownership of the 5/L^the other data which would be helpful in determining Ae ’'f depletion and depreciation deductions claimed m the return. ‘^^P^ral shall keep accurate ledger accounts as outlined in article 216, and in graeral should comply with the requirements of the f oregoing artic es relating o the depletion of mines and oil and gas wells so far as applicable. (Art. 233, Reg. 45, Rev., April 17, 1919.) 1445 Determination of Fair Market Value of Timber. Where the fair market value of the property at a specified date in lieu of ^ost thereof is the basis for depletion and depreciation deductions, such value must be determined, subject to approval or revision by the Commissioner Tthe owner of the property in the light of the most reliable and accurate information with reference to the condition of the property as it existed at that date, regardless of all subsequent changes such as changes m surround- ing circumstances, in methods of exploitation, m degree of utilization, «c. tL value sought should be that established, assuming a transfer between a wiltorseller and a willing buyer as of that particular date. No rule or meAofof dlrmining the fair"^ market value of timber Property is pre- scribed but the Commissioner will give due weight and consideration to a y and all’ facts and evidence having a bearing on the market value, such as cost actual sales, and transfers of similar properties, market value of stock or shares royalties and rentals, value fixed by the owner for purposes of t capital-stock^tax valuation for local or State taxation, partnership account- records^ litigation in which the value of the property was m ques- tiot the amount at which the property may have been m pro- bate court, disinterested appraisals by to ^ rket tors For depletion purposes the cost of the timber or its fair market value at a specified date shall not include any Part of the of the land. (Art. 234, Reg. 45, Rev., added by T. D. 2916, September b, 1919.) [In connection with the foregoing read at 1446 Determination of Quantity of Timber.--Each f a deduction for depletion is required to estimate with r®spect to each separate timber account the total units (feet board ^ d to htve units) of timber reasonably known or on good evidence believed to have Sd on the ground on March 1, 1913, or on the date of acquisition of the property, as the case may be. The taxpayer, according o i kLuldge Ld belief and in the light of the most accurate and reliable information, will estimate the number of units of P®'^®^^/®‘f'‘2ts^whidl noon the specified date; this , estimate will state the number of units which would have been found present by a careful estimate made on the specified date with the object of determining 100 per cent of the quantity o which the area would have produced on that date } ^ ^ standards oTutili- timber had been cut and utilized in accordance with the standards ot uti zato prevamng in that region at that time. If subsequently d™ *e ownersWp of the taxpayer making the return ^'dditional units o^ fimbe are found to be available for utilization as the result of the growth ot me timber of closer utilization of the timber, of the utilization of species of rTes not foimerly utilized, of underestimates of the quantity of timber available on the specified date, etc., which estimating the number of units for P«.■•P“®^°^/®Pl® found in the course of operation that timber included in the estimate 254 TAX INC. DEDUCTIONS— CONTRIBUTIONS. merchantable as the result of deterioration through rot or otherwise, or that the original estimate was too great, a new estimate of the recoverable units of timber (but not of the cost or the fair market value at a specified date) shall be made and when made shall thereafter constitute a basis for depletion. In the selection of the unit or units of estimate the custom applicable to the given type of timber in the given region should be con- sidered. (Art. 235, Reg. 45, Rev., added by T. D. 2916, September 5, 1919.) 1447 Law jf 142. Certain Contributions or Gifts Made by Individuals are Deductible to a Limited Amount. — ‘'(11) Contri- butions or gifts made within the taxable year to corporations organized and operated exclusively for religious, charitable, scientific, or educational pur- poses, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private stockholder or individual, or to the special fund for vocational rehabilitation authorized by section 7 of the Vocational Rehabilitation Act, to an amount not in excess of 15 per centum of the taxpayer’s’ net income as computed without the benefit of this paragraph. 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.” 1448 Charitable Contributions. — Contributions or gifts within the tax- able year are deductible to an aggregate amount not in excess of fifteen per cent of the taxpayer’s net income including such pay- ments, if made (a) to corporations or associations of the kind exempted from tax by subdivision (6) of section 231 of the statute or (b) to the special fund for vocational rehabilitation under the Vocational Rehabiliation Act of June 27, 1918. For a discussion of what corpor- ations and associations are included within (a) see article 517 [1f760]. A gift to a common agency (as a war chest) for several such cor- porations or associations is treated like a gift directly to them. In connection with claims for this deduction there shall be stated on re- turns of income the name and address of each organization to which a gift was made and the approximate date and the amount of the gift in each case. Where the gift is other than money, the basis for calculation of the amount of the gift shall be the fair market value of the property at the time given. A gift of real estate to a city to be maintained per- petually as a public park is not an allowable deduction. This article does not apply to gifts by partnerships, estates and trusts, or corpora- tions. See sections 218 [for partnerships, t552] and 219 [for estates and trusts, 1[652] of the statute and articles 561 and 562 [for corporations, 111 181 and 111227]. (Art. 251, Reg. 45, Rev., April 17, 1919.) 1449 Receipt is acknowledged of your letter dated December 5. 1917, referring to contributions or gifts made by citizen and resident individuals of the United States to corporations or associations organ- ized and operated exclusively for religious, charitable or scientific pur- poses which may be considered as a deduction for tax purposes, in ac- cordance with the provisions of the ninth paragraph added to Section 5 (a). Act of September 8, 1916, by Section 1201, Act of October 3, 1917. 1450 You present several inquiries which are repeated and answered in the order stated by you. INC. 255 TAX DEDUCTIONS— CONTRIBUTIONS. 1451 “Are gifts to foreign organizations of a character specified in the Law to be also deducted?” Such contributions or gifts may be considered in computing the amount allowable as a deduction under the provisions of paragraph nine. 1452 “Is the Red Cross to be included as a charitable organization . It is held that the American National Red Cross falls within the class of associations enumerated in paragraph nine. 1453 “Is a church to be considered a religious organpation? Of course, we know that ‘the Church’ is a religious institution, but is any particular church so considered?” It is held that every church con- stitutes a religious corporation or association for the purposes of the deduction provided by the ninth paragraph. _ r i . 1454 “In this connection, are donations made to missionary funds, to the church building funds and for the benefit of other activities of the church to be deductible?” It is held that all such donations, being for the benefit or furtherance of religious activities, constitute items which may be considered in computing the deductions provided by the niihh para- graph. (Letter to The Corporation Trust Company, signed by Commis- sioner Daniel C. Roper, and dated December 24, 1917.) 1455 With referenc to the ninth paragraph of Section 5 of the Act of September 8, 1916, as amended, how am^ I to determine to what extent contributions or gifts made to corporations or associations, organized exclusively for religious, charitable, scientific or educationa purposes, societies for the Prevention of Cruelty to Children or Animals, may be claimed as a deduction? , 1456 You should first ascertain what your taxable net income would be were you not entitled to a deduction on account of contri- butions or gifts made to such corporations, associations or so- cieties, and then if the aggregate of your contributions and gifts made during the year to such organizations does not exceed 15 per cent ot your taxable net income so computed, their aggregate aniount may be entered in the space provided therefor under General Deductions on a personal return form. If such aggregate amount exceeds 15 per cent of your taxable net income so computed, the excess cannot be claimed. 1457 For example: Your total taxable net income amounts to $2U,- OOO. During the year you have contributed to the National Red Cross $1,000, to the Young Men’s Christian Association $1,000, toward the construction of a new church $1,000, and to the Associated Char- ities of your home city $500, a total of $3,500. Fifteen per cent of your total net income amounts to $3,000, therefore, this latter amount may be claimed as a deduction, and the balance of your contributions and gifts may not be claimed. . 1458 During 1917 I contributed $100 toward the support of a needy family. May this contribution be claimed as a deduction? (An- swer ) Contributions or gifts made to individuals do not constitute allow- able deductions. (Questions 86 and 87, 1918 Income Tax Primer.) 1459 No Taxable Profit Accrues to the Donor in Connection with the Making of a Deductible Charitable Contribution in the Form of Securities Which Have Increased in Value in His Hands.— In compliance with your request of July 31, 1919, this office hereby confirms the following telegram addressed to you under date of July 19, IViy. “Your telegram July 17. Where donor is entitled to claim deduction 256 TAX INC. DEDUCTIONS— CONTRIBUTIONS. for value of gift as provided in Article 251 [1[1448] regulations he is not required to report as a profit the excess in value of the property donated over its cost or fair market value on March 1, 1913.’' The above was in reply to your telegraphic inquiry of July 17, which reads as follows : “Article 251 says where charitable gift is other than money basis for calculation of amount to be deducted shall be fair market value of thing given: Does this mean donor can deduct market value of gift of securities without being treated as having realized as taxable income the difference between such market value and cost of securities to him? Please wire reply our expense.” (Letter to Ropes, Gray, Boyden and Perkins, Boston, Mass., signed by J. H. Callan, Assistant to the Com- missioner, by N. T. Johnson, Chief of Section, and dated Aug. 14, 1919.) 1460 Corporations are not Entitled to Deduct from Gross Income the Amount of Contributions to Religious, Charitable, Scientific or Educational Corporations or Associations, Even Though Such Con- tributions Are Made to Red Cross or Other War Activities.— The Revenue Act of 1918 contains two sections relating to deductions which may be made in ascertaining net income subject to tax. Section 214 relates to individuals and allows as deductions : (1) All ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, etc. (2) All interest paid or accrued within the taxable year on indebted- ness, etc. (with certain exceptions). (3) Taxes paid or accrued within the taxable year, etc. (with cer- tain exceptions). (4-10) Certain allowance for losses, bad debts, exhaustion, wear and tear of property of various sorts. (11) Contributions or gifts made within the taxable year to corpora- tions organized and operated exclusively for religious, charitable, scien- tific, or educational purposes, or for the prevention of cruelty to chil- dren or animals, no part of the net earnings of which inures to the benefit of any private stockholder or individual, etc. 1461 Section 234 relates to corporations, and allows as deductions : (1) All ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a rea- sonable allowance for salaries or other compensation for personal serv- ices 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. (2) All interest paid or accrued within the taxable year on its in- debtedness (with certain exceptions). (3) Taxes paid or accrued within the taxable year, etc. (with cer- tain exceptions). (4 et seq.) Losses sustained of a certain character, bad debts, allow- ances for exhaustion, wear and tear, etc. 1462 The question is presented whether corporations are entitled to deduct from their gross income for the purpose of the income tax, the amount of contributions to religious, charitable, scientific or educational corporations or associations, this question arising most fre- quently with reference to contributions made to the Red Cross and other war activities. INC. 257 TAX DEDUCTIONS— INVENTORY LOSSES. 1463 It will be observed that there is no express deduction permitted corporations of such contributions, as in the case of individuals, and unless, therefore, they fall \vithin the definition of some items of deduction allowed to corporations, they cannot be allowed. The only head within which it might be suggested that such contributions could be included is that of ordinary and necessary expenses paid or incurred in carrying on any trade or business, including reasonable salaries or other compensation, rentals, and payments for use of property, pro- vided for in paragraph 11. [Sic. Should be ‘T.’’] Practically these same deductions are permitted in section 214 in the case of individuals, and had such words included the contributions or gifts mentioned in para- graph 11 of Section 214, it would have been unnecessary to put in such paragraph, as they would have been covered by paragraph 1 of such section. 1464 The Attorney General, in an Opinion dated May 19, 1919, states the view that ordinary and necessary expenses contemplated by paragraph 1 of sections 214 and 234 were not intended to include all necessary expenses because the two immediately succeeding paragraphs provide for deducting interest and taxes, both of which are necessary expenses ; also the provision in regard to allowance for salaries, com- pensation, rentals, etc., indicates that all of the expenses, which are contemplated under the terms used in paragraph 1 of these sections, are expenses incurred directly in the maintenance and operation of the busi- ness, and not all those which may be beneficial and even necessary in the broader sense. 1465 In addition to the above considerations and to the fact that there is express provision for deducting contributions or gifts in the case of individuals, which is wanting in the section providing for deduc- tions to be made b}^ corporations, reference to the legislative history of the Revenue Act of 1918 (Congressional Record for September 17, 1918), shows that an amendment providing that corporations^ might make de- ductions of contributions or gifts, as in the case of individuals, came to a vote and was defeated, the principal reason assigned in the debate being that it would be dangerous to authorize directors to be generous with the money of their stockholders even for such laudable purposes. 1466 It is concluded, therefore, that corporations are not entitled to deduct from their gross income for the purpose of the income tax the amount of contributions made to religious, charitable, scientific or educational corporations or associations, even though such contribu- tions are made to the Red Cross or other war activities. (T. D. 2847, as amended. May 24, 1919.) 1467 Law 11144. Adjustment for Substantial Losses Sustained in the Taxable Year 1919 Because of Material Reduction of Inventory Values for 1918, or Because of Certain Rebate Payments. — '‘(12) (a) At the time of filing return for the taxable year 1918 a tax- paver may file a claim in abatement based on the fact that he has sus- tained a substantial loss (whether or not actually realized by sale or other disposition) resulting from any material reduction (not due to temporary fluctuation) of the value of the inventory for such taxable year,” 1468 Law1fl45. “or from the actual payment after the close of such taxable year of rebates in pursuance of contracts en- tered into during such year upon sales made during such year.” 258 TAX INC. DEDUCTIONS— INVENTORY LOSSES. 1469 Lawp46. “In such case payment of the amount of the tax cov- ered by such claim shall not be required until the claim is decided, but the taxpayer shall accompany his claim with a bond in double the amount of the tax covered by the claim, with sureties satisfactory to the Commissioner, conditioned for the payment of any part of such tax found to be due, with interest. If any part of such claim is disallowed then the remainder of the tax due shall on notice and demand by the collector be paid by the taxpayer with interest at the rate of 1 per centum per month from the time the tax would have been due had no such claim been filed.” 1470 LawT[147. “If it is shown to the satisfaction of the Commissioner that such substantial loss has been sustained, then in computing the tax imposed by this title the amount of such loss shall be deducted from the net income.” 1471 Law|[148. ‘‘(b) If no such claim is filed, but it is shown to the satisfaction of the Commissioner that during the tax- able year 1919 the taxpayer has sustained a substantial loss of the character above described then the amount of such loss shall be de- ducted from the net income for the taxable year 1918 and the tax im- posed by this title for such year shall be redetermined accordingly. Any amount found to be due to the taxpayer upon the basis of such redetermination shall be credited or refunded to the taxpayer in ac- cordance with the provisions of section 252 [^2121].” 1472 LawplQ. [Corporations.] — “(14) (a) At the time of filing return for the taxable year 1918 a taxpayer may file a claim in abatement based on the fact that he has sustained a substantial loss (whether or not actually realized by sale or other disposition) re- sulting from any material reduction (not due to temporary fluctuation) of the value of the inventory for such taxable year,” 1473 Law ]f320. “or from the actual payment after the close of such taxable year of rebates in pursuance of contracts en- tered into during such year upon sales made during such year.” 1474 Law][321. “In such case payment of the amount of the tax cov- ered by such claim shall not be required until the claim is decided, but the taxpayer shall accompany his claim with a bond in double the amount of the tax covered by the claim, with sureties satis- factory to the Commissioner, conditioned for the payment of any part of such tax found to be due, with interest. If any part of such claim is disallowed then the remainder of the tax due shall on notice and de- mand by the collector be paid by the taxpayer with interest at the rate of 1 per centum per month from the time the tax would have been due had no such claim been filed.” 1475 Law jf322. “If it is shown to the satisfaction of the Commissioner that such substantial loss has been sustained, then in computing the taxes imposed by this title and Title III the amount of such loss shall be deducted from the net income.” 1476 Law1|323. “(b) If no such claim is filed, but it is shown to the satisfaction of the Commissioner that during the tax- able year 1919 the tax])ayer has sustained a substantial loss of the char- iNC. 259 TAX DEDUCTIONS— INVENTORY LOSSES. acter above described then the amount of such loss shall be deducted from the net income for the taxable year 1918 and the taxes imposed by this title and by Title III for such year shall be redetermined ac- cordingly. Any amount found to be due to the taxpayer upon the basis of such redetermination shall be credited or refunded to the taxpayer in accordance with the provisions of section 252 [1|2121].” 1477 Losses in Inventory and From Rebates. — Taxpayers are allowed deductions from net income for the taxable year 1918 for losses resulting (a) from material reductions after the close of the taxable year 1918 of the values of inventories for such taxable 3 ^ear, and (b) from actual payments after the close of the taxable year 1918 of re- bates in pursuance of contracts entered into during such year upon sales made during such year. The taxable year of the taxpayer, whether calendar or fiscal, is meant in every case. Such deductions may be se- cured by two methods, either by a claim in abatement or by a claim for refund, and must not be entered upon the regular return. (Art. 261, Reg. 45, Rev., April 17, 1919.) 1478 Loss from Rebates. — Where after the close of the taxable year 1918 rebates have been bona fide paid in pursuance of contracts entered into during such year upon sales made during such year, the net income for that year may be reduced by the deduction of the amount of such rebates actually paid. No such deduction will be allowed unless the profits from such sales have been included in the income for the taxable year 1918. (Art. 262, Reg. 45, Rev., April 17, 1919.) 1479 Loss in Inventory. — Inventory losses are allowable either (a) where goods included in an inventory at the end of the taxable year 1918 have been sold at a loss during the succeeding taxable year, or (b) where such goods remain unsold throughout the taxable year 1919 and at its close have a then market value (not resulting from a temporary" fluctuation) materially below the value at which they were inventoried at the end of the taxable year 1918. No deduction is allow- able for losses of anticipated profits or for losses not substantial in amount, nor for physical damage or obsolescence occurring in the tax- able year 1919. In determining whether goods included in an inventory at the end of the taxable year 1918 have been sold during the succeed- ing taxable year, and whether loss has resulted therefrom, sales of goods made in the taxable year 1919 will be deemed to have been made from the inventoried stock of 1918 until such inventoried stock is exhausted. (Art. 263, Reg. 45, Rev., April 17, 1919.) 1480 Loss Where Goods Have Been Sold. — Where goods included in the inventory at the end of the taxable year 1918 have been sold during the succeeding taxable year, the loss which may be deducted from net income for the taxable year 1918 is the amount by which the value at which the goods sold were included in the inventory exceeds the actual selling price minus a reasonable allowance for selling expenses and for manufacturing expenses, if any, incurred in the taxable year 1919 and attributable to such goods. (Art. 264, Reg. 45, Rev., April 17, 1919.) INC. 260 TAX DEDUCTIONS— INVENTORY LOSSES. 1481 Loss Where Goods Have Not Been Sold. — Where goods in- cluded in the inventory at the end of the taxable year 1918 have not been sold during the succeeding taxable year, the loss Avhich may be deducted from net income for the taxable year 1918 is the amount by which the net income for such year would be reduced if the inventory were redetermined and such goods taken at their market value (ignor- ing mere temporary fluctuations of value) at the end of the taxable year 1919. (Art. 265, Reg. 45, Rev., April 17, 1919.) 1482 Claims. — Claims in abatement should be filed with the collector on Form 47 when the return for the taxable year 1918 is made. Claims for refund should be filed on Form 46 not later than 30 days after the close of the taxable year 1919. Each claim shall contain a concise statement of the amount of the loss sustained and the basis upon which it has been computed, together with all pertinent facts necessary to enable the Commissioner to determine the allowability of the claim. The amount allow^ed by the Commissioner in respect of any such claim shall be deducted from the net income for the taxable year 1918 and the taxes shall be recomputed accordingly. Any excess paid over the tax due shall be credited or refunded to the taxpayer. See section 252 of the statute and articles 1031-1038 [for credits and refunds, [^2115]. In computing income for the taxable year 1919 the opening inventory must be properly adjusted by the taxpayer in respect of any claim allowed for the year 1918 under this article. (Art. 266 , Reg. 45, Rev., April 17, 1919.) 1483 Time for Filing Claim in Abatement. — Acknowledgment is made of the receipt of your telegram of July 25, 1919, asking to be advised if an abatement claim covering loss in inventory value can be filed by a taxpayer after his return is filed but before the total amount of tax is collected. In reply, you are advised that as the section of the law covering the matter referred to by you reads that at the time of filing a return for the taxable year 1918, a taxpayer may file a claim for abatement, it is held by this Bureau that the law does not man- datorily provide that the claim shall be filed at the time of rendering the return. Therefore, such an abatement claim will be considered by this Bureau if filed before, or within 30 days after, the mailing of the Collector’s notice and demand on Form 17. (Letter to the Guaranty Trust Company of New York, signed by Commissioner Daniel C. Roper, and dated August 6, 1919.) 1484 Disposition of Claims.^ — ^A claim for loss resulting from rebates paid or from actual sales will be decided as soon as practicable after it has been filed. A claim for loss in inventory not realized by sale will be decided only after the close of the taxable year 1919 upon the basis of any permanent reduction in the level of market values which may occur during such year from the inventory values taken at the close of the taxable year 1918. Not later than thirty days after the close of the taxable year 1919 a taxpayer who has filed either a claim in abatement or a claim for refund, or both, shall submit to the Com- missioner a descriptive statement showing the quantity and kind of all goods included in the 1918 inventory which have been (a) sold at a loss in the taxable year 1919, (b) sold at a profit during the taxable year 1919, or (c) not sold or otherwise disposed of during the taxable 261 TAX INC. DEDUCTIONS— INVENTORY LOSSES. year 1919, together with such other information in respect of such goods as the Commissioner may require. A claim filed with the return for a loss not then realized by sale will be passed upon in the light of any sales thereafter made during the taxable year 1919. A claim filed with the return is authorized for the purpose of allowing the taxpayer to utilize, where justified, a preliminary allowance for inventory losses and not to provide a deduction essentially different from that taken by way of a claim filed at the end of the taxable year 1919. (Art. 267, Reg. 45, Rev., April 17, 1919.) 1485 Effect of Claim in Abatement. — In the case of a claim in abate- ment filed with a return payment of the amount of the tax covered thereby shall not be required until the claim is decided, pro- vided the taxpayer files therewith a bond on Form 1124 in double the amount of the tax covered by the claim, conditioned for the payment of any part of such tax found to be due with interest at the rate of 12 per cent per annum. The bond shall be executed by a surety company holding a certificate of authority from the Secretary of the Treasury as an acceptable surety on federal bonds and shall be subject to the approval of the Commissioner. See also section 1320 of the statute [for United States bonds in lieu of sureties, 111500]. If abatement of any part of the tax covered by such a claim is denied, then such part shall be paid by the taxpayer with interest at the rate of 12 per cent per annum from the original due date of the tax. (Art. 268, Reg. 45, Rev., April 17, 1919.) 1486 Questions and Answers About Inventory Losses. Compiled and Arranged by Tax Committee of the Southern Wholesale Dry Goods Association. — These questions were asked at the Conven- tion of the Southern Wholesale Dry Goods ^ Association, held at Louisville, Kentucky, April 17th. At the suggestion of the Hon. Daniel C. Roper, Commissioner of Internal Revenue, these questions were sub- mitted to the Advisory Tax Board at Washington and explained by a committee from the Association composed of Messrs. W. J. D. Bell, Lynchburg ; Harry Dumesnil, Louisville ; C. C. Henking, Huntington, and Norman H. Johnson, Richmond. Each of the answers is made by the Advisory Board, and, therefore, is authoritative. 1487 Comment: [The Tax Committee of the Southern Wholesale Dry Goods Association, consisting of W. J. D. Bell, Chairman, W. R. King, Vice-Chairman, Harry Dumesnil, C. C. Henking, C. L. Sanger, James J. Ragan and Norman H. Johnson, Secretary, recently issued a pamphlet entitled “Questions and Answers on Inventories and the Abatement Clause of the Internal Revenue Act of 1918,” containing fifty-eight questions and the answers thereto. By the courtesy of the Committee, through its Secretary, we are permitted to reproduce below ^1488 to 1[1499. Those questions and answers which we have not repro- duced were rather more specific in their character than those we have given; hence their exclusion here. The foreword at |[1486, above, is the foreword of the pamphlet as issued by the Tax Committee.— The Corporation Trust Company.] 1488 Q. 1. Are copies of inventory required by the Department to be filed with return? . . , Ans. No. But it should be understood by all taxpayers that all original inventory sheets and all papers which would have any bearing on a claim for los-S in inventories (including sales slips) should be retained for a period of not less than five years. INC. 262 TAX DEDUCTIONS— INVENTORY LOSSES. It is recommended that the taxpayer attach to his return for the taxable year subsequent years, a summarized analysis of his inventories. 1489 Q. 2. Are these copies of inventory necessary whether a claim in abate- ment is filed or not? Ans. See answer to Question 1. However, it is recommended to the tax- payer that all such records be maintained in order to facilitate a proper verifica- tion of the return at any time deemed advisable by the Commissioner. Loose-leaf ledgers are recommended, whereby control can be secured of each classification or lot of goods upon which claim is to be made. Therein should be recorded quantities and values as returned on the inven- tory at the close of the taxable year 1918; and there should be recorded in summary form each day or week, the quantities sold and the values thereof and all items of sales should be carried forward, according to established classi- fication adopted by the taxpayer, to the time when the quantities as reported in the inventory shall have been accounted for. At the time of filing the return, on or about June 15, 1919, the taxpayer should compute his loss from sales to that date, by deducting from the total sales a i^asonable and proportionate allowance for operating and/or selling expense The net result ascertained should be deducted from the inventory value of the goods included in the 1918 inventory sold to that date, and the resultant loss brought down. The taxpayer should then reduce the balances remaining unsold to the then market value, and add the loss thus ascertained to the losses ascertained from sales. The sum total of these computations would represent the total loss upon which the amount of tax to be claimed in abatement is to be computed and this amount may be deducted from the second installment of the tax* Provided proper bond is furnished on Form 1124 in accordance with Article 268 of Regulations 45. [111485.] Should any goods unsold, upon which claim in abatement has been filed at the time of filing the return, be disposed of by sale at some future period within the taxable year 1919 the taxpayer will continue to record the sales effected deducting therefrom the proportionate cost of operating and/or selling expense Ihe gam or loss would then be ascertained by computing the difference be- tween the adjusted sales values and the inventory value established at the time of filing the claim m abatement. If at the close of the taxable year 1919 there remains any commodity unsold, the taxpayer shall adjust the inventory value to the market price (ignoring mere temporary fluctuations in price or value), at the close of the taxable year and compute the amount of gain or loss. Such gain or loss shall be combined with the gain or loss on sales between the time of filing the return and the close of the taxable year 1919 ^ If It IS shown that the taxpayer has sustained a loss additional to that shown in the claim in abatement a claim for refund should be made on Form 46 for the amount of tax overpaid. Should it be shown that the amount deducted in the claim in abatement at the time of filing the return for the taxable year 1918 is in excess of the tax based upon actual losses sustained throughout the taxable year 1919 the tax- payer must remit to the Collector the additional amount of tax involved with interest at the rate of 1% per month from the time of filing the return until the date of filing the final adjustment of taxes for the taxable year 1918 on account losses. An example is given for the information of your associa- Assunie an inventory at December 31, 1918, 200,000 yds. at 15c, $30,000 00 Assume sales, between January 1, 1919. and lune 1 1919 100 000 yds. at 12/.c. $12,500 00 Cost of manufacturing and/or selling based upon data as- certained from 1918 operations, say in this case 15% of sales values 1 875 00 Net proceeds from sales $10 625 00 The inventory cost at 15c. per yd. amounted to |l5’000 00 Net loss upon which tax can be claimed in abatement ’’ ’ Assume that the market price at June 1, 1919 (on the as- sumption that the taxpayer will prepare his claim on June 1, rather than delay until June 15, 1919), on this class of goods was 12c. There would remain unsold $4,375 00 INC. 263 TAX DEDUCTIONS— INVENTORY LOSSES. at that time 100,000 yds. originally inventoried at 15c. to be reduced to 12c. or at a loss of 3c. per yd. aggregating 3,000 00 1 Otal amount upon which tax could be claimed in abate- ment at the time of filing the return on or before June 1, 1919, would be $/,3/5 00 Now, between June 1, 1919, and December 31, 1919, assume that the taxpayer sells 50,000 yds. at a price of 15c. per yard, amount of sale would be $7,500 00 Deducting therefrom operating and/or selling expense at the same rate of 15% (or, if ascertainable, the ad- justed percentage for 1919) 1,125 00 Net proceeds from sale $6,375 00 Cost of this material as adjusted at June 1, 1919, on the bassi of 12c. per yd 6,000 00 Gain on these transactions $375 00 Further, assume that the remaining 50,000 yards were un- sold at the close of the taxable year 1919, and that the market price had risen to 17c. per yard, the taxpayer would, in this case, have to readjust his inventory value to the 17c. basis, and account for the element of appreciation, in this case (5c. per yard over ad- justed figure as of June 1) 2,500 00 Total gains 2,875 00 Adjusted loss upon which tax is to be abated or refunded, as the case may be $4,500 00 See also answer to Question No. 27. 1490 Q. 5. Does the claim in abatement apply to all goods charged in 1918, though not received until after inventory? Ans. All goods where title has actually passed to the taxpayer, must be in- cluded in the inventory, and as a result thereof are eligible for consideration in any claim in abatement. . , It is necessary that title shall have passed to the taxpayer m 1918, and the goods merely ordered for future delivery and for which no transfer of title has been effected, should be excluded. See Article 1581 of Regulations 45. [1[1091]. 1491 Q. 6. Where inventory is taken on December 1 or 15, can a claim be made for all goods invoiced up to December 31, 1918? Ans. It is presumed that your question refers either to a fiscal year ending November 30, 1918, or, in the second instance, to a calendar year ending December 31, since no fiscal year can be considered except at the close of some month in the year. In the first instance, no goods to v/hich title has not passed to the vendee at and including November 30, 1918, can be considered as inventory items. In the second instance, all goods to which title has passed to the vendee up to December 31, 1918, must be included in the inventory. Where the fiscal year ended on November 30, 1918, the claim in abatement can only apply to goods which are the property of the taxpayer up to that date but no claim can be made on any materials which have become the property of the taxpayer between December 1 and 31, inclusive, of that year. 1492 Q. 15. Can more than one claim be filed? Ans. Two claims may be filed, one at time of filing the return, and one adjusting the entire claim for losses at the close of the taxable year 1919. The first would represent a claim in abatement; the second, a claim for refund. It is possible that an additional amount of tax may become due from the taxpayer with interest at the rate of 1% per month from the time of making the deduction until the time of filing the final statement, which would be brought about by the fact that, in the disposition of unsold goods as to the 1918 inventory after the filing of the original return, and the claim in abate- ment, gains may result from subsequent sales. It will therefore be necessary for the taxpayer to prepare a statement which will fully reflect the corrected amount of any claim to which he may be entitled for losses in inventory of 1918, and this statement must definitely embrace the total amount of inventory INC. 264 TAX DEDUCTIONS— INVENTORY LOSSES. value as recorded on the books of the taxpayer at the end of the taxable year 1918, and be capable of proper audit. The following is suggested as a possible outline to be used in making final statement of adjustment at the close of the taxable year 1919. This is based upon the illustration given in answer to Question 2 which applies to one item of inventory only, but it must be understood that the final statement referred to herein, must cover the entire inventory value as at the end of the taxable year 191& 1. Inventory close of taxable year 1918 2. Sales from 1918 inventory during taxable year 1919.... 3. Less deductions from sales for selling expense 4. Net sales proceeds (Item 2 value less Item 3) 5. Balance of 1918 inventory on hand at close of taxable year (Quantity Item 1 less Item 2.) (Value priced at market close of taxable year 1919.) 6. Net sales proceeds and balance of inventory (Item 4 plus Item 5, values.) 7. Loss (Item 1 value less Item 6) 8. Gain 9. Amount of claim in abatement or for refund filed (date ) (In this illustration an excessive claim in abatement of tax based upon a loss of inventory values, amounting to $2,875 is assumed. Tax upon this amount with interest at one per cent, per month between the date of making the deduc- tion and final statement will be assessed in this case.) Should the taxpayer elect not to file a claim in abatement at the time of filing his return, but rather to wait until the end of the taxable year 1919 then in that case, but one claim would be filed. * ’ Quantity 200,000 150,000 Value $30,000 00 20,000 00 3,000 00 17,000 00 50,000 8,500 00 25,500 00 4,500 00 7,375 00 1493 Q. 20. Suppose we are unable to sell them (Discontinued off colors in broken lots?). Ans. If the salable colors had been disposed of and the stock broken before the close of the taxable year 1918, the element of obsolescence if definitely determined should be taken into account in both the inventory made at the close of the taxable year 1918 and that made at the close of the taxable year 1919. If “it is impossible to get the market value for such colors in broken stocks’*’ the taxpayer will be required to await the sale of such broken stocks in order to determine the loss involved; but it is believed that in practically all instances a reasonable and fair estimate of the market value can be made. salable colors were disposed of after the close of the ’taxable year 1918, the accompanying obsolescence of the remaining stock takes place in the ypr 1919, and the deduction must be taken not as a loss in inventory but as obsolescence occurring in the taxable year 1919. securing the sales 1494 Q. 25. Ue take stock on January 1. During December we shipped out quite a lot of ginghams at the high price, and in January were forced to rebate our customers on sales made in December. Are we allowed to charge this rebate in our claim? Ans. In cases where rebates have been made on sales reported in the 1918 Income Tax Return, a separate schedule should be submitted and the total thereof may be included in the taxpayer’s claim in abatement. This schedule should be prepared in such manner as to reflect* (a) The date of each rebate; (b) the name and address of each party the benefit thereof; (c) a description of the goods; (d) quantities* (e) value of each item; and (f) the amount rebated. ’ 1495 Q. 26. Suppose I ship some ginghams at the high price in January and A customers; am I entitled to put that on the claim? Ans. Rebates made during the taxable year 1919 on sales made during such year (provided the goods to which the rebate applies were included in the inventory at the close of the taxable year 1918) Avill be considered as an adiust- inent of sales values in arriving at the loss on inventories for the taxable year 1918, and will be treated as outlined in Question No. 2. This cannot go in the rebate claim, but the rebate may be considered in detciniining the sale orice for the purpose of determining an inventory loss. ^ It must be understood that rebates made on goods acguired and sold subse- ‘I’® taxable year 1918 cannot be considered in any manner as a 1918 inventory loss. INC. 265 TAX UNITED STATES BONDS AS SECURITY. 1496 Q. 27. Do we have to file a complete inventory of all our stock, or just the stock on which we ask an abatement? Ans. See Question No. 1. You are required to file with your original claim and at the close of the taxable year 1919 summarized statements covering all adjustments involved. To conform to good accounting practices, the taxpayer should consider these summaries in the light of controlling accounts and the sum totals thereof should equal the total inventories maintained in detail by the taxpayer. It must be understood that claim for losses in inventories of the taxable year 1918 are to embrace all items of the taxpayer’s inventory so that gains made in any sales of certain items or classes will be used to offset losses in others and the net result as to the entire inventory determined. Thus if the final computation shows a net gain over all inventory items sold, no claim for loss in any particular item or items can be sustained. 1497 Q. 34. When can this claim for abatement be filed? Ans. Claim for net loss cannot be made before November 1, 1919. Claim in abatement for loss in inventory must be filed at the time of filing the return for the taxable year 1918. [But see 111483.] 1498 Q. 37. Where the claim in abatement is allowed, what effect has that on 1919 profits? Ans. Where a claim for inventory loss is finally allowed, this means that the net income for 1919 — as established by usual accounting methods — will be correspondingly higher as reported in the return for the taxable year 1919. In other words, an item of loss which would normally find its way into 1919 operating accounts is thrown back against 1918 income. This Department recommends that the accounting records of the taxpayer be not changed, but that any adjustment of inventories be recorded in distinct accounts, sup- ported by adequate detailed schedules. In arriving at the net operating profits for any year, the income, excess and war profits taxes to be paid on such profits are not taken into consideration. Such taxes, therefore, are theoretically paid out of surplus for the year. If at a subsequent date any of such taxes are refunded, they should not be recorded in the operating accounts, but should be credited directly to surplus. 1499 Q. 47. Individual income of partnerships. How do you file plea of abatement when partnership files no blank or form like a corporation does? Ans. See Article 321 of Regulation 45 [1[551 and 1[553]. A claim in abatement arising from a loss in 1918 partnership inventory must be made by each individual partner as to his distributive share of recomputed net income. To this claim should be attached the statement of the partnership showing the loss in inventory supported in the same manner as such claims are supported by corporations and individuals. The statement filed as to the part- nership as a whole will be used by the Department for the purposes of record and verification and any adjustments which may be found necessary will be spread pro-rata over the claims of the individuals. At the close of the taxable year 1919 a properly authorized member of the partnership shall compile the final statement of adjustment in accordance with the methods outlined in Question 2 and elsewhere, attaching thereto the proportionate amounts of adjust- ment affecting each individual member of the partnership. On the determina- tion of the net result, each individual partner shall file a claim for refund (if any refund is due), or in the event that the claim in abatement was in excess of the actual losses sustained, each individual will remit to the Collector of his District, his share of the additional amount of tax ascertained from the adjusted statement, with interest at the rate of 1 % per month from the time of deduction from the second installment to the time when such remittance is made. (For source and authority see 1[1486 and 111487.) 1500 Law j[456. Liberty and Other United States Bonds as Security in Connection with “Penal Bonds.” — “Sec. 1320. That wherever by the laws of the United States or regulations made pursuant thereto, any person is required to furnish any recognizance, stipulation, bond, guaranty, or undertaking, hereinafter called “penal bond,” with surety or sureties, such person may, in lieu of such surety or sureties, deposit as se- curity with the official having authority to approve such penal bond. United States Liberty bonds or other bonds of the United States in a sum equal at INC. 266 TAX UNITED STATES BONDS AS SECURITY. their par value to the amount of such penal bond required to be furnished together with an agreement authorizing such official to collect or sell such bonds so deposited in case of any default in the performance of any of the conditions or stipulations of such penal bond. The acceptance of such United States bonds in lieu of surety or sureties required by law shall have the same force and effect as individual or corporate sureties, or certified checks, bank drafts, post-office money orders, or cash, for the penalty or amount of such penal bond. The bonds deposited hereunder, and such other United States bonds as may be substituted therefor from time to time as such security, may be deposited with the Treasurer, or an Assistant Treasurer of the United States, a Government depository. Federal Reserve bank, or member bank, which shall issue receipt therefor, describing such bonds so deposited. As soon as security for the performance of such penal bond is no longer necessary such bonds so deposited shall be returned to the depositor: Provided, * ^ 1501 Lawl[457. “Provided further- That nothing herein contained shall affect or impair the priority of the claim of the United States against the bonds deposited or any right or remedy granted by said Acts or by this section to the United States for default upon any obligation of said penal bond:” 1^02 Law 11458. “Provided further. That all laws inconsistent with this . . section are hereby so modified as to conform to the provisions hereof 1503 Law 1[459. And provided further. That nothing contained herein shall affect the authority of courts over the security, where such bonds are taken as security in judicial proceedings, or the authority of any administrative officer of the United States to receive 1^)4 security in cases authorized by existing laws.” ' Law 11460. “The Secretary may prescribe rules and regulations effect” necessary and proper for carrying this section into 1503 Bonds Under Sections 214 (a) (12), 234 (a) (14), and 1320 of the Revenue Act of 1918.-Sections 214 (a) (12) and 234 (a) (14) of the Revenue Act of 1918 provide in part as follows [P467 and 1114721 • At the time of filing return for the taxable year 1918 a taxpayer may file a c aim in abatement based on the fact that he has sustained a substantial loss (whether or not actually realized by sale or other dis- position) resulting from any material reduction (not due to temporai-y tiuctuation) of the value of the inventory for such taxable year or from the actual payments after the close of such taxable year of rebates in pursuance of contracts entered into during such year upon sales made during such year. In such case payment of the amount of the tax covered by such claim shall not be required until the claim is decided, but the taxpayer shall accompany his claim with a bond in double the amount of the tax covered by the claim, with sureties satisfactory to the Commissioner, conditioned for the payment of any part of such tax ^found to be due, with interest.” 1500 Section 1320 of the same Act provides, in part [IflSOO] : “That wherever by the laws of the United States or regulations made pursuant thereto, any person is required to furnish any recogniz- ance, stiT)ulation, bond, guaranty, or undertaking, hereinafter called penal bond,’ with surety or sureties, siidi person may, in lieu of such surety or suieties, deposit as security with the official having authority INC. 267 TAX UNITED STATES BONDS AS SECURITY. to approve such penal bond, United States Uiberty bonds or other bonds of the United States in a sum equal at their par value to the amount of such penal bond required to be furnished, together with an agreement authorizing such official to collect or sell such bonds so deposited in case of any default in the performance of any of the conditions or stipu- lations of such penal bond. The acceptance of such United States bonds in lieu of surety or sureties required by law shall have the same force and effect as individual or corporate sureties, or certified checks, bank drafts, post-office money orders, or cash, for the penalty or amount of such penal bond. The bonds deposited hereunder and such other United States bonds as may be substituted therefor from time to time as such security may be deposited with the Treasurer, * * * of the United States, * * * which shall issue receipt therefor, describing such bonds so deposited. As soon as security for the performance of such penal bond is no longer necessary, such bonds so deposited, shall be returned to the depositor.” 1507 Article 268 of Regulations No. 45 [P485] provides m part as follows, relative to claims for losses in inventory and from rebates : “In the case of a claim in abatement filed with a return payment of the amount of the tax covered thereby shall not be required until the claim is decided, provided the taxpayer files therewith a bond on Form 1124 in double the amount of the tax covered by the claim, conditioned for the payment of any part of such tax found to be due with interest at the rate of 12 per cent per annum. The bond shall be executed by a surety company holding a certificate of authority from the Secretary of the Treasury as an acceptable surety on Federal bonds and shall be subject to the approval of the Commissioner.” 1508 The bond executed on Form 1124, pursuant to Article 268 of Regu- lations No. 45, together with abatement claim, should be forwarded by the collector to the Commissioner of Internal Revenue. When it is re- ceived by the Commissioner it will be detached from the abatement claim and forwarded to the Surety Bond Section of the Treasury Department for certification as to the sufficiency of the sureties. The Surety Bond Section will after certification, return the bond to the Commissioner for his approval. When he has approved the bond he will cause it to be attached to the abate- ment claim. 1509 In case the claimant, in accordance with the provisions contained in Section 1320 of the Revenue Act of 1918, elects to offer, in lieu of the surety or sureties provided for on Form 1124, United States Uiberty Bonds or other bonds of the United States as security he should execute in duplicate a bond and agreement on Form 1124a, prescribed below. The original should accompany the United States bonds offered as security; the duplicate should be forwarded by the collector with the abatement claim to the Commissioner. If such bond and agreement is executed by a corpora- tion duly certified copy of the resolution of the board of directors, author- izing the execution, should be attached. The United States Liberty Bonds or other bonds of the United States, offered as security, shall at their par value be not less than the amount of the penal sum of the bond executed on Form 1124a, which shall be in double the amount of the tax covered by the abatement claim. The bonds so offered as security must be delivered to the Commissioner of Internal Revenue at the obligor’s risk and expense. Cou- pon bonds cannot safely be forwarded by registered mail unless insured by the obligor against risk of loss in transit. Registered bonds so offered as 268 TAX INC. CREDITS TO INDIVIDUALS. security must be registered in the name of the obligor and duly assigned to the Commissioner of Internal Revenue at or before the date of deposit with the Commissioner and need not be insured when forwarded by regis- tered mail, unless the obligor so elects. In connection with effecting in- surance of bonds shipped reference is made to Article 187 (a) of Regula- tions No. 2, Revised. 1510 The Commissioner of Internal Revenue will issue a receipt in dupli- cate for United States Bonds so deposited with him as security, the original of the receipt to be given to the obligor and the duplicate to be retained by the Commissioner for his files. Upon receipt by the Commis- sioner of the United States Bonds so offered as security and upon satisfying himself as to their ownership and as to the sufficiency of the agreement for him to collect or sell, and in case of registered bonds as to the regularity of the assignments, he will approve the bond executd on Form 1124a, and deposit the United States Bonds offered as security with the Treasurer of the United States, as provided in paragraph 7 of Department Circular No. 154 (1919), dated June 30, I9l9, and the Treasurer of the United States will, as provided in said circular, give receipt therefor in duplicate describing the bonds so deposited, the original to be delivered to the Commissioner of In- ternal Revenue and the duplicate to be retained by the Treasurer for his files. 1511 Bonds of the United States shall be returned to the obligor as soon as the security for the performance of such penal bond is no longer necessary. Registered bonds shall be reassigned to the owner when the lia- bility is cancelled. 1512 These special instructions are prescribed for the guidance of col- lectors of internal revenue pursuant to the provisions of Treasury Department Circular No. 154 as to the acceptance of United States Bonds in lieu of surety or sureties on penal bonds. (T. D. 2925, Sep- tember 26, 1919.) 1513 Lawp56. Credits Allowed to Individuals. — For Normal Tax Only. — “Sec. 216. That for the purpose of the normal tax only there shall be allowed the following credits:” 1514 Lawp57. Dividends as Credit for Normal Tax Only. — “(a) The amount received as dividends from a corporation which is taxable under this title upon its net income, and amounts received as dividends from a personal service corporation out of earnings or profits upon which income tax has been imposed by Act of Congress 1515 Law1[158. All Interest on Government and War Finance Cor- poration Bonds which has been Included as Gross Income is Credited for Normal Tax Purposes. — “(b) The amount re- ceived as interest upon obligations of the United States and bonds issued by the War Finance Corporation, which is included in gross income under section 213 [pi38] 1516 For the purpose of imposing the normal tax the taxpayer's net income as computed pursuant to section 212 of the statute and articles 21-26 [beginning at 117691 is first reduced by the sum of the allowable credits. These include dividends (as defined in sec- tion 201 and articles 1541-1549 [beginning at 1f815] received other than INC. 269 TAX CREDITS TO INDIVIDUALS—SPECIFIC EXEMPTION. from foreign corporations having no income from sources within the United States; interest not entirely exempt from tax received upon obligations of the United States and bonds of the War Finance Corporation; a personal exemption; and a credit for dependents. _ Consequently, the normal tax does not apply to dividends from domestic corporations or from foreign corporations deriving income from sources within the United States, or to interest on any obligations of the United States See section 213 (b) of the statute and articles 77-82 [for obligations of the United States, pi39] and 1131 [for dividends from certain foreign coi-porations taxed in Forto Rico and the Philippines, 11543]. For the purpose of imposing the surtp the taxpayer’s net income is entitled to none of these credits As to. credits allowed corporations, see section 236 and article 591 [^1041]. (Art. 3 , Reg. 45, Rev., April 17, 1919.) 1517 Dividends Received from Foreign Corporations Subject to In- come Tax are Exempt from Normal Tax. — Receipt is acknowl- edged of your letter dated May 9, 1919, in which you request advice as to whether Article 301 [111516] of Regulations 45 contemplated that normal tax imposed bv Section 210 of the Revenue Act oi 1918 does not apply to dividends received from foreign corporations deriving any income whatever from sources within the United States, without regarf ® character of that income and also without regard to the proportion which such income bears to the entire income of the corporation. In are advised that Section 216 (a) of the Act upon which Article 301 of the Regulations is based, provides that for the purpose of the normal tax only there shall be allowed as a credit “the amount received as dividends from a corporation which is taxable under this title upon its net income. ISee 111325 also.] Therefore, Article 301 of the Regulations contemplates that the normal tax imposed by Section 210 of the Act does not apply to dividends, regardless of the amount of such dividends, received from a foreign corporation taxable upon income from sources within the United States, however small such income may be. (Letter to The Corporation Trust Company, signed by Commissioner Daniel C. Roper, and dated June 9, 1919.) 1518 Law 11159. A Specific Exemption of Income is Allowed for Nor- mal Tax Purposes. — Single Persons.^ — (c) In the case of a single person, a personal exemption of $1,000> o'"” 1519 Law 11160. Married Persons Living Together and Heads of Fa®' ilies.— “in the case of the head of a family or a married person living with husband or wife, a personal exemption of $2,000.” 1520 Law 11161. One $2,000 Specific Exemption Only.— “A husband and wife living together shall receive but one personal exemption of $2,000 against their aggregate net income 1521 Law 11162. $2,000 Specific Exemption May Be Prorated Between Husband and Wife.— “and in case they make separate returns, the personal exemption of $2,000 may be taken by either or divided between them;” 1522 Personal Exemption of Head of Family. — A head of a ^ person who actually supports and maintains m one household one or more individuals who are closely connected with him by blood 270 TAX INC. CREDITS TO INDIVIDUALS— SPECIFIC EXEMPTION. relationship, relationship by marriage, or by adoption, and whose right to exercise family control and provide for these dependent individuals IS based upon some moral or legal obligation. In the absence of continu- ous actual residence together, whether or not a person with dependent rela- tives IS a head of a family within the meaning of the statute must depend on the character of the separation. If a father is absent on business or at war, or a chdd or other dependent is away at school or on a visit, the common home being still maintained, the additional exemption applies If moreover through force of circumstances a parent is obliged to maintain his dependent children with relatives or in a boarding house while he lives elsewhere, the additional exmption may still apply. If, however, without necessity the dependent continuously makes his home elsewhere, his bene- factor IS not the head of a family, irrespective of the question of support. A resident alien with children abroad is not the head of a familv f Art 302, Reg. 45, Rev., April 17, 1919.) 1523 Personal Exemption of Married Person.— In the case of a mar- man or married woman the joint exemption replaces the in- dividual exemption only if the man lives with his wife or the woman Ii\ es with her husband. In the absence of continuous actual resi- dence together, whether or not a man or woman has a wife or husband living with him or her within the meaning of the statute must depend on the chaiactei of the separation. If merely occasionally and temporarily a v.ufe IS away on a visit or a husband is away on business, the joint home being maintained, the additional exemption applies. The unavoidable ab- sence of a wife or husband at a sanatorium or asylum on account of illness does not preclude claiming the exemption. If, however, the husband vol- untarily and continuously makes his home at one place and the wife hers at another, they are not living together for the purpose of the statute, irre- spective of their personal relations. A resident alien with a wife residing abroad is not entitled to the joint exemption. (Art 303 Reo- 45 Rev April 17, 1919.) ■ ^ b- , V., Law Tf 163. Additional $200 wSpecific Exemption for Each Depend- (d) $200 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.” 1525 A taxpayer receives a credit of $200 for each person (other than husband or wife), whether relatecl to him or not and whether living with him or not, dependent upon and receiving his chief support fronr the taxpayer, provided the dependent is either (a) under 18 or (b) incapable of self-support because defective. The credit is based upon actual hnancial dependency and not mere legal dependency. It may accrue to a taxpayer who is not the head of a; family. Rut a father whose children re- ceive half or more of their support from a trust fund or other separate source is not entitled to the credit. (Art. 304, Reg. 45, Rev., April 17 lo26 Date Determining Exemption.— The status of the taxpayer on the last day of his taxable year determines his right to an additional exemption and to a credit for dependents. If then he is the head of a family, the personal exemption of $2,000 may be taken. If then INC. 271 TAX CREDITS TO CORPORATIONS. he is the chief support of a dependent who is under eighteen years of age or incapable of self-support because mentally or physically defective, the credit of $200 may be taken. But an unmarried individual or a married individual not living with husband or wife, who during the taxable year has ceased to be' the head of a family or to have dependents, is entitled only to the personal exemption of $1,000 allowed a single person. A husband and wife living together at the end of the taxable year may receive but one personal exemption of $2,000, divisible as they please, against their aggregate net in- come. If an individual dies during the taxable year, his executor or admin- istrator in making a return for him is entitled to claim his full personal ex- emption according to his status at the time of his death. See also section 219 (c) of the statute and articles 326 and 421 [for credits to trust, estate or beneficiary, |f668 and j|684]. If a husband or wife so dies and the joint personal exemx:)tion is used by the executor or administrator in making a return for the decedent, an undiminished personal exemption according to the status of the suiwivor at the end of the taxable year may be claimed in the survivor’s return. If a taxpayer makes a return for a period other than a taxable year, the last day of such period shall be treated as the last day of the taxable year for the purpose of this article. See section 226 and articles 431 [for returns when accounting period changed, p862] and 1013 [for declaration of termination of taxable period, 112074]. (Art. 305, Reg. 45, Rev., April 17, 1919.) 1527 Law 1f327. Credits Against Income Allowed to Corporations. — “Sec. 236. That for the purpose only of the tax imposed by section 230 [1[713] there shall be allowed the following credits:” 1528 Law 11328. Any Interest from Government Obligations and from War Finance Corporation Bonds is to be Credited for Purposes of the Income Tax. — “(a) The amount received as interest upon obligations of the United States and bonds issued by the War Finance Corporation, which is included in gross income under Section 233 [11808];” 1529 Law 11329. The Amount of War and Excess-Profits Tax Imposed for the Same Taxable Year is to be Credited Against Income for Purposes of the Income Tax. — “(b) The amount of any taxes imposed by Title III for the same taxable year:” 1530 Law 11330. War and Excess-Profits Tax Credit in the Case of Fiscal Year Corporations. — “Provided, That in the case of a corporation which makes return for a fiscal year beginning in 1917 and ending in 1918, in computing the tax as provided in subdivision (a) of section 205 [11613], the tax computed for the entire period under Title II of the Revenue Act of 1917 shall be credited against the net income com- puted for the entire period under Title I of the Revenue Act of 1916 as amended by the Revenue Act of 1917 and under Title I of the Revenue Act of 1917, and the tax computed for the entire period under Title III of this Act at the rates prescribed for the calendar year 1918 shall be credited against the net income computed for the entire period under this title ; and” 1531 Law 11331. Domestic Corporations Are Allowed a Specific Credit of $2,000. — “(c) In the case of a domestic corporation, $ 2 , 000 .” f f # # € INC. 272 TAX TAX ON NONRESIDENT ALIENS. 1532 Law |[4. “Domestic Corporation” Defined.— “The term Momes- . tic when applied to a corporation or partnership means created or organized in the United States [T|1009] Credit of $2,000 Apportioned When Returns Are Being Made for a Changed Accounting Period.— [Read at |[1861.] 1533 Credits Allowed.— After ascertaining the net income of a domes- tic corporation it is allowed as credits against such net income before the application of the income tax rate the sum of $2,000, plus the amount of any war profits and excess profits tax assessed or to be assessed for the same taxable year, and plus the amount of interest not entirely exempt from tax received upon obligations of the United States and bonds of the War Finance Corporation. See section 213 (b) of the statute and articles 77-82 [for interest on government obligations, TF11391. Consequently, m the case of corporations no income tax is imposed on any mterest received upon obligations of the United States or bonds of the War hmance Corporation. A foreign corporation is allowed the same credits . $2,000. As to corporations with fiscal years beginning in 1917 see section 205 and article 1623 [|f623]. For the purpose of the war profits and excess profits tax a corporation is not entitled to these credits. (Art. 591, Reg. 45, Rev., April 17, 1919.) P295^^ Against the Tax in the Case of a Corporation.— Read at 1535 Xax on Non-resident Aliens, at pis. -Who is a non-resident alien. — Read 1536 Law 1[75. Normal Tax on Non-resident Aliens.— “Sec. 210. That, in lieu of the taxes imposed by subdivision (a) of section 1 of the Revenue Act of 1916 [Normal income tax on individuals! and by section of the Revenue Act of 1917 [War-normal tax on individuals:' did not apply to nonresident aliens], there shall be levied, collected, and paid tor each taxable year upon the net income of every individual a normal tax at the following rates v^!r IQ^r'^F®' the Calendar Year 1918— “(a) For the calendar year 1918, 12 per centum of the amount of the net income in excess of the credits provided in section 216 [P513 and ]fl570] 1538 LawjfyS. For Calendar Year 1919 and Subsequent Years.— “(b) For each calendar year thereafter, 8 per centum of the ftfUn^nd 11U70] ''' provided in section 216 io39 LawpO. Surtax on Non-resident Aliens.— “Sec. 211. (a) That, 1 r , T. imposed by subdivision (b) of sec- o®"". Revenue Act of 1916 [Surtax on individuals] and^ by section 2 of the Revenue Act of 1917 [Surtax on individuals], but in addition to he normal tax imposed by section 210 [111538] of this Act, there shall be levied,^ collected, and paid for each taxable year upon the net income of every individual, a surtax equal to the sum of the following* [Rates same as for citizens and residents, for which see P85 ]” INC. 273 TAX TAX ON NONRESIDENT ALIENS. 1540 Law ^83. Net Income of Non-resident Aliens Defined. — “Sec. 212. (a) That in the case of an individual the term “net income” means the gross income as defined in section 213 [p542], less the deductions allowed by section 214 [p561].’ 1541 Law|f84. Annual Accounting Period for Non-resident Aliens (Fiscal Year or Calendar Year, as the Case May Be.) — Sec. 212. (b)., [Same as for citizens and residents for which see p78.] 1542 Law p09. — Gross Income of Non-resident Aliens. — Sec. 213. (a). (b) . [Same as for citizens and residents for which see P02, except that] — “(c) In the case of non-resident alien individuals, gross income includes only the gross income from sources within the United States,” 1543 LawplO. Interest on Domestic Securities and Dividends on Do- mestic Stock as Gross Income of Nonresident Aliens. — “including interest on bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise, dividends from resident corporations, and” 1544 Law p 11. Profits on the Manufacture and Disposition of Goods Within the United States as Gross Income of Non- resident Aliens, —“including all amounts received (although paid under a contract for the sale of goods or otherwise) representing profits on the manufacture and disposition of goods within the United States.” 1545 Gross Income of Non-resident Alien Individuals. — In the case of nonresident alien individuals “gross income” means only the gross income from sources within the United States. This includes interest on bonds, notes or other interest-bearing obligations of residents, corporate or otherwise, dividends from resident corporations, amounts re- ceived representing profits on the manufacture or disposition of goods within the United States, rentals and royalties from property and income from business carried on in the United States, interest on deposits in banks lo- cated within the United States, income from capital otherwise invested in the United States, and income from services rendered or labor performed within the United States. For what is a resident corporation see article 1509 [pOlO]. As to the gross income of foreign corporations see section 233 (b) of the statute and article 550 [P018]. (Art. 91, Reg. 45, Rev., April 17, 1919.) 1540 Income of Nonresident Alien Individuals Not Subject to Tax. — Salaries, wages, commissions and rents paid by domestic business enterprises to nonresident alien employees for services rendered entirely in a foreign country or for property located in a foreign country are not subject to tax as income from a source within the United States. Dividends on stock and interest on notes of corporations organized in the United States, but doing no business and owning no property therein, paid to non- resident alien individuals or corporations, are not subject to the tax. The tax does not apply to charter money or freight payments received by a foreign owner in regard to a vessel operated between the United States and foreign ports, if the person receiving the income maintains no regular agency in' the United States and is not doing business in the United States. Compensation received by nonresident alien munitions inspectors and pur- INC. 274 TAX TAX ON NONRESIDENT ALIENS. chasing agents from foreign governments is not subject to the tax. (Art. 92, Reg. 45, Rev., April 17, 1919.) 1547 When the Wages of a Nonresident Alien Seaman Are Derived from Sources Within the United States.—While resident alien seamen are taxable like citizens on their entire income from whatever sources derived,^ nonresident alien seamen are taxable only on income from sources within the United States. Ordinarily, wages received for services rendered inside the territorial United States are to be regarded as from sources within the United States. The wages of an alien seaman earned on a coastwise vessel are from sources within the United States, but wages earned by an alien seaman on a ship regularly engaged in foreign trade are not to be regarded as from sources within the United States, even though the ship flies the American flag, or although during a part of the time the ship touched at United States ports and remained there a reasonable time for the transaction of its business. The presence of a seaman aboard a ship which enters a port for such purposes of foreign trade is merely transitory and wages earned during that period by a non- resident alien seaman are not taxable. There is no withholding from the wages of alien seamen unless they are nonresidents within the rules laid (lown 111 Articles 311 to 315. Even in the case of a nonresident alien seaman, the employer is not obliged to withhold from wages unless those wages are from sources within the United States as defined above. As to when alien seamen are to be regarded as residents see Art. 312a fl[5l91. (Art. 92a Reg. 45, Rev., as added by T. D. 2869, June 20, 1919.) 1548 Article 92 (a) fP 547], which is added to Regulations 45 by Treas- ury Decision 2869, provides that ‘‘Nonresident alien seamen are taxable only on income from sources within the United States” and further, that “Wages earned by an alien seaman regularly engaged in foreign trade are not to be regarded as from sources within the United States even though the ship flies the American Fla.s, or although during a part of that time the ship touched at U. S. ports and remained there a reasonable time for the transaction of its business.” It follows therefore that in such cases the wages paid to nonresident alien seamen by an employer are not regarded as income from sources within the United States and the employer is not required to withhold. It should be remembered, however, that for pur- poses of information such an employer is required by Section 256, Article 1071 ^1^1736] thereunder, to render a return to the Commissioner on Form 1099, in all cases where the employer made payment of $1,000 or over of wages to resident alien seamen in any taxable year. (Part of letter to Ship- owners’ Association of the Pacific Coast, San Francisco, signed by P. S. Talbert, Acting Assistant to the Commissioner, by C. R. Trobridge, Acting Head of Division, and dated September 20, 1919.) 1549 Income of Nonresident Aliens from Dividends, the Record Owner of the Stock Being a Person in the United States.— Read at P776. 1550 Income of Nonresident Aliens from United States Bonds.— By virtue of section 4 of the Victory Liberty Loan Act of March 3 1919 amending section 3 of the Fourth Idberty Bond Act of July 9^ 1918 [^1551 1 , the interest received on and after March 3, 1919, on bonds notes and certificates of indebtedness of the United States and bonds of the War INC. 275 TAX TAX ON NONRESIDENT ALIENS. Finance Corporation, while beneficially owned by a nonresident alien individ- ual, or a foreign corporation, partnership or association, not engaged in business in the United States, is exempt from all income and war profits and excess profits taxes. (Art. 93, Reg. 45, Rev., April 17, 1919.) 1551 Sec. 4. That section 3 of the Fourth Liberty Bond Act is hereby amended to read as follows : o j t -u ^ “Sec. 3. That, notwithstanding the provisions of the Second Liberty Bond Act or of the War Finance Corporation Act or of any other Act, bonds, notes, and certificates of indebtedness of the United States and bonds of the War Finance Corporation shall, while beneficially owned by a non- resident afien individual, or a foreign corporation, partnership, or associa- tion not engaged in business in the United States, be exempt both as to principal and interest from any and all taxation now or hereafter imposed bv the United States, any State, or any of the possessions of the United States or by any local taxing authority.” (Section 4 of “An Act to amend the Liberty Bond Acts and the War Finance Corporation Act, and for other purposes,” known as the “Victory Liberty Loan Act,” approved by the President, March 3, 1919.) 1552 Sale of Stock. — When a nonresident alien who owns stock in an American corporation disposes of same by sale, the sale and delivery being made within the United States, the profit will be held to have been derived from sources within the United States and is to be included for the the purposes of income tax. (Art. 4, 1162, Reg. 33, Rev., Jan. 2, 1918.) 1553 Foreign Partnerships and the Nonresident Alien Members There- of. A domestic corporation or partnership is one organized or created in the United States, including only the States, the Terri- tories of Alaska and Hawaii, and the District of Columbia, and a foreign corporation or partnership is one organized or created outside the United States as so defined [1[1008 and 1[1009]. The nationality or residence of members of a partnership does not alfect its status. A partner- ship created by articles entered into in San Francisco between residents of the United States and residents of China is a domestic partnership See also articles 4 [for “Who is a citizen,” p\2] and 312-315 [for Who is a nonresident alien, etc., beginning at 1[518]. (Art. 1509, Reg. 45, Rev., April 17, 1919.) 1554 Income from United States Sources Received Through Foreign Partnership. — The income received by a nonresident alien part- nership from sources within the United States does not lose its identity as to source when distributed to a nonresident alien member of the firm. Therefore, the nonresident alien member will be required to^ return on Form 1040 or 1040A, as the case may be, and shall include therein his distributive share of the taxable profits from sources within the United States. (Part of letter to The Corporation Trust Company, signed by Commissioner Daniel C. Roper, and dated October 1, 1918.) 1555 Profits Accruing to Nonresident Alien Partnerships on Sale of Stock Negotiated Through Domestic Bankers.— This office has before it your letter of October 28, 1916. It appearing from paragraph (e) of your letter that the foreign banking house referred to is a co-partner- ship, the following answers are returned to your several inquiries: INC. 276 TAX TAX ON NONRESIDENT ALIENS. 1556 “A foreign banking house buys through a domestic banking house 1,000 shares of stock and sells the stock with a profit of $30,000. (a) Is this profit taxable ? (Answer) Yes. 1557 (b) Should the domestic firm retain the normal tax? (Answer) No. 1558 (^c) How can a foreign firm be made to render a tax return and pay the tax, it being assumed that the domestic firm or agent holds no property for account of the foreign firm after the transaction is conpleted? (Answer) The Government will proceed, under the general provisions of the law, to take all steps necessary to secure a required return, or to itself prepare one, and a collection of the amount of tax assessed against that return. 1559 ((i) if the foreign firm does not render a return, will the domestic firm be held responsible for the tax and supertax, if any? (Answer) The foreign firm itself is not required [under the law as it then was] to render an income tax return covering its own net income unless specifically requested to do so by the Commissioner of Internal Revenue or a Collector of Internal Revenue. Whether or not the domestic firm which has acted as agent for tlie foreign firm would be required to render a return in the event that the latter refused to do so, would be determined by the facts in the C3.se. 1560 (e) The foreign firm has several partners. Is the $30,000 to be considered an entity for the purpose of supertax or may the several partners declare their proportionate shares in the amount? (Answer) In- come Tax is not computed upon the amount of net income derived by a foreign partnership from sources within the United States, but upon the individual share of each member in such net income. (Letter to The Cor- poration Trust Company, signed by Commissioner W. H. Osborn, and dated Dec. 6, 1916.) 1561 Law 1fl49. Deductions Allowed to Nonresident Aliens. — “Sec. 214. (b) In the case of a nonresident alien individual the de- ductions allowed in paragraphs (1) [1111821, (4) [1fl303], (7) [P316], (8) [111238], (9) [111376], (10) [111397], (12) [111467], and clause (e) of paragraph (3) [111564], of subdivision (a) shall be allowed only if and to the extent that they are connected with income arising from a source within the United States 1562 Law 1[150. Apportionment and Allocation of Deductions. — “and the proper apportionment and allocation of the deductions with respect to sources of income within and without the United States shall be determined under rules and regulations prescribed by the Commissioner with the approval of the Secretary.” 1563 Law 11118. Interest Deductible by a Nonresident Alien.— “Sec. 214. (a) (2) [111232]— or, in the case of a nonresident alien individual, the proportion of such interest which the amount of his gross income from sources within the United States bears to the amount of his gross income from all sources within and without the United States 1564 Law 11125. Taxes Deductible by a Nonresident Alien. — “Sec. 214. (a) (3) [Taxes set forth in 111246, 111247, 111248, and in addition thereto] (e) in the case of a nonresident alien individual, by the authority of any foreign country (except income, war-profits and excess- profits taxes, and taxes assessed against local benefits of a kind tending to increase the value of the property assessed), upon property or business , 277 TAX INC. TAX ON NONRESIDENT ALIENS. 1565 Law p 28. Losses Incurred in Transactions Entered Into for Profit Outside of Business Deductible by Nonresident Aliens.— ‘Sec. 214. (5) [P310]— but in the case of a nonresident alien individual only as to such transactions within the United States;” 1566 LawiriSO. Property Losses Outside of Business Deductible by Nonresident Aliens. — “Sec. 214. (a) (6) [p311]— (but in the case of a nonresident alien individual only property within the United States)” 1567 Lawp43. Contributions to Religious, Charitable, Educational, etc.. Activities Are Deductible to a Limited Amount. — “Sec. 214. (b) (11) [p447] — In the case of a nonresident alien individual this deduction shall be allowed only as to contributions or gifts made to domestic corporations, or to such vocational rehabilitation fund;” 1568 In the case of a nonresident alien individual the deduction for inter- est paid or accrued is proportionate to his income from sources within the United States (see paragraph (2) of subdivision (a) of section 214 of the statute) [P563] ; for losses incurred in any trans- action entered into for profit, or arising from casualty or theft, is confined to transactions and property within the L^nited States (5), (6) ; for charit- able contributions excludes gifts to foreign corporations (11) ; and for busi- ness expenses, taxes imposed by a foreign country, losses in trade, bad debts, depreciation, amortization, depletion, and loss in inventory (1), (3), (4), (7), (8), (9), (10) and (12), is allowed only if and to the extent that it is connected with income arising from a source within the United States. See articles 91 [for gross income of nonresident aliens, P545] and 311 [for allowance of deductions and credits to nonresident aliens, P575] — 316 [for allowance of personal exemption to nonresident aliens, p570]. As to deductions allowed foreign corporations, see section 234 (b) of the statute and article 573 [p035]. (Art. 271, Reg. 45, Rev., April 17, 1919.) 1569 Dividends and United States Bond Interest as Credit for Normal Tax (All Individuals, Including Nonresident Aliens). — Read at P513. 1570 Lawp64. Specific Exemption as Credit for Normal Tax to Non- resident Aliens. — “Sec. 216. (e) — In the case of a non- resident alien individual who is a citizen or subject of a country which imposes an income tax, the credits allowed in subdivisions (c) [111518] and (d) [P524] shall be allowed only if such country allows a similar credit to citizens of the United States not residing in such country.” 1571 Credits to Nonresident Alien Individual. — A nonresident alien individual, similarly to a citizen or resident, is entitled for the pur- pose of the normal tax to credit dividends from domestic or resident foreign corporations, interest on obligations of the United States, a personal exemption, and $200 for each dependent, except that if he is a citizen or subject of a country which imposes an income tax a personal ex- emption or credit for dependents is allowed him “only if such country allows a similar credit to citizens of the United States not residing in such country.” “If such country allows a similar credit” means if such country in imposing its income tax allows a personal exemption or a credit for dependents, as 278 TAX INC. TAX ON NONRESIDENT ALIENS. the case may be, and allows it without discrimination to citizens of the United States not residing in such country. For the meaning of “country’^ see article 382 [p292]. To satisfy the requirement of a similar credit it is not necessary that the personal exemption or credit for dependents, as the case may be, should be the same as that allowed by the United States statute. The status as to residence of an alien individual on the last day of his taxable year determines his right to be treated as a resident: or as a non- resident for such year. [For discussion of personal exemption generally read at jfl518]. (Art. 306, Reg. 45, Rev., April 17, 1919.) 1572 When Nonresident Alien Individual Entitled to Personal Ex- emption. — (a) The following is an incomplete list of countries which either impose no income tax or in imposing an income tax allow both a personal exemption and a credit for dependents which satisfy the similar credit requirement of the statute : Argentina ; Belgium ; Bohemia ; Bolivia ; Bosnia; Brazil; Bukowina; Canada; Carinthia; Carniola; China; Chile; Cuba; Dalmatia; Denmark; Ecuador; Egypt; France; Galicia; Goritz; Gradisoa ; Herzegovina ; Istria ; Rower Austria ; Mexico ; Montenegro ; Mor- avia; Morocco; Newfoundland; Nicaragua; Norway; Panama; Paraguay; Persia; Peru; Portugal; Roumania; Russia (including Poles owing allegi- ance to Russia) ; Salzburg; Santo Domingo; Serbia; Siam; Silesia; Styria; Spain; Trieste; Tyrol; Upper Austria; Union of South Africa; Venezuela, (b) The following is an incomplete list of countries which in imposing an in- come tax allow a personal exemption which satisfy the similar credit require- ment of the statute, but do not allow a credit for dependents : Bachka ; Banat of Temesvar; Croatia; Salvador; India; Italy; Slavonia; Slovakia; Transyl- vania. (c) The following is an incomplete list of countries which in im- posing an income tax do not allow to citizens of the United States not re- siding in such country either a personal exemption or a credit for dependents and, therefore, fail entirely to satisfy the similar credit requirement of the statute: Australia; Costa Rica; Great Britain and Ireland; Japan; The Netherlands; New Zealand; Sweden. The former names of certain of these territories are here used for convenience, in spite of an actual or possible change in name or sovereignty. A nonresident alien individual who is a citi- zen or subject of any country in the first list is entitled for the purpose of the normal tax to such credit for a personal exemption and for dependents as his family status may warrant. If he is a citizen or subject of any country in the second list he is entitled to a credit for personal exemption, but to none for dependents. If he is a citizen or subject of any country in the third list he is not entitled to credit for either a personal exemption or for dependents. If he is a citizen or subject of a country which is in none of the lists, then to secure credit for either a personal exemption or for depend- ents he must prove to the satisfaction of the Commissioner that his country does not impose an income tax or that in imposing an income tax it grants the similar credit required by the statute. (Art. 307, Reg. 45 Rev. as amended by T. D. 2922, September 18, 1919. 1573 Credits to Nonresident Aliens, Citizens of Countries Which in Imposing Income Taxes Levy no Income Taxes on United States Citizens Not Residing Therein.— Reference is made to your letter of March 22, 1919, in which you refer to Treasury Decision 2811 [amended by T. D. 2922, 1[1572] and ask to be advised concerning the application of the ruling contained therein in cases where an individual INC. 279 TAX TAX ON NONRESIDENT ALIENS. is a citizen or subject of a country which Imposes an income tax but whic tax does not apply to nonresident aliens. ^Tn reply you are advised that a citizen or subject of a country which imposes an income tax but does not levy a tax on income derived from such country by citizens of the United States not residing therein is permitted to claim the credits Provided for in paragraphs (c) and (d), Section 216 of the Revenue Act of 1918 in pre- paring a return of income derived from sources within the United ^ates. (Letter to The Corporation Trust Company, signed by Commissioner Daniel C. Roper, and dated May 1, 1919.) 1574 Law 11165. Deductions and Credits Allowed Conditionally. “Sec. 217. That a nonresident alien individual shall receive the benefit of the deductions and credits allowed in this title only by or causing to be filed with the collector a true and accurate return of ms total income received from all sources corporate or otherwise in the United States, in the manner prescribed by this title, including therein all the in- formation which the Commissioner may deem necessary for the calcula- tion of such deductions and credits:” 1575 Allowance of Deductions and Credits to Nonresident Alien Indi- vidual.— Unless a nonresident alien individual shall render a re- turn of income as required in article 401 [1(1579], the tax shall be col- lected on the basis of his gross income (not his net income) from sources within the United States. Where a nonresident alien has various sources of income within the United States, so that from any one source or from all sources combined the amount of income shall call for the assessment of a surtax, and a return of income shall not be filed by him or on his behalf, the Commissioner will cause a return of income to be made and include therein the income of such nonresident alien from all sources concerning which he has information, and he will assess the tax and collect it from one or more of the sources of income within the United Staites of such non- resident alien, without allowance for deductions or credits. The benefit of the credits allowed against net income for the purpose of the normal tax mav not be received by a nonresident alien by filing a claim with the withholding agent, but only by Maiming them upon filing except as permitted in article 316 [111577 and m Article * section 216 of the statute and articles 306 and 307 [for credits to n^n^sident aliens, p571 and 1(1572]. (Art. 311, Reg. 45, Rev., April 17, 1919.) 1576 LawK166. Specific Exemption May Be Claimed at the Source.— “Provided, That the benefit of the credits allowed in sub- divisions (c) [P518] and (d) [1(1524] of section 216 may in the ^cre- tion of the Commissioner, and except as otherwise provided in subdivision (e) [1(1570] of that section, be received by filing a claim therefor with the withholding agent.” 1577 Allowance of Personal Exemption to Nonresident Alien Em- ployee.-A nonresident alien employee provided he is entitled under section 216 of the statute and articles 301-307 [fl571 and 1115721 to credit for a personal exemption or for dependents or both may claim the benefit of such credit by filing witn his employer form 111^ duly filled out and executed under oath. See particularly the lists of fo ^ countries in article 307 [111572]. On the filing of such a claim the em- 280 TAX INC. TAX ON NONRESIDENT ALIENS. ployer shall examine it. If on such examination it appears that the claim is in due form, that it contains no statement which to the knowledge of the employer is untrue, that such employee on the face of the claim is en- titled to credit, and that such credit has not yet been exhausted, such em- ployer need not until such credit be in fact exhausted withhold any tax from payments of salary or wages made to such employee. Every employer with whom affidavits of claim on form 1115 are filed by employees shall pre- serve such affidavits until the following calendar year, and shall then file them, attached to his annual withholding return on Form 1042 (revised), with the collector on or before March 1. In case, however, when the fol- lowing calendar year arrives such employer has no withholding to return, he shall forward all such affidavits of claim directly to the Commissioner (Sorting Division), with a letter of transmittal, on or before March 15. Where any tax is withheld the employer in every instance shall show on the pay envelope or shall furnish some other memorandum showing the name of the employee,, the date and the amount withheld. This article ap- plies only to payments of compensation by an employer to an employee. See further section 221 and articles 361-376 [for withholding of the tax at the source, beginning at p585]. (Art. 316, Reg. 45, Rev., April 17, 1919.) 1578 Personal Exemption of Nonresident Aliens in the Case of Interest Payments on Tax-Free Covenant Bonds. — Read at p650. 1579 Return of Income of Nonresident Alien. — A nonresident alien in- dividual shall make or have made a full and accurate return on form 1040 (revised) or form 1040 A (revised) of his income received from sources within the United States, regardless of amount, unless the tax on such income has been fully paid at the source. See section 217 of the statute and articles 311 [for allowance of deductions and credits, p575] — 316 [for allowance of personal exemption to nonresident alien employee, P577]. The responsible representatives of nonresident aliens in connection with any source of income which such nonresident aliens may have within the United States shall make a return of such income, and shall pay any and all tax, normal and additional, assessed upon the income received by them in behalf of their nonresident alien principals, in all cases where the tax on income so in their receipt, custody or control shall not have been withheld at the source. The agent of a nonresidnet alien is responsible for a correct return of all income accruing to his principal within the purview of the agency. The agency appointment will determine how completely the agent is substituted for the principal for tax purposes. Where upon- filing a re- turn of income it appears that a nonresident alien is not liable for tax, but nevertheless a tax shall have been withheld at the source, in order to obtain a refund on the basis of the showing made by the return there should be attached to it a statement showing accurately the amounts of tax withheld, with the names and post-office addresses of all withholding agents. [For claims for refund read at pi 15.] See article 376 [for return of income from which tax is withheld p722]. (Art. 404, Reg. 45, Rev., April 17, 1919.) 1580 When a Broker is Not the Agent, for Income Tax Purposes, of a Nonresident Alien Client. — This office is in receipt of your letter of Mar. 7, 1918, in which you ask what constitutes an agent or representative in this country in charge of property of a nonresident alien, and by! way of INC. 281 TAX I i WITHHOLDING AT THE SOURCE. illustration you submit the following statement: ‘I have in mind the ordi- nary relation of broker and client. The non-resident alien client maintains an account with a broker, occasionally buying some securities on margin and selling some from time to time ; interest is charged on balances due and dividends as paid on the stocks carried are credited to the account. All dealings are in response to direction from the customer. Is the broker in such case, agent or representative of the alien so that he must make a return in behalf of the customer and become responsible for normal taxes and sur- taxes on all income and profits passing through his hands ?” Pn reply you are, advised that the facts set forth in this statement do not constitute the relationship of agency between these parties to an extent which will make the broker responsible for filing the return for the nonresident client. The broker in such, case, however, for the purposes of the income tax is con- sidered the withholding agent and should withhold the 2% [8%] normal tax and the nonresident alien should file a return on Form 1040 [or Form 1040A], including all income received from sources in the United States. (Letter to Henry W. Beal, Boston, Mass., signed by Deputy Commissioner L. F. Speer, and dated April 17, 1918.) 1581 Return for Nonresident Alien Beneficiary by Fiduciary.— See P05. 1582 Law p67. Property of Nonresident Alien Subject to Distraint for the Tax. — “Sec. 217. — In case of failure to file a return, the collector shall collect the tax on such income, and all property belong- ing to such nonresident alien individual shall be liable to distraint for the tax.'' 1583 Law 11432. “Sec. 1307. That in all cases where the method of collecting the tax imposed by tliis Act is not specifically provided in this Act, the tax shall be collected in such manner as the Commissioner, with the approval of the Secretaiy, may prescribe." 1584 Payment of Tax by Nonresident Aliens. — See general provisions governing payment of the tax, 112000. 1585 Law pOl. Payment of Tax at the Source on Account of Nonresi- dent Aliens. — “Sec. 221. (a) That all individuals, cor- porations and partnerships, in whatever capacity acting, including lessees or mortgagors of real or personal property, fiduciaries, employers, and all officers and employees of the United States," 1586 Law 11202. “having the control, receipt, custody, disposal, or pay- ment of interest,^ rent, salaries wages, premiums, annuities, com- pensations, remunerations, emoluments, or other fixed Or determinable an- nual or periodical gains, profits, and income," * Payment at the source, of tax on interest on corporate obligations. — [Read at 111625.] 1587 Law 1[203. “of any nonresident alien individual" 1588 Lawl[204. “(other than income received as dividends from a cor- poration which is taxable under this title upon its net income)" 282 TAX INC. WITHHOLDING AT THE SOURCE. 1589 Law ^205. “shall (except in the cases provided for in subdivision (b) [|fl636] and except as otherwise provided in regu- lations prescribed by the Commissioner under section 217 [p576]” 1590 Law ][206. “deduct and withhold from such annual or periodical gains, profits, and income'' 1591 Lawlf207. “a tax equal to 8 per centum thereof:" 1592 In general withholding is required (a) of a tax of 8 per cent in the case of fixed or determinable annual or periodical income (other than dividends from corporations liable to the income tax and interest upon corporate bonds containing a tax-free covenant clause [for withholding on tax-free covenant bond interest see 1[1636]) payable to a nonresident alien individual * * * (Art. 361 Reg. 45, Rev., April 17, 1919.) 1593 Withholding is required from income of a nonresident alien indi- vidual, except as provided in article 316 [allowance for personal exemption to non-resident alien employees, 1115771. (Art. 363, Reg-. 45 Rev., April 17, 1919.) ^ s ^ 1594 No Withholding on Dividends. — No withholding from corporate dividends (other than distributions by a personal service corpora- tion) is required in any case. (Art. 363, Reg. 45, Rev., April 17, 1919.) 1595 No Withholding Against Domestic and Resident Foreign Corpo- rations. — The income of domestic and resident foreign corpora- tions is free from withholding. [For exemption claims in connection with corporate obligation interest see p697]. (Art. 363, Reg. 45, Rev., April 17, 1919.) > o , , F 1596 Fixed or Determinable Annual or Periodical Income.— Only (a) fixed or determinable (b) annual or periodical income is subject to withholding.^ Among such income, giving an idea of the general character of income intended, the statute specifies interest, rent, salaries, wages, premiums, annuities, compensations, remunerations and emoluments. But other kinds of income may be included, (a) Income is fixed when it is to be paid in amounts definitely predetermined. On the other hand, it is de- terminable whenever there is a basis of calculation by which the amount to be paid may be ascertained.^ (b) The income need not be paid annually if it is paid periodically, that is to say, from time to time, whether or not at regular intervals. That the length of time during which the payments are to be made may be increased or diminished in accordance with some- one's will or with the happening of an event does not make the payments any the less^ determinable or periodical. A salesman working by the montli for a commission on sales' which is paid or credited monthly receives deter- minable periodical income. (Art. 362, Reg. 45, Rev., April 17, 1919.) 1597 Duties and Obligations of Employers, in Connection with With- holding, in the Case of Nonresident Aliens Employed in the United States.— Reference is made to your letter dated March 25, 1919, transmitting a copy of your letter dated February 28, 1919, in which the following questions are submitted with respect to the duty of operators of bituminous coal mines to withhold income tax from salaries, INC. 283 TAX WITHHOLDING AT THE SOURCE. wages and other compensation paid to nonresident aliens employed in this coim^ y years will the Department attempt to make collection of such items? . . ^ y. “2. In the absence of any record now existing as to the nationality or intentions of employees who have left the service of a person or cor- poration which employed them during past years, what action on the pa.rt of the employers will be necessary to relieve them from any further liability for this tax? Is not the burden of proof on the Government m this case. “3. Will a canvass of the present employees with a view to ascer- taining their nationality or intentions of becoming resident taxpayers, and a collection of the taxes due from them be a satisfactory solution of the case. If so, how far back should employers attempt to make this collection. “4. It is customary in a great many mining districts to let out a certain portion of a mine to some miner who is usually termed a contractor who employs additional labor in the production of coal from the section of the mine assigned to him. These men, usually termed back hands sometimes do not appear upon the payroll and are very frequently not officially known to the operator or employer. Who is responsible for the collection in this case, the operator or the contractor? The operator fre- quently does not know the amount of the earnings of the back hand or laborer employed by tlie contractor and the latter usually keeps no books of account. . i ^ • 4 .u “5. Many employees, not only in the mining industry but m other industries, are known only by number. Will it be necessary to ascertain their names and intentions as to residence? ^ “6. Does the failure of the employer to make such collections make him liable for the full amount of the tax? If so, how far back of the present will the department attempt to make collections, and in the absence of specific information as to the nationality of past employees, upon what evidence will they base their action during the past period?” 1598 In reply to your first inquiry you are advised that the Department is not limited as to years in regard to investigations relative to the liability of employers to deduct income tax at the source from ^ other determinable income paid to nonresident aliens as provided by the Revenue Act of 1918 and the acts for prior years. No effort will be made to hold employers of nonresident aliens liable for tax prior to the issuance of Treasurv Decision 2242, September 17, 1915, which defined a nonresi- dent alien and not then if such nonresident alien had been employed con- tinuously by the same person or corporation for a period of three months or more. j ♦ j i. r 1599 In reply to your second inquiry you are advised that aliens em- ployed in the United States are prima facie regarded as non- resident aliens, and in case where withholding has not occurred it will be necessary for the employer to furnish written proof of facts which come that presumption. The burden of proof is on the employer. The records of a corporation, such as the cancelled checks representing payment to its employees, and the payrolls, are held to constitute written proof. 1600 Referring to your third inquiry you are advised that if an alien has been living in the United States for as much as one year immedi- ately prior to the time he entered the employment of the withholding agent, or if he has been regularly employed by an individual resident m the United States or by a resident corporation in the same city or county for as INC. 284 TAX WITHHOLDING AT THE SOURCE. much as three months immediately prior to any payment by the employer, he may be treated as a resident in deciding as to the necessity of withholding part of such payment, provided no facts are known to the employer showing that he is in fact a transient. The facts with regard to the length of time the alien has thus lived in this country or has been so regularly employed may be established by the certificate of the alien. The employer may also obtain evidence to overcome the prima facie presumption of nonresidence by securing from the alien Form 1078, revised, properly executed or an equivalent certificate of the alien establishing residence. Having secured such evidence^ from the alien, the employer may rely thereon unless the statement of the alien was false and he has reasonable cause to believe it was false, and may continue to rely thereon until the' alien ceases to be a resident. 1601 Referring to your fourth inquiry you are advised that in case the owner or operator of a mine leases a portion thereof to a contractor whose operations are separate and distinct from that of the corporation, the individuals being actually employed by the contractor, the duty to withhold is that of the contractor and not of the corporation. 1602 Referring to your fifth inquiry you are advised that in every case where tlie employee is a nonresident alien, withholding is required, except for 1918, in which case a claim for exemption may be filed in accord- ance with the provisions of Article 307 [][1572] Regulations 45. The name and address of such employees should be secured regardless of the fact that for the convenience of the operator, the individual is known by number. 1603 Referring to your sixth inquiry you are advised that this question appears to be covered by the answer to your third inquiry. 1604 Replying to the next to the last paragraph of your letter you are advised that the employer who fails to withold and account for income tax with respect to income paid to alien employees, may submit any evidence which will substantiate the fact that such employees are resi- dents of the United States within the meaning of Article 312 to 316 [begin- ning at |f518] of Regulations 45. As to what action will be taken by the Bureau in regard to the collection of income tax at the source, you are advised that any investigations deemed necessary for the proper admin- istration of the revenue acts will be made in order that taxpayers may satisfy their obligations to the Government. 1605 Referring to the inquiry contained in your letter of March 25, 1919, in regard to aliens who have been employed in this country by the corporation for a period of three months, you are advised that such circumstances are held to constitute the individual a resident of the United States for purpose of withholding, and no further tax is required to be with- held at the end of that period provided no facts are known to the employer tending to show that the individual is a transient as described in Article 312 [j[518]. Regulations 45. (Letter to W. B. Reed, Accounting Secretary, National Coal Association, Washington, D. C., signed by Commissioner Daniel C. Roper, and dated May 26, 1919.) 1606 In reply you are advised that where the status of an alien changes during the year from that of a resident to that of a nonresident, or from that of a nonresident to that of a resident, the status which exists at the end of the taxable year is the one which determines his right to exemption as to the whole year. Where an employer has withheld wages from a nonresi- dent during part of the year, and thereafter the employee became a resident (before the employer has paid over to the United States the amount with- INC. 285 TAX WITHHOLDING AT THE SOURCE. held), the employer is authorized on receiving proof of the change to refund to the employee the amounts which had been withheld from him during the earlier part of the taxable year, while his status was that of a nonresident. 1607 The ruling contained in this letter supersedes all other rulings in con- flict therewith. (Letter to W. B. Reed, Accounting Secretary, National Coal Association, Washington, D. C., signed by Commissioner Daniel C. Roper, and dated June 12, 1919.) 1608 Alien Employees — Resident and Nonresident — ^Withholding Upon Change of Status. — Reference is made to your letter dated June 30, 1919, which is quoted here in part: “Referring to our tele- phone conversation of this morning, we understand that in the case of the employment of alien labor that where such labor has been em- ployed for three months or more continuously his status is established as a resident alien, and there is no liability upon the employer for further withholding from such an employee. In fact, he may refund the amounts withheld prior to that time. Assuming that such an employee has been in the service of an employer continuously for a sufficient time to establish his status as a resident alien until for example November 15th. The em- ployer has paid over to him all of the money which is due him up to that time. The employee announces his intention to return to the foreign country from which he came, but continues to work for the employer until the first of January. The employer now has information as to the intentions of such an employee. We understand that there is no liability upon him for withholding prior to the time in which these intentions became known ; namely, November 15th, and that he should withhold only upon the basis of the earnings of the employee from the time from which the employer knew of the intention of the employee to quit the country.” 1609 In reply you are advised that under the provisions of Article 315 [jf523], Regulations 45, if wages are paid without withholding the tax, the employer should be provided with written proof of facts which overcome the presumption that such alien is a nonresident. If an alien has been living in the United States for as much as one year immediately prior to the time he entered the employment of the withholding agent, or if he has been regularly employed by a resident individual or corporation in the same county for as much as three months immediately prior to any payment by the employer, he may be treated as a resident in the absence of facts known to the employer showing that he is in fact a transient. 1610 In the case tax has been withheld by the employer from wages paid during three months period while the status was that of a nonresident alien, the amount of tax may be refunded in accordance with the data con- tained on Form 1115 [PS77]. This form is provided for the purpose of receiving the benefit of personal exemption and credit for dependents in connection with income tax withheld at the source from salaries, wages and similar income. In case tax has been withheld from an alien employee and his status as a resident has been established by the execution of Form 1078 [see 1[523], any income tax withheld may be refunded upon receipt of that certificate. The fact, however, that an alien has been employed by a cor- poration for three months is nob in itself sufficient grounds upon which to refund income tax withheld at the source. It was not the intention that Ar- ticle 315 of Regulations No. 45 referred to herein, should be construed as permitting an employer to withhold from nonresident alien employees for a period of only three months and refund the amount of tax withheld at the 286 TAX INC. WITHHOLDING AT THE SOURCE. end of that period merely because aliens had been employed by him for that period of time. 1611 If the status of a resident employee changes to that of a nonresident alien, the employer should withhold income tax at the rate of eight per cent from^ all wages paid to the nonresident employee on and after the date on which the employer had knowledge of the change. Although the employee, in such case, will be taxable as a nonresident alien for the entire taxable year during which his status is changed from that of a resident to that of a nonresident alien, the employer will not be held liable for the deduction of income tax with respect to wages paid preceding the knowledge of the employer as to the change in status. (Letter to W. B. Reed, Ac- counting Secretary, National Coal Association, Washington, D. C., signed by Commissioner Daniel C. Roper, and dated August 6, 1919.) 1612 Interest, on Accounts Current and on Deposits, Accruing to Non- , Individuals and Foreign Partnerships : Withhold- acknowledges receipt of your letter dated March 17, 1919, in which you request information as to whether commission merchants, private bankers, and others are re- quired under Section 221 (a) of the Revenue Act of 1918, to withhold anv part of interest accruing on mercantile accounts current, or upon moneys held on deposit, to nonresident alien individuals or foreign partnerships if the principal amounts so due, as well as the interest, are at all times sub- ject to call, and payable on demand, pn reply you are advised that interest upon deposits or accounts current, accruing on the books of citizens or resi- dents of the United States, domestic partnerships or corporations is subject to the deduction of the tax at the source, only when the recipient is a non- resident alien individual. The amount to be deducted is 8% of the interest credited on the books of the debtor, at the time of crediting same. Such tax as IS Avithheld should be retained by the withholding agent until the end of the calendar year and remitted to the Collector of Internal Revenue ac- ^mpanied by a return on Form 1042 in the usual manner. (Letter to Hughes, Rounds, Schurman & Dwight, New York, N. Y., signed by I. H. Callan, Assistant to Commissioner, and dated April 22, 1919.) [See lfl620 ] 1613 Income of Nonresident Aliens Which is Not Subject to Tax and Hence Not Subject to Withholding.— Read at 1jl546. 1614 Law p32 Payment of Tax at the Source on Account of Certain Foreign Corporations.--Sec. 237. That in the case of foreign coipoiations subject to taxation under this title not engaged in trade or business therein ** not havin^^ any office or place of 1615 Law p33. '‘there shall be deducted and withheld at the source in . same manner and upon the same items of income as IS provided in section 221 [1fl585]” 1616 Law jl334. “a tax equal to 10 per centum thereof,” 1617 Lawt[335. in that section ‘and such tax shall be returned and paid in the same manner and subject to the same conditions as provided INC. 287 TAX WITHHOLDING AT THE SOURCE. 1618 In general withholding is required * * * (b) of a tax of 10% the case of fixed or determinable annual or periodical income (othei than dividends from corporations liable to the income tax and interest upon corporate bonds containing a tax-free covenant clause) payable to a foreign corporation not engaged in trade or business within pe United Sta es and not having- any office or place of business therein. ' (Art. 361, Keg. 45, Rev., April 17, 1919.) 1619 With respect to payments to foreign corporations not engaged in trade or business within the United Sffites and not having any office or place of business therein, withholding is required of a tax of ^ cent in the case of interest payable upon corporate bonds or other obligations containing a tax-free covenant clause, and of a tax ot lU pei cent in the case of other fixed or determinable annual or periodical income, other than corporate dividends. [For withholding in the case ot on corporate obligations read at 111625.] d'o enable debtors in the United States to distinguish between foreign corporations which have and those which have not any office or place of business m the United States, and also to enable such corporations as have an office or place of business in the United States to claim exemption from withholding the tax on bond inte^st or other income, a certificate stating that any such corporation has an office or place of business in the United States should be filed by it with the debtoi. [Form 1001 in connection with bond interest, p697. No specified form has been provided for use in connection with miscellaneous income pay- ments]. (Art. 601, Reg. 45, Rev., April 17, 1919.) 1620 Is withholding of ten per cent required fro^^ interest on bank de- posits paid or credited to nonresident foreign corporations . Please reply collect. (Answer.) Tax should be withheld at rate of ten per cent from interest credited on and after February 25, 1919, on bank deposits of nonresidents alien corporations not having office or place oi busi- ness in United States. [Note that the question at ^1612 relates to indi- viduals and partnerships solely.] (Telegram from The Equitable Trust Company of New York and the answer thereto, signed by Commissioner Daniel C. Roper and dated May 23, 1919.) 1621 Withholding and Tax Liability in Connection with Credit and Debit Interest Items Involved in Transactions Between Domestic and Foreign Banks.— Reference is made to your letter dated June 30, 1919, relative to withholding of the tax at the source from in- terest on bank balances of foreign banks on deposit in domestic banks, under the provisions of the Revenue Act of 1918. In many cases the ac- counts of foreign banks are at times overdrawn and instead of crediting interest to their accounts the domestic bank is obliged to debit interest for the money temporarily advanced to the foreign bank. In some cases foreign banks have two accounts with domestic banks, one a deposit account, and the other a borrowing account. You ask whether in such cases the domestic bank should deduct the tax from the entire amount of interest credited to the foreign bank or whether the domestic bank is required to deduct the tax from only the net amount of interest credited to the foreign bank after sub- tracting the amount of interest debited or only from the excess of the amount me: 2*88 tax _ WITHHOLDING AT THE SOURCE. or interest credited to the deposit account of the foreign bank over the amount of interest charged upon the borrowing account. In this connection you are advised that under the provisions of Sections 221 and 237 of the Act, domestic banks are required to deduct and withhold the tax from the entire amount of interest credited to foreign banks upon their deposits in the domestic banks regardless of the amount of interest charged the foreign banks on money advanced to them through loans or borrowing accounts or on account of overdrafts or otherwise. However, if the foreign banks render returns of their total income from all sources within the United States they may deduct in such returns the interest charged upon the money advanced to them by the domestic banks to the extent provided in Sections 214 (a,2) and 234 (a, 2) of the Act. In such cases the foreign bank should include in its gross income the entire amount of the income from which the tax was withheld and paid at the source as well as income from all other sources within the United States without deduction for the tax so paid, but any tax actually so withheld is to be credited against the total tax as com- puted in its return. In the event the amount of tax so paid at the source by the withholding agent is in excess of the total tax liability of the foreign bank, a claim for refund may be properly filed for the amount overpaid. (Letter to The Corporation Trust Company, signed by Commissioner Daniel C. Roper, and dated July 26, 1919.) 1622 Law ^22. Definition of the Term “Withholding Agent.” — “The term ‘withholding agent’ means any person required to deduct and withhold any tax under the provisions of section 221 [j[1585] or section 237 [1[1614] 1623 A withholding agent may be a corporation with bonds outstand- ing, a trustee under a corporate mortgage, or any corporation, partnership or private individual. (Art. 1533, Reg. 45, Rev., April 17, 1919.) 1624 Tax-Exempt Corporations Required to Withhold. — While the or- ganizations enumerated in section 11 of this title are themselves ex- empt from the tax on any income received by them, they are not exempt from the requirements of the title with respect to the withholding of the normal tax on bond interest * * * foreign corporations or bond interest paid to individuals on bonds having a tax free covenant or from furnishing information in accordance with the provisions of this title as amended by section 1205 of Title XIII of the act of October 3, 1917. (Art. 81, P36, Reg. 33, Rev., Jan. 2, 1918.) Return of Taxes Withheld. — [Read at j[1707.] Payment of the Taxes Withheld. — [Read at j[1708.] TAX TO BE DEDUCTED AT THE SOURCE ON INCOME FROM INTEREST ON DOMESTIC OBLIGATIONS. 1625 Tax Withheld in Case of Interest on Obligations Not Containing Tax-Free Covenants. — [Applies only to nonresident alien indi- vidual owners (Law provision at p585) and to foreign corporations not engaged in trade or business within the United States and not having any office or place of business therein (Law provision at 1[1614.)] INC. 289 TAX WITHHOLDING AT THE SOURCE. 162G In general withholding is required (a) of a tax of 8 per cent in the case of fixed or determinable annual or periodical income (other than dividends from corporations liable to the income tax and interest upon corporate bonds containing a tax-free covenant clause) payable to a nonresident alien individual; (b) of a tax of 10 per cent in the case of fixed or determinable annual or periodical income^ (other than dividends from corporations liable to the income tax and interest upon corporate bonds containing a‘ tax-free covenant clause) payable to a foreign corporation not engaged in trade or business within the United States and not having any office or place of business therein; (Art. 361, Reg. 45, Rev., April 17, 1919.) 1627 Law 11208. Owner to Be Known to Withholding Agent or Tax is Withheld in Any Case.— 'Provided, That the Commis- sioner may authorize such tax [8%, 1|1591, although the rate of tax against corporations is 10%, If 1616. Read, f[1629.] to be deducted and withheld from the interest upon any securities the owners of which are not known to the withholding agent.” 1628 Withholding in all cases at the highest applicable rate is also required from interest on bonds or other securities where the owner of such securities is unknown to the withholding agent. (Art. 361, Reg. 45, Rev., April 17, 1919.) 1629 It seems that there has been some misunderstanding as to the mean- ing of the following sentence in Article 361 [ljl628] Regulations 45 :_“Withholding in all cases at the highest applicable rate is also required from interest on bonds or other securities where the owner of such securities is unknown to the withholding agent.” , s o ^ 1630 The “highest applicable rate” as used above is (a) 2 per cent on interest upon bonds or other obligations of domestic or resident for- eign corporations containing a so-called tax-free covenant clause; (b) 8 per cent in the case of fixed or determinable annual or periodical income (other than dividends from corporations liable to the income tax and inter- est on corporate bonds containing a tax-free covenant clause) payable to an unknown owner. (R — Mim. 2143, June 2, 1919.) 1631 Tax Liability and Withholding Obligation on Bond Interest Col- lected and Paid in Year Subsequent to That in Which the Inter- est Became Due and Payable.— Bond interest represents .income to taxpayer when due and payable in accordance with article 54, Regulations 45 [11947]. No tax required to be withheld from interest upon bonds due prior to March 1, 1913, but paid subsequent to that date. Interest due on and after March 1, 1913, subject to withholding at rates in force at time of payment but in case excess tax is withheld and paid to Government claim for refund on Form 46 will be considered. (Telegram to A. Iselin & Co., New York, N. Y., signed by P. S. Talbert, Acting As- sistant to the Commissioner, and dated September 8, 1919.) 1633 Reference is made to office letter of September S, 1919, in which 3 ’ou were given a ruling in answer to your inquiry^ of June ^o, 1919, relative to the rate of withholding which attaches to interest cou- pons maturing in one year and presented for payment in a subsequent year 290 TAX INC. WITHHOLDING AT THE SOURCE. during which withholding is required at a different specified rate. fYou are advised that after further consideration of the subject matter of your letter of June 26, 1919, his office is of the opinion that the second and third para- graph of office letter of September 5, 1919 should have read: T[‘‘In reply you are advised that Article 54 of Regulations 45 [1|947] states specifically that where interest coupons have matured but have not been cashed, such interest payment though not collected when due and payable, is nevertheless available to the taxpayer and should therefore be included in his gross income for the year in which the coupons matured. IfArticle 371 [111711] states that in the case of every payment made after February 24, 1919, the withholding agent must withhold at the rates prescribed by the present statute from the whole payment, not merely from that part which applies to the period after February 24, 1919. Hence, in the case of the foreign owners of American securities whose interest coupons matured during the years 1915, 1916, 1917 and 1918 but which were not presented for payment until the year 1919, the amount of these coupons should have been entered as income on their returns rendered for the years in which the coupons matured but the withholding agent was required to withhold from these coupons at the rate in force at the time of payment and in case excess tax was withheld and paid to the Government by reason of this requirement, the owners of the bonds to which you refer may exercise their privilege of filing with the col- lector on Form 46 a claim for refund of that portion of the tax withheld which was in excess of their true liability.” ^Therefore, you will disre- gard office letter of September 5, 1919 and be governed by the ruling given herein. (Letter to Morris F. Fre}^ Guaranty Trust Company, New York, N. Y., signed by P. S. Talbert, Acting Assistant to the Commissioner, by C. R. Trobridge, Acting Head of Division, and dated September 23, 1919.) 1633 Withholding at the Source on Interest on Bonds Having No Tax- Free Covenant. — Your telegram May 29. Bonds without tax-free covenant not permitted to be considered tax-free bonds at option of issuing corporations. HCorporation only allowed to withhold tax at rate of eight and ten per cent, from nonresident alien individuals and non- resident alien corporations respectively. ^Corporation prohibited from pay- ing tax on interest derived from such bonds when owned by citizens or residents of United States. (Telegram 'to the Fanner’s Loan and Trust Company, New York, N. Y., signed by Commissioner Daniel C. Roper, and dated June 2, 1919.) 1634 Coupons of Foreign-Ov/ned Domestic Bonds Purchased by a Do- mestic Corporation. — In case bank purchases abroad coupons from bonds issued by domestic corporations purchaser held prima facie to be recipient of income. Ownership certificates should therefore be secured from original owners of bonds in order that tax may be withheld as provided in sections 221 and 237 Revenue Act 1918. (Telegram M. F. Frey, Guaranty Trust Company, New York, N. Y., signed by Commis- sioner Daniel C. Roper, and dated July 22, 1919.) l63o No Withholding Against Known Citizens or Residents in the Case of Interest on Corporate Obligations Not Containing Tax- Free Covenants. — Income paid to citizens or residents of the United States is subject to withholding of normal tax at the source only when derived from interest on bonds and mortgages, or deeds of trust, jor other similar obligations of corporations, joint stock companies, etc., containing 291 TAX INC. WITHHOLDING AT THE SOURCE. a so-called “tax-free” or “no deduction” clause. (Mimeograph letter to Collectors, No. 1663, Nov. 1, 1917.) Information Relative to Ownership to Be Disclosed by Means of Ownership Certificates in the Case of Coupon Interest.— [Read at 111659.] 1636 Law 1f209. Tax Withheld in Case of Interest on Obligations Con- taining Tax-Free Covenants.— “(b) In any case where bonds, mortgages, or deeds of trust, or other similar obligations of a cor- poration contain a contract or provision by which the obligor agrees” 1637 Law 11210.11 “to pay any portion of the tax imposed by this title upon the obligee, or” 1638 Law 11211. “to reimburse the obligee for any portion of the tax, or” 1639 Law 11212. “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,” 1640 Law 11213. 2% to be Withheld in Case of Interest on Tax-Free Covenant Obligations. — “the obligor shall deduct and withhold a tax equal to 2 per centum of the interest upon such bonds, mort- gages, deeds of trust, or other obligations, whether such interest is payable annually or at shorter or longer periods and” 1641 Law 11214. Withholding of 2% in Case of Interest on Tax-Free Covenant Obligations Applies Against Nonresident Alien Individuals, Citizens and Residents, and Partnerships.— “whether payable to a nonresident alien individual or to an individual citizen or resi- dent of the United States or to a partnership :” 1642 Lawp35. Withholding of 2% in Case of Interest on Tax-Free Covenant Obligations Applies Against Foreign Cor- porations Not Engaged in Trade or Business Within the United States and Not Having Any Office or Place of Business Therein.— Sec. 237 [111614] : “Provided. That in the case of interest described in subdivision (b) [111636] of that section the deduction and withholding shall be at the rate of 2 per centum.” 1643 Liability of Debtor Corporation, When No Exemption is Claimed, in Case of Bond Bearing Covenant to Pay Old 1% Rate Only. Sec. 9—Q Act of September 8, 1916, as amended [P636_and 111641 above], provides that normal tax of 2% shall be deducted and withheld from inter- est payments upon bonds owned by citizens or residents of United States, if such bonds contain contract or provision whereby obligor agrees to pay anv portion of tax imposed by that title upon obligee. Debtor corporation will, in such cases, be held liable for 2% tax, although the portion of tax guaranteed is only 1%. (Telegram to S. W. Straus & Co., New York, N. Y., dated Feb.'^lS, 1918, and signed by Commissioner Daniel C. Roper.) INC. 292 TAX WITHHOLDING AT THE SOURCE. 1644 Lawf215. Owner to Be Known to Withholding Agent or Tax is Withheld in Any Case.— “Provided, That the Com- missioner may authorize such tax [2%, fl640] to be deducted and withheld in the case of interest upon any such bonds, mortgages, deeds of trust or a^nt owners of which are not known to the withholding Informadon Relative to Ownership to be Disclosed by Means of Ownership Certificates in the Case of Coupon Interest.— [Read at P659.] 1645 In General Withholding is Required— * * * and (c) of a tax of z pel cent in the case of interest payable to an individual or a partnership whether resident or nonresident, or to a foreign corporation not ei^aged in trade or business within the United States and not having any office or place of business therein, upon bonds or other obligations of domestic or resident foreign corporations containing a so-called tax-free covenant ‘clause. Bonds issued under a trust deed containing a tax-free covenant are treated as if they contained such a covenant. A foreign cor- poration having a fiscal agency in this country is required to withhold a tax o^f 2 per cent upon the interest on its tax-free covenant bonds. fArt 361 Reg. 45, Rev., April 17, 1919.) ^ 1646 Lawj[216. Tax of Two Per Cent Not to be Withheld Against Citizens and Residents in the Case of Interest on Tax-Free Covenant Obligations if Personal Specific Exemption be Claimed. - Such deduction and withholding shall not be required in the case of a citizen or resident entitled to receive such interest, if he files with the withholding agent on or before February i, a signed notice in writing benefit of the credits provided in subdivisions (c) [HISISI and (d) [P524] of section 216;” 1647 Exemption from Withholding.-Withholding from interest on bonds or other obligations containing a tax-free covenant shall not be required m the case of a citizen or resident alien individual if he files with the withholding agent when presenting interest coupons for payment or not later than February first following the taxable year, an ownership certificate on form 1001 (revised) [see P697]claiming'^a persona";?- dependents. See section 216 of the statute and articles PU1-.5U5 [for personal exemption discussion, 1115161. (Art 363 Reg- 45 Rev., April 17, 1919.) j How may a citizen or resident of the United States secure the benefit of personal exemption to which he is entitled when receiving a pay- ment of interest on bonds containing a so-called “Tax-Free” or “No Deduc- tion ’ clause? (Answer.) By attaching to the interest coupons an income cerrificate and claiming thereon the amount of exemption desired. The amount of personal exemption claimed on such certificates during any one calendar year is not to exceed the total amount of personal exemption to which he is entitled. (Q. 104, 1918 Income Tax Primer.) 649 Lawpn. Tax of Two per cent Not to be Withheld Against Non-resident Aliens in the Case of Interest on Tax- Covenant Obligations, if Claim for Personal Specific Exemption at the Source Has Been Authorized by Regulations, and Such Claim INC. 293 TAX WITHHOLDING AT THE SOURCE. be Made. — “nor in the case of a non-resident alien individual if so pro- vided for in regulations prescribed by the Commissioner under section 217 [P576].’’ 1650 Providing for Relief of Domestic Corporations Which Have As- sumed Payment of Income Tax in Respect to Tax-Free Covenant Bonds, Owned by Non-resident Aliens, Who Are Entitled to Credits for Personal Exemption and Dependents, But Whose Incomes from Sources in the United States Do Not Exceed Such Credits. — The final edition of Regulations No. 45 is amended by inserting immediately after Article 363, a paragraph which will be known as Article 363a as follows: Article 363a. Personal Exemption of Nonresident Aliens.— In case a nonresident alien is entitled to personal exemption and credits for de- pendents in accordance with Paragraphs (c), (d), (e), of Section 216 of the Revenue Act of 1918, and his gross income from sources in the United States, including bond interest, does not exceed his personal exemption and credits for dependents, a certificate, Form lOOiB, should be executed and filed with the withholding agent, if any part of rhe gross inconie is derived from interest upon bonds of a domestic corporation which contain a tax-free covenant clause. The certificate may be filed with the withholding agent at the end of the calendar year but not later than February 1 of the suc- ceeding year and all such certificates should be attached to the annual list return. Form 1013. The amount of tax due from the withholding agent as shown by Form 1013, may be reduced by two per cent of the aggregate amount of interest payments made to the nonresident alien upon tax-free cov- enant bonds during the calendar year, and the amount of tax represented by the certificates, payment of which was assumed on monthly list return. Form 1012, will not be included in the assessment against the withholding agent. The certificate may be filed only by a citizen or subject of the countries enu- merated in Paragraph (a) or (b) of Article 307, as amended [|[1572]. In case tax in excess of a non-resident alien’s tax liability has been withheld from interest upon bonds which do not contain a tax-free covenant clause, the nonresident alien should file or cause to be filed with the collector of internal revenue a return of his gross income from all sources within the United States, accompanied by a claim for refund on Form 46. (Art. 363a, Reg. 45, Rev., added by T. D. 2920, September 15, 1919.) 1651 One Form of a Qualified Tax-Free Covenant Which Relieves the Debtor from Withholding the Amount of the Normal Tax from Bond Interest Payments to Citizens and Residents.— With further ref- erence to your letter of Oct. 27, 1917, herein quoted, “Please advise us at the earliest possible moment whether bonds bearing the covenant that ‘Both principal and interest of this bond are payable without deduc- tions for any taxes, assessments or other governmental charges which the company may be required to pay thereon or authorized to retain therefrom under any present or future law or lequirement of the United States of America (except any Federal Income Tax) or any State, county, municipality or other governmental subdivision thereof, come within the provisions of subsection (c) of Section 9 of ihe Federal Income Tax Law requiring the debtor corporation to withhold the amount of the normal tax at the source.”, you are advised that interest from bonds containing the covenant quoted will not be subject to withholding as provided in subsection (c), [111636] Section 9 of the Act of Sept. 8, 1916, as amended by Section 1205 of the 294 TAX INC. WITHHOLDING AT THE SOURCE. War Revenue Act of Oct. 3, 1917. (Letter to Simpson, Thatcher & Bart- lett, New York, N. Y., signed by Deputy Commissioner L. F. Speer, and dated Nov. 21, 1917.) 1652 Federal Income Tax Being a Tax on Income and Not a Tax on the Interest on a Bond, per se, a Tax-Free Covenant in a Bond Does Not Obligate the Debtor to Pay the Interest Free of Income Tax. [This was the decision (April 2 , 1917 ) of the Supreme Court of Arkansas in the Urquhart v. Marion Hotel Company case (iQq S. W. i).] 1653 The Term “Debtor’’ Defined.— The term “debtor,” as hereinafter used [in connection with bond interest] shall apply to all corpora- tions, joint-stock companies or associations, and insurance companies. (Art. 38, Reg. 33, Jan. 5, 1914.) 1654 Withholding and Paying Agents May Be Appointed by Debtors. — [and] Such “debtor” may appoint withholding and paying agents to_ act for it in matters pertaining to the collection of this tax, upon filing with the collector of internal revenue for the district a proper notice of the appointment of such agent or agents. (Art. 38, Reg. 33, Jan. 5, 1914.) 1655 Filing Notice of Appointment of Paying Agent.— This notice of appointment should be placed on file in the office of the collector of internal revenue for the district in which the debtor corporation is located or has its principal place of business, and the said collector should notify the collector of internal revenue for the district in which the duly authorized withholding agent is located. (T. D. 2135, Jan. 23, 1915.) 1656 Where Returns and Certificates Are to be Filed by Paying Agents Appointed by Debtors. — Where such withholding agent is so authorized by the debtor corporation, he may file with the collector of his district the required returns and accompanying certificates in which case the assessment of the tax withheld by him will be made in that district. Unless such authority be given, such reports, etc., will be furnished by the debtor corporation to the collector of its district (i. e., the district in which its principal financial or business office is located), where, in such cases, assess- ment will be made. (Art. 38, Reg. 33, Jan. 5, 1914.) 1657 The duly authorized withholding agent is required to file its return with the collector of internal revenue for the district in which the said withholding agent is located, and is not required to file a return with the collector for the district in which the debtor corporation is located. (T. D. 2135, Jan. 23, 1915.) 1658 The Debtor Corporation Only Deducts the Tax, if Any. — In reply you are advised that this office holds that the normal tax, to be with- held under the Act of Sept. 8, 1916, as amended l.'y Section 1205, subdivision (c). Act of Oct. 3, 1917, is required to be deducted only by the debtor cor- poration and should not be withheld by the bank by whose agency collection is made. (Letter to Sackett, Chapman & Stevens, New York, N. Y., signed by Deputy Commissioner L. F. Speer, and dated Nov. 13, 1917.) 295 TAX INC. WITHHOLDING AT THE SOURCE. 1659 Ownership Certificates for Interest Coupons. — The owners of bonds or other obligations, whether or not containing a tax-free covenant, issued by domestic or resident foreign corporations, when pre- senting interest coupons for payment shall file a certificate of ownership for each issue of bonds, showing the name and address of the debtor cor- poration, the name and address of the owner of the bonds, whether the payee is married or the head of a family, the nature of the obligations, the amount of interest and its due date, and the amount of any tax withheld. No ownership certificates need be filed in the case of interest payments on bonds the income from which is not included in gross income, nor in the case of any obligations of the United States. See section 213 (b) of the statute and articles 74-82 [for state and federal obligations, pi 35 ]. Where in connection with the sale of its property payment of the bonds or other obligations of a corporation is assumed by the assignee, such assignee, whether an individual, partnership, corporation, or a State or political sub- division thereof, must deduct and withhold such taxes as would have been required to be withheld by the assignor had no such sale and transfer been made. (Art. 364, Reg. 45, Rev., April 17, 1919.) 1660 Interrogatories on Ownership Certificates to be Answered Fully. — All information called for on ownership certificates must be sup- plied. Debtor corporation or its authorized agent will be held responsible for proper execution of certificates but not as to misstatements by bond owners. Payment of bond interest should be refused unless data is complete. In- formation necessary for efficient administration of Revenue Act. (Telegram to the Southern Pacific Company, New York, N. Y., signed by Commission- er Daniel C. Roper, and dated April 7 , 1919 .) 1661 Numbers of Bonds; Waiver of Requirements for Filling in on Certificates. — Notice is hereby given that Regulation requiring the filling in on certificates of numbers of bonds, or other like obligations of corporations, etc., from which interest coupons are detached or upon which registered interest is to be paid — which was extended to Oct. 31, 1914, by T. D. 1985, issued May 28, 1914 — is hereby waived until further notice. (T. D. 2022, Oct. 3, 1914-) 1662 Full Post Office Address on Certificates. — Replying to your letter of April 15, 1914, relative to street address on certificates you are advised that banks should exercise care in securing full post office address on certificates. Where no street address is given, this office will assume that same is not necessary in addressing mail, and certificates will not be returned for correction. (Letter to National Park Bank, signed by Deputy Commissioner L. F. Speer, and dated April 23, 1914.) 1663 Address May Be Omitted from Certificates in Certain Cases. — Address may be omitted from ownership certificates in case promi- nent corporation and in its place description bond issue inserted. (Telegram to Lee, Higginson & Co., Boston, Mass., signed by Commissioner Daniel C. Roper, dated Feb. ii, 1918.) 1664 Banks and Trust Companies May Use Fac-simile Signatures. — You are advised that as a convenience to Banks and Trust Companies having a large number of ownership certificates to execute in the collection of interest on bonds, it is hereby provided that the name of the Bank or Trust Company may be printed or stamped, and the facsimile of the signa- ture of the person authorized to sign for the Bank or Trust Company in executing the said ownership certificates may be printed or stamped on the certificate: Provided, that in all cases the Bank or Trust Company shall 296 TAX INC. WITHHOLDING AT THE SOURCE. first file with the Commissioner of Internal Revenue a certificate of its au- thorization in substantially the following form: (City) (Date> The Commissioner of Internal Revenue, Washington, D. C. The undersigned hereby authorizes the use of the facsimile signature shown below upon all income tax ownership certificates issued in its name until this authorization is revoked by written notice to you. (Name of Bank or Trust Co.) By (Signature of person authorized to sign) (Official position.) Facsimile signature of person authorized to sign.) (T. D. 2258 , Nov. I, i9i5.) 1665 Use of Initials on Certificates Authorized. — Replying to your tele-* gram of the 6 th instant, you are advised that in writing the name at top of certificate initials may be used.* 1666 Married Woman in Executing Certificate Should Use Her Own Christian Name. — A married woman should sign her own Chris- tian name and not the name of her husband.* *[ Comment: The answers embodied in paragraphs above, are repro- duced, by courtesy, from a letter to the Central Trust Company of New York, dated Jan. 7 , 1914 , signed by Deputy Commissioner L. F. Speer. These are printed now as there still seems to be confusion on the points covered.] 1667 Ownership Certificates in the Case of Fiduciaries in Control of More Than One Trust and in the Case of Joint Owners. — When fiduciaries have the control and custody of more than one estate or trust, and such estates and trusts have as assets bonds of corporations and other securities, a certificate of ownership shall be executed for each estate or trust, regardless of the fact that the bonds are of the same issue. When bonds are owned jointly by several persons, a separate ownership certificate must be executed in behalf of each of the owners. (Art. 374 , Reg. 45 , Rev.» April 17 , 1919 .) 1668 Separate Ownership Certificates Required for Coupons of Differ- ing Maturity Dates. — Separate ownership certificate will be re- quired for each interest coupon of different maturity date even though of same issue. (Telegram to the Southern Pacific Company, New York, N. Y.,. signed by Commissioner Daniel C. Roper, and dated June 24, 1919.) 1669 Ownership Certificates Must Be Obtained. — This office has re- ceived several letters with reference to a letter addressed to the Old Colony Trust Company of Boston, Massachusetts, under date of May 10 , 1915 , in which the office acquiesced in the contention of various debtor corporations that the actual facts of the relation of firms, organizations and fiduciaries to the withholding provisions of the Income Tax Law, once established to their satisfaction, may be accepted by this office upon the proper showing of debtor corporations and withholding agents, for their own convenience, the interest of the Government being safeguarded by the INC. 297 TAX WITHHOLDING AT THE SOURCE. personal liabilities imposed upon them by law. In view, however, of the confusion created in the matter of the certificates required to be furnished with coupons or interest orders showing ownership of bonds and the exemp- tion claimed, you are advised that the office holds that certificates of this character must be obtained by debtor corporations and withholding agents in all cases as required by the Regulations. (Mimeograph letter No. 1242 to Collectors, July 8, 1915.) 1670 Stamp Indicating “Satisfied as to Identity of Agent Not Re- quired. — Receipt is acknowledged of your letter of February 20, 1918, and in reply you are advised that it is not necessary for the first col- lecting agent receiving coupons accompanied by an ownership certificate which was executed by an agent on behalf of the owner to affix a stamp containing the words “Satisfied as to identity and responsibility of agent.” (Letter to the Columbia Trust Company, Neve York, N. Y., signed by Deputy Commissioner L. F. Speer, and dated March 26, 1918.) 1671 Person First Receiving Coupons or Interest Orders for Collection Need Not Endorse on the Back of the Certificate. — This office is in receipt of your letter of September 18, 1913, inquiring whether the provision in T. D. 1887, October 25, 1913, requiring that, “the person or corporation first receiving coupons or interest orders for collection shall write or stamp his or its name and address and date on the back of said certificates,” is still in force. You are advised that this requirement appear- ing in the first draft of the Regulations was omitted in the subsequent draft of the Regulations, and as they now appear in permanent form in Regula- tions No. 33 adopted January 5, 1914. The foregoing endorsement is not now required. (Letter to The Corporation Trust Company, signed by Dep- uty Commissioner L. F. Speer, and dated September 18, 1914.) 1672 '‘You are advised that the endorsement provided in Treasury De- cision 1887, dated October 25, 1913, is no longer required.” (Extract from a letter to the National Park Bank, signed by Internal Revenue Col- lector Anderson, New York, and dated December 23, 1914.) 1673 Proper Ownership Certificates to be Used by Fiduciaries, Whether Corporate or Individual. — Should a corporate fiduciary acting for an individual beneficiary use form of ownership certificate and line thereon designated for a corporation or that designated for an individual? In gen- eral are discriminations between the form of ownership certificates and line thereon to be used by fiduciaries to be based upon the status, corporate or individual, of the fiduciary, or on the status, corporate or individual,^ of the beneficiary? ^Fiduciary, whether corporate or individual, must use lines on ownership certificates provided for use of fiduciary. Citizen or resident fiduciary should use Form 1000 line 1 ; and Form 1001, line 1 or line 2. Nonresident alien fiduciary should use Form 1000,^ line 3. (Telegram of inquiry from the First National Bank, Cleveland, Ohio, and the reply thereto signed by Commissioner Daniel C. Roper, and dated May 20, 1918.) 1674 Exchange of Interest Coupons for Funding Bonds. — The exchange of interest coupons for funding bonds is a payrnent of interest on the bonds and the income tax should be imposed and paid upon such interest as income for the year in which it matures and such payment is made and in the absence of proper claim for exemption the tax should be deduced and withheld on the amount represented by the coupons. (T. D. 2090, Dec. 14, 1914.) INC. 298 TAX WITHHOLDING AT THE SOURCE. 1675 Advance Retirement of Bonds Within an Interest Period. — Where bonds, under contract provisions in the bonds, are retired within an interest period and prior to the expiration of the full term of the bond, ownership certificates will be required and should cover that part of the interest period affected between the beginning of such period and the date of the retirement of the bonds. (T. D. 2090, Dec. 14, i9i4.) 1676 Receipt is acknowledged of your letter of March 17, 1916, wherein you make reference to certain rulings of the office relative to the filing of certificates of ownership in cases where bonds are purchased by the debtor corporation and retired between interest dates. In reply you are advised that after a careful consideration of the matter the ruling con- tained in office letter of January 5, 1916, addressed to Messrs. White & Case, 14 Wall Street, New York City, has been annulled, and it is now re- quired that in a case wherein the corporation which issued the bond, or its ^receiver or trustee, is the purchaser, and the bond is retired and all its coupons cancelled, the seller of the bond shall execute a certificate of owner- ship, claiming or not claiming exemption, to cover such coupons as are due and payable at date of sale, but are still attached to the bond, and the coupon covering the interest which had accrued from last interest date to date of sale. In short, in all cases where bonds are retired within an interest period and prior to the expiration of the full term of the bond, whether under con- tract or not, ownership certificates will be required, which certificates should cover that part of the interest period affected between the beginning of such period and the date of the retirement of the bonds. (Letter to one of our subscribers, signed by Deputy Commissioner L. F. Speer, and dated April II, 1916.) 1677 Purchase and Sale of Bonds Between Interest Dates. — This office acknowledges receipt of your letter of Dec. 20, 1915, and in reply you are advised that, as stated in office letter of December 18, 1915, it is held that where a bond is purchased between interest-bearing dates, the seller is not required to execute, for Federal Income Tax purposes, an ownership certificate to accompany the interest coupon which is not due and payable and is not detached from the bond, but such a certificate will be required from the purchaser of the bond, when, at a later date, the coupon is detached and presented for payment or collection. (Letter to White & Case, New York, N. Y., signed by Deputy Commissioner L. F. Speer, and dated Jan. 5, 1916.) 1678 Usufruct of Foreign-Owned Bonds Belonging to an American Citizen or Resident. — This office is in receipt of your letter dated November 9, 1914, stating that you had received a letter from one of your foreign correspondents containing the following inquiry : “We have on our accounts certain American bonds which are the property of Swiss citizens, but the usufruct of which belongs to an American citizen ; when collecting the coupons of these bonds, can we sign the ownership certificates on behalf of the Swiss owners, or is it necessary to state thereon the name of the American beneficiary ?” 1679 In reply to your request for a ruling based on the facts given above you are advised that the coupons should be accompanied by a certificate of ownership signed by, or in behalf of, the person entitled to receive the income from the bonds. The revised form of certificates of 299 TAX , INC. WITHHOLDING AT THE SOURCE. ownership should be altered to show that such person is entitled to receive the interest on the bonds. For example, if Form looo, Revised, is used, there should be inserted in the first line of the declaration on the certificate the words “interest on the” between the words “the” and the word “above- described,” so that the certificate will read, “I do solemnly declare that I am a citizen or resident of the United States and am the owner of the interest on the above-described bonds, etc.” (Special letter of Nov. 23, 1914.) 1680 Bonds Purchased by Trustee Under the Mortgage Deed of Trust But Not Retired. — With reference to the ruling contained in office letter of November 18, 1916, wherein it was held, in a case where cor- porate bonds are purchased “by the trustee under the mortgage deed of trust out of the money from a sinking fund when the bonds are not retired or can- celled but held alive by the trustee and interest is continued on the coupons, the interest so paid to the trustee being held for the account of the corpora- tion issuing the bond” that the trustee merely acts as agent for the debtor corporation and that the corporation itself, or the trustee if duly authorized to act as agent for the corporation, should execute income tax certificates. Form 1001, Revised, to accompany the interest coupons detached from the bonds so purchased and held when such coupons are presented for payment or collection, you are advised as follows : 1681 The office now holds that if legal title to the bonds rests with the trustee, he should execute * * * certificates ’S' * * to accompany the coupons detached from the bonds when they are presented for payment or collection. (Letter to The Corporation Trust Company, signed by Com- missioner W. H. Osborn, and dated Dec. 6, 1916.) 1682 Size, Color, etc., of Certificates. — All certificates shall be, in size, 8 by inches, and shall be printed to read from left to right along the 8-inch dimension. 1683 All paper upon which certificates shall be printed shall correspond in weight and texture to white writing paper 21 by 32, about 40 pounds to the ream of 500 sheets. 1684 Certificates will be printed by the Governm.ent and furnished with- out cost for the use of bond owners. 1685 Individuals or organizations desiring to print their own certifi- cates may do so, but certificates so printed must conform in size and be printed in similar type, upon the same color, shape, and weight of paper as used by the Government. 1686 Sample certificates showing size of type and color of paper can be secured from collectors of internal revenue in their several districts or from the Commissioner of Internal Revenue at Washington, D. C. (T. D. 1976, May 2, 1914.) 1687 The department will furnish blank forms of certificates to be used in connection with the collection of the income tax by such parties as may make application for the same. Private corporations and others desiring to have these certificates printed for themselves may do so if they will strictly observe the requirements of the department as to size, print, form, color, and contents. (T. D. 1939.) (T. D. 2090, Dec. 14, 1914.) 1688 Ownership Certificates for Use by Foreigners May Be Printed in Two Languages. — Certificates of ownership required to be filed with interest coupons or orders for registered interest by non-resident for- 3CX) TAX INC. 12 - 29 - 19 . WITHHOLDING AT THE SOURCE. eigners * * * and by foreign organizations, shall be printed, as pre- scribed by regulations, in the English language, and directly under each line of the English text, on each of the above-mentioned certificates, there may be printed the text of said certificate in a foreign language. 1689 In executing these certificates, however, all blanks to be filled in, with amounts, shall be filled in using United States dollar values. 1690 These certificates shall be of the same size as prescribed by regu- lations for all certificates of ownership. (T. D. 1926, Dec. 30, 1913.) 1691 Authorizing Debtor Corporations and Withholding Agents to Accept Old Forms of Ownership Certificates With Respect to Interest Due on and Prior to November 1, 1919, When Received from Continental United States and With Respect to Interest Due on and Prior to December 1, 1919, When Received from Abroad.— 1. In view of the fact that the revised forms of ownership certificates were placed at the disposal of the public over three months ago, this office is of the opinion that a reasonable period of time has elapsed in which to permit the public to have become familiar with them. In order, however, to pre- vent inconvenience to individuals and organizations required to use such forms, old forms of ownership certificates will be accepted with respect to interest due on and prior to November i, 1919, when received from conti- nental United States, and with respect to interest due on and prior to Decem- ber I, 1919, when received from abroad. 1692 2 . Banks and collecting agents, debtor corporations, and withhold- ing agents shall refuse to accept the old forms, in connection with interest due, after the respective dates named herein, and Collectors of In- ternal Revenue receiving monthly returns accompanied by certificates on the old forms, when it shall appear that such certificates were filed with debtor corporations or withholding agents, with respect to interest due subsequent to such dates, shall require the debtor corporation or withholding agent con- cerned to secure certificates on the revised forms. 1693 3. In order that the fulfillment of the requirements herein provided may cause as little hardship as possible to individuals, banks, col- lecting agents, debtor corporations, etc.. Collectors should satisfy them- selves that they have a sufficient supply of the revised forms on hand to meet anticipated demands and where the supply is not deemed sufficient, requisition should be made without delay for such additional quantity as may be necessary. ^ Collectors are requested to disseminate this information throughout their districts as quickly as possible. (T, D. 2923, September 24, 1919.) 1694 Ownership Certificates — Defining Revised Forms and Old Forms. Referring Treasury Decision 2923, please define Revised Forms and Old Forms. Do you consider Forms 1000 and 1001 Revised Febru- ary, 1919, as Revised Forms or Old Forms? Please telegraph reply. (Answer) Revised Forms of ownership certificates are those issued Feb- ruary, 1919, and those issued subsequently. Old Forms are certificates in use prior to February, 1919. Forms 1000 Revised February, 1919, and looi Revised February, 1919, considered Revised Forms. (Telegram from The Chase National Bank, New York, N. Y., and the answer thereto signed by iTommissioner Daniel C. Roper, and dated September 29, 1919.) INC. 301 TAX wifrikOLiJiSiG' ft'T'ifitfe' ’sbkRClfe. 1605 c:. of Certificate^ Where Wit&or}(S^^ Rc^mred — Form lOQO 3 f f i i (revi^^ ) shall be used (a)^ • Citi^eTi^ ; br" tesideufe^ of : the United States tirheii no |>ersonal exemption of bredit is daimed 5|aifet^ on bonds containing a tax-ffee covenant ;^(b) l::^ rtohfe alien fnc^viduals ■and by '^orei'gn eorpOrattons not en^ged ih/^ade'of business w?thin the united States and nbt having "any office bb plate '"of Msines^ therein, 'Whethet^ of not sueh'^ bonds ‘bbntain a taX-iree bovdnantj (c) by partner- resident dr nonresident, in the^'tage 'bf bdhlds tdntainfng a tax-free covenant. (Art. 365, Reg. 45, Rev., April 17, 1919.) fiimg’ <4 Fbim lOOO by pscr"sbnal Servj<^‘C^b6f‘W6ns^in Cdt- ot joedeeHng Ihtere^ 5^ Tax-Free^0©Venaht Bbnd^i^Sfesta^^^erence £somadevtCM-^ur> li^tter? Idated bWhMe thii Revenue aet 'ol ’^ffeWs simiiaar to*a pk#tnevahtp9no*p^<>Vi^Sn^^tfls tfd liave b^bh^MaSe tb a?fbw a* pers 0 mai:^aemee corporation to d?a5^e a4t^htage dr the taX-ffee disuse when ob^lectihg coupons frotn^ bonds. We iaqurfe ^if a^^petsdnaT service corporation may alter f Certificate Form IGOO^-tyhen collebtihg coupons froinotax^free ©bvenant obligations.” ' ^In^rep^% ^dU-a^e adviseddhat Sonal rservicd 'Corporations are to be treated,^ SCI dar aS p'raetldabld, on the same'basisiais.paftuef ships £bf the jpwtposesld^vMl^hhO Ming ‘^^^^Sdcfidd 22fio(}h^i XDfi the Revenue Act ©fi 191S;' (A:)rp6rafidn^ notrcieifrom theblncome Tax> Unit that their f6t4fh'stas 'pfer^dtial servibe CorporationirGontaining' a sbH:alled tax-free eovenahl Clause^in the same mailnier :as:a)h!d'td the, same extent that partnerships arte ‘authorized to uSe .4ltat . ilFhe f oatiB'shouid bear ; the stanuped oig wf itten iiotathbh Ap* proved; - hy. the Treasuryr 'Departmenti as Personal ^Service' Corporation om j ;( blatik date ) ( Fetter j to The Corporation ’ T rusti Company, signed byj Comn^issidne'i? UanieFQ^ and dated. NoveTnber20plt9l9cip - i >3c:' 0 r.O 89 : Cofi STJOSS Oj . Whefe_fe i^eqmre^,— Form “"O ' '|r|yised)"^hhll .bemused t a) pi the Uhiired 'TOGI '|r|yised) ^Shali.be Used'X?)joPy;fr9^^^^^ pi th< d :Sfhths wHbh pefsbnal)ekempi^&n 3s°ciair&4 againsif latcr^sf on Jiomi bbiit’aihing/ a taXri ree^ boven^fit" and wfen ' presehting r,cpuP9Pi,-ft W. therein, whether or not such bonds contain a tax-free covenant. In Case a citizen or resident alien individual receives interest on bonds containing a taijofrde feib^ehaBtim'JEXcefeS'pf oi2per9bbai^>^^{ft1©R^<^iclf mfe individual may /claim/iany-such ,exeessomusCIbetrepoSe'd' 'iM3fPftn 1000 {nredi)sed5^3ai(Aiit. 366i, Reg. 4(5,) Rem,:‘A^riFi^p^919.^) ■: oQ armoT r ' ' .viqs" riqBig 9 l 9 t 98B9 Fi '^^rmo l i)r lo armoT b98iv9iT 8£ ,Oipi y ' -094 h 9 ri 8;4 98oH) 9^15 89tB-;firj'-99 qi'i-norrv/o lo arrnoT b9aiv9R ^i9v;?n/.'- o?T9l si Sife par^rapkTiiioted, hcrt^ j prigi^lly f wassinduded mi |[402. Information at the Source Provisions Do Not Apply to Payments of Interest on Government Obligations. — “but [the information at the source provisions] shall not apply to the pay- ment of interest on obligations of the United States.” [See (a) in Tfl744, above.] INC. 311 TAX INFORMATION AT THE SOURCE. 1746 Return of Information as to Payments to Nonresident Aliens.— In the case of payments of annual or periodical income to nonresi- dent alien individuals or to foreign corporations not engaged in trade or business within the United States and not having any office or place of business therein, the returns by withholding agents on forms 1098 (re- vised) and 1042 (revised) shall constitute and be treated as returns of in- formation. See sections 221 and 237 of the statute and articles 361-376 [for withholding at the source beginning at fl585, and particularly jfl709]. (Art. 1076, Reg. 45, Rev., April 17, 1919.) 1747 Lawp98. Returns of Information of Payments of Corporate Obligation Interest. — “Such returns may be required, regardless of amounts, (1) in the case of payments of interest upon bonds, mortgages, deeds of trust, or other similar obligations of corporations, and” 1748 In the case of payments of interest, regardless of amount, upon bonds and similar obligations of domestic or resident foreign cor- porations, the original ownership certificates, when duly filed, shall constitute and be treated as returns of information. If a bondholder files no ovv^nership certificate in the case of payments of interest on registered bonds, the withholding agent shall make out such a certificate in each in- stance and file it with his monthly return. See sections 221 and 237 of the statute and articles 361-376 [for withholding at the source beginning at ^1585 and particularlylll709 and p710]. (Art. 1075, Reg. 45, Rev., April 17, 1919.) 1749 Lawp99. Returns of Information Concerning the Collection of Foreign Items.— “(2) [Such returns may be required, regardless of amounts] in the case of collections of items (not payable in the United States) of interest upon the bonds of foreign countries and interest upon the bonds of and dividends from foreign corporations by individuals, corporations, or partnerships, undertaking as a matter of busi- ness or for profit the collection of foreign payments of such interest^^or dividends by means of coupons, checks, or bills of exchange [p755].” 1750 Source of Information as to Foreign Items. — The terms “foreign item,” as here used, means any dividend upon the stock of a non- resident foreign corporation or any item of interest upon the bonds of foreign countries or nonresident foreign corporations, whether or not such dividend or interest is paid in the United States or by check drawn on a domestic bank, (a) Wherever a foreign country or nonresi- dent foreign corporation issuing bonds has appointed a paying agent in this country, charged with the duty of paying the interest upon such bonds, such paying agent shall be the source of information. If such foreign country or foreign corporation has no such agent, then the last bank or collecting agent in this country shall be the source of information, (b) In the case of dividends on the stock of a nonresident foreign corporation, however, the first bank or collecting agent accepting such item for collec- tion shall be the source of information. (Art. 1077, Reg. 45, Rev., April 17, 1919.) 1751 Ownership Certificates for Foreign Items.— (a) Where bonds of foreign countries, or bonds or stocks of nonresident foreign corpora- tions, are owned by citizens or residents of the United States, individual or INC. 312 TAX INFORMATION AT THE SOURCE. fiduciary, or by domestic or resident foreign corporations or partnerships, ownership certificate form 1001 A (revised) shall be executed by the actual owner or by his duly authorized agent when presenting the item for collec- tion, whether such item is a dividend or an interest payment, except in the case of a foreign country or a foreign corporation having a fiscal agent in this country and issuing bonds which contain a tax-free covenant clause. [For dividends of resident foreign corporations, see p744 (b).] In such a case the fiscal agent is required to withhold the normal tax upon the inter- est on such bonds and ownership certificate form 1000 (revised), modified to show the name and address of the fiscal agent, should be used, unless the owner (if so entitled) desires to claim exemption, in which case form 1001 A (revised) should be filed, (b) Where such foreign bonds or stocks are owned by nonresident alien individuals, corporations or partnerships, ownership certificate form 1001 A (revised) shall be used on behalf of such owners by any responsible bank or banker, either foreign or domestic, hav- ing knowledge of such ownership. In such a case the bank or banker need not fill in the names of the owners. (Art. 1078, Reg. 45, Rev., April 17, 1919.) 1752 Return of Information as to Foreign Items. — In the case of col- lections of foreign items, regardless of amount, the original owner- ship certificates, when duly filed, shall constitute and be treated as returns of information, (a) In the case of dividends, as to which the first bank or collecting agent is the source of information, it shall detach the ownership certificate and indorse on the item the words, “Certificate detached and in- formation furnished,” adding its name and address. When foreign items have been indorsed as above prescribed, the cerlificates shall be forwarded to the Commissioner (Sorting Division) on or before the 20th day of the month following that during which the items were accepted, accompanied by a return on form 1096 A shov/ing the number of certificates and the aggregate amount of foreign items disclosed thereon. An annual return on form 1096 B shall be forwarded to the Commissioner not later than March 15 of each year, on which shall be given a summary of the monthly returns, (b) In the case of interest items, as to which the paying agent or the last bank or collecting agent in this country is the source of information, the ownership certificate shall accompany the coupon to such agent or source of information, who shall forward the ownership certificate to the Commis- sioner in the same manner as above provided with respect to dividend items. Where ownership certificate form 1000 (revised) is used, a monthly return shall be made on form 1012 (revised) and an annual return on form 1013 (revised), as provided in articles 361-376 [particularly Art. 370, p709]. Forms 1012 (revised) and 1013 (revised), wdien so used, should be modified to show the name and address of the paying agent. The use of substitute certificates is not permitted in the collection of foreign items. (Art. 1079, Reg. 45, Rev., April 17, 1919.) 1753 Law T[400. Name and Address of Recipient of Income to be Fur- nished on Request. — “When necessary to make effec- tive the provisions of this section the name and address of the recipient of income shall be furnished upon demand of the individual, corporation, or partnership paying the income.” 1754 Information as to Actual Owner. — When the person receiving a payment falling within the provisions of the statute for information at the source is not the actual owner of the income received, the name and 313 TAX INC. INFORMATION AT THE SOURCE. address of the actual owner shall be furnished upon demand of the individ- ual, corporation or partnership paying the income, and in default of a com- pliance with such demand the payee becomes liable to the See section 253 of the statute and article 1041 [for penalties, 111903 J. (Art. 1080, Reg. 45, Rev., April 17, 1919.) 1755 Law 11410. License Required for the Collection of Foreign Items. —‘‘Sec. 259. That all individuals, corporations, or partnerships undertaking as a matter of business or for profit the col- lection of foreign payments of interest or dividends by means of coupons, checks, or bills of ^exchange [P749] shall obtain a license from the Commissioner and” 1756 Law 11411. All Persons Collecting Foreign Items to be Subject to Regulations.— “shall be subject to such regulations enabling the Government to obtain the information required under this title as the Commissioner, with the approval of the Secretary, shall prescribe, 1757 Law 11412. “and whoever knowingly undertakes to collect such payments without having obtained a license therefor, or without complying with such regulations, shall be guilty of a misde- meanor and shall be fined not more than $5,000, or imprisoned for not more than one year, or both.” 1758 License to Collect Foreign Items. — Banks or agents collecting foreign items, as defined in article 1077 [P750], and required by article 1078 [lfl752] to make returns of information with respect thereto, must obtain a license from the Commissioner to engage in such business. Application form 1017 for such license may be procured from collectors. The license is issued without cost on form 1010. Foreign items shall not be accepted for collection by any bank or collecting agent so licensed unless properly indorsed or accompanied by proper ownership certificates giving all the information called for by such certificate. See sec- tion 256 and articles 1077-1079 [for source of information, ownephip cer- tificates and returns of information as to foreign items, beginning at [P750]. (Art. nil, Reg. 45, Rev., April 17, 1919.) 1759 Each Bank Handling a Foreign Item Before it Reaches the Source of Information is Required to be Licensed. — Receipt is acknowl- edged of your letter of recent date, referring to Treasury Decision 2759 {superseded by Art. 1079, 111752] as follows: “In instances where a foreign country or corporation has no paying agent in this country the above num- bered Treasury Decision requires the last bank to be the source of informa- tion. It may be that several banks may handle a foreign item before it reaches the source of information. We inquire if each of the banks hand- ling a foreign item before it reaches the last bank in this country must take out a license?” Pn reply you are advised that the provision referred to is applicable only to interest coupons detached from bonds issued by a for- eign government, corporation, etc. In cases v/here a dividend check or warrant is presented for collection, the first bank accepting the item is held to be the source of information. HThe first bank making payment of a for- eign item and the last bank in this country handling same, as well as the intermediary banks concerned in the transmission of the item beUveen these two agencies, are required to obtain a license. (Letter to The Trust Company, signed by Commissioner Daniel C. Roper, and dated No- vember 28, 1918.) INC. 314 TAX INFORMATION AT THE SOURCE. 1760 Licenses Required for Branch Offices of Persons or Firms Col- lecting Foreign Items. — When any person, firm, or corporation shall have branch offices and desire to collect foreign interest or dividend income through such branch offices, the application for license or licenses shall be made by the person, firm, or corporation through its principal office for its branch office or offices. Application for licenses in such cases shall be made to the collector of internal revenue for the district in which the home office is located. (Art. 57, Reg. 33, Jan. 5, 1914.) 1761 License for Branch Office of Person or Firm Collecting Foreign Items Having Branch Office, to be Issued by Collector of District Where Branch is Located. — The names and addresses of the branch offices shall be furnished to the collector in the application of the said prin- cipal, and if the requirements of the foregoing regulations have been com- plied with to the satisfaction of the collector, he shall certify this fact to the collector of internal revenue for the district in which the branch office is located, and the collector to whom this certification is made shall issue to such branch office a license, as in the case provided in article 55 [Article 1111, paragraph 1758]. (Art. 57, Reg. 33, Jan. 5, 1914.) 1762 Law ]J389. Returns of Information Relative to Payments of Divi- dends to be Rendered When Required. — “Sec. 254. That every corporation subject to the tax imposed by this title and every personal service corporation [1[593] shall, when required by the Commis- sioner, render a correct return [P902] duly verified under oath [P789], of its payments of dividends, stating the name and address of each stock- holder, the number of shares owned by him, and the amount of dividends paid to him.” 1763 Return of Information as to Payments of Dividends. — When di- rected by the Commissioner, either specially or by general regulation, every domestic or resident foreign corporation and every personal service corporation shall render a return on form 1097 of its pay- ments of dividends and distributions to stockholders for such period as may be specified, stating the name and address of each stockholder, the number and class of shares owned by him, the date and amount of each dividend paid him, and when the surplus out of which it was paid was accumulated. (Art. 1051, Reg. 45, Rev., April 17, 1919.) 1764 Law]f390. Returns of Information by Brokers to be Rendered When Required. — “Sec. 255. That every individual, corporation, or partnership doing business as a broker shall, when required by the Commissioner, render a correct return [|fl902] duly verified under oath [P789], under such rules and regulations as the Commissioner, with the approval of the Secretary, may prescribe, showing the names of cus- tomers for whom such individual, corporation, or partnership has transacted any business, with such details as to the profits, losses, or other information which the Commissioner may require, as to each of such customers, as will enable the Commissioner to determine whether all income tax due on profits or gains of such customers has been paid.” 1765 Return of Information by Brokers. — When directed by the Com- missioner, either specially or by general regulation, every person doing business as a broker shall render a return on form 1100, show- INC. 315 TAX RETURNS. ing the names and addresses of customers to whom payments were made or for whom business was transacted during the calendar year or other specified period next preceding and giving the other information called for by the form. (Art. 1061, Reg. 45, Rev., April 17, 1919.) 1766 Lawj[233. Returns by Individuals. — “Sec. 23. That every indi- vidual having a net income for the taxable year of $1,000 or over if single or if married and not living with husband or wife,” 1767 Law ^[234. “or of $2,000 or over if married and living with hus- band or wife,” 1768 Law1|235. “shall make under oath 1^789] a return stating specif- ically the items of his gross income and the deduc- tions and credits allowed by this title.” 1769 LawTf236. Joint or Separate Returns of Husband and Wife. — “If a husband and wife living together have an aggregate net income of $2,000 or over, each shall make such a return unless the income of each is included in a single joint return.” 1770 Individual Returns.— Every individual whose net income as de- fined in section 212 of the statute and articles 21-26 [beginning at 1F7711, is $1,000 or over for the taxable year must make a return of income unless married and living with husband or wife as defined in article 303 1111523]. The return shall be for his taxable year, whether calendar or fiscal. Whether or not an individual is the head of a family or has dependents is immaterial in determining his liability to render a return. If an individual is a married person living with husband or wife, no return need be made where their aggregate ne: income is less than $2 000; but a separate return must be made by each of them, regardless of the amount of the individual income of each, where their aggregate net mcome is $2,000 or over, unless they join a single return. The husband shall in- clude in his return the income derived from services rendered by the wife or from the sale of products of her labor if she does not file a separate return or join with him in a return setting forth her income separately, h or re- turns by partnerships see section 224 and articles 411 and 412 [11560] , by fiduciaries see section 225 and articles 421-425 111684] ; by personal service corporations see section 239 and article 624 [11597] ; and by other corpora- tions see sections 239 and 240 and articles 621-626 [regularly, 111780] and 631-638 [for consolidated returns, 111821]. _ See also section 227 and ar- ticles 441-448 [for general provisions relative to the filing of returns, be- ginning at 111814]. (Art. 401, Reg. 45, Rev., April 17, 1919.) 1771 Husband and Wife Filing Separate. — Where husband and wife file separate returns of income, one of them being filed in time and the other delinquent, such returns are not supplemented of_ each other and delinquency must be answered for by the one in connection with whose return it occurred. (Art. 25, 11182, Reg. 33, Rev., Jan. 2, 19 .) 1772 Advisable to Make Return Even Though No Net pcome, if Due to Deductible Losses Claimed.— Reference is made to your letter of March 10, 1919, in which you ask the following question: 316 TAX INC. RETURNS. ''An individual has had a loss determined in 1918 by the Courts that will exceed all income. In view of the fact that the income is large, and my client has always filed a report, would it be wise to file a report this year and thus dispose of the matter rather than to omit such filing and eventually have the Government take up the matter of non-filing, etc.’' Uln reply you are advised that if this individual’s net income for 1918 was less than the exemption to which he was entitled according to his marital status on December 31, 1918, he is not required to file an income tax return. How- ever, as you state he has filed a return for all previous years it would be ad- visable for him either to fill out a return showing his total income and deductions, or notify the Collector of the circumstances which precluded his rendering a return for 1918, in order that it may be determined whether the loss, which he has sustained, is deductible for income tax purposes. (Letter to Alexander John Lindsay, New York, N. Y., signed by J. A. Cal- lan. Assistant to the Commissioner, and dated May 6, 1919.) 1773 Form of Return for Individuals. — The return shall be on Form 1040 (revised), except that it may be on short form 1040 A (revised) where the net income does not exceed $5,000 and the net income subject to the normal tax, that is, after applying the personal exemption and other credits, does not exceed $4,000. The forms are provided by the Commis- sioner and may be had from the collectors of the several districts. In the case of a person owning State, municipal, United States, farm loan or War Finance Corporation bonds, his return shall contain a statement showing the number and amount of such obligations owned by him, the income re- ceived therefrom, and the other information called for in the form. See section 213 (b) (4) of the statute [for law provision covering return of government securities, etc., j[1130]. The return may be made by an agent * * * [for which read at 1[674]. (Art. 402, Reg. 45, Rev., April 17, 1919.) 17 <4 Manner of Reporting Tax-Free Covenant Bond Interest and Rent Payments on Form 1040. — Reference is made to your letter dated February 15, 1918, in regard to the execution of income tax return Form 1040. You inquire if a taxpayer in filling in Block G [F], interest on "tax- free” covenant bonds, is required to itemize the payments or only show the total amount of interest received during the calendar year. Uln reply, you are advised that it is not necessary to enter in Block G [F] the separate payments of interest on "tax-free” covenant bonds, but the total amount of interest received during the calendar year fiom each debtor corporation should be shown. 1775 You also inquire if the name and address of each tenant must be listed separately under Block D [E], income from rents and royal- ties, and you state that in the case where a large office building is owned by a taxpayer it would be difficult for him to furnish the names and ad- dresses of all the tenants and it would also be difficult to apportion repairs and property losses. Ifln reply to this inquiry, you are advised that in cases where a large office building is owned by an individual, the amount received from each tenant should be reported separately under Block D [E] in cases where the amount of rent received from the tenant equals $800 [$1,000] or more, but only the total amount of income received from the tenants paying rental less than $800 [$1,000] is required to be shown. It will not be neces- sary to apportion the repairs and property losses with respect to each tenant in the building, but the total thereof must be shown. (Letter to The Cor- poration Trust Company, signed by Commissioner Daniel C. Roper, and dated March 22, 1918.) INC. 317 TAX RETURNS. 177G Manner of Reporting Profits and Losses in Block C on Form 1040. —Reference is made to your letter of February 7, 1918, in which you state that the Collector's office, Third Massachusetts District, is requiring individuals who fill out income tax returns. Forms 1040, to submit a list of all securities, together with the information called for in C [D], and you ask if it is necessary to submit a list detailing each sale, tin reply you are advised that if the profits or losses on sales made through any one broker aggregated [$1,000] or more, you should report the transactions ■on a separate line with the name and address of the broker. The total of other transactions should be reported, but it is not necessary to give de- tails. If, however, this office should ask for further information the tax- payer should be able to furnish all the details requested. (Letter to Lee, Higginson & Company, Boston, Mass., signed by Deputy Commissioner L. F. Speer, and dated March 25, 1918.) 1777 Return of Corporate Dividends. — Dividends on stock of domestic corporations or resident foreign corporations are prima facie in- come of the record owner of the stock, and such record owner will be liable for any additional tax based thereon, unless a disclosure of the actual ownership is made to the Commissioner on form 1087 (revised) which shall show that the record owner is not the actual owner and who the owner is and his address. In all cases where the actual owner is a non-resident alien individual and the record owner is a person in the United States, the record owner will be considered for tax purposes to have the receipt, custody, control and disposal of the dividend income and will be required to make return for the actual owner, regardless of the amount of the income, and to pay any surtax found by such return to be due. (Art. 405, Reg. 45, Rev., April 17, 1919.) 1778 Law p43. Returns by Corporations. — “Sec. 239. That every cor- poration subject to taxation under this title and every personal service corporation [11593] shall make a return, stating sj^- cifically the items of its gross income [11808] and the deductions [11118UJ and credits [|[1527] allowed by this title. 1779 Lawj[347. “Returns made under this section shall be subject to the provisions of sections 226 [‘Returns when ac- counting period is changed,’ 111855] and 228 [‘Understatement in Returns,’ 111864].” 1780 Corporation Returns. — Every corporation not expressly exempt from tax and every personal service corporation must make a return of income, regardless of the amount of its net income. In the case of ordinary corporations the return shall be on form 1120. For returns of insurance companies see article 623 [111002] ; of personal service corporation see article 624 [11597] ; of foreign corporations see article 625 [111044] ; and of affiliated corporations see section 240 oi the statute and articles 631-638 [111821]. A corporation having an existence during any portion of a taxable year is required to make a return. A corporation which has received a charter, but has never perfected its organization, and which has transacted no business and had no income from any source, may upon presentation of the facts to the collector be relieved from the necessity of making a return so long as it remains in 318 TAX INC. RETURNS. an unorganized condition. In the absence of a proper showing to the Collector such a corporation will be required to make a return. A cor- poration which was dissolved in 1918 or 1919 prior to the enactment of the present statute is not relieved from the necessity of rendering returns thereunder for 1918 and for such portion of 1919 as elapsed before its dissolution. [For returns by corporations going into liquidation, see ^1816.] See further section 228 of the statute and articles 406 [for veri- fication of returns, p789], 407 [for use of prescribed forms, p787] and 451 [for understatement of income, P866]. (Art. 621, Reg. 45, Rev., April 17, 1919.) 1781 Corporations Dissolving Before the Time for Making Returns. — A corporation which has continued in business through a calendar year cannot evade liability for the special excise tax imposed by Act of August 5 1919, Section 38, by dissolving before the time when it is re- quired to make a return of said business to the collector of internal revenue and the assessment of the tax. — United States v. General Inspec- tion & Loading Co., 192 Fed. 223. 1782 Under Corporation Act N. J. Sections 53-55, the officers of a dis- solved corporation who are also directors have authority to make return to the collector of internal revenue of its business of the preceding year on which it has incurred liability for the special tax imposed by Act 5, 1909, Section 38. Id. 1783 Corporation Dissolved Prior to October 4, 1917. — A corporation which was dissolved in 1917, prior to the passage of the war- revenue act of October 3, 1917, is subject to tax under the act of September 8, 1916, as amended, and ^so to the war income tax and the war excess profits tax imposed by the act of October 3, 1917 (Brady et al. v. Ander- son, 240 Fed. 665). A corporation so situated -will make a return on revised Form 1031, covering the period in 1917 during which it was in business prior to its dissolution. If it shall have previously made a re- turn covering this period and shall have paid any excess profits tax under the act of March 3, 1917, it shall be entitled to credit for the amount of such tax so paid against any excess profits tax assessable against it under Title II of the act of October 3, 1917. (Art. 61, 11304, Reg. 33, Rev., Jan. 2, 1918.) 1784 Change of Corporate Name. — A mere change in name does not constitute a new corporation. If the business was continuous throughout the year, no change in management or operation other than the change in name having occurred, the return should be made covering the business transacted throughout the year, such return to be made by the corporation in the name which it bears at the end of the year, with a nota- tion on the return to the effect that the name had been changed, giving both the old and the new names. (Art. 206, 11613, Reg. 33, Rev., Jan. 2, 1918.) 1785 Law 11346. Receivers, Trustees in Bankruptcy, and Assignees Operating the Property or Business of Corporations, to Make Returns. — “In cases where receivers, trustees in bankruptcy, or assignees are operating the property or business of corporations, such re- ceivers, trustees, or assignees shall make returns for such corporations in INC. 319 TAX RETURNS. the same manner and form as corporations are required to make returns. Any tax due on the basis of such returns made by receivers, trustees, or assignees shall be collected in the same manner as if collected from the corporations of whose business or property they have custody and control.’* 1786 Returns by Receivers. — Receivers, trustees in dissolution, trustees in bankruptcy, and assignees, operating the property or business of corporations, must make returns of income for such corpora- tions on form 1120, covering each year or part of a year during which they are in control. Notwithstanding that the powers and functions of a corporation are suspended and that the property and business are for the time being in the custody of the receiver, trustee or assignee, subject to the order of the court, such receiver, trustee or assignee stands in the place of the corporate officers and is required to perform all the duties and assume all the liabilities which would devolve upon the officers of the corporation were they in control. A receiver in charge of only part of the property of a corporation, however, as a receiver in mortgage closure proceedings involving merely a small portion of its property, need not make a return of income. See articles 424 [for further discussion of returns by receivrs, pOl] and 547 [for gross income of a corporation in liquidation and return by receiver, 11968]. (Art 622, Reg. 45, Rev., April 17, 1919.) 1787 Use of Prescribed Forms.— Copies of the prescribed return forms will so far as possible be furnished taxpayers by collectors. Fail- ure on the part of any taxpayer to receive a blank form \vill not, however, excuse him from making a return. Taxpayers not supplied with the proper forms should make application therefor to the collector in ample time to have their returns prepared, verified and filed with the collector on or before the last due date. Each taxpayer should carefully prepare his return so as fully and clearly to set forth the data therein called for Imperfect or incorrect returns will not be accepted as meeting the requirements of the statute. In lack of a prescribed form a statement made by a taxpayer disclosing his gross income and the deductions there- from may be accepted as a tentative return, and if filed within the pre- scribed time a return so made will relieve the taxpayer from liability to penalties, provided that without unnecessary delay such a tentative return is replaced by a return made on the proper form. See further articles 443- 446 [for extensions of time and tentative returns, beginning at 11184^]. (Art. 407, Reg. 45, Rev., April 17, 1919.) 1788 Law p44. Returns to be Made Under Oath.— -The [corporation] return shall be sworn to by the president, vice presi- dent, or other principal officer and by the treasurer or assistant treasurer. “Every individual shall make under oath a return, 1[1768. “The return shall be sworn to by any one of the partners, “Every fiduciary shall make under oath a return for the individual, estate or trust for which he acts,” [[676. 1789 All income tax returns must be verified under oath or affirmation, before an officer duly authorized to administer oaths either by the laws of the United States or by the laws of the state or territory where such officer resides. Persons in the naval or military service of the United 320 TAX INC. RETURNS. States may verify their returns before any official authorized to adminis- ter oaths for the purposes of those services. Income tax returns executed abroad may be attested free of charge before United States consular offi- cers. Where a foreign notary or other official having no seal shall act as attesting officer, the authority of such attesting officer should be certi- fied to by some judicial official or other proper officer having knowledge of the appointment and official character of the attesting officer. (Art. 406, Reg. 45, Rev., as amended by T. D. 2951, November 19, 1919.) 1790 Law][440. Sec. 3165, Revised Statutes. — “Every collector, deputy collector, internal-revenue agent, and internal-revenue officer assigned to duty under an internal-revenue agent, is authorized to administer oaths and to take evidence touching any part of the administra- tion of the internal-revenue laws with which he is charged, or where such oaths and evidence are authorized by law or regulation authorized by law to be taken.’' Referring to your suggestion at a personal conference that revenue agents, inspectors, and special employees be commissioned as deputy collectors without additional compensation for the purpose of qualifying them to administer oaths, you are advised that the suggestion has been given careful consideration by this office, and it is of the opinion that there is no legal objection thereto and the plan is both practicable and desirable. Manifestly it will save much time and some expense to taxpayers, as well as result in a prompter filing of returns by persons found to be liable for taxes if such officers are in position to secure a return properly sworn to on the spot. 1792 Collectors will therefore be authorized to issue commissions to such officers serving in their districts, the commissions to expire with the regular employment of the officer so commissioned. 1793 A copy of this letter will be published in Treasury Decisions as authority to collectors for such action. (T. D. 2235, Aug. 28, 1915.) 1794 In reply to your letter of the 11th instant, requesting to be advised whether in issuing commissions to officers mentioned in T. D. 2235 it should be stated that the commission is only issued for the purpose of administering oaths, you are advised that this office doubts the legality of such a limited commission, and a regular commission should be issued with a proviso that the service is to be without additional compensation, but the officers instructed that their activities as deputy collectors should be confined to the administering of oaths, as it is not necessary for such officers to collect moneys. 1795 There is no objection to your requiring that the officers to whom such commissions are issued furnish you a bond, the same as other deputies appointed by you. (T. D. 2238, Sept. 17, 1915.) 1796 This office is in receipt of your letter of the 8th instant referring to Treasury Decision 2235 [paragraphs 1791 plus] authorizing Col- lectors to commission Revenue Agents, Inspectors and Special Employees as Deputy Collectors without additional compensation for the purpose of administering oaths, and requesting to be advised whether or not this de- cision can be extended to apply to clerks on the Income Tax Roll, stating that the Deputies in your office are too busy on other assignments to assist in the Income Tax Department and it would be advisable to have Income Tax Clerks empowered to administer oaths. 321 TAX INC. RETURNS. 1797 In reply, you are advised that this office sees no objection to the commissioning by Collectors of Income Tax or other clerks as Deputy Collectors without additional compensation under the same pro- visions and with the same restrictions as applied in Treasury Decision 2235 to the commissioning of the field officers named. ^ _ 1798 A copy of this letter will be published in Treasury Decisions as authority to Collectors for such action. (T. D. 2293, Feb. 10, 1916.) 1799 The annual return must be verified by oath =5* * * of the person making the same. Collectors are directed by law to require every return to be so verified by the person rendering it. The affidavit may be made before the collector for the district or before any officer authorized by law to administer oaths. (Art. 22, Reg. 33, Jan. 5, 1914.) 1800 (2) If a return is executed in a State before a notary who is not re- quired by the laws of the State to use a seal, and none is used the notary should file with the Commissioner of Internal Revenue the certificate of an officer possessing a seal, showing that he is duly commissioned and authorized to administer oaths; otherwise the certificate will not be recog- nized. (T. D. 2090, Dec. 14, 1914.) 1801 Replying to your letter of the 23d ultimo you are informed that affidavits to tax returns may be made before Justices of the Peace or any officer authorized by law to administer oaths. ^ 1802 If made before a Notary Public who is not required by the laws of the State to use a seal, and none is used or if made before a Justice of the Peace who has no seal, certificates of the Clerk of Jv their authority to administer oaths may be waived m your State or in a y other State where such jurats are accepted m the State either with or without seal, and without a certificate showing authority, (i. i^. March 12, 1915.) 1803 Assistance from Collectors in Preparing Returns.— All Collectors of Internal Revenue who have not already done so will please ar- range to inform the public, in their respective districts, through the press or othfr means of publicity without cost to the Government or by posting nmnriate notices, that any assistance or information whi^ may be re quired in connection with preparing and filing Income Tax ® gladly and promptly furnished by applying to or calling at any Internal ^04 "In pmsuance of the above. Collectors should assign from the pres- ent office forces, an employee or employees, as the case may « quire, who should be thoroughly posted on the provisions of the Income Tax law and all Treasury Decisions and Regulafions in connection with same oarticularly with relation to the P ersonal Tax and the filing of - dt”durLturns! to promptly furnish the public with mfo.^at,^ sired when calling at the various Internal Revenue offices. (Letter to Collectors, Feb. 10, 1914.) 1805 A large part of the volume of correspondence coming to this office asking for information relative to making return and ascertainment of net income, etc., for the income tax, is sufficiently covered by regulations, and should be answered in the offices of collectors. 322 TAX INC. RETURNS. 1806 Collectors are therefore advised that letters coming to this office ask- ing for information which should be supplied by collectors in accord- ance with instructions and regulations furnished them, will be re- ferred to collectors for reply and writers of the letters advised of the refer- ence._ Collectors, upon receipt of letters referred to them by this office, will give immediate attention to the subject-matter of the inquiry, in accordance with the regulations and instructions bearing upon the same. (T. D 1949 Feb. 14, 1914, and T. D. 1956, Feb. 14, 1914.) 1807 Lawp58. Time for Filing Returns.— ‘‘Sec. 241. (a) That returns of corporations shall be made at the sam.e time as is provided in subdivision (a) of section 227 [p808 below].'' 1808 Law ][253. Time for Filing Returns on Fiscal Year Basis. — “Sec. 227. (a) That returns shall be made on or before the fifteenth day of the third month follov/ing the close of the fiscal year, or," 1809 Law 1[254. Time for Filing Return on Calendar Year Basis.— “if the return is made on the basis of the calendar year, then the return shall be made on or before the fifteenth day of March." Comment:^ [All returns of net income are “for the taxable year." Taxable year ' is defined at l[/95, in general, as being coextensive with the taxpayers annual accounting period. If the taxpayer has no account- ing period, or keeps no books, his taxable year is the calendar year.] 1810 Returns of income miust be made on or before the fifteenth day of March following the taxable year, except that returns on the basis of a fiscal year other than the calendar r^ear must be made on or before the fifteenth day of the third month following the close of the fiscal year. Returns on the basis of fiscal years ending in 1918 of taxpayers who made returns on the calendar year basis for the year 1917 shall be made on or before the fifteenth day of March, 1919. (Art. 441, Reg 45 Rev April 17, 1919.) > & . 1811 Lawjf256. Where Returns Are to be Filed by Individuals.— “(b) . Returns shall be made to the collector for the district in which is located the legal residence or principal place of business of the person making the return, or," 1812 Law |[257. if he has no legal residence or principal place of ^ , . business in the United States, then to the collector at Baltimore, Maryland." 1813 Law p59. Where Returns Are to be Filed by Corporations. “(b) Returns shall be made to the collector of the district in which IS located the principal place of business or principal office or agencv of the corporation, or," 1814 LawpeO. “if it has no principal place of business or principal . -o 1 • or agency in the United States, then to the collector at Baltimore, Maryland." 1815 Place for Filing Return.— Returns of income must be delivered ^ ^ or mailed to the collector for the district of the legal residence or principal place of business of the person making the return Persons having no domicile or place of business in the United States, and persons INC. 323 TAX RETURNS. in the military or naval service of the United States, may file their returns of income with the collector at Baltimore. (Art. 448, Reg. 45, Rev., April 17, 1919.) 1810 Returns of income must be made on or before the fitteenth day of the third month following the close of the fiscal or calendar year, as provided in section 227 of the statute and articles 441-W [be- o-innino- at ^1810 above and continuing through this discussion]. A corporSion going into liquidation during any taxable year may upon the con^^pletion of such liquidation prepare a return covering its income for the fractional part of the year during which it was engaged in business and may immediately file such return with the collector. ^ an office or agency in the United States must make its return to the collector of the district in vdiich is located its principal office or agency. Other corporations must make their returns to the collector at Baltimore. (Art. 651, Reg. 45, Rev., April 17, 1919.) 1817 The principal place of business of a corporation is the place or office in which are kept the books of account and other data from which the return is to be prepared. (T. D. 2090, Dec. 14, 1914.) 1818 Liquidating Corporations. — [Read 1[1816.] Before distributing its assets a dissolving corporation should reserve funds sufficient to pay any fncome tax assessible aVinst it. Otherwise the tax may be collected by suit against the stockholders. (Art. 205, t 612, Reg. 33, Rev., Jan. 2, 9 .) 1819 Dissolved Corporation to Make Final Return. All corporations having an existence as such during all or any portion of a year, unless coming within the class specifically enumeiyed as exempt, are re- quired to make leturns. Corporations dissolved during the year and Those fiscal vear coincides with the calendar year will niake returns cover- ing the period from January 1, to date of dissolution and such corporations haUng a fiscal year (ither than the calendar year, will make returns covering the piriod froil the beginning of the fiscal year to the date of dissolution andffiew corporations will make returns for the period froni the date of organization to December 31, unless a fiscal year is designated in the pioper manner, in which case returns for a period from the date of organization to the close of the fiscal vear so established, in no case to exceed 12 months, will be'filed. (Art. 203, 1(608, Reg. 33, Rev., Jan. 2, 1918.) 1830 Last Due Date.— The last due date is the last day upon which a return is reouired to be filed in accordance with the provisions^ of the statute or the 'last day of the period covered by an extension of time granted by the collector or Commissioner. When the last due date falls on lunday or a legal holiday, the last due date for filing returns will be the dT Svhig such Sunday or legal holiday. If placed in the mails the return should be posted in ample time to reach the collector s office, under ordffiarV Tndling of the mails, on or before the date on which the return is required to beVd. If a return is made and placed in the mails m due course properly addressed and postage paid, in ample time to reach the Xce oTthe^ collector on or before the last due date no pena ty will attach should the return not be actually received by such officer until subsequent y to that date. Where a question may be raised as to whether or not the return was posted in ample time to reach the collector s office on or before the due INC. 324 TAX CONSOLIDATED RETURNS. date, the envelope in which the return was transmitted will be preserved by the collector and forwarded to the Commissioner with the return. (Art. 447, Reg. 45, Rev., April 17, 1919.) 1821 Lawp49. Consolidated Returns by Affiliated Corporations. — “Sec. 240. (a) That corporations which are affiliated within the meaning of this section shall, under regulations to be prescribed by the Commissioner with the approval of the Secretary, make a consoli- dated return of net income and invested capital for the purposes of this title and Title III [excess profits tax], and the taxes thereunder shall be com- puted and determined upon the basis of such return 1822 Law j[350. Corporation Deriving Chief Income from Government Contracts. — “Provided, That there shall be taken out of such consolidated net income and invested capital, the net income and invested capital of any such affiliated corporation organized after August 1, 1914, and not successor to a then existing business, 50 per centum or more of whose gross income consists of gains, profits, commissions, or other income, derived from a Government contract or contracts made be- tween April 6, 1917, and November 11, 1918, both dates inclusive. In such case the corporation so taken out shall be separately assessed on the basis of its own invested capital and net income and the remainder of such affiliated group shall be assessed on the basis o.f the remaining consolidated invested capital and net income.” 1823 In the case of any affiliated corporation organized after August 1, 1914, and not a successor to a then existing business, 50 per cent or more of whose gross income consists of gains, profits, commissions or other income derived from a Government contract or contracts made between April 6, 1917, and November 11, 1918, both dates inclusive, the net income and invested capital of such corporation shall be taken out of the consolidated net income and invested capital of the group of affiliated corporations and the corporation so segregated shall be separately assessed on the basis of its own invested capital and net income, the remainder of such affiliated group being assessed on the basis of the remaining con- solidated invested capital and net income. See section 1 of the statute and article 1510 [for definition of Government contract, 11579]. (Art. 635, Reg. 45, Rev., April 17, 1919.) 1824 Law1[351. In the Case of Consolidated Returns the Tax is As- sessed as a Unit and Then Apportioned. — “In any case in which a tax is assessed upon the basis of a consolidated return, the total tax shall be computed in the first instance as a unit and shall then be assessed upon the respective affiliated corporations in such proportions as may be agreed upon among them, or, in the absence of any such agreement, then on the basis of the net income properly assignable to each.” 1825 Law 1f352. In the Case of Consolidated Returns One Specific Credit of $2,000 Only is Allowed. — “There shall be allowed in computing the income tax only one specific credit of $2,000 (as provided in section 2v36 [1fl531]) ; [The following is applicable to the ex- cess profits tax only.] in computing the war-profits credit (as provided in section 311) only one specific exemption of $3,000; and in computing the excess-profits credit (as provided in section 312) only one specific exemption of $3,000.” INC, 325 TAX CONSOLIDATED RETURNS. 1826 The Underlying Necessity for Consolidated Returns.— The pro- vision of the statute requiring affiliated corporations to file consoli- dated returns is based upon the principle of levying the tax accord- ing to the true net income and invested capital of a single business enterprise, even though the business is operated through more than one corporation. Where one corporation owns the capital stock of another corporation or other corporations, or where the stock of two or more coipora- tions is owned by the same interests, a situation results which is closely analogous to that of a business maintaining one or more branch establish- ments. In the latter case, because of the direct ownership of the property the invested capital and net income of the branch form a part of the invested capital and net income of the entire organization. Where such branches or units of a business are owned and controlled through the medium of separate corporations, it is necessary to require a consolidated return m order that the invested capital and net income of the entire group may be accurately determined. Otherwise opportunity would be afforded tor the evasion of taxation by the shifting of income through price fixing, charges for services and other means by which income could be arbitrarily assigned to one or another unit of the group. In other cases without a consolidated return excessive taxation might be imposed as a result of purely artincia conditions existing between corporations within a controlled group, bee articles 785, 791, 802 and 864-869 [all having to do with excess profits tax. —War Tax Service]. (Art. 631, Reg. 45, Rev., April 17, 1919.) 1837 Forms for Use in Making Consolidated Returns and the Contents Thereof. — Affiliated corporations, as defined in the statute m article 633 [1118381, are required to file consolidated returns on form IIZU. The consolidated return shall be filed by the parent or principal reporting corporation in the office of the collector of the district in which it has ly principal office. Each of the other affiliated corporations shall file in the office of the collector of its district form 1122, along with the several sched- ules indicated thereon. The parent or principal corporation filiy a con- solidated return shall include in such return a statement specifically sethng forth (a) the name and address of each of the subsidiary or affiliaty Mr porations included in such return, (b) the par value of the total outstanding capital stock of each of such corporations at the beginning of the tax^le yeL, (c) the par value of such capital stock held by the or by the same interests at the beginning of the taxable year, (d) m ffie case of affiliated corporations owned by the same interests a list of the indi- viduals or partnerships constituting such interests, with the yrcentage the total outstanding stock of each affiliated corporatiy held by y^h o such individuals or partnerships during all of the taxable year, and (y a schedule showing the proportionate amount of the total tax which U is agreed among them is to be assessed upon each affiliated ^ eign corporations and personal service corporations need iwt file consoh- dated returns. See article 1524 [for corporations which, under no c™- stances, are to be considered as personal service corporations, p84J. (Art. 632, Reg. 45, Rev., April 17, 1919.) 1838 Consolidated Net Income of Affiliated Corporations. Subject to the provisions covering the determination of taxable net income o separate corporations, and subject further to the ehminatmn of ’"tfcom- paW transactions, the consolidated taxable net income ^all bined net income of the several corporations consolidated, except that the 326 TAX INC. CONSOLIDATED RETURNS. net income of corporations coming within the provisions of article 635 [111823] shall be taken out. In respect of the statement of gross income and deductions and the several schedules required under form 1120, a corpora- tion filing a consolidated return is required to prepare and file such state- ments and schedules in columnar form to the end that the details of the Items of gross income and deductions for each corporation included in the consolidation may be readily audited. (Art. 637, Reg. 45, Rev., April 17 1829 Apportionment and Payment of Tax.— In connection with the assessment and payment of income and profits taxes of affiliated corporations, the opinion apparently prevails among taxpayers that the tax must be assessed against and paid by each corporation within an affiliated group. Unless a subsidiary has made a payment, the Bureau greatly prefers that the parent or principal reporting corporation take up and pay the entire tax, making any desired adjustment thereof by charging the affiliated corporations through their own records. 1830 The amount reported by the subsidiary in answers to Question 9, Form 1122, will be used as the basis for assessment and payment. If the subsidiaries have reported an apportionment in this manner, but the parent corporation has paid the tax installments on account of such sub- sidiaries, an amended Form 1122 showing “none” in answer to Question 9, should be filed. If the last condition obtains, but the taxpayer insists upon apportionment, the Collector of the subsidiary s district will request abate- ment of such portion of the subsidiary’s tax as may have been previously paid by the parent corporation in another district. 1831 As a basis for such advice, the latter Collector will secure from the parent corporation a schedule showing apportionment of the total tax and installments to the respective affiliated corporations. If a subsidiary has filed a tentative return and paid an installment of the tax, it should be assessed the amount shown on Form 1122, and will pay future install- ments as they fall due. (I. T.-Mim. 2221, August 8, 1919.) 1832 Different Fiscal Years of Affiliated Corporations.— In the case of all consolidated returns, consolidated invested capital must be com- puted as of the beginning of the taxable year of the parent or prin- cipal reporting company and consolidated income must be computed on the basis of Its taxable year. Whenever the fiscal year of one or more sub- sidiary or other affiliated corporations differs from the fiscal year of the parent or principal corporation, the Commissioner should be fully advised by the taxpayer in order that provision may be made for assessing the tax in respect of the period prior to the beginning of the fiscal year of the parent or principal company. See section 226 of the statute and article 431 [for returns when accounting period changed, P862]. (Art. 638, Reg. 45 Rev April 17, 1919.) 1833 Consolidated Return of Fiscal Year Parent and Affiliated Calen- dar Year Public Utility. — We are asking for a ruling relating to consolidated returns on the state of facts contained below, and ask for your ruling by telegram, collect. corporation owns all the capital stock of another corporation. The corporation owning the capital stock makes its Income Tax Return on fiscal year basis ending Mar. 31, 1919 INC. 327 TAX CONSOLIDATED RETURNS. tlic other corpoi'tition makes its Income Tax Return on calendar year basis ending Dec. dlst. pt is our understanding that under Article 633 [P838J such corporations will be deemed to be affiliated, as 95 per cent, of the stock of the corporation whose hscal yeai ends Dec. 31st is owned by the corpora- tion whose fiscal year ends Mar. 31st. jjUnder Article 638 LP832] when- ever the fiscal year of one of the affiliated corporations differs from the fiscal of the parent or principal corporation the Commissioner should be fully advised by the taxpayer in order that provision may be made for assessing the tax in respect to the period prior to the beginning of the fiscal year of the parent or principal company. The question therefore arises as to the return for the three-month period of the corporation whose fiscal year ends Dec. 31st and it appeared to us that if your ruling would be to the effect, that the return should be made on the basis of the fiscal year of the parent corporation, such corporation being the corporation holding 95 per cent of the stock of the second corporation, that there should be a return made for the corporation whose year ended Dec. 31 for the period between Dec 31 1917 and Mar. 31, 1918, and then a consolidated return made for the year Mar’ 31, 1918, to Mar. 31, 1919. UTlie corporation whose taxable year ends Dec. 31st and whose stock is held by corporation having its tax- able year end Mar. 31st is a Public Service Corporation. I assume from letter of Acting Commissioner J. H. Callan to The Corporation Trust Co., dated April 1/, 1919, and found in Corporation Income Tax Service at paragraph 1839, that it would make no difference whether one or both corporations were Public Service Corporations and they would not be taken out of the class of affiliated corporations because of that fact m tentative return was filed covering corporation whose fiscal year ended Dec. ols with a statement that it was understood that a consolidated return would probably be required, and that an adjustment would be made for the first ffiree months of 1918. There was also a tentative return filed for the cor- poration whose fiscal year ended Mar. 31, 1918. IjOn the foregoing state of facts will you, therefore, wire us— first: should there be a consolidated return filed; second: shall the corporation whose taxable year ends Dec. 31st file an Income Tax report for the period between Dec. 31, 1917, and Mar. 31 1918; third: should the taxpayer file a statement giving the reasons for filing the return for the period between Dec. 31st and Mar. 81st, fourth, in computing the normal tax on income for the three-month period should the exemption be $500, one-fourth of the $2,000 allowed, under Section 236; fifth: if the company whose stock is owned by the principal company is a Public Service Corporation would a consolidated return be required [read at |[1839]. (Answer to above Inquiry.) 1834 Your letter sixth. Consolidated return including parent and fully owned public service subsidiary corporation should be filed for fiscal vear parent ended March 31. 1918. Tax is computed in first instance on basis of twelve month period ended March 31, 1918, with full deductions under revenue act of nineteen eighteen and then proraffid. With return file complete statement facts. (Letter of inquiry from The Qeveland Trust Company, Cleveland, Ohio, and the answer thereto, signed by Acting Com- missioner J. H. Callan, and dated May 20, 1919.) 1835 Law 1[353. What Corporations Are Deemed to be Affiliated.— ^b) For the purpose of this section two or more domestic corporations shall be deemed to be affiliated” 328 TAX INC. CONSOLIDATED RETURNS. 1836 Law^[354. “(1) corporation owns directly or controls through closely affiliated interests or by a nominee or nominees substantially all the stock of the other or others, or” 1837 LawpSS. “(2) if substantially all the stock of two or more cor- porations is owned or controlled by the same interests.” 1838 Corporations will be deemed to be affiliated (a) when one domestic corporation owns directly or controls through closely affiliated in- terests or by a nominee or nominees substantially all the stock of the other or others, or (b) when substantially all the stock of two or more domestic corporations is owned or controlled by the same interests, t he words “substantially all the stock” cannot be interpreted as meaning any particular percentage, but must be construed according to the facts of the particular case. The owning or controlling of 95 per cent or more of the outstanding voting capital stock (not including stock in the treasury) at the beginning of and during the taxable year will be deemed to constitute an affiliation within the meaning of the statute. Consolidated returns may, however, be required even though the stock ownership is less than 95 per cent. When the stock ownership is less than 95 per cent, but in excess of 50 per cent, a full disclosure of affiliations should be made, showing all perti- nent facts, including the stock owned in each subsidiary or affiliated cor- poration and the percentage of such stock owned to the total stock out- standing. Such statements should preferably be made in advance of filing the return with a request for instructions as to whether a consolidated return should be made. In any event such a statement should be filed as a part of the return. The words “the same interests” shall be deemed to mean the^ same individual or partnership or the same individuals or partnerships, but •- when the stock of two or more corporations is owned by two or more indi- | V iduals or by two or more partnerships a consolidated return is not required j unless the percentage of stock held by each individual or each partnership | is substantially the same in each of the affiliated corporations. (Art. 633, f Reg. 45, Rev., April 17, 1919.) 1839 Consolidated Returns: Public Service Corporations, Including Railroads, Not Excepted. — Receipt is acknowledged of your letter, dated April 8, 1919, in which you state: “In connection with the Revenue Act of 1917, Title II, the Bureau of Internal Revenue made provision for consolidated re- turns for War Excess Profits Tax purposes. “Treasury Decision 2662, issued March 6, 1918, provided in ‘B’ that railroads, gas, electric, water and other public service corporations, when operated independently and not physically connected or merged - — particularly when situated in different jurisdictions and subject to regulation by Public Service Commission — will not be required or per- mitted, without special permission obtained in advance, to make a con- solidated return. “The Revenue Act of 1918, Section 240, makes statutory provision for consolidated returns, both for Income and for War Profits and Excess Profits Tax purposes, setting forth quite definitely just what shall be considered to be affiliated corporations. The amplifying Regu- lations of the Department as contained in Regulations No. 45, Part II-A, contain nothing indicating that the rule relating to public service corporations laid down by the Department in connection with the 329 TAX INC. CONSOLIDATED RETURNS. Revenue Act of 1917 will be held to apply to the Revenue Act of 1918, Section 240. “We shall appreciate word from the Department as to whether or not public service corporations which otherwise would be deemed to be affiliated corporations are to be taken out of that class because of the fact that they are public service corporations and otherwise meet the conditions outlined in Treasury Decision 2662.” 1840 In reply you are advised that subdivision (b) of Treasury Decision 2662 issued March 6, 1918, in connection with the Revenue Act of October 3, 1917, does not apply to the Revenue Act of 1918. In other words, public service corporations v/hich otherwise would be deemed to be affiliated corporations are not to be taken out of that class because of the fact that they are public service corporations and otherwise meet the conditions out- lined in Treasuiy Decision 2662. (Letter to The Corporation Trust Com- pany, signed by Acting Commissioner J. H. Callan, and dated April 17, 1919.) 1841 Consolidated Returns Not Permitted; Stock of Two Corporations Owned “by the Same Interests,” the Percentage of Holding in the Two Companies Differing. — [An example of a ruling in a specific case.] Receipt is acknowledged of your letter dated March 31, 1919, to which you attach a letter from . pt appears that there are two corporations, one owning and operating properties in the Hawaiian Islands and the other owning and leasing various pieces of property in California. The stock of the California corporation is held by the members of one family, four male members of the family each owning five-twenty- fourths and a sister one-sixth of the entire stock. The Hawaiian coi*pora- tion is held by the same family principally, with the exception that one- sixth of the stock is held by each of the four male menibers afore-men- tioned, one-sixth by the sister afore-mentioned, and one-sixth by the hus- mand of a deceased sister to the other stockholders. IfThe affairs and opera- tions of the two corporations have in the past been, and are now being, actively conducted by and in the control of the male members of the family. The two corporations, it is stated, are in purpose and effect only one enter- prise. Pn accordance with regulations No. 45, where substantially all of the stock of two or more corporations is held by the same interests, such holdings must be in substantially the same proportions in order to require a consolidated return. It is therefore held that these corporations should file separate returns. (Letter to The Corporation Trust Company, signed by Commissioner Daniel C. Roper, and dated April 11, 1919.) 1842 Change in Ownership During Taxable Year.— When one corpora- tion owns substantially all the stock of another corporation at the beginning of any taxable year, but during the taxable year sells all or a majority of such stock to outside interests not affiliated with it, or when one corporation during any taxable year acquires substantially all the capital stock of another corporation with which it was not previously affiliated, a full disclosure of the circumstances of such changes in owner- ship shall be submitted to the Commissioner.^ In accordance with the pe- culiar circumstances in each case the Commissioner may require separate or consolidated returns to be filed, to the end that the tax may be equitably assessed. (Art. 634, Reg. 45, Rev., April 17, 1919.) 1843 Law 11356. Credit for Certain Taxes Paid by a Foreign Corpora- tion, a Majority of the Voting Stock of Which is Owned by a Domestic Corporation.— “(c) for the purposes of section 238 INC. 330 TAX COmOtmATEB llTOEHi. [p295] k domestic corporation which owns a majority of the voting stock of a foreign corporation shall be deemed to have paid the same proportion of any income, war-profits and excess-profits taxes paid (but not including taxes accrued) by such foreign corporation during the taxable year to any foreign country or to any possession of the United States upon income de- rived from sources without the United States, which the amount of any dividends (not deductible under section 234 [|[1325]) received by such do- mestic corporation from such foreign corporation during the taxable year bears to the total taxable income of such foreign corporation upon or wdth respect to which such taxes were paid:” 1844 Law jf357. “Provided, That in no such case shall the amount of the credit for such taxes exceed the amount of such dividends (not deductible under section 234 [p325]) received by such domestic corporation during the taxable year.” 1845 Domestic Corporation Affiliated With Foreign Corporation. — A domestic corporation which owns a majority of the stock of a foreign corporation shall not be permitted or required to include the net income or invested capital of such foreign corporation in a consoli- dated return, but for the purpose of section 238 of the statute a domestic corporation which owns a majority of the voting stock of a foreign corpora- tion shall be entitled to credit its income, war profits and excess profits taxes wdth any income, war profits or excess profits taxes paid (but not including taxes accrued) by such foreign corporation during the taxable year to any foreign country or to any possession of the United States upon income derived from sources without the United States in an amount equal to the proportion which the amount of any dividends (not deductible under section 234) [p325] received by such domestic corporation from such foreign corporation during the taxable year bears to the total taxable income of such foreign corporation upon or with respect to which such taxes were paid. But in no such case shall the amount of the credit for such taxes exceed the amount of such dividends (not deductible under section 234) received by such domestic corporation during the taxable year. A domestic corporation seeking such credit must comply with those provisions of sub- division (a) of article 383 [p293] which are applicable to credits for taxes already paid, except that in accordance with article 611 [^1301] the form to be used is form 1118 instead of form 1116 (Art. 636, Reg. 45, Rev., April 17, 1919.) 1840 Consolidated Returns: Two Domestic Corporations, the One Own- ing a Foreign Corporation, and the Other Owned by That Foreign Corporation. — Receipt is acknowledged of your letter, dated April 11, 1919, in which you state: “A client of mine, a New Jersey Cor- poration owns all of the outstanding stock in a foreign corporation, which in turn owns all of the outstanding stock in a New York corporation. Although under Article 636 [111845] of Regulations No. 45 relating to the Ijicome Tax a domestic corporation is not required or permitted to file a consolidated return with a foreign corporation, it seems to me that the New Jersey and New York corporations above-mentioned are affiliated as that term is defined in Article 633 [jfl838], and that, on that account the New Jersey corporation should file a consolidated return for both, under the pro- visions of Section 240 of the Revenue Act. HKindly advise me at your earliest convenience whether in the opinion of your office I atn correct in this interpretation of the law.” INC. 331 TAX EXTENSIONS OF TIME. In reply you are advised that in accordance with Section 240 of the Revenue Act of 1918 it will be necessary for the New Jersey corporation and the New York corporation above-mentioned to file a consolidated re- turn, excluding the foreign corporation. (Letter to a subscriber, signed by Acting Deputy Commissioner P. S. Talbert, and dated April 23, 1919.) 1847 Law |f447. Extension of Time for Filing Returns May Be Granted by the Collector.— -Sec. 3176, Revised Statutes [second paragraph]. ‘Tf the failure to file a return or list is due to sickness or absence, the collector may allow such further time, not exceeding thirty days, for making and filing the return or list as he deems proper.'' 1848 Law ^[255. Extension of Time for Filing Returns May Be Granted by the Commissioner. — “The Commissioner may grant a reasonable extension of time for filing returns whenever in his judgment good cause exists and shall keep a record of every such extension and the reason therefor. Except in the case of taxpayers who are abroad, no such extension shall be for more than six months." 1849 Extension of Time by Collector, and Penalties for Failure to File Final Returns Where Tentative Returns Have Been Filed. — Section 1309 of the Revenue Act of 1918 (approved February 24, 1919) provides in part as follows [j[2227] : “That the Commissioner, with the approval of the Secretary, is hereby authorized to make all needful rules and regulations for the enforcement of the provisions of this Act." 18.50 In pursuance of the foregoing provision of law. Article 443 of Regu- lations 45 is hereby amended to read as follov/s: It is important that the taxpayer render before the return due date a return as complete and final as it is possible for him to prepare. However, in cases of sickness or absence collectors are authorized to grant an extension of not exceeding thirty days where, in their judgment, such further time is actually required for the making of an accurate return. (See Article 1002 [for payment of tax when no proper return, |fl888].) The application for such extension must be made prior to the expiration of the period for which the extension is desired. The absence or sickness of one or more officers of a corpora- tion at the time the return is required to be filed will not be accepted as a reasonable cause for failure to file the return within the prescribed time, unless it is satisfactorily shown that there were no other principal officers available and sufficiently informed as to the affairs of the corporation to make and verify the return. As a condition of granting an extension of time for filing a return the collector may require the submission of a tenta- tive return and estimate of the tax on Form 1040-T in the case of indi- viduals, or on Form 103 1-T in the case of coiporations, and the payment of one-fourth of the estimated amount of tax. Where a taxpayer has filed a tentative return and has failed to file a complete return within the period of the extension requested by him the complete return when filed is subject to penalties prescribed for delinquency. Where a tentative return has been filed and no time has been fixed within which a complete return must be filed, the collector may at any time send notice to the taxpayer to file a complete return within a period of time therein specified by him, and a taxpayer who fails to comply with such request will incur the penalties prescribed by statute for delinquency in filing a return. (Art. 443, Reg. 45, Rev., as amended by T. D. 2935, October 16, 1919.) INC. 332 TAX EXTENSIONS OF TIME. 1851 Extension of Time by Commissioner. — If before the end of an extension of 30 days granted by the Collector an accurate return can not be made, an appeal for a further extension must be made to the Commissioner with a full recital of the causes for the delay. The Commis- sioner will not grant an additional extension without a clear showing that a complete return can not be made at the end of the 30 day period. The Commissioner will grant no such extension beyond the original due date of the third installment of the tax. Either a complete or a tentative return, as complete as possible and giving a ground for assessment of the tax, must be submitted on or before the due date as extended, and the tax shown to be due must be paid with the submission of the return. If a complete return can not be made at that time, the facts must be submitted to the Commis- sioner for such further action as he deems warranted. In exceptional cir- cumstances the taxpayer may apply originally to the Commissioner for an extension of time. (Art. 444, Reg. 45, Rev., April 17, 1919.) 1852 Extension of Time in the Case of Persons Abroad and the Pay- ment of the Tax in Such Cases. — In view of the disturbed condi- tions abroad and the consequent interference with the usual channels of communication, an extension of time for filing returns of income for 1918 and subsequent years and for paying the tax is hereby granted in the case of nonresident alien individuals and nonresident foreign corporations, or their proper representatives in the United States, and of American citizens residing or traveling abroad, including persons in military or naval service on duty outside the United States, for such period as may be necessary, not exceeding ninety days after proclamation by the President of the end of the war with Germany. The installments of tax which are actually due must be paid at the time of filing the return and the other installments shall be paid as they fall due. In all such cases an affidavit must be attached to the return, stating the causes of the delay in filing it, in order that the Com- missioner may determine that the failure to file the return in time was due to a reasonable cause and not to wilful neglect, and that the return was filed without any unnecessary delay. If the showing justifies the conclusion that the failure to file the return in time was excusable, no penalty will be im- posed. This extension is granted as a matter of general expediency to all persons abroad owing income, war-profits, and excess-profits taxes to the Federal Government and is not granted upon the request of any particular taxpayer. Accordingly, in the case of taxpayers who take advantage of this general extension of time for the filing of returns and the payment of tax no interest will be collected from such taxpayers, but where a request is made by a taxpayer and an extension is granted for other reasons by the Commissioner interest will be collected at the rate of one-half of one per cent per month from the time the tax would have been due if no exten- tion had been granted. (Art. 445, Reg. 45, Rev., as amended by T. D. 2844, May 17, 1919.) 1853 Extension of Time for Filing Returns by Corporations Whose Business is Transacted and Whose Books Are Kept Abroad. — Replying your telegram April 14, advise that Article 443 [now Art. 445], Regulations 45, relative extensions, applicable in case of domes- tic corporation whose records kept and business transacted abroad. (Tele- gram to H. C. Hopson, New York, N. Y., signed by Acting Commissioner J. H. Callan, and dated April 19, 1919.) INC. 333 TAX RETURNS WHEN ACCOUNTING PERIOD CHANGED. 1854 Extension of Time in the Case of Enemies. — An extension of time is hereby granted for such period as may be necessary, not exceeding 90 days after proclamation by the President of the end of the war with Germany, for filing returns of income for 1918 and subsequent years and for paying the tax by or for nonresident enemies or allies of enemies, as defined by section 2 of the Trading with the Enemy Act of October 6, 1917, not holding licenses granted under the provisions of that act. The whole tax shown to be due must be paid at the time of filing the return. This ex- tension, however, does not authorize any delay in filing returns of informa- tion. This extension is also subject to the condition that all persons who on October 6, 1917, had or since have had or may hereafter have control of any money or other property for any such enemy or ally of enemy, or who on October 6, 1917, were or since have been or may hereafter be indebted to any such enemy or ally of enemy, shall hold and deliver all said money and property in all respects subject to the Trading with the Enemy Act and to the orders of the President and of the alien property custodian thereunder, and shall in due course file returns of income in respect of all such money and property for such period as may elapse or have elapsed prior to the actual delivery of such money and property to the alien property custodian. As to withholding at the source, see article 375 [P699]. (Art. 446, Reg. 45, Rev., April 17, 1919.) 1855 Law lj247. Returns When Accounting Period is Changed, Fiscal to Calendar Year Basis. — “Sec. 226. That if a taxpayer, with the approval of the Commissioner, changes the basis of computing net income from fiscal year to calendar year a separate return shall be made for the period between the close of the last fiscal year for which return was made and the following December thirty-first.” 1856 Law ^248. Calendar to Fiscal Year Basis. — “If the change is from calendar year to fiscal year, a separate return shall be made for the period between the close of the last calendar year for which return was made and the date designated as the close of the fiscal year.” 1857 Law|[249. One Fiscal Year to Another Fiscal Year Basis. — “If the change is from one fiscal year to another fiscal year a separate return shall be made for the period between the close of the former fiscal year and the date designated as the close of the new fiscal year.” 1858 Law ][250. First Return When on Fiscal year Basis. — “If a tax- payer making his first return for income tax keeps his accounts on the basis of a fiscal year he shall make a separate return for the period between the beginning of the calendar year in which such fiscal year ends and the end of such fiscal year.” 1859 Law 11251. Computation of Income and Tax When Accounting Period is Changed. — “In all of the above cases the net income shall be computed on the basis of such period for which separate return is made, and the tax shall be paid thereon at the rate for the calendar year in which such period is included ;” 1860 Lawlf252. Apportioning the Specific Personal Exemption When Accounting Period is Changed. — “and the credits pro- vided in subdivisions (c) [lfl518] and (d) [1[1524] of section 216 shall be INC. 334 TAX PENALTIES— RETURNS. reduced respectively to amounts which bear the same ratio to the full credits provided in such subdivisions as i^he number of months in such period bears to twelve months.” isfii Law 348. Apportioning the Specific Credit of $2,000 in the Case of Corporations When Accounting Period is Changed. — “When return [in the case of corporations] is made under section 226 [P855] the credit provided in subdivision (c) [^1531] of section 236 shall be reduced to an amount w’hich bears the same ratio to the full credit therein provided as the number of months in the period for which such return is made bears to twelve months.” 1862 Returns When Accounting Period Changed. — No return can be made for a period of more than 12 months. A separate return for a fractional part of a year is, therefore, required wherever there is a change, with the approval of the Commissioner, in the basis of com- puting net income from one taxable year to another taxable year or wher- ever a taxpayer making his first return of income does so on the basis of a fiscal year. The periods to be covered by such separate returns in the several cases are stated in the statute. The requirements with respect to the filing of a separate return and the payment of tax for a part of a year are the same as for the filing of a return and the payment of tax for a full taxable year closing at the same time. See sections 227 and 250 of the statute and articles 441-448 [for returns for fidl taxable year, beginning at P814] and 1001 [for payment of tax, p007]. The tax on net income com- puted on the basis of the period for which a separate return is made shall be paid thereon at the rate for the calendar year in which such period is included, and the credits for personal exemption and dependents shall be such proportion of the full credits as the numTer of months in such period bears to 12 months. See section 216 and article 305 [for date determining personal exemption, ^1526]. See further section 212 and articles 25 [for accounting period, p99] and 26 [for change in accounting period, POI], and as to corporations see sections 232 and 239 and articles 531 [accounting periods, ^772] and 626 [for returns for fractional part of year, p863]. (Art. 431, Reg. 45, Rev., April 17, 1919.) 1863 Returns for Fractional Part of Year. — In the case of a corporation making its first return of income on the basis of a fiscal year and in the case of a corporation changing its accounting period, whether from calendar year to fiscal year, from fiscal year to calendar year, or from one fiscal year to another fiscal year, a separate return for a fractional part of a year is required. See section 226 of the statute and article 431 [P862 above]. In such a case the credit of $2,000 against net income allowed a domestic corporation shall be reduced to such proportion of the full credit as the number of months in the period for which the return is made bears to twelve months. See sections 236 and 305 and articls 591 [for cred- its allowed, |fl533] and 761 [for apportionment of the $3,000 specific ex- emption from excess profits tax. — War Tax Service]. (Art. 626, Reg. 45, Rev., April 17, 1919.) 1864 Law1|258. Understatement in Returns and Increases by the Col- lector. — “Sec. 228. That if the collector or deputy collector has reason to believe that the amount of any income returned is understated, he shall give due notice to the taxpayer making the return to 335 TAX INC. PENALTIES— RETURNS. show cause why the amount of the return should not be increased, and upon proof of the amount understated, may increase the same accordingly.” 1865 Law]f259. Taxpayer May Appeal Collector’s Decision, to the Commissioner. — “Such taxpayer may furnish sworn testimony to prove any relevant facts and if dissatisfied with the decision of the collector may appeal to the Commissioner for his decision, under such rules of procedure as niay be prescribed by the Commissioner with the approval of the Secretary.” 1866 Understatement of Income. — If a collector suspects that the amount of any income is understated in a return, he may on his own initiative take up the matter with the taxpayer and upon becoming satisfied that the amount was understated may increase it accord- ingly, subject to the right of the taxpayer to appeal to the Commissioner. The Commissioner, however, without the intervention of the collector may exercise original jurisdiction in cases of understatements or other errors in returns, in which event sections 250 [beginning at P880] and 1305 [^[1876] of the statute and section 3176 [beginning at 1|1889] of the Revised Stat- utes, as amended by section 1317 of the statute, are applicable instead of section 228 [j|1864 above]. See articles 1002, [paymient of tax when no proper return, ijl888], 1005 [penalty for understated return, 1[1887], and 1711 [Commissioner has benefit of all existing internal revenue laws as aids to collection of the tax, p999] . Section 3172 of the Revised Statutes, as amended by section 1317 of the Revenue Act of 1918, provides [P867] : See also section 3173 of the Revised Statutes as amended by section 1317 of the Revenue Act of 1918 [does not relate specifically to income tax, but see T[1981]. (Art. 451, Reg. 45, Rev., April 17, 1919.) 1867 Law|f442. Collectors to Inquire After and Concerning Persons Liable to Make Income Tax Returns. — “Sec. 3172. Every collector shall, from time to time, cause his deputies to proceed through every part of his district and inquire after and concernins: all per- sons therein who are liable to pay any internal-revenue tax. and all persons owning or having the care and management of any objects liable to pav any tax, and to make a list of such persons and enumerate said objects.” 1868 Income-Tax Agents and Inspectors. — Revenue agents in charge of revenue agents’ divisions and income-tax revenue agents and inspectors are hereby instructed as follows: 1869 1. Income-tax agents and inspectors appointed under the provisions of the act of October 3, 1913, and paid from the appropriation for collecting the income tax will be assigned to duty under the super- vision of agents in charge of revenue agents’ divisions. 1870 2. Person appointed either as income-tax agents or income-tax inspectors, when the appointment is sent from this office, will be instructed by letter to report to one of the division revenue agents for duty, and until otherwise ordered may report either in person or by letter, and if by letter await the instructions of the agent m charge of the division to which they are assigned. 1871 3. Officers of this class are expected to perform the duties of their offices where their services are required, but for the present, and until they become somewhat familiar with the duties of their places, they will be assigned to the revenue agent in charge of the division embrac- ing their legal residence. INC. 336 TAX PENALTIES— RETURNS. 4 , Income-tax agents and inspectors will be expected to confine their operations to income-tax work so long as there is income-tax work to be performed, and division agents are admonished not to employ officers of this class for the general or ordinary v>^ork of the bureau except when their services are not required on income-tax work. 5. The duties of officers of this class are to ascertain and report the names of persons who in their opinion are liable to the income tax and who have failed to make return as required by law, to inquire into income-tax returns where there is any suspicion that the return made is erroneous, to examine the books and accounts of persons who have made returns, for the purpose of ascertaining and reporting as to whether the law has been complied with, when so ordered by the agent in charge of the division to which they are assigned; to inquire into the manner in which income-tax employees are discharging their official duties and to report those who have failed in this respect. For the purpose of securing such informa- tion as they may desire they may visit the office of any State, county, or municipal officer, and for the general purpose of their employment * may confer with any collector or deputy collector of internal revenue within the territory in which they are authorized to operate. 1874 (S. The reports of these officers should be made to the agent in charge ^ of the division to which they are assigned, who in turn will report to the Commissioner of Internal Revenue and the collector of the proper district. ^ 1875 7. In the discharge of the official duties officers of this class, as well as all officers of the Internal-Revenue Bureau, in making’ in- quiries and investigations are expected to exercise sound discretion, treat all persons with due courtesy, and, while acting firmly and courageously to avoid all contention or controversy that would give just ground for com- plaint. (T. D. 1932, Jan. 13, 1914.) 1876 Law|f430. Return May Be Required of Any Person Whether . . Liable to Tax or Not. — ''Whenever in the judgment of the Commissioner necessary he may require any person, by notice served upon him to make a return or such statement as he deems sufficient to show whether or not such person is liable to tax.” ^877 Law|[431. Examination of Persons, Books and Papers.— "The Commissioner, for the purpose of ascertaining the cor- rectness of any return or for the purpose of making a return where none has been made, IS hereby authorized, by any revenue agent or inspector designated by him for that purpose, to examine any books, papers records or memoranda bearing upon the matters required to be included in the re- turn, and may require the attendance of the person rendering the return or of any officer or employee of such person, or the attendance of any other person having knowledge in the premises, and may take his testimony wTth reference to the matter required by law to be included in such return with power to administer oaths such person or persons.” i« 78 Law1T454. Jurisdiction of District Courts in Connection with At- tendance, Testimony or Production of Books.— “Sec 1.518. 1 hat if any person is summoned under this Act to appear, to testify’ or to produce books, papers or other data, the district court of the United States for the district in which such person resides shall have iurisdiction hv appropriate process to compel such attendance, testimony, or production of books, papers, or other data.” ^ INC. 337 TAX PENALTIES— RETURNS. 1879 Law ^455. ‘‘The district courts of the United States at the in- stance of the United States are hereby invested with such jurisdiction to make and issue, both in actions at law and suits in equity, writs and orders of injunction and of ne exeat republica orders appointing receivers, and such other orders and process, and to render such judgments and decrees, granting in proper cases both legal and equitable relief to gether, as may be necessary or appropriate for the enforcment of *e Pro- visions of tliis Act. The remedies hereby provided are in addition to and not exclusive of any and all other remedies of _ the United States in such courts or otherwise to enforce such provisions.” 1880 Law 11371. Recomputation of Installments After an Examination of the Return by the Commissioner. — (b) As soon as practicable after the return is filed, the Commissioner shall examine it. If k then appears that the correct amount of the tax is greater or less than that shown in the return, the installments shall be recomputed. 1881 Law 11372. Crediting or Refund of Excess Payment.— the amount already paid exceeds that which should have been paid on the basis of the installments as recomputed, the excess so paid shall be credited against the subsequent installments; and if the amount already paid exceeds the correct amount of the tax, the excess shall be credited or refunded to the taxpayer in accordance with the provisions of section 2.S2 [112121].” 1882 Law 11373. Payments of Amounts Due Because of Underpayments Originally.— “If the amount already paid is less than that which should have been paid, the difference shall, to the extent not covered by any credits then due to the taxpayer under section 252 L112121J, be paid upon notice and demand by the collector. 1883 Upon recomputation of the tax, if the amount already paid exceeds the correct amount of the installment or of the whole tax, ihe excess shall be credited against subsequent installments or other similar taxes then due from the taxpayer or, if there is no such installment or tax, shall be refunded to him; but if the amount already paid is less than the correct amount of the installment or tax then due, the difference shall be P^'d notice and demand with interest. See 252 ®nd article 1034_1036 r for claims for credit and refunds beginning at 112123] . (Art. lUUl, Keg. , Rev., April 17, 1919.) 1884 Lawp74. No Penalty for Understatement « Return be Made in Good Faith and if the Understatement is Due to No Fault of the Taxpayer.— “In such case if the return is made in good faith and the understatement of the amount in the return is not due to any fault of the taxpayer, there shall be no penalty because of such understate- ment.” 1885 Law 11375. Penalty if Understatement is Due to Negligence, Merely. — “If the understatement is due to negligence on the part of the taxpayer, but without intent to defraud there shall be added as part of the tax 5 per centum of the total amount of the deficiency plus interLt at the rate of 1 per centum per month on the amount of the deficiency of each installment from the time the installment was due. INC. 338 TAX PENALTIES— RETURNS. 1886 p76. Penalty if Understatement is False or Fraudulent With Intent to Evade the Tax. — ‘Tf the understatement is false or fraudulent with intent to evade the tax, then, in lieu of the penalty provided by section 3176 of the Revised Statutes, as amended, for false or returns willfully made [50 per cent of the amount of the tax, but m addition to other penalties provided by law for false or fraudulent returns there shall be added as part of the tax SO per centum of the amount of the deficiency/' 1887 Penalty for Understated Return.-(a) If an understatement of the amount of the tax in a return of income is due to negligence on the part of the taxpayer, but without intent to defraud, a penalty of 5 ner cent of the amount of the deficiency is added; but (b) if the understate- ment of the tax is false with intent to evade the tax, a penalty of 50 per cent o the amount of the deficiency is added, (c) In case a false or fraudulent return is wiHfully made, other than as specified in (b) above, a penalty of 50 per cent of the amount of the tax is added. See articles 1002 [for payment of tax when no return, f]888] and 1003 [for interest on to thp't payments, f2014]. In general, negligence is attributable to the taxpayer if he computes the tax in disregard of the instructions on the return form or otherwise incorrectly, unless he can show that his error was due to an honest misunderstanding of the facts Or the law of which an average reasonable man might be capable. See also section 253 of the statute and article 1041 [for specific penalty for failure to ^'^ Revt Apriri/^lOrO^)" (Art. 1005, Reg. 1888 Payment of Tax When No Proper Return. — Section 3176 of the A . / Statutes, as amended by Section 1317 of the Revenue Act^of 1918, provides [[[1889 below]. (Art. 1002, Reg. 45, Rev., April 17, 1889 Law1f443. Penalty for Failure to Make Return or for False or Fraudulent Return.— Sec. 3176, Revised Statutes “If any pel son, corporation, company, or association fails to make and file a return or list at the time prescribed by law or by regulation made urett''r''etmro? Hst,”"'’ otherwise, a false or fraud- 1880 Law [[444. “the collector or deputy collector shall make the re- • r ,• , from his own knowledg-e and from such islT^LawVIs^^/®" obtain through testimony or otherwise.” aw[J445. In any such case the Commissioner may, from his obtain tbrn„ s- , INC. 351 TAX INSPECTION OF RETURNS. 1973 Law ^406. Returns to be Open to Inspection by Stockholder of Record Owning One Per Cent or More of the standing Stock of a Corporation.— ‘Provided further, That all bona fide stockholders of record owning 1 per centum or more of the outstanding stock of any corporation shall, upon making request of the Commis- sioner, be allowed to examine the annual income returns of such cor- poration and of its subsidiaries/' . . 1973 LawMOy. “Any stockholder who pursuant to the provisions ot this section is allowed to examine the return of any corporation, and who makes known in any manner whatever not pro- vided by law the amount or source of income, profits, losses, expendi- tures, or any particular thereof, set forth or disclosed turn shall be guilty of a misdemeanor and be punished by a hne not exceeding $1,000, or by imprisonment not exceeding one year, or both. 1974 Bv express exception in the statute a bona fide stockholder of record owning one per cent of the outstanding stock of a cor- poration is entitled as of right to examine the returns of income of such corporation and its subsidiaries. ^ A stockholders desiring the privilege of inspection shall apply in writing to the^ Commissioner, specifying his address, the name of the corporation, its outstanding capital stock, the number of shares owned by him, the date of their acquisition and whether or not he has the beneficial as ^ well as the record title to such shares, and in other respects complying with the requirements of paragraph 4 of article 1091 [P961] . A stockholder who has acquired his shares for the purpose of inspection oif the turns of the corporation is not a bona fide stockholder. (Art. lUVo, Reg. 45, Rev., April 17, 1919.) 1975 A stockholder who examines the return of a corporation and re- veals without express authority of law any particulars of its in- come statement is guilty of a misdemeanor and liable to fine and imprisonment. Section 3167 of the Revised Statutes, as amended by section 1317 of the Revenue Act of 1918, also provides [P976 belowj. (Art. 1094, Reg. 45, Rev., April 17, 1919.) 1976 Law ^441. Specific Information Relative to Taxpayers* Affairs, Disclosed by Returns or Otherwise, Not to be Di- vulged.— [Sec. 1317 of the Revenue Act of 1918 amends Sec. 3167, Re- vised Statutes, to read as follows] : “Sec. 3167. It shall be unlawful for any coUector, deputy collector, agent, clerk, or other officer or employee of the United States to divulge or to make known in any manner whatever not provided by law to any person the operations, style of work, or apparatus of any manufacturer or producer visited by him in the discharge of his official duties, or the amount or source of income, profits, losses, expenditures, or any particular thereof, set forth or disclosed in any income return, or to permit any income return or copy thereof or any book containing any abstract or particulars thereof to be seen or examined by any person except as provided by law ; and it shall be unlawful for any person to print or publish in any manner whatever not provided by law anv income return, or any part thereof or source of in- come, profits, losses!! or expenditures appearing in any income return ; and any offense against the foregoing provision shall be a misdemeanor and be punished by a fine not exceeding $1,000 or by imprisonment not exceeding INC. 352 TAX INSPECTION OF RETURNS. one year, or both, at the discretion of the court; and^ if the offender be an officer or employee of the United States he shall be dismissed from office or discharged from employment.” 1977 The attention of collectors of internal revenue, internal-revenue agents, and other officers concerned is invited to sections 3167 of the United States Revised Statutes, which prohibits the disclosure of informa- tion contained in income and other returns of internal-revenue taxpayers. 1978 All internal-revenue officers will preserve an inviolably confiden- tial all income tax returns, as the slightest infraction of law upon this subject will be severely punished. (T. D. 1962, March 20, 1914.) 1979 Disclosure of Return — Penalty. — The disclosure by a collector, deputy collector, agent, clerk, or other officer or employee of the United States, to any person not legally authorized to receive the same, of any information whatever contained in or set forth by any return of annual net income made pursuant to this act, is by the act, made a mis- demeanor, and is punishable by a fine not exceeding $1,000, or by imprison- ment not exceeding one year, or both, in the discretion of the court, and if the offender is an officer or employee of the United States he shall be dis- missed and be incapable thereafter of holding any office under the United States Government. (Art. 229, ^651, Reg. 33, Rev., Jan. 2, 1918.) 1980 Your attention is directed to the following legislation relating to the divulging of information contained in the returns of taxpayers. 1981 Section 257 of the Revenue Act of 1918 provides: [p955]. Section 3167 R. S., as amended by Section 1317 of the said Revenue Act of 1918, provides: [j[1976]. Section 3152, R. S., as amended by Act of March 1, 1879, authorizing the employment of internal revenue agents also provides : ‘‘And all provisions of section thirty-one hundred and sixty-seven, Qf Revised Statutes shall apply to internal-revenue agents as fully as internal-revenue officers.” Section 3173 (R. S., as amended by said Section 1317) of the Revenue Act of 1918 pro- vides that: “It shall be the duty of any person, partnership, firm or asso- ciation or corporation, made liable to any duty, special duty, special tax, or other tax imposed by law, when not otherwise provided for, (1) in case of a special tax, on or before the thirty-first day of July in each year, and (2) in other cases before the day on which the taxes accrue to make a list or return * * . Provided, That if any person liable to pay any duty or tax, or owning, possessing, or having the care or management of property, goods, wares, and merchandise, articles or objects liable to pay any duty, tax or license, shall fail to make and exhibit a list or return required by law, but shall consent to disclose the particulars of any and all the property, goods, wares, and merchandise, articles, and objects liable to pay any duty or tax, or any business or occupation liable to pay any duty or tax, or any business or occupation liable to pay any tax as aforesaid, then, and in that case, it shall be the duty of the collector or deputy collector to make such list or return. * * *” Section 3176, R. S. as amended by said Section 1317, Revenue Act of 1918, further provides: [If 1889]. 1982 Reading these provisions of law together, it is evident that any col- lector, rleputy collector, agent, clerk, or other officer or employee of the Bureau of Internal Revenue, including internal-revenue agents, who di- vulges or makes known in any manner whatsoever not provided by law the INC. 353 TAX CORRECTION OF RETURNS. amount or source of income, profits, losses, expenditures, or any particu- lars thereof set forth or disclosed in any income return made by any tax- payer, or by a collector or deputy collector, or by the Commissioner of Inter- nal Revenue, or who permits any income return or copy thereof, or any book containing any abstract or particulars thereof, to be seen or examined by any person, except as provided by lav/, or who prints or publishes m any manner whatever, not provided by law, any income return or any part thereof, or source of income, profits, losses, or expenditures appearing m any income return, is guilty of a misdemeanor and subject to a fine not ex- ceeding $1,000 or to imprisonment not exceeding one year, or both, at the discretion of the court, and if he be an officer or employee of the United States, to be dismissed from office or discharged from employment. 1983 ’xhe only provisions of law authorizing the making known of any income return under the Revenue Act of 1918 are those contained in Section 257 of said Act, above quoted. ^ -r. a ^ ^ 1984 Similar provisions to those contained m Section 257, Revenue Act ot 1918, and Sections 3173 and 3176, as amended by said Revenue Act of 1918, were also contained in the Act of October 3, 1914, and the Act of September 8, 1916. i 1985 You should endeavor in every way possible to impress employees under your supervision with the seriousness of the offenses which are intended to be prevented by this legislation. Any violations of these pro- visions of the law which become known to any officer or employ^ of the Bureau must be immediately reported for investigation. (T. D. 2903 July 30, 1919.) 1986 Law ^408. Lists of Individuals Making Income Tax Returns to be Prepared.- — “The Commissioner shall^ as soon as prac- ticable in each year cause to be prepared and made available to public in- spection in such manner as he may determine, in the office of the collector in each internal-revenue district and in such other places as he niay deter- mine, lists containing the names and the post-office addresses of all individ- uals making income-tax returns in such district. 1987 Law 11409. Annual Report by the Commissioner of Statistical Information.— “Sec. 258. That the Commissioner, with the approval of the Secretary, shall prepare and publish annually statistics reasonably available v/ith respect to the operation of the income, war-profits and excess-profits-tax laws, including classifications of taxpayers and of income, the amounts allowed as deductions, exemptions, and credits, and any other facts deemed pertinent and valuable. 1988 The Commissioner will publish annually a volume of statistics of income, showing, among other things, the distribution of incomes betw’een corporations and individuals and by States, by classes and by occupations. (Art. 1101, Reg. 45, Rev., April 17, 1919.) 1989 Correction by the Taxpayer of Erroneons Return. — All returns should be carefully scrutinized, and, if improperly prepared, they should be returned to the taxpayer for correction, with instructions that if a new return be executed, the old one, showing the date of the receipt thereon should be forwarded to the Collector to avoid the possibility of subjecting the taxpayer to additional tax or penalties for failure to file the return within the period required by law. 354 TAX INC. CORRECTION OF RETURNS. 1990 A record of each return sent back to the taxpayer for correction should be made in the office of the Collector, so that if the taxpayer fails to properly amend and forward same, the Collector may take steps to secure the return. (Extract from Mimeograph Letter No. 1160 to Collec- tors, signed by Acting Commissioner David A. Gates and dated February 9, 1915.) 1991 Correction of Erroneous Returns at the Instance of the Collector. — Referring to the returns of annual net income to be filed by cor- porations for the year [1914], you are requested to examine each return closely with a view to having such returns as nearly correct as possible be- fore forwarding to this office. (Mimeograph letter No. 1148 to Collectors, Jan. 16, 1915.) 1992 Referring to your statement that the representative of this office insists upon the officers of corporations signing amended returns with- out giving any reasonable time for investigation on the part of the officers, you are informed that examining officers have been instructed by this office to secure from corporations amended returns wherever, as a result of their examinations, it is shown that the original returns were not correct. 1993 It is not the desire of this office, however, that examining officers shall not give the officers of corporations the fullest opportunity to make any investigation they may desire prior to signing these amended re- turns, provided, of course, such investigation does not cover an unreason- able length of time. (Extract from letter to the Industrial Association of Cincinnati, signed bv Commissioner W. H. Osborn, and dated February 2, 1915.) 1994 Amended Return not Required When Audit or Investigation Re- veals Necessity for a Further Tax. — Hereafter, in cases where an individual, a fiduciary, or a withholding agent has been found subject to a further tax as a result of the audit of a return in this office, or of an inves- tigation made by a Revenue Agent an amended return will not be required. 1995 In cases where a further tax is to be assessed, either against an in- dividual, a fiduciary, or a withholding agent, collectors will be ad- vised by letter from this office of the amount of further tax to be assessed, and the reason for making such assessment will be fully set forth. 1996 With a view to minimizing the work in the offices of Collectors a carbon copy of the letter to them will be enclosed, which should be forwarded by the Collector to the individual, fiduciary, or withhold- ing agent, as the case may be, in lieu of writing a letter of explanation. 1997 The use of Income Tax Form 6981 by Revenue Agents will be dis- continued in connection with reports on Personal Income Tax Re- turns. (Mimeograph Letter No. 1232 to Collectors, June 22, 1915.) 1998 Law 1[429. The General Administrative Provisions of Law Rela- tive to the Making of Returns, etc., are Applicable. — “Sec. 1305. That all administrative, special, or stamp provisions of law, including the law relating to the assessment of taxes, so far as applicable, are hereby extended to and made a part of this Act, and every person liable jto any tax imposed by this Act, or for the collection thereof, shall keep such records and render, under oath, such statements and returns, and shall comply with such regulations as the Commissioner, with the approval of the Secretary, may from time to time prescribe.” INC. 355 TAX PAYMENT OF TAX. 1999 In collecting the income and war profits and excess profits taxes the Commissioner has the benefit of all existing internal revenue laws. In aid of the enforcement of the statute the Commissioner may re- quire any person to keep specified records, to render returns and state- ments as directed, to submit himself and his book to examination, and to comply with such regulations as may be prescribed. Section 3165 of the Revised Statutes, as amended by section 1317 of the Revenue Act of 1918, provides: [P790]. See also sections 228 [P864], 250 [P880] and 1318 [p878] of the statute and articles 451 [p866] and 1002 [p888]. (Art. 1711, Reg. 45, Rev., April 17, 1919.) 2000 Law 1|361. The Tax is to be Paid in Four Equal Installments Except When Withheld at the Source. — “Sec. 250. (a) That except as otherwise provided in this section and sections 221 and 237 [p585 and P614, taxes collected at the source] the tax shall be paid in four installments, each consisting of one-fourth of the total amount of the tax.” 2001 Law ^362. “The first installment shall be paid at the time fixed by law for filing the returns, and” 2002 Law 1|363. “the second installment shall be paid on the fifteenth day of the third month,” 2003 Law ^364. “the third installment on the fifteenth day of the sixth month, and” 2004 Law ^365. “the fourth installment on the fifteenth day of the ninth month,” 2005 Law ^366. “after the time fixed by law for filing the return.” 2006 Law 1(370. The Entire Tax May Be Paid on or Before the Due Date of the Return. — “The tax may at the option of the taxpayer be paid in a single payment instead of in installments, in which case the total amount shall be paid on or before the time fixed by law for filing the return, or, where an extension of time for filing the return has been granted, on or before the expiration of the period of such extension.” 2007 Xhe tax, unless paid at the source, is to be paid to the collector in four equal installments, the first at the time for filing the return and the others at intervals of three months thereafter, or it may at the option of the taxpayer be paid in a single payment on or before the time for filing the return or such time as extended. See section 227 of the statute and articles 441-447 [for time for filing returns PSIO and for the last due date p820]. (Art. 1001, Reg. 45, Rev., April 17, 1919.) 2008 Law 1(367. When First Installment Is Due When Time for Filing Return Has Been Extended. — “Where an extension of time for filing a return is granted the time for payment of the first install- ment shall be postponed until the date of the expiration of the period of the extension, but the time for payment of the other installments shall not be postponed unless the Commissioner so provides in granting the extension.” 2009 An unconditional extension of time for filing a return will post- pone the date for payment of the first installment, but will not postpone the date of payment of the other installments unless so speci- fied in each case. (Art. 1001, Reg. 45, Rev., April 17, 1919.) 356 TAX INC. PAYMENT OF TAX. 2010 Law 1|368. Interest Runs on Amount of Installment During Pe- riod of Extension Availed of. — “In any case in which the time for the payment of any installment is at the request of the tax- payer thus postponed, there shall be added as part of such installment in- terest thereon at the rate of of 1 per centum per month from the time it would have been due if no extension had been granted until paid.” 2011 Lawjf379. Ad Valorem Penalty, Plus Interest, for Delay in Pay- ment of Tax. — “(e) If any tax remains unpaid after the date when it is due, and for ten days after notice and demand by the collector, then, except in the case of estates of insane, deceased, or insolvent persons, there shall be added as part of the tax the sum of 5 per centum on the amount due but unpaid, plus interest at the rate of 1 per centum per month upon such amount from the time it become due 2012 Law lj380. Interest Rate Lower as to Any Amount Subject to a Bona Fide Claim for Abatement. — “Provided, That as to any such amount which is the subject of a bona fide claim for abatement [|f2119] such sum of 5 per centum shall not be added and the interest from the time the amount was due until the claim is decided shall be at the rate of 3^ of 1 per centum per month.” 2013 LawU381. Ipso Facto Assessment of the Tax and Notice and Demand for the First Installment. — “In the case of the first installment provided for in subdivision (a) the instructions printed on the return shall be deemed sufficient notice of the date when the tax is due and sufficient demand, and the taxpayer’s computation of the tax on the return shall be deemed sufficient notice of the amount due.” 2014 Interest on Tax. — Where the time for the payment of any install- ment of the tax is postponed at the request of the taxpayer, in- terest at the rate of 6 per cent per annum is added from the original due date. If an understatement of the tax in the return is due to the negligence of the taxpayer, but without intent to defraud, interest at the rate of 12 per cent per annum is added to the amount of the deficiency of each installment from the time the installment was due. If any tax remains due and unpaid for ten days after notice and demand by the collector, or in the case of the first installment as computed by the taxpayer remains due and unpaid for ten days, interest at the rate of 12 per cent per annum is added from the due date, except that the inter- est on any amount which is the subject of a bona fide claim for abate- ment shall be at the rate of 6 per cent per annum, and except that no interest is added in the case of estates of insane, deceased or insolvent persons. But if any part of a claim for abatement on the ground of a loss in inventory under section 214 (a) [1[1467] or section 234 (a) (14) [|fl472] of the statute is disallowed, interest from the original due date at the rate of 12 per cent per annum will be added to the tax not abated; and interest is to be added in all cases in which the demand of payment is made of the taxpayer personally, although he subse- quently dies, or becomes insane or insolvent, so that collection of the tax is made from his estate in the hands of his representative. See further articles 1005 [for penalty for false return, ]fl887] and 1006 [for penalty for non-payment of tax, T[2015]. (Art. 1003, Reg. 45, Rev., April 17, 1919.) INC. 357 TAX PAYMENT OF TAX. 2015 Ad Valorem and Specific Penalties for Nonpayment of Tax.— If any tax or installment thereof remains due and unpaid for ten days after notice and demand by the collector (the instructions on the return serve as notice and demand in the case of the first installment as computed by the taxpayer), a penalty of 5 per cent is added. When, however, upon an assessment of a tax and demand made for payment, a bona fide claim for its abatement is filed within 10 days after such de- mand, no penalty is imposed. Upon receipt of a notice of rejection of the claim (or so much thereof as is not allowed), the collector will notify the claimant and demand the payment of the tax. If the tax is not then paid within 10 days, the 5 per cent penalty will be assessed on the amount of tax not abated. If abatement of the entire tax assessed is not demanded in a claim, and the balance of the tax is not paid within the required ten days, the 5 per cent penalty will immediately accrue on such balance. See also article 1003 [for interest on tax, 1|2014]. The estate of a deceased person, regardless of the date of his death, or of an insane or insolvent person, cannot be charged with liability to the 5 per cent penalty on account of his or the fiduciary’s delinquency in making pavment of taxes. W^here a warrant of distraint is served, $5 is added [112016] . For other penalties see section 253 of the statute and article 1041 [for specific penalty, 1(1903]. (Art. 1006, Reg. 45, Rev., April 17, 1919.) 2016 Law 1(382. $5 Penalty for Necessitating a Warrant of Distraint. — “(f) In any case in which in order to enforce payment of a tax it is necessary for a collector to cause a warrant of distraint to be served, there shall also be added as part of the tax the sum of $5.” 2017 Law 1(369. If Any Installment Is Not Paid When Due the Entire Unpaid Tax Becomes Due. — “If any installment is not paid wh^ due, the whole amount of the tax unpaid shall become due and payable upon notice and demand by the collector. 2018 Upon failure to pay an installment on time, all of the tax re- maining unpaid becomes due and payable upon notice and de- mand. (Art. 1001, Reg. 45, Rev., April 17, 1919.) 2019 Notice and Demand of Payment. — The service of a notice and demand by the collector on Form 17 is complete upon mailing it, and the time within which the tax must be paid runs from the date of mailing the notice and not of its receipt by the taxpayer. [For notice and demand on account of the first installment, see 1(2013.] But ps-y" ment for the tax must actually reach the collector within the ten day period, and merely mailing a remittance before the expiration of the ten days is not sufficient. So, to avoid the prescribed penalties, no more than ten days may elapse after the mailing of the notice before the pay- ment is in the collector’s hands. See section 3184 of the Revised Stat- utes [See 1(2020, below]. By reason, however, of absence from their homes or places of business in foreign countries or in the military or other service of the country and the consequent delay in receiving mail, or bv reason of the location of the residence of an individual or of the office of a corporation to which the notice was addressed at a distance from the collector’s office, it is impossible for many persons to receive a notice and demand and to make payment of the tax so that such ps^y* INC. 358 TAX PAYMENT OF TAX. ment may be received by the collector within the ten-day period fol- lowing the service of notice and demand, and in all such cases the col- lector will enter on the notice as the date on which the tax becomes due and payable a date as nearly as possible ten days after the time that the notice should be received in the ordinary course of the mails by the taxpayer. In such cases when it appears that a remittance for the tax was placed in the mails within the ten-day period after the date specified in the notice, and in cases where tardiness is occasioned because the notice was not delivered in due time by reason of delay in the mail and satisfactory evidence of that fact is furnished, the penalty and interest will not be collected. (Art. 1007, Reg. 45, Rev., April 17, 1919.) 2020 Where it is not otherwise provided the collector shall in person or by deputy, within ten days after receiving any list of taxes from the Commissioner of Internal Revenue, give notice to each person liable to pay any taxes stated therein, to be left at his dwelling or usual place of business, or to be sent by mail, stating the amount of.such taxes and demanding payment thereof. If such person does not pay the taxes within ten days after the service or the sending by mail of such notice it shall be the duty of the collector or his deputy to collect the said taxes, with a penalty of 5 per cent additional upon the amount of taxes and interest at the rate of 1 per centum a month. (Section 3184^ Revised Statutes.) 2021 Form 17. — Collectors should issue Form 17 for the purpose of fixing definitely the date when the 5 per cent penalty accrues and in- terest at 1 per cent per month begins to run, and a copy of this notice should be filed as provided by act of August 17, 1912, amending section 3186, Re- vised Statutes. (Art. 41, |f252, Reg. 33, Rev., Jan. 2, 1918.) 2022 It appears that certain collectors hold that notice of assessment and demand. Form 17, is not necessary to create a liability to 5 per cent, penalty and interest at 1 per cent, per month in the case of income tax remaining unpaid after [ * * * the] due date. This view as to the requirements of the law is clearly wrong and contrary to the instructions (Art. 197, Reg. 33) issued on the subject. 2023 The necessity of issuing Form 17 is twofold — first, to determine the date when 5 per cent penalty accrues and interest at 1 per cent per month begins to run, and, second, to complete the Government's lien on property belonging to the taxpayer. 2024 In case of non-payment, * * ^ formal notice and demand which the law clearly contemplates and which the courts hold to be necess- ary before the delinquent taxpayer becomes chargeable with penalty and interest [is to be issued]. 2025 In all cases, therefore, where an assessed tax remains unpaid after it becomes due a notice on Form 17 should be at once issued, to be followed, when necessary, by Form 21 and 69, in their order. The fact that a claim for abatement is pending or the tax is in litigation does not relieve the collector from issuing the notices, demands, ec., required by law. 2026 A misunderstanding on the part of certain collectors as to these requirements has occasioned a considerable loss to the Govern- INC 359 TAX PAYMENT OF TAX. ment of penalty and interest, especially where claims for abatement were pending. (T. D. 1995, June 12, 1914.) 2027 Notice of Assessment (Form 17) may lawfully be given by mail, and when so given is presumed to have been received. The burden rests on the taxpayer to prove the contrary in order to avoid penalty. (U. S. V. General Inspection & Loading Company, 204 F. 657.) 2028 [Comment: The following word was given to The Corporation Trust Company orally, regarding the practice of the Department rel- ative to the proof “to the contrary.” The taxpayer is required only to prove to the satisfaction of the Commissioner that he did not receive notice of as- sessment, Under such conditions, it has been the practice of the Bureau of Internal Revenue to waive the penalties and give the taxpayer an opportunity to pay his taxes. Of course, the Collector would be called on to produce his records to prove his assertion, that notice had been sent, but that would not stand in the way of the taxpayer offering proof that the notice did not reach him. (July, 1917)]. 2029 Lawl|378. Five-Year Limitation on the Assessment of Taxes and on the Collection of Taxes by Suit Except in the Case of False or Fraudulent Return With Intent to Evade the Tax. — “(d) Except in the case of false or fraudulent returns with intent to evade the tax, the amount of tax due under any return shall be determined and as- sessed by the Commissioner within five years after the return was due or was made, and no suit or proceeding for the collection of any tax shall be begun after the expiration of five years after the date when the return was due or was made. In the case of such false or fraudulent returns, the amount of tax due may be determined at any time after the return is filed, and the tax may be collected at any time after it becomes due.” 2030 Assessment of Tax. — When the returns are received at the col- lectors’ offices, they are examined and listed before being forwarded to the Commissioner. If it appears that the tax is greater or less than shown in the return, it is recomputed. [Read at p880.] After checking the figures the Commissioner assesses the tax on the basis of the collectors’ lists. The collectors then send out bills for the taxes, either as computed by the taxpayer or as recomputed. If the taxpayer believes that he has been overassessed, he may file a claim for abatment or (after payment of the tax) for a refund of the excess. See section 252 of the statute and articles 1031-1038 [for claims for abatement and refund, beginning at ^2115]. As soon as practicable the returns are carefully audited by accountants in the office of the Commissioner at Washington, assisted where necessary by re- ports of the examination of taxpayers’ books and records made by revenue agents in the field. If error in a return is detected, the taxpayer is notified accordingly and an additional assessment is made against him or he is given the opportunity to file a claim for a refund, as the case may be. Any as- sessment must be made within five years after the return was due or was made, except in the case of false returns with intent to evade the tax. See sections 228 [for taxpayer may furnish sworn testimony, P865], 1305 [for inspection of taxpayer’s records, ^[1877] and 1318 [for jurisdiction of U. S. District Courts, ^[1878] of the statute and articles 451 [for false returns, Tfl866] and 1711 [for application of existing statutes as aids for collection of tax, P999]. (Art. 1012, Reg. 45, Rev., April 17, 1919.) INC. 360 TAX PAYMENT OF TAX. 2031 Five-year Limitation on Assessment and Suit Applies Only to Taxes Due Under Revenue Act o£ 1918. — Read at ^[2182. 2032 Law t[461. Continuing Effect of Prior Laws for the Assessment and Collection of Taxes, and the Imposition and Col- lection of Penalties, that have Accrued Thereunder. — “Sec. 1400. (a) That the following parts of Acts are hereby repealed, subject to the limitations provided in sub-division (b) : (1) The following titles of the Revenue Act of 1916: Title I (called “Income Tax”) ; ^ 5^ jjc ^ ^ (2) The following parts of the Act entitled “An Act to provide in- creased revenue to defray the expenses of the increased appropriations for the Army and Navy and the extensions of fortifications, and for other purposes,” approved March 3, 1917 : * * sjs Section 402 (called “Returns of Dividends”). (3) The following titles of the Revenue Act of 1917 : Title I (called “War Income Tax”) ; * Hs * * Hs SK Title X (called “Administrative Provisions”) ; Title XII (called “Income-Tax Amendments”). 2033 Law ^462. “(b) Such parts of Acts shall remain in force for the assessment and collection of all taxes which have ac- crued thereunder, and for the imposition and collection of all penalties or forfeitures which have accrued and may accrue in relation to any such taxes, and except that the unexpended balance of any appropria- tion heretofore made and now available for the administration of any such part of an Act shall be available for the administration of this Act or the corresponding provision thereof : Provided, That, except as other- wise provided in this Act, no taxes shall be collected under Title I of the Revenue Act of 1916 as amended by the Revenue Act of 1917, or Title I or II of the Revenue Act of 1917, in respect to any period after December 31, 1917 : ♦ * * * sK Ht 2034 Law ^463. “In the case of any tax imposed by any part of an Act herein repealed, if there is a tax imposed by this Act in lieu thereof, the provision imposing such tax shall remain in force until the corresponding tax under this Act takes effect under the provisions of this Act.” 2035 The “Three- Year Limitation on Assessments” and the “No Lim- itation on Collection of the Tax by Suit” Provisions of Prior Laws.— [Sec. 9 (a) of Title I of the Revenue Act of 1916 as amended by the Revenue Act of 1917 providing for the assessment of income taxes on individuals reads, in part, as follows: “except in cases of refusal or neglect to make such return and in cases of errone- ous, false, or fraudulent returns, in which cases the Commissioner of Internal Revenue shall, upon the discovery thereof, at any time within three years after said return is due, or has been made, make a return upon information obtained as provided for in this title or by existing law, or require the necessary corrections to be made, and the assessment made by the Commissioner of Internal Revenue thereon shall be paid by such person or persons immediately upon notification of the amount of such assessment:” INC. 361 TAX PAYMENT OF TAX. 2036 [Sec 14 (a) of Title I of the Revenue Act of 1916 as amended by the Revenue Act of 1917 providing for the assessment of income taxes on corporations reads, in part, as follows: in rases of “except in cases of refusal or neglect to make such return, and m cases ot erroneous false or fraudulent returns, in which cases the Commissioner of Internal Revenue shall, upon the discovery thereof, at any time years after said return is due, make a return upon information vided for in this title or by existing law; and the assessment made by the Com missioner of Internal Revenue thereon shall be paid by such stock company or association, or insurance company immediately upon notifica- tion of the amount of such assessment.’ J 2037 Procedure in Cases of Delinquency.— In cases ^'■„"®frn\‘'\he make return and in case of erroneous, false, or fraudulent returns the Commissioner of Internal Revenue shall, upon the discovery thereof, at any time within three years after said return is Uw oT^reqSirf the of income upon information obtained as Provided for by 'aw, or squire ^ nere^sarv corrections to be made, and the assessment made by the Commissioner of Internal Revenue thereon shall be paid by such upon notification of the amount of such assessment. I* fherefor bv the a^^^pssment remains unpaid for 10 days after notice and demand theretor Py tne collector there shall be added the sum of 5% on the amount of tax unpaid and interest at the rate of 1% per month upon such tax from the time the same became dL! except from th^ estates of insane, deceased, or insolvent persons. 2038 ‘^In !ases wheretn corporations have neglected or refused to "^^be jTe turns, time within three years after such return is due, make a return upon the informa- tiSi Obtained if the manner provided in the act and the Ux so discovered to be due together with the additional tax prescribed,^ 221 amount thireof shall be paid immediately upon notice and demand. (Art. 22 , ^[638, Reg. 33, Rev., Jan. 2, 1918.) 2039 The statute (Sec. 9 (a). Act Sept. 8, 1916) f ^ ment to be made within three years from the time The limitation is upon the discovery of delinquency or error, wiAm three years. ^.^^“fs^rtrortr In'^aSie'nTef r^rl ‘“or^’^tV^^wfir-f b^^uired except ii-pS^fonmftal^.^ ‘^ri! 2041 Section 14 authorizes the Commissioner of Internal Revenue 2041 ^ecttoJJ^m^^ ^3ke returns, or in cases of erroneous, false or JSd“"ns^lrriue“rmtkrrtlLns^^^^^^^^^ October 3 1913 contain similar provisions. Under this provision, it appea s Otherwise, any additional tax found due for a period antedating the three-year HrnRaTiom (Art. 233, ^[658, Reg. 33, Rev., Jan. 2, 1918.) 2042 No Three-Year Limitation to Right of Government to Collect Suit --In numerous cases the courts have held that there is no limitation iinon the right of the Government to sue for and recover unpaid taxes. It is not essential that assessment be made; or, if made, that it be ^ 'f,aA Tf liabilitv to original or additional tax exists or has been dis- cS“ered tramouif theTeo? recovered by suit, regar«n‘arily pay fhe additional tax to retorns or waiVers win nOr h and does so pay the additional tax, amended returns or waivers will not be required. (Art. 234, 1[661, Reg. 33, Rev., Jan. 2, 2068 Law 11439. Duty of Collector to Report Violations of Law.— [Sec. 1317 of the Revenue Act of 1918 amends Sec. 3164, Revised Stat- wO follows] : “Sec. 3164. It shall be the duty of every col- aw of°tVe"n "Od knowledge of any willful violation of any law of the United States relating to the revenue, within thirty days after of tho^ r"!° P°®session of such knowledge, to file with the district attorney crlt r'l" penalty, or forfeiture may be incurred, a m! ^ ^ circumstances of the case within his knowl- edge, together with the names of the witnesses, setting forth the pro- visions of law believed to be so violated on which reliance may be had for condemnation or conviction.” 20f>9 Violations of Law to Be Reported by Internal Revenue Officers ^c^d^n^b^^ discovering in the course of his duty information leading him to suspect a possible violation of any law with the enforcement of which he is not directly concerned should immediately report the matter to the Commissioner, who is authorized to communicate with the orooer department involved. (Art. 1094, Reg.^45, Rev., April 17, 1919.) INC. 365 TAX PAYMENT OF TAX. ao 70 Collection of Tax by Suit.-Taxes, fines, penalties and forfeitures may be sued for and recovered m the name of the United States in the district courts of the United States. Suits taxes may be brought at any time within five years after the due or was made, whether the taxes have been assessed, or are assess able or not In the case of false or fraudulent returns wUh intent to evade the tax no statute of limitations runs against ^e Section 3164 of the Revised Statutes, as amended by section 1317 of the Revenue Act of 1918, provides [P068 above]: FTnwever no suit for the recovery of unpaid taxes or of any hne, Penalty or forfeiture shall be commenced until the collector shall have submitted to the Commissioner a full report of all material facts and circumstances in the case and shall have received from him express authority to See sections 3212-3216 of the Revised Statutes, and (revised! and Regulations No. 12 (revised). (Art. 1008, Reg. 45, Rev., April 17, 1919.) 2071 Collection of Tax by Distraint.-If any person liable ^ any taxes neglects or refuses to pay them within ten ^ays after notice and demand it shall be lawful for the collector or his deputy to collect such taxes with 5 per cent additional and interest at 12 per cent per annum hv distrainTand sale of the goods, chattels or effects, including stocks, securities and evidences of debt, of the person delinquent. When goods, cra te s or effects sufficient to satisfy the taxes imposed upon any person Sf not found by the collector or deputy collector, he is authorized to collect such taxes by seizure and sale of real estate. See ("s fas amended by the Act of March 4, ^ a a u amended by the Act of March 1, 1879), 3198-3202, 3203 (as amended by tte Act of March 1, 1879), 3204-3207, 3208 (as amended by the Act of T\/r u 1 1R7Q^ and 3209 of the Revised Statutes and Regulations No. 12 1919.) r.S •!>« «»n property and risho to property belonjing ““ L.w,333. Sr-fnotSuSroiTR^^^^^^^^^ INC. 366 TAX PAYMENT OF TAX. quickly to depart from the United States or to remove his property there- from, or to conceal himself or his property therein, or to do any other act tending to prejudice or to render wholly or partly ineffectual proceedings to collect the tax for the taxable year then last past or the taxable year then current unless such proceedings be brought without delay, the Com- missioner shall declare the taxable period for such taxpayer terminated at the end of the calendar month then last past and shall cause notice of such finding and declaration to be given the taxpayer, together with a demand for immediate payment of the tax for the taxable period so declared ter- minated and of the tax for the preceding taxable year or so much of said tax as is unpaid, whether or not the time otherwise allowed by law for filing return and paying the tax has expired; and such taxes shall there- upon become immediately due and payable. In any action or suit brought to enforce payment of taxes made due and payable by virtue of the pro- visions of this subdivision the finding of the Commissioner, made as herein provided, whether made after notice to the taxpayer or not, shall be for all purposes presumptive evidence of the taxpayer’s design. A taxpayer who is not in default in making any return or paying income, war-profits, or excess-profits tax under any Act of Congress may furnish to the United States, under regulations to be prescribed by the Commissioner with the approval of the Secretary, security approved by the Commissioner that he will duly make the return next thereafter required to be filed and pay the tax next thereafter required to be paid. Tlie Commissioner may approve and accept in like manner security for return and payment of taxes made due and payable by virtue of the provisions of this subdivision, provided the taxpayer has paid in full all other income, war-profits, or excess-profits taxes due from him under any Act of Congress. If security is approved and accepted pursuant to the provisions of this subdivision and such further or other security with respect to the tax or taxes covered thereby is given as the Commissioner shall from time to time find necessary and require, payment of such taxes shall not be enforced by any proceedings under the provisions of this subdivision prior to the expiration of the time otherwise allowed for paying such respective taxes.” 2074 Declaration of Termination of Taxable Period. — In the case of a taxable person who designs by immediate departure from the country or otherwise to avoid payment of the tax for the preceding or cur- rent taxable year, the Commissioner may so find upon evidence satis- factory to him and may declare the taxable period for such person ter- minated at the end of the month last past, causing the service upon him of a notice and demand for immediate payment of the tax declared due and any other tax unpaid. In such a case the taxpayer is entitled to a full personal exemption and credit for dependents. See section 216 of the statute and article 305 [for date of determining exemption, p526]. If suit is necessary to collect the tax, the Commissioner’s finding is presump- tive evidence of the taxpayer’s design. A person who is not in default in making returns or in paying other taxes may procure the postponement until the usual time of the payment of taxes declared or declarable to be due pursuant to this article by depositing with the Commissioner United States bonds of a principal amount double the estimated amount of taxes due from such person for the taxable year or by furnishing such other security as may be approved by the Commissioner. See section 1320 [for United States bonds in lieu of sureties, ^[1500]. (Art. 1013, Reg. 45^ Rev., April 17, 1919.) INC. 367 TAX PAYMENT OF TAX. 2075 On account of the unusual exodus of aliens from the United States following the armistice agreement and the treaty of peace, it be- comes necessary to outline uniform procedure as to the manner in which income tax should be collected from aliens seeking passage abroad. 2076 Section 250(g) of the Revenue Act of 1918 provides in part as follows : “If the Commissioner finds that a taxpayer designs quickly to depart from the United States or to remove his property therefrom, or to conceal himself or his property therein, or to do any other act tending to prejudice or to render wholly ineffectual proceedings to collect the tax for the taxable year then last past or the taxable year then current unless such proceedings be brought without delay, the Commissioner shall declare the taxable period for such taxpayer ter- minated at the end of the calendar month then last past and shall cause notice of such finding and declaration to be given the taxpayer, together with a demand for immediate payment of the tax for the taxable period so declared terminated and of the tax for the preceding taxable year or so much of said tax as is unpaid, whether or not the time otherwise allowed by law for filing return and paying the tax has expired; and such taxes shall thereupon become immediately due and payable.” 2077 In order that the provisions of the foregoing section may be strictly enforced with the least possible friction and discomfort to persons who are returning to their native land, the following rules have been outlined : 2078 1. Aliens, whether resident or nonresident as to the United States, who desire to depart from this country, should appear be- fore the Collector of Internal Revenue for the district in which the indi- vidual last resided and should satisfy all income tax obligations with respect to income received up to and including the preceding month. 2079 2. In computing the tax liability of any person whose taxable period is terminated .in accordance with Section 250(g), the tax- payer is entitled to the same personal exemption and credit for depend- ents as he would have been entitled to had the return been prepared for the full taxable year. See Article 1013, Regulations No. 45 [1[2074]. 2080 3. If any income tax has been withheld from wages or other in- come of an alien, credit therefor should be given to the taxpayer when computing the balance of income tax due the United States Gov- ernment. 2081 4. An alien, who is a resident for income tax purposes during the year 1918 but decides in 1919 to return to his native country, should be classified as a nonresident alien for the taxable period of 1919. ^ This is not to be construed as depriving an alien of his status as a resident in case his absence is only temporary. A resident alien with children abroad is not a head of a family. A resident alien with a wife residing abroad is not entitled to the joint exemption. A nonresident alien is entitled to personal exemption and credit for dependents only in case he is a subject of a country which imposes no income tax, or in imposing an income tax allows similar credits to citizens of the United States not residing in such country. For a list of the countries see Article 307 [p572], which will be supplemented by a list of additional countries when the data is Available. 2082 5, An alien appearing before the Collector of Internal Revenue should be questioned as to his earnings for 1916, 1917, 1918 and 1919, 368 TAX INC. PAYMENT OF TAX. and the Collector, in accordance with the information furnished, should ex- ecute Form lO^C, which will be issued at an early date. The form as drafted shows the amount of tax due for the taxable period in 1919 as well as the income and anmunt of tax for prior years. On the bottom of the return is^ printed a Certificate of Compliance. This return should be executed in duplicate by the alien, and the Certificate of Compliance should be signed by the Collector of Internal Revenue. The alien should retain ^e duplicate copy and should present it to the Internal Revenue Agent in Charge at the port of embarkation for a Sailing Permit. Sailing Permits will only be issued by Internal Revenue Agents at the port of embarkation. . . Sailing Permit — United States Internal Revenue. I his IS to certify that Name City State. ..!.... has complied with all requirements of the Revenue ’ Act’ of ' i^is’ and the Acts for prior years. Signed • (Internal Revenue Agent.) 2083 6. An American citizen applying for a Sailing Permit should satisfy nf Agent in charge that he has paid all installments of income tax due up to the date of departure and has made arrangements for the payment of future installments as they become due. It will not be neces- j ‘*?e taxable period of a citizen of the United States closed as provided in Section 250 (g) of the Revenue Act of 1918, unless the Agent has reason to believe that the departing citizen intends evasion of his income tax liability for 1919. The Sailing Permits will be printed on special paper so they may not be easily duplicated and will be readily distinguished by the Revenue Agent at the port of departure. ^ 2084 7 The examination of aliens in the Collector’s office should be in 1 .u ™an thoroughly qualified as to the tax liability of aliens f oriresident, and the exemption to which entitled. See Articles 307 and 311 to 316, inclusive, of Regulations No. 45, as well as |l572f ^ Revenue Act of 1918 [beginning at [[518 and at 8. In accordance with an agreement with the officials of steamship operate ships entering into United States ports, steamship officials will require persons applying for overstamping of tickets to produce a Sailing Permit signed by the proper Internal ReveLe officer The Internal Reyeniie Agent in Charge will assign a sufficient number of his force to inspect the Permits at the pier on days of sailing. 2080 9 In cases where an alien has failed to appear before the Collector ot Internal Revenue for his district prior to seeking passage to a for- Wcnal ' necessary for him to appear befofe the Collector of Internal Revenue for the district in which the port of embarkation is located in order to satisfy his income tax obligations. Pending the issuance of ahens. Form 1040C, havin| printed thereon the Certiyate of Compliance, the Collector of Internal Revenue will pre- pare, with necessary adjustments. Form 1040A in duplicate, attaching to the duplicate a Certificate of Compliance. The worksheet of Form 1040A may be used as a duplicate to be retained by the alien. ^ INC. 369 TAX PAYMENT OF TAX. Examination of Aliens. 2087 When examining aliens in the office of Collectors of Internal Revenue, they should be questioned substantially as follows: (a) By whom em- ployed, length of time, amount earned, amount of tax withheld, supported by letter from employer, (b) Married or single, and if former, is wife m this country, (c) If not employed for any part of the year, give reasons ana how supported while unemployed, (d) Information as to nature of worn performed should be secured as correctness of amount of ^ income may be determined by standard prices paid for labor, (e) Information as to amount of money sent abroad should also be obtained and, if necessary, be vended through local bankers or steamship company. 2088 A strict compliance with the plan as outlined, and the cooperation between the Offices of the Collectors of Internal Revenue and Internal Revenue x\gents in Charge is requested. (If— Mim. 2195, July 18, 1919.) 2089 Law 11434. Fractional Part of Cent to Be Disregarded in Payment ‘of Tax.— ‘Sec. 1313. That in the paym.ent of any tax under this Act not payable by stamp a fractional part of a cent shall be dis- regarded unless it amounts to one-half cent or more, in which case it shall be increased to 1 cent.” 2090 When Fractional Part of Cent May Be Disregarded.— In the pay- ment of income or war profits and excess profits taxes, and in each step or computation necessary in determining the amount of any such tax, a fractional part of a cent may be desregarded unless it amounts to one-half cent or more, in which case it shall be increased to 1 cent. (Art. 1721, Reg. 45, Rev., April 17, 1919.) 2091 Law 1|435. Payment of the Tax by Means of Treasury Certificates of Indebtedness and Uncertified Checks. — “Sec. 1314.. That collectors may receive, at par with an adjustment for accrued interest, certificates of indebtedness issued by the United States and uncertified checks in payment of income, war-profits and excess-profits, te^es and any other taxes payable other than by stamp, during such time and under such regu- lations as the Commissioner, with the approval of the Secretary, shall pre- scribe; but if a check so received is not paid by the bank on which it is drawn the person by whom such check has been tendered shall remain liable for the payment of the tax and for all legal penalties and additions the same as if such check had not been tendered.” 2092 Payment of Tax by Certificates of Indebtedness. — Collectors will receive at par United States Treasury certificates of indebtedness [certificatess mentioned have matured] * * * in payment of taxes pay- able within sixty days before the maturity of the certificates. The terms of the acceptance of certificates of other issues will be prescribed from time to time. The amount at par of the certificates of indebtedness presented by any taxpayer in payment of taxes must not exceed the amount of the taxes to be paid by him. (Art. 1731, Reg. 45, Rev., April 17, 1919.) 2093 Procedure with Respect to Certificates of Indebtedness. ^Such certificates of indebtedness may be accepted by the collector prior to the date the tax is due and in that case should be forwarded by the collector to the federal reserve bank to be held for his account until the date the tax is 370 TAX INC. PAYMENT OF TAX. due and for deposit on such date. All coupons maturing on or before the date the tax is due must be detached by the taxpayer and collected in ordin- ary course, but all other coupons must remain attached to the certificate and be forwarded to the federal reserve bank. Any accrued interest to the date the tax is Jdue, not covered by coupons detached as above provided, will be remitted to the taxpayer by the federal reserve bank by check, for which purpose the collector will furnish tO\ the bank the name and address of the taxpayer, the amount and serial numbers of the certificates presented in each case, the date of issue of the certificates, and the date the tax is due. Collectors shall in no case pay interest on sucli certificates nor accept them for an amount other or greater than their face value. Receipts given by col- lectors to taxpayers should show the amount of certificates of each series received in payment of taxes. For the purpose of saving taxpayers the ex- pense of transmitting such certificates as are held in federal reserve cities to the office of the collector in whose district the taxes are payable, tax- payers desiring to pay taxes by acceptable certificates of indebtedness should communicate with the collector and request from him authority to deposit such certificates to his credit with the federal reserve bank in the city in which the certificates are held. (Art. 1732, Reg. 45, Rev., April 17, 1919.) 2094 Deposits of Treasury certificates of indebtedness received in payment of income and profits taxes must be made by collectors, unless other- wise specifically instructed by the Secretary of the Treasury, with the Fed- eral Reserve Bank of the district in which the collector’s head office is lo- cated, or in case such head office is located in the same city with a branch Federal Reserve Bank, with such branch Federal Reserve Bank. Specific in- structions may be given in certain instances for the deposit of the certificates with Federal Reserve Banks of other districts and with branch Federal Re- serve Banks, and the term “Federal Reserve Bank,” where it appears herein, includes such branches. Treasury certificates accepted by the collectors prior to the dates when the certificates, respectively mature should be for- warded by the collector to the Federal Reserve Bank, to be held for account of the collector until the date of maturity, and for deposit on such date. Certificates of indebtedness should in all cases be stamped as follows by the Collector, and when so stamped forwarded to the Federal Reserve Bank by registered mail, uninsured: “ 191 This certificate has been accepted in payment of income and profits taxes and will not be redeemed by the United States except for credit of the undersigned. Collector of Internal Revenue for the district of ” 2095 Collectors of internal revenue are not authorized, unless otherwise notified by the Secretary of the Treasury, to receive in payment of income or profits taxes interim receipts issued by Federal Reserve Banks in lieu of definitive certificates of the series herein described. 2090 Collectors should make in tabular form a schedule in duplicate of the certificates of indebtedness to be forwarded to the Federal Reserve Bank, showing the serial number of each certificate, the date of issue and maturity, and face value. Certificates of indebtedness accepted prior to the date of maturity must be scheduled separately. At the bottom of each schedule there should be written or stamped “Income and Profits INC. 371 tax’ PAYMENT OF TAX. Taxes, $ which amount must agree with the total shown on the schedule. One copy of this schedule must accompany certificates sent to the Federal Reserve Bank and the other be retained by the collector. Such income and profits tax deposits must in all cases be shown on the face of the certificate of deposit (National Bank Form 15) separate and distinct from the item of miscellaneous internal-revenue collections ( formerly called “Ordinary”), but it is not necessary to give the separation into corporation income, individual income and profits taxes. 2097 Until certificates of deppsit are received from the Federal Reserve Banks, the amounts represented by the certificates of indebtedness forwarded must be carried by collectors as cash on hand, and not credited as collections, as the dates of certificates of deposit determine the dates of collections. 2098 For the purpose of saving taxpayers the expense of transmitting such certificates as are held in Federal Reserve cities to the office of the collector in whose district the taxes are payable, taxpayers desiring to pay income and profits taxes by Treasury certificates of indebtedness ac- ceptable in payment of such taxes, should communicate with the collector of the district in which the taxes are payable and request from him au- thority to deposit such certificates with the Federal Reserve Bank in the city in which the certificates are held. Collectors are authorized to per- mit deposits of Treasury certificates of indebtedness in any Federal Re- serve Bank with the distinct understanding that the Federal Reserve Bank is to issue a certificate of deposit in the collector’s name covering the amount of the certificates of indebtedness at par and to state on the face of the certificate of deposit that the amount represented thereby is in payment of income and profits taxes. The Federal Reserve Bank should forward the original certificate of deposit to the Treasurer of the United States, with its daily transcript, and transmit to the collector the duplicate and triplicate, accompanied by a statement giving the name of the taxpayer for whom the payment is made in order that the collector may make the necessary record and forward the duplicate to the office of the Commissioner of Internal Revenue. 2099 This Treasury Decision amends and supplements the provisions of Articles 1731 [P092] and 1732 1I[2093] of Regulations 45. (T. D. 2907, August 7, 1919 as amended by T. D. 2918, September 12, 1919.) 2100 Payment of Tax by Uncertified Checks. — Collectors may accept uncertified checks in payment of income and war profits and excess profits taxes, provided such checks are collectible at par, that is, for their full amount, without any deduction for exchange or other charges. The collector will stamp on the face of each check before deposit the words, “This check is in payment of an obligation to the United States and rnust be paid at par. No Protest,” with his name and title. The day on which the collector receives the check will be considered the date of payment so far as the taxpayer is concerned, unless the check is returned dishonored. If one check is remitted to cover two or more persons’ taxes, the remittance must be accompanied by a letter of transmittal stating (a) the name of the drawer of the check ; fb) the amount of the check ; (c) the amount of any cash, money order or other instrument included in the same remittance; (d) the name of each person whose tax is to be paid by the remittance; (e) the amount of the pavment on account of each person ; and (f) the kind of tax paid. (Art. 1733, Reg. 45, Rev., April 17, 1919.) 372 TAX INC. PAYMENT OF TAX. 2101 Procedure with Respect to Dishonored Checks. — If the bank on which any such check is drawn should refuse to pay it at par, the check should be returned through the depositary bank and be treated in the same manner as a bad check. All expenses incident to the attempt to collect such a check and the return of it through the depositary bank must be paid by the drawer of the check to the bank on which it is drawn, since no deduction can be made from amounts received in payment of taxes. See section 3210 of the Revised Statutes. If any taxpayer whose check has been returned uncollected by the depositary bank should fail at once to make the check good, the collector should proceed to collect the tax as though no check had been given. A taxpayer who tenders a certified check in payment for taxes is also not released from his obligation until the check has been paid. See chapter 191 of the Act of March 2, 1911. (Art 1734, Reg. 45, Rev., April 17, 1919.) 2102 Law |[384. Receipts for Taxes. — ^‘Sec. 251. That every collector to whom any payment of any tax is made under the pro- visions of this title shall upon request give to the person making such pay- ment a full written or printed receipt, stating the amount paid and the particular account for which such payment was made;” 2103 Receipts for Tax Payments.— Upon request a collector will give a receipt for each tax payment. In the case of payments made by check or money order the cancelled check or the money order receipt is usually a sufficient receipt. In the case of payments in cash, how- ever, the taxpayer should in every instance require and the collector should furnish a receipt. (Art. 1021, Reg. 45, Rev., April 17, 1919.) 2104 Simulation of Income Tax Receipts — Decision of Court. — The appended opinion and charge of Judge Westenhaver in the District Court of the United States, for the Northern District of Ohio, Eastern Division, in the case of United States v. Pittaro, is published for the infor- mafion of internal revenue officers and others concerned. [Captions only.] 2105 L Receipts to taxpayers — Duty to issue. The fact that Section 251 of the act of February 24, 1919, requires that full written or printed receipts be issued to taxpayers only on request therefor does not limit the collector’s mandatory duty to issue them when requested and does not fail to make them documents required to be issued whenever requested, and the receipts are plainly documents required to be issued by such section. 2100 2. Same — Simulation or fraudulent execution. Such receipts are documents required by provisions of the internal revenue laws and by regulations made in pursuance thereof, within the mean- ing of Section 3451, R. S., making it an offense to simulate or falsely or fraudulently execute or sign any document required by the internal revenue laws, or any regulation made in pursuance thereof, or to procure the same to be falsely or fraudulently executed, or to advise, aid in, or connive at such execution thereof. 2107 3 , Same — Blanks. The offense may be committed either where the receipt itself is a genuine receipt of the kind kept for that purpose in the office of the internal revenue collector but signed by the defendant without authority, or where, even if not a blank of the kind required to be kept, the blank itself is simu- lated or falsely or fraudulently executed and issued by a person who has no power or authority to do so. INC. 373 TAX PAYMENT OF TAX. 2108 4. Same — Income tax receipts. Where defendant was charged with violating Section 3451, R. S., in that he falsely, fraudulently, etc., simulated and executed and advised, aided in, and connived at the execution of certain income tax receipts re- quired by Section 251 of the act of February 24, 1919, to be given when requested, what defendant told the persons who paid the money is not material, nor is the question whether or not such persons were subject to the payment of an income tax, or to assessment and levy of such tax. (T. D. 2874, June 23, 1919.) 2109 Unofficial Receipts. — The department has received from time to time complaints from taxpayers, especially those paying corporation income tax, that collectors refuse to sign what is known as commercial re- ceipts, or refuse to indorse what is generally known as voucher checks, many of such receipts and checks stating on the face that by indorsement the voucher check or receipt becomes a receipt in full for amount and purpose drawn. 2110 The only official receipt for taxes that collectors may sign under tlie law are stamps, where stamps are issued, or Form 1, when the tax is not payable by stamp, which receipts are to be issued to every taxpayer for taxes paid. However, the department has no objection to collectors signing commercial receipts or voucher checks (subject in the latter case to the rules of the depositary), but they should, in signing such receipts or vouchers, write or stamp across the face thereof the words “Not an official receipt.” The official receipt on Form 1, must, however, be furnished; and it is to be distinctly understood that an unofficial receipt is not in any manner binding on the department, and will not be received by it as evidence of payment of the tax. (T. D. 2226, July 14, 1915.) 2111 Deputy Collectors to Give Personal Receipts for Collections Made by Them. — After careful consideration, this office has reached the conclusion that, in order thoroughly to protect the interests of both the taxpayers and the Government, some evidence of payment should be given at the time to taxpayers who pay taxes directly to deputy collectors, and that such a receipt as herein described is not in violation of Section 3188, which prohibits the issuance of a receipt in lieu of a stamp. 2112 You are therefore instructed to direct your deputies hereafter to give to special and other taxpayers, at the time of payment, a personal receipt for moneys collected, substantially in the following form : “Received of* JOHN DOE $ to be forwarded to the Collector to cover special tax due as ^ 2113 In case the payment is for stamp tax or for amounts other than special tax, the form of receipt may be modified accordingly. (T. D. 2341, June 19, 1916.) 2114 Law p85. Receipts to Be Given for Payments Made by Withhold- ing Agents on Account of Amounts Deducted at the Source. — “and whenever any debtor pays taxes on account of payrnents made or to be made by him to separate creditors the collector shall, if re- quested by such debtor, give a separate receipt for the tax paid on account of each creditor in such form that the debtor can conveniently produce such receipts separately to his several creditors in satisfaction of their respective demands up to the amounts stated in the receipts ; and such receipt shall be INC, 374 TAX ABATEMENT AND REFUND CLAIMS. sufficient evidence in favor of such debtor to justify him in withholding from his next payment to his creditor the amount therein stated; but the creditor may, upon giving to his debtor a full written receipt acknowledging the payment to him of any sum actually paid and accepting the amount of tax paid as aforesaid (specifying the same) as a further satisfaction of the debt to that amount, require the surrender to him of such collector's receipt." 2115 Authority for Abatement, Credit and Refund of Taxes. — Author- ity for the credit, refund or abatement of taxes erroneously collected or assessed is contained in section 252 of the statute [|f2121] and in section 3220 of the Revised Statutes, as' amended by section 1316 of the Revenue Act of 1918, which provides [|f2116 below] : (Art. 1031, Reg. 45, Rev., April 17, 1919.) 2116 Law j[436. Taxes Erroneously Assessed or Collected, Penalties Collected Without Authority, and Excessive Taxes May be Remitted or Refunded by the Commissioner. — ‘'Sec. 1316. (a) That section 3220 of the Revised Statutes is hereby amended to read as follows : ‘Sec. 3220. The Commissioner of Internal Revenue, subject to regula- tions prescribed by the Secretary of the Treasury, is authorized to remit, refund, and pay back all taxes erroneously or illegally assessed or collected, all penalties collected without authority, and all taxes that appear to be unjustly assessed or excessive in amount, or in any manner wrongfully col- lected ; also to repay to any collector or deputy collector the full amount of such sums of money as may be recovered against him in any court, for any internal revenue taxes collected by him, with the cost and expenses of suit [1[2210] ; also all damages and costs recovered against any assessor, assistant assessor, collector, deputy collector, agent, or inspector, in any suit brought against him by reason of anything done in the due performance of his official duty, and shall make report to Congress at the beginning of each regular session of Congress of all transactions under this section’." 2117 Section 3225 of the Revised Statutes, as amended by section 1316 of the Revenue Act of 1918, however, provides: [|f2176]. Authority for the abatement of uncollectible taxes due from persons absconded or insolvent is contained in section 3218 of the Revised Statutes. These provisions apply to the income and war profits and excess profits taxes imposed by the present statute and also to the excise tax under the Act of 1909, the income tax under the Acts of 1913 and 1916, and the income and excess profits taxes under the Act of 1917. (Art. 1031, Reg. 45, Rev., April 17, 1919.) 2118 Refund of Taxes Erroneously Collected for Years Prior to 1914. — Read at j[2181. 2119 Claims for Abatement of Taxes Erroneously Assessed. — Claims by the taxpayer for the abatement of taxes or penalties erroneously or illegally assessed or abateable under remedial acts shall be made on form 47. They must be sustained by the affidavits of the parties against whom the taxes were assessed, or of other parties cognizant of the facts. When a tax has been assessed and turned over to the collector, the presumption is that the assessment is correct. The burden of proof in rebutting the presumption and showing that it was improperly or illegally assessed, or that relief should INC. 375 TAX ABATEMENT AND REFUND CLAIMS. be given under a remedial statute, rests upon the applicant for abatement. The affidavits must therefore contain full and explicit statements of all the material facts relating to the claim in support of which they are offered and to the proper consideration of which they are essential. The legality of the claim is to be determined by the Commissioner upon the facts presented by the affidavits. The filing of a claim for abatement does not necessarily operate as a suspension of the collection of the tax or make it any less the duty of the collector to exercise due diligence to prevent the collection of the tax being jeopardized. He should, if he considers it necessary, collect the tax and leave tlie taxpayer to his remedy by a claim for refund. See further Regulations No. 14 (revised). A collector may himself present once a month a blanket claim on form 47 for the abatement of taxes coming within certain classes of taxes erroneously assessed. (Art. 1032, Reg. 45, Rev., April 17, 1919.) 2120 Claims for Abatement of Uncollectible Taxes. — When a tax is found to be uncollectible, the collector or deputy collector who made the demand for payment and is conversant with the facts may prepare a claim for abatement on form 53. See Regulations No. 14 (revised). Al- though credits allowed on account of. insolvency or absconding release the collector from the obligation created by his receipt for the amount cred- ited, the obligation to pay still remains upon the person assessed. It is the duty of the collector to use the same diligence to collect a tax after it has been abated as uncollectible as before abatement. Collectors should therefore keep a record of all taxes thus credited and of the persons from whom they are due, and should enforce payment whenever it is in their power to do so. (Art. 1033, Reg. 45, Rev., April 17, 1919.) 2121 Law 11386. Credit or Refund, on Disclosure by Examination of Any Return, of Amount Paid in Excess of that Prop- erly Due. — “Sec. 252. That if, upon examination of any return of in- come made pursuant to this Act, the Act of August 5, 1909, entitled ‘An Act to provide revenue, equalize duties, and encourage the industries of the United States, and for other purposes,’ the Act of October 3, 1913, entitled ‘An Act to reduce tariff duties and to provide revenue for the Government, and for other purposes,’ the Revenue Act of 1916, as amended, or the Rev- enue Act of 1917, it appears that an amount of income, war-profits or excess- profits tax has been paid in excess of that properly due, then, notwithstand- ing the provisions of section 3228 of the Revised Statutes [1[2180], the amount of the excess shall be credited against any income, war-profits or excess-profits taxes, or installment thereof, then due from the taxpayer under any other return, and any balance of such excess shall be immediately re- funded to the taxpayer:” 2122 Law 11387. Five-Year Limitation for Making Claim for Credit or Refund. — “Provided, That no such credit or refund shall be allowed or made after five years from the date when the return was due, unless before the expiration of such five years a claim therefor is filed by the taxpayer.” 2123 Claims for Credit of Taxes Erroneously Collected. — Any amount of income, war profits or excess profits tax paid in excess of that properly due shall be credited against any such taxes due from the taxpayer INC. 376 TAX ABATEMENT AND REFUND CLAIMS. under any other return. To obtain such credit the taxpayer should proceed as follows: 2124 ( 1 ) Where the credit demanded is equal to or less than any outstand- ing assessment of tax, a taxpayer desiring to obtain such credit shall file with the collector for the district in which his original return was filed a claim on form 47 A, which shall be sworn to and shall contain the follow- ing statements: (a) business engaged in by claimant; (b) character of as- sessment; (c) amount of tax paid and for what taxable year; (d) portion of tax under (c) claimed as a credit; (e) unpaid assessment against which credit is asked and for what taxable year; and (f) all facts regarding the overpayment. 2125 (2) Where the amount claimed as a credit is greater than the out- standing assessment of tax, a taxpayer desiring to obtain such credit and the refund to which he is entitled shall file, in addition to the claim for credit required to be made on form 47 A for the amount of the outstanding assessment, a claim for refund of the overpayment in excess of the credit. See article 1036 [|f2133]. This claim for refund may be attached to the claim for credit or it may be separately filed with the Commissioner. All the facts regarding the total overpayment should be stated in the claim for refund and a reference made to such claim in the claim for credit. (Art. 1034, Reg. 45, Rev., April 17, 1919.) 2126 Action on Claims for Credit. — Upon receipt of a claim for credit on form 47 A the collector shall certify thereon the required informa- tion concerning all outstanding assessments and payments covered thereby and shall note on his records that a claim for credit has been filed. He shall thereupon transmit the claim to the Commissioner. Due notice will be given the collector and the taxpayer of the action taken on the claim. A schedule of credit claims on form 7220 A will be transmitted to the collector once a month and formal credit shall be taken Ty the collector at that time. If a claim is allowed against additional taxes due for other years, but such other taxes have not yet been assessed, only the amount of the excess of such taxes over the overpayment shall be assessed, or the excess of the overpay- ment over such other taxes due shall be refunded, as the case may be. A taxpayer desiring to convert a claim for refund previously filed into a claim for credit may file with the collector a claim on form 47 A, referring in it to such claim for refund. Upon its receipt by the Commissioner the claim for credit will be attached to the claim for refund and will be adjusted in the same manner as if the taxpayer had originally filed the claim for credit. The effective date of filing of the claim for credit shall be the actual date of filing such claim with the collector. The filing of a claim for credit against a tax due under another return shall be subject to the same rules with re- spect to the addition of interest and penalties as if the taxpayer had filed a claim for abatement of the tax against which credit is desired. See articles 1003 [for interest on amount of tax, 1f2014] and 1006 [for ad valorem and specific penalties, ]f2015]. (Art. 1035, Reg. 45, Rev., April 17, 1919.) 2127 Claims Heretofore Rejected May Be Reopened. — Sir: This office is in receipt of your letter of the 26th ultimo, asking for a ruling as to whether, under section 14, paragraph A, of the act of September 8, 1916, claims for refund which have once been rejected by the commissioner because of the statute of limitation in existence at that time may be reopened. The portion of section 4 referred to is in the following words: INC 377 TAX ABATEMENT AND REFUND CLAIMS. Provided, That upon the examination of any return of income made pursuant to this title, the act of August 5, 1919, * * * and the act of October 3, 1913, * * if it shall appear that amounts of tax have been paid in excess of those properly due, the taxpayer shall be permitted to present a claim for refund thereof notwithstanding the provisions of section 3228. 2128 This office is of the opinion that claims can now be made for refund under that provision [see lj2183]. Claims rejected can also be re- opened if the question involves an examination of the return. The power does not extend to other claims whose adjustment does not necessitate an examination of the return. (T. D. 2396, Nov. 1, 1916.) 2129 Claims for Credit or Refund on Account of Taxes Paid Under the Act of Oct. 3, 1913, on Stock Dividends. — In order to complete claims for the crediting or refunding of income tax collected under the Act of October 3, 1913, on stock dividends; that is, claims based upon the decision of the Supreme Court in the case of Towne v. Eisner |f2313], the following evidence is required. An affidavit showing: 1. The name of the corporation which declared and paid the stock dividend. 2. The date of declaration of the stock dividend and date of receipt by claimant. 3. In which year’s return of annual net income did the claimant include this stock dividend? 4. Under what item on the return was the value of the stock divid- end included, and what was the valuation placed upon the dividend in the return? 5. Has the stock thus received and returned as a dividend been sold by the claimant, and if so, what was the date of sale ; how much did claimant receive from the sale; and what part of the total amount re- ceived from the sale was included by the claimant in its return of annual net income for the year in which the sale occurred? 6. Did the dividend consist of stock of the corporation distributing the dividend to claimant, or did it consist of stock acquired by the dis- tributor in another corporation? Note. — A stock dividend is a distribution by a corporation to its stockholders of capital stock of the distributing corporatioi. A dis- tribution of capital stock other than that of the distributing corporation is not a stock dividend but a dividend in property. 2130 The receipt on Form No. 1 should also be filed with the claim. 2131 In giving publicity to this requirement please inform taxpayers that there is no possible advantage in the employment of special attorneys for the prosecution of claims. Preparations are being made for the prompt handling of these cases and it is believed that they can be disposed of with minimum delay and inconvenience to the taxpayer. Claims filed directly by the claimants will receive in every respect as careful and expeditious con- sideration as those filed through special attorneys. (IT-Cls. Mim. 1795, Feb. 26, 1918.) 2132 Refund of Taxes Paid on Account of Stock Dividends Under Revenue Acts of 1916 and 1917, in Event Such Taxes are Here- after Held to Have Been Erroneously Assessed. — Receipt is acknowl- iNC. 378 TAX 1-24-20. . ABATEMENT AND REFUND CLAIMS. edged of your letter of October 28, 1918, in which ♦ ♦ ♦ you ask to be advised whether persons who wish to take advantage of a possible decision that the taxing of stock dividends as income is unconstitutional would be required to begin suit within two years after the payment of the tax in order to prevent their right to recover being outlawed, in accordance with the provisions of Sec. 3227 Revised Statutes [P178]. Pn reply you are advised that Sec. 14 (a) [pi21] of the Act of September 8, 1916 provides m part as follows : “Upon the examination of any return of income made pursuant to this title, the Act of August 5, 1909— and the Act of October 3, 1913— if it shall appear that amounts of tax have been paid in excess of those properly due, the taxpayer shall be permitted to present a claim for refund thereof, notwithstanding the provisions of Sec. 3228 [^1801 Revised Statutes.” Pn accordance with that portion of the Section above quoted, it is held that it is not necessary for an individual to institute suit or hie a claim within two years after the payment of income tax, in order to obtain a refund of taxes which, by a later court decision or ruling of the Department, are held to have been erroneously assessed. (Letter to Hebert J. Lyall, New York, N. Y., signed by Deputy Commissioner L. F. Speer, and dated Nov. 2, 1918.) Lower Court Decision on Stock Dividends Under the Act of Sep- tember 8, 1916, p53. ^ 3133 Claims for Refund of Taxes Erroneously Collected.— Claims by •11 i/^^ taxpayer for the refunding of taxes and penalties erroneously or illegally collected shall be made on form 46. In this case, as in that of claims for abatement, the burden of proof rests upon the claimant. All the facts relied upon in support of the claim should be clearly set forth under oath. It should be accompanied by the collector’s receipt or the can- celled check showing payment of the tax. In the case of a taxpayer’s death, certified copies of the letters of administration or letters testamentary, or other similar evidence, should be annexed to the claim to show the authority of the administrator or executor. The affidavit may be made by an agent of the person assessed, but in such a case a power of attorney must accom- pany the claim. Warrants in payment of claims allowed will be drawn in the names of the persons entitled to the money and shall unless other- wise directed be sent by the Treasurer of the United States directly to the proper persons or their duly authorized attorneys or agents. See further Regulations No. 14 (revised). In certain cases of overpayment by taxpayers the collector may repay the excess after allowance by the Com- missioner of a claim for refund, made by the collector on Form 751. The cases in which refund is made through collectors are covered by specific provisions not herein incorporated. The Commissioner has no authority to refund on equitable grounds penalties legally collected. (Art. 1036 Reg. 45, Rev., as amended by T. D. 2871, June 21, 1919.) 2134 Claims for Refund May Be Filed with the Commissioner Direct.— I have been advised by the Claim Department of your office that Claims for Refund should be sent direct to Washington provided there is attached thereto the actual receipt of the collector. On the other hand I note that Form 46, Revised March, 1918, has printed on the face of it : , “Important” “This claim should be forwarded to the Collector of Internal Revenue INC. 379 TAX ABATEMENT AND REFUND CLAIMS. to whom the tax was paid and must be accompanied by Collector’s receipt therefor.” 2135 (Answer.) Replying to your letter of March 22, 1919, you are advised that claims for refund may be forwarded direct to the Com- missioner of Internal Revenue, Claims Division, Income Tax. [Read, however, at j[2159.] (Letter from H. C. Hopson, New York, N. Y., and the reply thereto, signed by J. H. Callan, Assistant to the Commissioner and dated March 2Q, 1919.) 2136 Procedure Under Which Collectors Are Authorized to Refund Excessive Payments of Internal Revenue Tax. — [In connection with the following read the matter beginning at j[2153.J Beginning April 1, 1918, there will be advanced to each Collector of Internal Revenue, at the be- ginning of each quarter of the fiscal year, out of the appropriation for the refundment of internal revenue taxes, a sum estimated to be sufficient for the repayment to taxpayers of certain excessive collections, as follows : 1. Collections exceeding the tax shown by the return of the taxpayer to be due. 2. Collections exceeding the amount of tax shown by the assessment list to be due. 3. Duplicate payments where : (a) Both are made in advance of assessment; (b) Both are made after assessment; (c) One is made before, and one after assessment. 2137 1. Procedure where a collection has exceeded the tax shown in the taxpayer’s return as due. 2138 The Collector will enter on the assessment list the full amount paid, and in the '‘Remarks” column of the list will note the amount of the excess. 2139 The complete data regarding the excessive collection is then to be entered on the schedule of Claims for Authority to Refund, Form 751. The “Paid,” “Due,” and “Refundable Excess” columns on the Form will be totaled. 2140 Form 751 is to be made in triplicate one copy to be retained by the Collector, and two to be forwarded securely attached to the proper assessment list. A single Form 751 cannot be used for items on lists of the separate classes. 2141 In the Proving Division of the Bureau the amount shown on Form 751 as due will be checked against the taxpayer’s return, and the amount shown on the assessment list as paid will be checked against the similar item on Form 751. 2142 The original Form 751 will remain attached to the assessment list and will form an integral part thereof, so that the Commissioner’s si^a- ture of approval of the assessment list will be, to the Collector, sufficient evidence of the Commissioner’s approval of the claim. To effectuate this, there should be typewritten on the first page of Form 110, below the line reading, “Total Chargeable to Collector,” the words, “Amount Refundable on Form 751.” 2143 Upon receipt of the returned claim, thus determined as approved by the Commissioner, the Collector v/ill immediately make refund to the taxpayer, clearly designating upon the draft the nature of the refund, as, for instance, “Refund under Claim on Form 751, March list, 1919.” The TNC 380 TAX ABATEMENT AND REFUND CLAIMS. list to be designated is the list on which the claim was approved, rather thail the list on which the assessed or overpayment was reported. 2144 2. Procedure where a collection has exceeded the tax. 2145 The procedure will be identical with that outlined under subheading (1), above, except that in the “Remarks” column on the assess- ment list the exact amount paid is to be noted. 2146 3. Procedure where a tax has been paid wholly or in part in dupli- cate. 2147 (a) Where both payments are in advance, there shall be entered on Form 751 a notation showing both lines of the advance payment list or lists on which payments appear. If the amounts of the two payments differ, the Collector shall claim authority for refund of the lesser payment. 2148 (b) Where the assessment has been made, entries will be made on the assessment list to show both dates of payment. 2149 A similar notation should be made under the item claimed Form 751 as refundable. 2150 The total amount collected is to be reported on Forms 325 and 51 B. 2151 (c) Where one payment has been made before and one after the entry of assessment, notations will be made on Form 751 showing the line of the list on which the advance payments was reported and the line on which the assessment was entered. 2152 Except as indicated, the balance of procedure under subheading (3) will correspond to the procedure fully outlined under subheading (1). (T. D. 2688, April, 1918.) 2153 Claims for Refund or Abatement; Procedure to be Followed by Collectors with Respect to Claims for Refund or Abatement — Extension of Treasury Decision 2688. — (1) Claims for refund or for abatement, pertaining to tax returns which have not at the time been posted to an assessment list, will be numbered to agree with, attached to, and made a part of, the original return so that the total tax as posted on the assessment list will be the admitted tax liability of the taxpayer. If a tax- payer submits an amended return as a claim either for refund or for abate- ment before the original return has been listed, such amended return will be numbered to agree with and attached to the original return in the same manner. Similarly, errors or omissions in returns discovered by the col- lector prior to the posting operate as an amendment to the amount of tax liability shown by the return. 2154 In other words, all amendments or changes either increasing or de- creasing the amount of tax liability and whether originated by the taxpayer or by the collector will be reflected on the face of the return it- self and the posting to the assessment list will be of the correct amount. In this connection attention is called to the provisions of Mim. 2124. 2155 (2) Amended returns showing a reduced tax liability will not be acted upon by collectors if the original return has been previously entered on the assessment list. All claims pertaining to returns which have been listed for assessment must be submitted on Form 47, if the tax has not been paid. 2156 ( 3 ) The following classes of claims may be included on Form 751 (if for refund), or blanket Form 47 (if for abatement). Separate sheets properly designated of Forms 751 or blanket Forms 47 must be pre- pared for returns on file in the Commissioner’s office and those on file in the collector’s office: (a) All claims for refund or abatement pertaining to Form INC 381 TAX ABATEMENT AND REFUND CLAIMS. 1040-A income returns for the calendar year 1918, or subsequent years. i i • (b) Errors in computation. (These include only mistakes in arithmetic.) ^ (c) Errors in specific exemptions on income returns, (inese include such items as failure to deduct exemptions for dependents ; the $2,000 exemption for corporations, etc.) (d) Payments in excess of the total amount of tax due as shown by the return. (These include such cases as a remittance of $1,500 covering payment of a tax liability of $1,300, etc.) (e) Amount previously paid on submission of a tentative in- come return in excess of the total tax liability shown by the final return. (f) Duplicate payments or assessments. (g) All claims for refund on account of nonrevenue remittances forwarded to the collector in error and deposited by him (These include such items as state or municipal taxes sent to the collector and deposited by him as ‘unidentified,” etc.) 2157 (4) All claims for refund or abatement other than those enumerated above will be forwarded to the Commissioner for settlement. How- ever, any claim may be so forwarded whenever the collector does not feel absolutely certain of the law, regulations or precedent involved, or if his disbursing bond is insufficient to enable him to procure an advance on accountable warrant of the requisite amount of funds from which to make payment. . . . 2158 (5) Before forwarding claims to the Commissioner for settlement certification must be made on the claim of the account number, the amount of tax originally due, the dates and amounts of all payments or other transactions affecting such amount, and the balance due as shown by the account on the list. All claims of this nature now on file in the collector’s office and hereafter as received should be certified and forwarded 2159 (6) Claims submitted by taxpayers direct to the Commissioner will in future be referred to the collector for this certificate as to the status of the account on the assessment list. Until so certified by tlie col- lector such claims will not be settled. When certifying claims for refund the collector will make a notation in the “Remarks” column of the date and amount of the refund claim but no record will be made on the tax journals unless a credit balance exists in the taxpayer s account. In th^ case, the amount of the claim as certified will be posted to the list and recorded on the journal in the same manner as though payment were made by the collector. -r j i_ i. i 2160 (7) In all cases where abatement claims are certified by the col- lector, notation will be made on the assessment list of the date on which the abatement claim was filed and the amount thereof, and on the daily journals. Form 769. (See paragraph 49, Manual of Revenue Ac- 2161 (8) Blanket claims for abatement of uncollectible items Form 53 may be filed by the collector as heretofore. The same record will be made on the tax journal and on the assessment list as in cases where the taxpayers submit such claims (the only difference being that in the first instance the claim originates with the taxpayer instead of with the col- lector. INC 382 TAX ABATEMENT AND REFUND CLAIMS. 2162 (9) xhe last two sentences of Article 1036, Regulations 45 (final edi- tion), are to be replaced by the following [being the last three sentences of 1[2133] : 2163 (10) All existing regulations in conflict with the above are hereby revoked. (T. D. 2871, June 21, 1919.) 2164 Suits to Restrain Assessment or Collection of Taxes.— ‘No suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court.” (Section 3224, Revised Statutes.) 216o jg'o suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court. “Restraining” is used in its broad popular sense of hindering or impeding, as well as prohibiting or staying, and the provision is not limited in its application to suits for injunctive relief. The prohibition of such suits cannot be waived by any officer of the Government. (Art. 1037, Reg. 45, Rev., April 17, 1919.) 2166 The appended decision of the Supreme Court of the United States in the case of Dodge v. Osborn, Commissioner of Internal Revenue, is pub- lished for the information of internal-revenue officers and others concerned. (T. D. 2301, March 3, 1916.) Decision. (February 21, 1916.) 240 U. S. 118. Jofin F. Dodge and Horace E. Dodge, Appellants, v. AVilliam H. Osborn, Commissioner of Internal Revenue. Appeal from the Court of Appeals of the District of Columbia. Mr. Chief Justice White delivered the opinion of the Court. 2167 The appellants filed their bill in the Supreme Court of the District of Columbia against the Commissioner of Internal Revenue to enjoin the assessment and collection of the taxes imposed by the Income Tax sec- tion of the Tariff Act of October 3, 1913 (38 Stat. 166, 181) and especially the surtaxes therein provided for on the ground that the statute was void for repugnancy to the Constitution of the United States. The case is here on appeal from the judgment of the court below affirming the action of the trial court in sustaining a motion to dismiss the complaint for want of jurisdiction because the complainants had an adequate remedy at law and because of the provision of section 3224 Revised Statute that “No suit for the^ purpose of restraining the assessment or collection of any tax shall be maintained in any court. 2168 -y^^e at once put out of view a contention that section 3223 [pi64] is not applicable to taxes imposed by the Income Tax Raw since we are clearly of the opinion that it is within the contemplation of paragraph R of the Act which provides: [T[1998.] “That all administrative, special and general provisions of law, including the laws in relation to the assessment, remission, collection, and refund of internal revenue taxes not heretofore specifically repealed and not inconsistent with the provisions of this section, are hereby extended and made applicable to all the provisions of this section and to the tax herein imposed.” 2169 And for the same reason we do not further notice a contention as to the inapplicability of sections 3220, 3226 and 3227, to which effect INC. 383 TAX ABATEMENT AND REFUND CLAIMS. was given by the court below requiring ah appeal to the Commissioner of Internal Revenue after payment of a tax claimed to have been erroneous y and illegally assessed and collected and upon his refusal to return the sum paid giving a right to sue for its recovery. 2170 The question for decision therefore is whether the sections of the Revised Statutes referred to are controlling as to the case in hand. The plain purpose and scope of the sections are thus stated m Snyder v. Marks, 109 U. S. 189, 193-194, a suit brought to enjoin the collection ot a revenue tax on tobacco : , “The inhibition of Section 3224 applies to all assessments of taxes, made under color of their offices, by internal revenue officers charged with general jurisdiction of the subject of assessing taxes against tobacco manufacturers. The remedy of a suit to recover back the tax after it is paffi is provided by statute, and a suit to restain its collection is forbidden Ihe given is exclusive, and no other remedy can be substituted for it. Cheatham V. United States, 92 U. S. 85, 88, and again m State Railroad lax Cases, 92 U. S. 575, 613, it was said by this court that the system prescribed by the United States in regard to both customs duties and internal revenue taxes, of stringent measures, not judicial, to collect them, with appea s o specified tribunals, and suits to recover back moneys illegally exacted was a system of corrective justice intended to be complete, and enacted undei the right belonging to the government to prescribe the conditions on which it would subject itself to the judgment of the courts in the | revenues. In the exercise of that right, it declares, by Sec. 3224, that its officers shall not be enjoined from collecting the tax claimed to have been unjustly assessed, when those officers, m the course of general juiisdiction over the subject matter in question have made the assignment (assessment) and claim that it is valid.” .-i 2171 And this doctrine has been repeatedly applied until it is no longer open to question that a suit may not be brought to enjoin the assess- ment or collection of a tax because of the alleged unconstitutionality of the statute imposing it, Sheldon v. Platt, 139 U. S. 591 ; pttsburgh, etc., Ry. V. Board of Public Works, 172 U. S. 32; Pacific Whaling Company v. United States, 187 U. S. 447, 451, 452. _ r .• t... , 3173 But it is contended that this doctrine has no application to a case where wholly independent of any claim of the constitutionality of the tax sought to be enjoined, additional equities sufficient to sustain jurisdic- tion are alleged, and this, it is asserted, being such a case, falls within the exception to the general rule. But conceding for argument s sake only the legal premise upon which the contention rests, we think the conclusion that this case falls within such exception is wholly without merit, since aftei an examination of the complaint we are of the opinion that no ground for equitable jurisdiction is alleged. It is true the complaint contains averments that unless the taxes are enjoined many suits by other peisons will be brought for the recovery of the taxes paid by them, and alsT^that by reason of Section 3187 Rev. Stat. making the tax a hen on plaintiff s property the assessment of the taxes would constitute a cloud on plaintiffs title. But these allegations are wholly inadequate under the hypothesis which we have assumed solely for tlie sake of the argument, to sustain jurisdiction since it is apparent on their face they allege no ground for equitable relief independent of the mere complaint that the tax is illegal and unconstitutional and should not be enforced— allegations which if recognized as a basis for equitable jurisdiction would take every case where a tax was assailed be- INC. 384 TAX SUITS FOR RECOVERY OF TAXES. cause of its unconstitutionality out of the provisions of the statute and thus render it nugatory, while it is obvious that the statute plainly forbids the enjoining of a tax unless by some extraordinary and entirely exceptional circumstance its provisions are not applicable. 2173 There is a contention that the provisions requiring an appeal to the Cornmissioner of Internal Revenue after payment of the taxes and giving a right to sue in case of his refusal to refund are wanting in due process and therefore there is jurisdiction. But we think it suffices to state that contenion to demonstrate its entire want of merit. 2174 Affirmed. (240 U. S. 118— T. D. 2301, March 3, 1919.) 2175 No Suit to Enjoin Collection of Penalties Shall Be Maintained in Any Court.— In Kohlhamer vs. Smietanka, Collector (239 Fed. 408), it was held that while Section 3224 R. S. [Paragraph 21^] which prohibits suits to enjoin the collection of internal revenue taxes, does not specifically include “penalties” as such, yet where penalties are authorized by statute to be added to the tax and collected as a part of the tax, the court will hold that the penalty is a part of the tax, the assessment and collection of which are governed by Section 3224. (239 Fed. 408.) 2176 Law|[437. Abatement of Second Assessments, Refund of Taxes Collected on Such Assessments, and the Recovery by Suit of Taxes So Paid. — “Sec. 1316. (b) Section 3225 of the Revised Statutes of the United States is hereby amended to read as follows : Sec. 3225. When a second assessment is made in case of any list, statement, or return, which in the opinion' of the collector or deputy col- lector was false or fraudulent, or contained any understatement or under- valuation, such assessment shall not be remitted, nor shall taxes collected under such assessment be refunded, or paid back, or recovered by any suit, unless it is proved that such list, statement, or return was not wil- fully false or fraudulent and did not contain any wilful understatement or undervaluation.’ ” 2177 Suit for Recovery of Taxes Wrongfully Collected. — No suit shall be maintained in any court for the recovery of any internal tax alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessive or in any manner wrongfully collected, until appeal [pi33] shall have been duly made to the Commissioner of Internal Revenue, according to the provisions of law in that regard, and the regu- lations of the Secretary of the Treasury established in pursuance thereof, and a decision of the Commissioner has been had therein: Provided, That if such decision is delayed more than six months from the date of such appeal, then the said suit may be brought, without first having a decision of the Commissioner at any time within the period limited in the next section.” (Section 3226, Revised Statutes.) 2178 Limitation as to Suits for Recovery of Taxes Wrongfully Col- lected. — No suit or proceeding for the recovery of any internal tax alleged to have been erroneously or illegally assessed or collected, or of any penalty alleged to have been collected without authority, or of any sum alleged to have been excessive or in any manner wrongfully collected, shall be maintained in any court unless the same is brought within two INC. 385 TAX SUITS FOR RECOVERY OF TAXES. years next after the cause of action accrued; Provided, That actions for such claims which accrued prior to June six, ^igiTeen hundred and seventy-two, may be brought within one year from said date, and t where'anT such daim was pending before the Commissioner as provided in the preceding section, an action thereon m.ay be brought within veafafter such decision and not after. But no right of action which was Teadv barred by any statute on the said date shall be reyiyed by this section.” (Section 3227, Revised Statutes.) 2170 No suit shall be maintained in any court for the recovery of any tax alleged to have been erroneously or illegally assessed or cplected, or of any penalty claimed to have been collected without authority, unti an appeal by a daim for credit or refund shall have been duly inade to the Commissioner and a decision of the Commissioner has been had therein unless such decision is delayed more than six months.^ The cause of act o accrues upon an unfavorable decision by the Commissioner or at the expira- tion of six months after an appeal without action thereon and no suit m^ L brought after two years fVom the time the cause of action accrued. (Art. 1037, Reg. 45, Rev., April 17, 1919.) 2180 Limitation on Claims for Refunding Other Than Those Based on an Examination of a Return of Income.— All claims fof Jh® ^ funding of any internal tax alleged to have been erroneously opd'egal y as- sessed or collected, or of anv penalty alleged to have been collected without authority or of any sum alleged to have been excessive or in any manner wrongfully collected, must be presented to the Comm^oner of Intem^^ Revenue within two years next after the cause of action accrued . ^ro S ThVt claims which accrued prior to June six, eighteen hundred and sevLitv-two, may be presented to the_ Commissioner at any time within frnin date Blit nothing in this section shall be constiued “S iTrS;? Of ?».!! which w5. 1 '?"J' V ^ f*“' “ that date.” (Section 3228, Revised Statutes.) [Read at 112121. J 3181 Amended Returns and Repnds for Years Prior is acknowledged of your letter of Septembei 8 1919, with refer ence to the question of refund in the case of your client, the. . . ••••••••• ComnLv Wisconsin, whose invested capital has been reduhd 'in order to provide for depreciation which had not pen de- ducted during the years 1909 to 1917, inclusive. You state that a letter addressed to the cLpany by the Revenue Agent m charge, on August IS, contained the following paragraph: ‘‘On account of the limitation contained in the Revenue Act of 1918, no refund is allowable for any year Prior to 1914. For this reason it will be useless for you to file amended returns for years prior to 1914. 3220 You question the statement made therein and refer to Sections 322U and 3228 [1121801 of the Revised Statutes in support of your SStlSion tharthilomplny should be entitled to file amended returns for 1909 and all subsequent years. Pn reply, you are advised that c;tatement of the Revenue Agent is erroneous. _ . • j • 3182 The five-year limitation on assessment and suit tion 250 (d) [P029] applies only to taxes due under the Revenue Act of 1918. INC. 386 TAX SUITS FOR RECOVERY OF TAXES. 2183 Section 252 [][2121] does not operate so as to take away the rights which a taxpayer has under Section 3228, Revised Statutes [j[2180], to file a claim for refund within two years after the time the cause of action accrued. (Letter to Ernst and Ernst, Washington, D. C., signed by Commissioner Daniel C. Roper, and dated October 9, 1919.) 2184 We now come to the taxes of 1909 and 1910. The 1909 tax was paid June 28, 1910, but claim for refund was not filed until June 10, 1913, nearly three years thereafter. The 1910 tax was paid June 8, 1911, but claim for refund was not filed until June 10, 1913, two years and one day (excluding Sunday, June 8, 1913) thereafter. The relevant sec- tions of the United States Revised Statutes are as follows: [112177, 112178 and 1f2180, above]. 2l8o Sections 3226, 3227 and 3228 of the Revised Statutes (Comp. St. 1913, Sections 5949-5951) must be read together, and, when so read, provide a simple and orderly system whereby an aggrieved taxpayer may sue to recover taxes wrongfully collected. 2186 In the first place, under section 3226, no suit can be maintained unless the taxpayer appeals to the Commissioner of Internal Revenue. This appeal under section 3228 must be presented to the Commissioner of Internal Revenue within two years after the cause of action accrued. Under section 3227 no suit can be maintained unless brought within two years next after the cause of action accrued. Under section 3228 the accrual of the cause of action is at the date when the tax is illegally assessed or collected. Obviously the wrongful act was done when the United States, acting in this instance through the Collector, received the money in payment of the tax. Under section 3227, the date of accrual is the date when the Commissioner of Internal Revenue decides adversely to the taxpayer. Of course, under that section the taxpayer need not wait longer than six months in the event that the Commissioner delays his decision. 2187 To illustrate, therefore, with the precise facts' in the case at bar: On June 28, 1910, the Mail Company paid the Collector the tax for the year 1909. The appeal to the Commissioner of Internal Revenue should have been made on or before June 28, 1912, but was not made until June 10, 1913. On June 8, 1911, the Mail Company paid the Collector for the tax for the year 1910. The appeal to the Commissioner of Internal Revenue should have been made on or prior to June 8, 1913, but was not made until two days later, to wit, June 10, 1913. Thus the condition precedent with which it was necessary to comply before the Mail Company could maintain a suit was not complied with, and no cause of action ever accrued for the years 1909 and 1910 in favor of the Mail Company against the Collector. 2188 If to illustrate, an appeal in those cases had been presented to the Commissioner of Internal Revenue within two years, say on or be- fore June 8, 1912, and on or before June 9, 1913 (June 8, 1913, being a Sunday) respectively, then the Mail Company under section 3227 would have been in time if suit had been commenced on or before June 8, 1914 and June 8, 1915, respectively. Merck v. Treat, 174 Fed. 388, 98 Q C. a! 606. * * * . (Mail & Newspaper Transportation Co., et. al., v. Ander- son, Collector, Circuit Court of Appeals, Second Circuit, New York April 11, 1916.- 234 Fed. 590.) ' ^ INC. 387 TAX SUITS FOR RECOVERY OF TAXES. 2189 Conditions Precedent to Suit Which the Law Requires.— -[Com- ment : The following example of procedure, with the Court s com- ment thereon, is taken from Gulf Oil Corporation v. Lewellyn in the lower court (242 Fed. 709). (Reversed by Circuit Court of Appeals, 245 Fed. 1. Decision of Circuit Court reversed by U. S. Supreme Court (248 U. S., 71).] 2190 From the evidence produced at the trial, following : FACTS. the Court has found the 2191 first. * * ❖ 2192 SECOND. The Gulf Oil Corporation, on the 14th day of Febru- ary, 1914, in compliance with the provisions of the Act of Congress of October 3, 1913, made a return of its annual net income for the twelve months ending December 31, 1913, as required by said Act. In making said return the Gulf Oil Corporation certified that it had not included in the statement of gross income for the year 1913 certain dividends amounting to $11,424,440 received by it from subsidiary companies out of earnings and surplus of said subsidiary companies accrued prior to January 1, 1913. 2193 third. In said return the Gulf Oil Corporation showed net in- come for the twelve months ending December 31, 1913, of $886,- 250.44, but under date of May 1, 1914, the said C. G. Lewellyn, Collector, mailed to said corporation notice of an assessment of tax thereon amounting to $9,072.56. A claim for abatement of this overcharge amounting to $210.06 was filed with the Collector June 9, 1914, and on June 30, 1914, the Gulf Oil Corporation paid to the said C. G. Lewellyn, Collector, the sum of $8,862.50, being the amount of said assessment, less the $210.06 for which abatement was claimed. Said claim for abatement having been disallowed, said Gulf Oil Corporation, on the 5th day of November, 1914, paid the said Collector the additional sum of $210.06, with interest amounting to $6.30, making a total payment of $216.36. 2194 fourth. On the 30th day of December, 1914, the said C. G. Lewellyn, Collector, acting under instructions from the Commis- sioner of Internal Revenue at Washington, D. C., mailed notice and demand for tax assessment against the Gulf Oil Corporation for the year ending December 31, 1913, amounting to $114,034.34. In fact, this additional as- sessment amounted to $114,244.40, being the 1% upon the entire amount of the dividends received by the Gulf Oil Corporation from subsidiary compan- ies out of surplus accrued to such subsidiaries prior to January 1, 1913, and payable to the Gulf Oil Corporation prior to March 1, 1913, and said ad- ditional assessment was based solely on said dividends. In making the as- sessment, however, the Commissioner of Internal Revenue reconsidered and allowed the previous claim for abatement of $210.06, erroneously assessed against the corporation in the original assessment, and credited the same as having been paid upon the assessment of December 30, 1913, leaving the net balance of such assessment $114,034.34 as stated. 2195 fifth. The notice and demand of the said C. G. Lewellyn, Col- lector, for the payment of this additional tax recited that if the tax is not paid on or before January 8, 1915, it would be the duty of' the Collec- tor to collect said tax, together with 5% additional and interest at the rate of I % per month until paid. 2196 SIXTH. That subsequently the plaintiff filed with the defendant for presentation to the Commissioner of Internal Revenue a claim for the abatement of said income tax amounting to $114,034.34, a copy of 388 TAX INC. SUITS FOR RECOVERY OF TAXES. which claim is attached to and made a part of plaintiff's Statement as Exhibit A. That after an examination of said claim for abatement the Commis- sioner of Internal Revenue rejected the same. 2197 SEVENTH. On February 17, 1915, the said Gulf Oil Corporation paid to the said C. G. Lewellyn, Collector, said additional income taxes assessed for the period ending December 31, 1913, in the sum of $114,034.34, and at the same time filed with C. G. Lewellyn a written protest, a copy of which protest is attached to and made a part of plain- tiff’s statement as Exhibit B. 2198 EIGHTH. That subsequently the plaintiff filed with the said C. G. Lewellyn for presentation to the Commissioner of Internal Revenue a claim for the refund of the net amount of the assessment of said income tax, to wit: $114,034.34, and also the amount of the credit allowed thereon of $210.06, representing an over assessment against the corporation on the basis of its return as originally filed, the two amounts constituting the entire amount of the assessment in the sum of $114,244.40. A copy of the said claim for refund is attached to and a part of plaintiff’s Statement as Ex- hibit C. 2199 ninth. That after consideration of said claim for refund, the Commissioner of Internal Revenue rejected the same, and the said C. G. Lewellyn was instructed to notify the Gulf Oil Corporation, and on or about April 13, 1915, did so notify said corporation, that said claim was re- jected a copy of which notice is attached to and made a part of plaintiff’s statement as Exhibit D. Jit * ♦ sK ♦ 2200 The payment of all taxes hitherto required of the several subsidiaries by acts of Congress, and the full disclosure by the plaintiff in its re- turn for 1913 of the dividends from its subsidiaries negative any suggestion that the conduct of the plaintiff has been in any way evasive or otherwise improper. The plaintiff has merely asserted its legal rights. Its rights to bring this action is clear because it has performed all the conditions pre- cedent to suit which the law requires. ^ * (242 Fed. 709.) 2201 A Suit for Recovery of Taxes Erroneously or Illegally Assessed Can Be Brought Against the Collector Only Who Collected the Taxes, and Not His Successor. — The appended decision (236 Fed. 604) of the United States District Court for the Southern District of New York, in the case of Duncan I. Roberts v. John Z. Lowe, Jr., collector, is published for the information of internal revenue officers and others concerned. 2202 [Summary: A suit to recover back taxes can not be maintained against the successor to the collector to whom the taxes were paid, ex- cept in his individual capacity. The remedy lies either in an action against the collector who actually received the taxes or in an action against the United States.] (T. D. 2394, Nov. 14, 1916.) 2203 The appended decision of the United States Circuit Court of Appeals for the Third Circuit in the case of Philadelphia, Harrisburg & Pitts- burgh Railroad Company to use, etc., v. Ephraim Lederer, collector of in- ternal revenue, is published for the information of internal-revenue officers and others concerned. Before Buffington, McPherson, and Wooley, Circuit Judges. 2204 The satisfactory opinion of Judge Thompson (239 Fed., 184) re- lieves us from discussing nearly all the questions raised by this writ INC. 389 TAX SUITS FOR RECOVERY OF TAXES. of error. We concede the force of the company’s argument that in sub- stance, and especially in practical effect, suits such as this are against the collector as an official rather than as an individual — his personal liability is rarely if ever enforced — and it may be that Congress might with safety and propriety extend the existing law to cover the situation now presented. But until the change be actually made we are bound by the law as it stands, and we see no reason to doubt that the statutes and decisions now in force p^- vent the company from recovering in this action for the taxes collected by William McCoach, the defendant’s predecessor in office. No suit to recover them has been brought against McCoach, and for this reason the Act of 1899 does not apply. 2205 We need hardly say that without statutory permission no suit to recover a Federal tax can be maintained. Moreover the statutes on this subject must be strictly obeyed; they lay down the conditions and limita- tions under which the sovereign consents to be sued, and this consent should not be enlarged by construction. We turn for a few moments to the act of 1899, since this seems to be the company’s principal reliance. Some addi- tional facts should be stated in order to make the position clear. The com- pany paid the tax for 1909 in June, 1910, the tax for 1910 in June, 1911, and the tax for 1911 in June, 1912. These taxes were paid under protest to McCoach, who remained in office until October 7, 1913. During his term, namely, in June, 1912, January, 1913, and May, 1913, respectively, ffie company claimed the refund of these three taxes ; and in June, 1913, ff presened a petition to abate the tax of 1912 apparently on the ground that penalties had been incurred in addition to the tax, although we do not pre- cisely know what abatement was asked for. The claim for the refund of the tax for 1909 was rejected by the Commissioner of Internal Revenue on July 15, 1912, but apparentlv the subsequent claims for refund of the taxes of 1910 and 1911 and also the petition for abatement in connection with the tax for 1912 were not disposed of until February, 1914. 2206 On October 22, 1913, after McCoach had retired from office, the company filed a supplemental affidavit with the commissioner in sup- port of its petition to abate the tax of 1912, and on the same day asked Inm to reopen and reconsider his refusal to refund the tax of 1909. On October 27, 1913, this request to reopen was granted, and at the same time the commissioner asked for additional information and affidavits in refer- ence to the claims for the refund of the taxes for 1909, 1910, and 1911, and also in reference to the petition to abate the tax of 1912. Accordingly, an affidavit was furnished on January 14, 1914. In February, 1914, the peti- tion for abatement was refused, and apparently at the same time the claims for the refund of the taxes for 1909, 1910, and 1911 were also refused, for on February 13, 1914, Lederer notified the company that these claims, and also the petition for abatement, had been examined and rejected by the com- missioner. In March, 1914, a claim to refund the tax for 1913 was pre- sented, and was refused soon afterwards. The present suit was brought on June 29, 1914, and sought to recover from Lederer the taxes for the four years. 2207 From these facts it seems clear to us that the Act of 1899 does not apply. The act is as follows , , No suit, action, or other proceeding, lawfully commenced by or against the head of any department or Bureau or other officer of the 390 TAX INC. SUITS FOR RECOVERY OF TAXES. United States in his official capacity or in relation to the discharge of his official duties, shall abate by reason of his death, or the expiration of his term of office, or his retirement, or resignation or removal from office; but, in such event the court, on motion or supplemental petition filed, at any time within twelve months thereafter, showing a necessity for the sur\dval thereof, to obtain a settlement of the questions involved, may allow the same to be maintained by or against his successor in office, and the court may make such order as shall be equitable for the payment of costs. 2208 only “suit, action, or other proceeding” that could have been begun against McCoach while he was in office would have been a suit for the taxes of 1909 and 1910, but no such suit was brought, and it can not be suc- cessfully contended that a mere claim for refund, which is a matter wholly for the commissioner is a suit proceeding against the collector. The basis of an action against the collector is his receipt of the tax, and if he has not received it we do not see how he can be called on to pay it back. And the fact that Lederer was the channel by which the commissioner transmitted the refusal to refund did not impose liability. Lederer was liable, if at all, for the tax of 1912, for this had come into his own hands, but no statute made him liable for the money that was collected by his predecessor but had never been sued for. 2209 Po^- these reasons, and for those to be found in Judge Thompson's opinion, the judgment is affirmed. (242 Fed. 492.) (T. D. 2507, July 2, 1917.) 2210 Claims for Refund of Sums Recovered by Suit. — (a) Claims by taxpayers for the amount of a judgment representing taxes or pen- alties erroneosuly collected should be made on Form 46. The claimant should state the grounds of his claim under oath, giving the names of all the parties to the suit, the cause of action, the date of its commencement, the date of the judgment, the court in which it was recovered, and its amount. To this affidavit there should be annexed a certified copy of the final judg- ment, a certificate of probable cause, and an itemized bill of the cost paid re- ceipted by the clerk or other proper officer of the court, together with a certi- fied copy of the docket entries of the court in the case or so much thereof as may be reauired by the Commissioner. When a recoverv is had in any suit or proceeding against a collector or other officer of the revenue for any act done by him, or for the recovery of any money exacted by or paid to him and by liim paid into the Treasury, in the performance of his official duty, and the court certifies that there was probable cause for the act done by the collector or other officer, or that he acted under the directions of the Secretary of the Treasury, or other proper officer of the Government, no execution shall issue against such collector or other officer, but the amount so recovered shall, upon final iudgment, be provided for and paid out of the proper appropriation from the Treasury. See section 989 of the Revised Statutes, (b) Tf the judgment debtor shall have already paid the amount recovererl against him, the claim should be made in his name. There should also be a certificate of the clerk of the court in which the iudgment was re- covered (or other satisfactory evidence), showing that the iudgment has been satisfied and specifying the exact sum paid in its satisfaction, with a detail of all items of costs which were ]mid bv the iudgment debtor or for which he is liable. See further article 1031 fjf21191 and Regulations No. 14 (revised). (Art. 10v38, Reg. 45, Rev., April 17, 1919.) INC. 391 TAX COMMITTEE OF REVIEW AND APPEALS. 2211 LawK23. The “Advisory Tax Board.” — “Sec. 130L (a) * (b) * * (c) * (d) (1) There is hereby created a board to be known as the “Advisory Tax Board,” hereinafter called the Board, and to be composed of not to exceed six niembers to be appointed by the Commissioner with the approval of the Secretary. The Board shall cease to exist at the expiration of ^o years after the passage of this Act, or at such earlier time as^the Commissioner with the approval of the Secretary may designate.” 2212 Law 1[424. “Vacancies in the membership of the Board shall be filled in the same manner as an original appointment. Any member shall be subject to removal by the Commissioner with the appro va of the Secretary. The Commissioner with the approval of the becietary shall designate the chairman of the Board. Each member shall receive an annual salary of $9,000, payable monthly, together with actual necessary expenses when absent from the District of Columbia on official business. 2213 Law^I425. “(2) The Commissioner may, and on the requ^t of any taxpayer directly interested shall, submit to the Board any question relating to the interpretation or administration of the income war-profits or excess-profits tax laws, and the Board shall report its findings and recommendations to the Commissioner.” ^ ^ 2214 Law 11426. “(3) The Board shall have its office in the Bureau ot Internal Revenue in the District of Columbia. The ex- penses and salaries of members of the Board shall be audited, allowed, and paid out of appropriations for collecting internal revenue, in the same man- ner as expenses and salaries of employees of the Bureau of Internal Rev- enue are audited, allowed, and paid.” . 2215 LawM27. “(4) The Board shall have the power to summon wit- nesses, take testimony, administer oaths, and to require any person to produce books, papers, documents, or other data relating to any matter under investigation by the Board. Any member of the Board may sign subpoenas and members and employees of the Bureau of Internal Revenue designated to assist the Board, when authorized by the Board, may administer oaths, examine witnesses, take testimony and receive evidence. 2216 The Advisory Tax Board Membership During Its Existence. Commissioner Daniel C. Roper announced today his appointments to the new Advisory Tax Board of the Bureau of Internal Revenue. Five memberships are announced. The sixth membership has been reserved as a roving commission for experts who will be called in from time to time from various industries. The men named today are : r i tt • Dr T S. Adams, Professor of Political Economy of Yale Univ- ersity and formerly of the Wisconsin Tax Commission. T. E. Sterrett, of New York, Certified Public Accountant, and formerly President of the American Institute of Accountants. Striart W. Cramer, of Charlotte, North Carolina, engineer, con- tractor and cotton manufacturer; former President of the National Association of American Cotton Manufacturers. r t . i L. F. Speer, former Deputy Commissioner, Bureau of Internal Revenue, Income Tax Division. j r i Fred T. Field, of Boston, Mass., expert tax lawyer, and formerly Assistant Attorney General of Massachusetts. 392 TAX INC. COMMITTEE OF REVIEW AND APPEALS. 2217 The chairman of the new board of advisers will be Dr. Adams, who has been active in the Bureau’s affairs for some time. 2218 Particular attention will be given to problems arising where differ- ences of opinion exist between the taxpayers and the Bureau. Such differences occur not only with individuals, but also with groups and even with classes of industry. 2219 Formal hearings will be given to taxpayers in every case where the facts warrant, and it was stated today at the Revenue Bureau that the smallest individual or the most eminent legal counsel for the largest corporation shall find a hearing equally accessible. Commissioner Roper has already announced his policy “to employ every means available so that the scales of justice may be held evenly in deciding each case.” 2220 The Board will be called upon to decide questions involving the general aspects of taxation and differentiation of economic activities, accounting, forms of organization, trade customs, industrial management, legal procedure and administration. Special studies will be made of such matters as they affect Federal taxation. (Official announcement from the Bureau of Internal Revenue, dated March 14, 1919.) 2221 Submission of Questions to Advisory Tax Board. — Questions re- lating to the interpretation or administration of the income tax and war profits and excess profits tax laws may be submitted to the Advisory Tax Board by the Commissioner on his own initiative or at the request of any taxpayer directly interested for the purpose of obtaining the recom- mendation of the Board thereon. When a final conclusion has been reached by the income tax unit of the Internal Revenue Bureau as to the disposi- tion of a matter, any taxpayer directly interested therein may request the Commissioner to submit such matter to the Board. In the case of matters arising in connection with the audit of a taxpayer’s return the taxpayer will ordinarily be notified of such conclusion prior to assessment by letter. The taxpayer shall file with the Commissioner (to be transmitted to the in- come tax unit) a request in writing for submission with a statement of his objections to the conclusion of the unit and the reasons for such objec- tions. Such request and statement shall be filed with the Commissioner within thirty days after the taxpayer has been notified of the conclusion of the income tax unit or within such longer period as the Commissioner rnay allow, but the Board may at its discretion at any time receive addi- tional statements of objections or reasons therefor. (Art. 1701, Reg- 45 Rev., April 17, 1919.) 2222 Procedure Before Advisory Tax Board.— Matters submitted to the Advisory Tax Board will ordinarily be considered upon the papers, but a hearing for oral presentation of a case will be granted when- ever the Board deems such hearing necessary for the proper disposition thereof. Matters will ordinarily be considered upon the facts presented to the income tax unit. New evidence will not ordinarily be received by the Board, but matters will be recommitted to the income tax unit for further presentation of facts. Oral or written evidence may, however, be re- ceived by the Board whenever it deems such action necessary for the pro- tection of the Government or the prevention of injustice to the taxpayer. Decisions by the Board upon matters referred to it at the request of tax- 393 TAX INC. RULES AND REGULATIONS. payers will be transmitted to the Commissioner. (Art. 1702, Reg. 45, Rev., April 17, 1919.) 2223 The Advisory Tax Board Dissolved. — The Board will be dis- solved at the end of September, 1919, by reason of the fulfillment of its function and the development of the Income Tax Unit of the Inter- nal Revenue Bureau. (Official announcement from the Bureau of Inter- nal Revenue, August, 1919.) 2224 Organization of a Committee on Review and Appeal to Take Over the Work of the Advisory Tax Board Which Ceased tO' Exist on October 1, 1919. — Taxpayers in many parts of the country have expressed interest in the plans of the Bureau for continuing the important work entrusted to the Advisory Tax Board. The function of the Board has been to review, upon appeal, the administrative decisions of the Income Tax Unit in important income and excess profits cases, particularly cases involving exceptional or unusual conditions with respect to questions of invested capital, amortization, depletion, depreciation, etc. The newly organized Committee on Review and Appeal will take over this highly im- portant function, and taxpayers are assured of the same thoughtful and impartial consideration of their problems that has been a feature of the work of the retiring Board. 2225 p, s. Talbert, head of the Technical Division of the Income Tax Unit, has been selected as chairman of the committee because of his exceptional experience and peculiar qualifications for this important task. Mr. Talbert is one of our leading experts on income tax matters. He worked continuously with the Tax Advisers in drafting the administrative regulations for the enforcement of the 1917 law and has also played an important part in framing the regulations under the Act of February 24, 1919. Mr. Talbert will be relieved from duty as head of the Technical Division in order that he may devote his entire time to the work of the committee. 2226 The individual members of the Committee on Review and Appeal will be selected with the greatest care from our most experienced men in order that their combined judgment may represent the best experi- ence and highest intelligence of the Bureau’s personnel. I am confident that this body of men will continue in a most satisfactory manner the work inaugurated by the Advisory Tax Board and taxpayers may be assur^ of courteous, intelligent and impartial hearings. (Announcement by Com- missioner Daniel C. Roper, dated September 27, 1919.) 2227 Law M33. The Commissioner Authorized to Make Rules and Regulations. — “Sec. 1309. That the Commissioner, with the approval of the Secretary, is hereby authorized to make all need- ful rules and regulations for the enforcement of the provisions of this Act. 2228 Promulgation of Regulations — No. 45, Revised. — In pursuance of the statute the foregoing regulations [Reg. 45, Rev., April 17, 1919: see Finder Page 1] are hereby made and promulgated and all rulings inconsistent herewith are hereby revoked. (Art. 1800, Reg. 45, Rev., April 17, 1919.) INC. 394 TAX RULES AND REGULATIONS. 2229 Effective Date of Treasury Decisions. — Treasury decisions pro- mulgating' rulings of the Internal Revenue Bureau become effective upon the date of approval unless otherwise stated therein. Cases previously adjusted in contravention of law as pronounced in such decisions, are sub- ject to readjustment in accordance with the decision. [Read at 112132.1 (Art. 38, 1[245, Reg. 33, Rev., Jan. 2, 1918.) 2230 Policy of the Bureau of Internal Revenue with Regard to Re- quests for Rulings and Advice Upon Abstract Propositions. — The Bureau of Internal Revenue herein definitely outlines its policy with regard to requests which are received daily for rulings and advice upon abstract propositions involving questions of income tax and profit lia- bility. For example, taxpayers considering the reorganization of corpora- tions frequently ask whether the contemplated plans will result in the realization of taxable income. These requests for advance information have become so numerous, that the Bureau deems it advisable to state why it is found necessary to decline to make advance rulings in particular cases. ^ The policy of the Bureau, it is announced, will be not to answer such inquiries except under the following circumstances : The transaction must be completed and not merely proposed or planned. The complete facts relating to the transaction, together with abstracts from contracts or other documents necessary to present the complete facts must be given. The names of all the real parties, interested (not “dummies” used in the transaction) must be stated regardless of who presents the question, whether attorney, accountant, tax service or other representative. 2231 q'he conclusions upon which the rulings are based are as follows : “An examination of the revenue laws setting forth the duties of the Commissioner of Internal Revenue does not disclose any function assigned to him by statute which authorizes him to make a decision in any particular case which does not arise in actual course of administering the law. He is authorized, with the approval of the Secretary of the Treasury, to make regulations, but this would not aifthorize him, even with the approval of the Secretary, to decide any particular case in advance of its actual pres- entation of the facts for a decision. 2232 “In the interval between an informal advance decision and the time when the case is finally presented for actual decision, develop- ments may occur which affect the decision. When a question is actually presented in the regular course of administration for the decision of the Commissioner, the decision must then be in accordance with such light, whether from experience or from judicial decision, as he may then have. Any taxpayer who had relied on an advance decision would necessarily be prejudiced whenever the final decision did not agree with the advance de- cision. The fact that taxpayers asking for advance decisions are usually unwilling to accept an oral opinion shows that taxpayers are intending to rely on such advance decisions, and are likely to be misled by them if change later becomes necessary 2233 “ii; ^ matter of practical experience that when facts are pre- sented for advance decision it is practically impossible to present the same facts as will afterwards come up in the regular course for actual decision. Reorganization plans, for instance, when they actually work out, may be changed in some particular which the taxpayer regards as unimportant, but which in fact may be decisive of the case. INC. 395 TAX SUPREME COURT DECISIONS. 2234 “The large number of taxpayers which must be dealt with under the present law and the great variety of intricate questions involved requires employes not only of native ability but of special training. Even such a force is taxed to the utmost in dealing with the actual pses as they arise, and every attempt to render an advance decision takes just so mudi time away from the taxpayers who have a definite right under the law to a consideration of their cases which are ready for final disposal. 2235 “Experience in the past shows that when such questions were con- sidered a single advance decision was not sufficient in most cases. 2236 “It is realized that the uncertainty which exists in the minds of business men as to the construction of various parts of the law is unfortunate and tends to hamper business development, but since such uncertainty can be resolved only through decisions of the courts, and since an advance decision by the Commissioner is not a real but only an apparent resolution of the uncertainty, it appears that in giving such advance decisions the Commissioner would be doing the taxpayer an injustice rather than a favor. 2237 “Where a question presented is not covered by the regulations and is so general that the regulations should contain a provision bear- ing on it, an amendment of the regulations will be prepared as heretofore. 2238 “The conclusions here stated are the same conclusions that have been reached in practically every instance by bodies whose duty it is to make decisions based on facts — that it is unsafe and misleading to treat hypothetical questions or to give advance information even on real questions.” (Statement by the Bureau of Internal Revenue, dated August 26, 1919.) 2239 LawTJ428. Leaves of Absence for Internal-Revenue Officers.^ — “Sec. 1302. That all internal-revenue agents and in- spectors shall be granted leave of absence with pay, which shall not be cumulative, not to exceed thirty days in any calendar year, under such regulations as the Commissioner, with the approval of the Secretary, may prescribe.” * 2240 Law T[465. Invalidating Clause. — “Sec. 1402. ^ That if any clause, sentence, paragraph, or part of this Act shall for any reason be adjudged by any court of competent jurisdiction to be invalid, such judgment shall not affect, impair, or invalidate the remainder of this Act, but shall be confined in its operation to the clause,^ sentence, paragraph, or part thereof directly involved in the controversy in which such judg- ment has been rendered.” 2241 Cases Involving the Constitutionality of the Revenue Acts of 1916, 1917, and 1918. — [No suit brought under any one of these three Acts has been decided by the Supreme Court.— January 1, 1920.] 2242 Cases Involving the Constitutionality of the Act of October 3, 1913. The following cases arising under the Income Tax Law of October 3, 1913, have been decided in the Supreme Court of the United States. 2243 Frank R. Brushaber, Appellant, v. Union Pacific Railroad Com- pany. (240 U. S. 1.) Appeal from the District Court of the Southern District of New York. [For the opinion see 1[2260.] INC. 396 TAX SUPREME COURT DECISIONS. 2244 John F. Dodge and Horace E. Dodge, Appellants, v. James J. Brady, Collector of Internal Revenue. (240 U. S. 122.) [For the opinion see ^2294.] 2245 John R. Stanton, Appellant, v. Baltic Mining Company et al. (240 U. S. 103.) Appeal from U. S. District Court, District of Massachusetts. [For the opinion see j[2297.] 2246 Tyee Realty Company, Plaintiff in Error, v. Charles W. Anderson,, Collector of Internal Revenue. (240 U. S. 115.) In error to U. S. District Court S. D. New York. [For the opinion see j[2290.] 2247 Edwin Thorne, Plaintiff in Error, v. Charles W. Anderson, Col- lector of Internal Revenue. (240 U. S. 115.) In error to U. S. District Court S. D. New York. [For the opinion see ^2290.] 2248 John F. Dodge and Horace E Dodge, Appellants, v. William H. Osborn, Commissioner of Internal Revenue. (240 U. S. 118.) Appeal from the Court of Appeals of the District of Columbia. 2249 [Comment: The appellants here [P248], sought in the lower courts to enjoin the assessment and collection of the additional tax. The Court of Appeals of the District of Columbia affirmed the decree of the Supreme Court of the District of Columbia dismissing the bill and held that the constitutional questions could not be considered in a proceeding to enjoin collection. The U. S. Supreme Court affirmed. For the opinion see paragraph 2167.] 2250 Howard Gould, Plaintiff in Error, v. Katherine C. Gould (245 U. S. 151.) ^ In error to the Supreme Court of the State of New York. [For the opinion see ][2306.] 2251 Henry R. Towne, Plaintiff in Error, v. Mark Eisner, Collector of Internal Revenue. (245 U. S. 418.) In error to the U. S. District Court for the S. D. of New York. [For the opinion see |[2313.] 2252 William E. Peck & Co., Inc., Plaintift in Error, v. John Z. Lowe Jr., Collector of Internal Revenue. (247 U. S. 165.) In error to the U. S. District Court for the S. D. of New York. [For the opinion see ^[2329.] 2253 E. J. Lynch, Collector of Internal Revenue, Petitioner, v. H C Hornby. (247 U. S. 339.) On writ of certiorari to the U. S. Circuit Court of Appeals for the Eighth Circuit. [For the opinion see ]f2337.] INC. 397 TAX SUPREME COURT DECISIONS. 2254 E T Lynch, Collector of Internal Revenue, Petitioner, v. Henry Turrish. (247 U. S. 221.) i On writ of certiorari to the U. S. Circuit Court of Appeals for the Eighth Circuit. [For the opinion see 1|2351.J 2255 Charles A. Peabody, Plaintiff in Error, v. Mark Eisner, Collector of Internal Revenue. (247 U. S. 347.) In error to the U. S. District Court for the S. D. of New York. [For the opinion see 112378.] 2256 Southern Pacific Company, Plaintiff in Error, v. John Z. Lowe, Jr. Collector of Internal Revenue. (247 U. S. 330.) In error to the U. S. District Court for the S. D. of New York. [For the opinion see 1[2380.] 2257 Gulf Oil Corporation, Petitioner, v. C. J. Lewellyn, Collector of Internal Revenue. (248 U. S. 71.) , r ..u On writ of certiorari to the U. S. Circuit Court of Appeals for the Third Circuit. . i [For the opinion see 1f2395.j 2258 Alvah Crocker, et al., Trustees, Petitioners, v. John F. Malley, Collector of Internal Revenue. (249 U. S. 223.) On writ of certiorari to the U. S. Circuit Court of Appeals for the First Circuit. i [For the opinion see Tf2399.J 2259 Emily R. DeGanay, v. Ephraim Lederer, Collector of Internal Revenue. (250 U. S. 376.) i r i n-u* a Certificate from the U. S. Circuit Court of Appeals for the Third Circuit. . . 1 [Eor the opinion see 1[240b.j Brushaber v. U. P. Railroad Company. (240 U. S. 1.) 2260 The appended decision of the Supreme Court of the United case of Frank R. Brushaber v. Union Pacific Railroad Co. is publish^ for the information of internal-revenue officers and others concerned, (i. L>. 2290, Jan. 31, 1916.) (January 24, 1916.) Mr. Chief Justice White delivered the opinon of the Court. 2261 As a stockholder of the Union Pacific Railroad Company the appell^t filed his bill to enjoin the corporation from complying with the income tax provisions of the Tariff Act of October 3 1913 (Section II, ch. 166). Because of constitutional questions duly arising the case is here on direct appeal from a decree sustaining a motion to dismiss because no ground fo 2262 '^he^^^i^ght to prevent the corporation from returning tax was based upon many averments as to the repugnancy of the statute to the Constitution of the United States, of the peculiar relation of the cor- poration to the stockholders and their particular interests resulting from many of the administrative provisions of the assailed act, of the confusion, wrong and multiplicity of suits and the absence of all means of redress which would result if the corporation paid the tax and complied with the act in without protest, as it was alleged it was its intention to do. To put out of the 398 TAX INC. SUPREME COURT DECISIONS. way a question of jurisdiction we at once say that in view of these averments and the ruling in Pollock v. Farmers’ Loan & Trust Co., 157 U. S. 429, sustaining the right of a stockholder to sue to restrain a corporation under proper averments from voluntarily paying a tax charged to be unconstitutional on the ground that to permit such a suit did not violate the prohibitions of Section 3224, Revised Statutes, against enjoining the enforcement of taxes, we are of opinion that the contention here made that there was no jurisdiction of the cause since to ener- tain it would violate the provisions of the Revised Statutes referred to is without merit. Before coming to dispose of the case on the merits, however, we observe that the defendant corporation having called the attention of the government to the pendency of the cause and the nature of the controversy and its unwilling- ness to voluntarily refuse to comply with the act assailed, the United States as amicus curiae has at bar been heard both orally and by brief for the purpose of sustaining the decree. 2263 Aside from the averments as to citizenship and residence, recitals as to the provisions of the statute and statements as to the business of the corporation contained in the first ten paragraphs of the bill advanced to sustain jurisdiction, the bill alleged twenty-one constitutional objections specified in that number of paragraphs or subdivisions. As all the grounds assert a violation of the Constitution, it follows that in a wide sense they all charge a repugnancy of the^ statute to the Sixteenth Amendment under the more immediate sanction of which the statute was adopted. 2264 The various propositions are so intermingled as to cause it to be difficult to classify them. We are of opinion, however, that the confusion is not inherent, but rather arises from the conclusion that the Sixteenth Amendment provides for a hitherto unknown power of taxation, that is, a power to levy an income tax which although direct should not be subject to the regulation of apportionment applicable to all other direct taxes. And the far-reaching effect of this erroneous assumption will be made clear by generalizing the many conten- tions advanced in argument to support it, as follows: (a) The Amendment author- izes only a particular character of direct tax without apportionment, and there- fore if a tax is levied under its assumed authority which does not partake of the characteristics exacted by the Amendment, it is outside of the Amendment and is . void as a direct tax in the general constitutional sense because not appor- tioned. (b) As the Amendment authorizes a tax only upon incomes “from whatever source derived,’’ the exclusion from taxation of some income of desig- nated persons and classes is not authorized and hence the constitutionality of the law must be tested by the general provisions of the Constitution as to taxation, and thus again the tax is void for want of apportionment, (c) As the right to tax “incomes from whatever source derived’’ for which the Amendment pro- vides must be considered as exacting intrinsic uniformity, therefore no tax comes under the authority^ of the Amendment not conforming to such standard, and hence all the provisions of the assailed statute must once more be tested solely under the general and pre-existing provisions of the Constitution, causing the statute again to be void in the absence of apportionment, (d) As the power conferred by the Amendment is new and prospective, the attempt in the statute to make its provisions retroactively apply is void because so far as the retro- active period is concerned, it is governed by the pre-existing constitutional re- quirement as to apportionment. 2265 But it clearly results that the propositions and the contentions under it, if acceded to, would cause one provision of the Constitution to destroy another; that is, they would result in bringing the provisions of the Amendment exempting a direct tax from apportionment into irreconcilable conflict with the general requirements that all direct taxes be apportioned. Moreover, the tax authorized by the Amendment, being direct, would not come under the rule of uniformity applicable under the Constitution to other than direct taxes, and thus it would come to pass that the result of the Amendment would be to authorize a particular direct tax not subject either to apportionment or to the rule of geographical uniformity, thus giving power to impose a different tax in one state or states than was levied in another state or states. This result instead of simplifying the situation and making clear the limitations on the taxing power, which obviously the Amendment must have been intended to accomplish, would create radical and destructive changes in our constitutional system and multiply confusion. 2266 But let us by a demonstration of the error of the fundamental proposition as to the significance of the Amendment dispel the confusion necessarily arising from the arguments deduced from it. Before coming, however, to the INC. 399 TAX SUPREME COURT DECISIONS. text of the Amendment, to the end that its significance may be determined in the light of the previous legislative and judicial history of the subject with which the Amendment is concerned and with a knowledge of the conditions which p sumpt^vely Ted up to its adoption and hence of the purpose it was intended to accomplish, we make a brief statement on those subjects. 2267 That the authority conferred upon Congress by section ^ J “to lay and collect taxes, duties, imposts and excises is exhaustive ana embraces every conceivable power of taxation has never been it has, has been so often authoritatively declared as to render ^ ^ to state the doctrine. And it has also never been questioned from the lonnda tion without stopping presently to determine under which of ings The power was properly to be classed, that there was authority given as the part was included in the whole, to lay and collect income taxes. Again, it has never moreover been questioned that the conceded complete and all- emtacing taxing power was subject, so far as they were f to limitations resulting from the requirements of ^rt. I, sec. 8, cl. 1, that an duties imposts and excises shall be uniform throughout the United btates, and t^the imitations of Art. I, sec. 2, cl. 3, that “direct taxes shall be apportioned among thrse^era^^ of Art.’l, sec. 9, cl. 4, that “no capitation or other ^direct, tax shall be laid, unless in proportion to the census or enumeration hereinbefore directed to be taken.” In fact the two great subdivisions embracing the complete and perfect delegation of the power tax ^;^Vh.ef fustic limitations as to such power were thus aptly stated by ^hief in Pollock V. Farmers’ Loan & Trust Company supra, at page 557^ of direct matter of taxation, the Constitution recognizes the two great classes ot direct and indirect taxes, and lays down two rules by which their imposition must be^governed, namely: The rule of apportionment ^as to direct taxes, and ^he rule^of uniformity as to duties, imposts and excis^es. the ever as long ago pointed out in Veazie Bank v. Fenno, 8 Wall, 533, 541, that the requirement of apportionment as to one of the great classes and of uniformity a^to the other class were not so much a limitation upon the complete and all embracing authority to tax, but in their essence were simply F^g^JfVhrwho^e Lrning the mode in which the plenary power was to be exerted. In the whole history of the Government down to the time of the adoption of the Sixteenth Amendment, leaving aside some conjectures expressed to p^ssibihty of a tax lying intermediate between the two great classes and embraced by neither, no question has been anywhere made as to the correctness of these proposition's. At the very beginning, however, there arose differences of opinion conc^nmg the criteria t7 be applied in determining in which of the two great subdivisions a tax would fall. Without pausing to state at length the basis of these differences and the consequences which arose frc^ them, as the w^® ® subject was elaborately reviewed in Pollock v. Farmers Loan & Tru Comoanv 157 U. S. 429; 158 U. S. 601, we make a condei^ed statement which is in^substance taken from what was said in that case. Early the were manifested in pressing on the one hand and opposing on other the passage of an act levying a tax without apportionment on carriages for the Conveyance of persons^ and when such a tax was enacted the yo^tion o its repugnancy to the Constitution soon came to this court for determination. (Hylton V United States, 3 Dali 171.) It was held that the tax came wi hm the^class of excises, duties and imposts and therefore did not CouCt ment, and while this conclusion was agreed to by all fbe members of the court who took part in the decision of the case, there was not an exact coincidence in the reasoning by which the conclusion was sustained. Without stating the minor differences, it may be said with substantial accuracy that the divergent C^asoning was this: On the one hand, that the fax was not m the class of direct taxes requiring apportionment because it ^ was not levied ^ir^ctly on property because of its ownership but rather on its use .^^^/berefore an Lcise duty or impost; and on the other, that in any event the class of direct taxes mcluded only taxes directly levied on real estate because of its owner- ship Putting out of view the difference of reasoning which led to the concurrent conclusion in^ the Hylton case, it is undoubted that it came to pass in legislative practice that the line of demarcation between the two great classes of direct Lxefon the one hand and excises, duties and Imposts on the other which was exemplified by the ruling in that case, was accepted and acted upon. In the INC. 400 TAX SUPREME COURT DECISIONS. first place this is shown by the fact that wherever (and there were a number of cases of that kind) a tax levied directly on real estate or slaves because of ownership It was treated as coming within the direct class and apportionment was pro^aded for, while no instance of^ apportionment as to any other kind of tax IS afforded. Again the situation is aptly illustrated by the various acts taxing incomes^ derived from property of every kind and nature which were enacted beginning in 1861 and lasting during what may be termed the Civil War period It is not disputable that these latter taxing laws were classed under the head of excises, duties and imposts because it was assumed, that they were of that character inasmuch as, although putting a tax burden on income of every kind, including that derived from property real or personal, they were not tapces directly on property because of its ownership. And this practical con- struction came in theory to be the accepted one since it was adopted without dissent by the most eminent of the text-writers. 1 Kent. Com. 254, 256; 1 Story .Const. Lim. (5th ed.) 480; Miller on the Constitution, 237; Pomeroys Constitutional Law, Section 281; Hare Const. Law, Vol. 1 249 Taxation, 502; Ordronaux, Constitutional Legislation, 22^ Upon the lapsing of a considerable period after the repeal of the income tax laws referred to, in 1894 an act was passed laying a tax on incomes from all classes of property and other sources of revenue which was not appor- tionerl, and which therefore was of course assumed to come within the classifi- cation of excises, duties and imposts which were subject to the rule of uniformity but not to the rule of apportionment. The constitutional validity of this law vas challenged on the ground that it did not fall within the class of excises duties and imposts, but was direct in the constitutional sense and was therefore void for want of apportionment, and that question came to this court and was p.assed upon in Pollock v. Farmers’ Loan & Trust Co., 157 U. S. 429* 158 U. S. oUl. ihe court, fully recognizing in the passage which we have previously quoted t^rie all-embracing chamcter of the two great classifications including on the one hana, direct taxes subject to apportionment, and on the other, excises, duties and imposts subject to uniformity, held the law to be unconstitutional in substance for these reasons. Concluding that the classification of direct was adopt^'d for Ihe purpo.se of rendering it impossible to burden by taxation accumulations of property, real or personal, except subject to the regulation of apportionment. It was held that the duty existed to fix what was a direct tax in the constitutional sense so as to accomplish this purpose contemplated by the Constitution (157 U b. Coming to consider the validity of the tax from this point of view, while not questioning at all that in common understanding it was direct merely on in- come and only indirect on property, it was held that considering the substance of ttr.ngs It was direct on property in a constitutional sense since to burden an in- the point of substance to burden the property from which the income was derived and thus accomplish the very thing which the provision as to apportionment of direct taxes was adopted to prevent. As this conclusion but enforced a regulation as to the mode of exercising power under particular circumstances it did not in any way dispute the all embracing taxing authority possessecl by Congress, including necessarily therein the power to im- pose income taxes if only they conformed to the constitutional regulations which were applicable to them. Moreover in addition the conclusion reached in the ioilock case did not in any degree involve holding that income taxes genericallv and necessarily came within the class of direct taxes on property, but on the contrary recognized the fact that taxation on income was in its nature an excise entUled to be enforced as such unless and until it was concluded that to enforce It would amount to accomplishing the result which the requirement as to appor- tionment of direct taxation was adopted, in which case the duty would arise to disregard form and consider substance alone and hence subject the tax to the regulation as to apportionment w’^hich otherwise as an excise would not apply to it. JNothing could serve to make this clearer than to recall that in the Pollock case in so far as the law taxes incomes from other classes of property than real estate and invested personal property, that is, income from “professions, trades employments, or vocations” (158 U. S. 637), its validity was recognized; indeed It was expressly declared that no dispute was made upon that subject and atten- tion was called to the fact that taxes on such income had been sustained as excise taxes in the past. Ib. p. 635. The whole law was, however, declared un- constitutional on the ground that to permit it to thus operate would relieve real estate and invested personal property from taxation and “would leave the burden ot the tax to be borne by professions, trades, employments, or vocations; and in that way what was intended as a tax on capital would remain, in substance, a INC. 401 TAX SUPREME COURT DECISIONS. tax on occupations and labor” (Ib. p. 637), a result which it was held could not have been contemplated by Congress. 2269 This is the text of the Amendment: “That Congress shall have power to lay and collect taxes on incomes from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.” 2270 It is clear on the face of this text that it does not purport to confer power to levy income taxes in a generic sense — an authority already possessed and never questioned— or to limit and distinguish between one kind of income taxes and another, but that the whole purpose of the Amendment was to relieve all income taxes when imposed from apportionment from a consideration of the source whence the income was derived. Indeed, in the light of the history which we have given and of the decision in the Pollock case and the ground upon which the ruling in that case was based, there is no escape from the conclusion that the Amendment was drawn for the purpose of doing away for the future ^with the principle upon which the Pollock case was decided, that is, of determining whether a tax on income was direct not by a consideration of the burden placed on the taxed income upon which it directly operated, but by taking into view the burden which resulted on the property from which the income was derived, since in express terms the Amendment provides that income taxes, from what- ever source the income may be derived, shall not be subject to the regulations of apportionment. From this in substance it indisputably arises, first, that all the contentions which we have previously noticed concernnig the assumed hm- itations to be implied from the language of the Amendment as to the nature and character of the income taxes which it authorized find no support in the text and are in irreconcilable conflict with the very purpose which the Amendment was adopted to accomplish. Second, that the contention that the Amendment treats a tax on income as a direct tax although it is relieved from apportionment and is necessarily therefore not subject to the rule of uniformity as such rule only applies to taxes which are not direct, thus destroying the two great dassi- fications which have been recognized and enforced from the beginning, is also wholly without foundation since the command of the Amendment that all income taxes shall not be subject to apportionment by a consideration of the sources from which the taxed income may be derived, forbids the application to such taxes of the rule applied in the Pollock case by which alone such taxes were removed from the great class of excises, duties and imposts subject to the rule of uniformity and were placed under the other or direct class. This must be unless it can be said that although the Constitution as a^ result of the Amendment in express terms excludes the criterion of source of income, that criterion yet mains for the purpose of destroying the classifications of the constitution by taking an excise out of the class to which it belongs and transferring it to a class in which it cannot be placed consistently with the requirements of the Constitution. Indeed, from another point of view, the Amendment demonstrates that no such purpose was intended and on the contrary shows that it was drawn with the object of maintaining the limitations of the Constitution and harmonizing their operation. We say this because it is to be observed that although from the date of the Hylton case because of statements made in the opinions in that case it had come to be accepted that direct taxes in the constitu- tional sense were confined to taxes levied directly on real estate because of its ownership, the Amendment contains nothing repudiating or challenging the ruling in the Pollock case that the word direct had a broader significance since it em- braced also taxes levied directly on personal property because of its ownership, and therefore the amendment at least impliedly makes such wider significance a part of the constitution — a condition which clearly demonstrates that the purpose was not to change the existing interpretation except to the extent necessary to accomplish the result intended, that is, the prevention of the resort to the gQ'Qj-Qgs from which a taxed income was derived in order to cause a direct tax on the income to be a direct tax on the source itself and thereby to take an income tax out of the class of excises, duties and imports and place it in the class of direct taxes. , . . , i • 2271 We come then to ascertain the merits of the many contentions^ made in the light of the Constitution as jt now stands, that is to say including within its terms the provisions of the Sixteenth Amendment as correctly inter- preted We first dispose of two propositions assailing the validity of the statute on the one hand because of its repugnancy to the Constitution in other respects, and especially because its enactment was not authorized by the Sixteenth Amend- ment. INC. 402 TAX SUPREME COURT DECISIONS. 2272 The statute was enacted October 3, 1913, and provided for a general^ yearly- income tax from December to December of each year. Exceptionally, however, it fixed a first period embracing only the time from March 1, to Decem- ber 31, 1913, and this limited retroactivity is assailed as repugnant to the due process clause of the Fifth Amendment and as inconsistent with the Sixteenth Awiendment itself. But the date of the retroactivity did not extend beyond the time when the Amendment was operative, and there can be no dispute that there was power by virtue of the A.rnendment during that period to^ levy the tax, without apportionment, and so far as the limitations of the Constitution in other respects are concerned, the contention is not open, since^ in Stockdale vs. Insurance Companies, 20 Wall 323, 331, in sustaining a provision in a prior income tax law which was assailed because of its retroactive character, it was said: “The right of Congress to have imposed this tax by a new statute, although the measure of it was governed by the income of the past year, cannot be doubted, much less can it be doubted that it could impose such a tax on the income of the current year, though part of that year had elapsed when the statute was passed. The joint resolution of July 4, 1864, imposed a tax of five per cent, upon all income of the previous year, although one tax on it had already been paid, and no one doubted the validity of the tax or attempted to resist it.” 2273 The statute provides that the tax should not apply to enumerated organ- izations or corporations, such as labor, agricultural or horticultural organ- izations, mutual savings banks, etc., and the argument is that as the Arnendmcnt authorized a tax on incomes “from whatever source derived,” by implication it excluded the power to make these exemptions. But this is only a form of pt- pressing the erroneous contention as to the meaning of the Amendment, which we have already disposed of. And so far as this alleged illegality is based on other provisions of the Constitution, the contention is also not open, since it was expressly considered and disposed of in Flint v. Stone Tracy Co., 220 U. S. 108, 173. _ _ 2274 Without expressly stating all the other contentions, we summarize them to a degree adequate to enable us to typify and dispose of all of them. 2275 1. The statute levies one tax called a normal tax on all incomes of in- dividuals up to $20,000 and from that amount up by gradations, a pro- gressively increasing tax called an additional tax, is imposed. No tax, however, is levied upon incomes of unmarried individuals amounting to $3,000 or less nor upon incomes of married persons amounting to $4,000 or less. The progressive tax and the exempted amounts, it is said, are based on wealth alone and the tax is therefore repugnant to the due process clause of the Fifth Amendment. 227G 2. The act provides for collecting the tax at the source, that is, makes it the duty of corporations, etc., to retain and pay the sum of the tax on interest due on bonds and mortgages, unless the owner to whom the interest is payable gives a notice that he claims an exemption. This duty cast upon cor- porations, because of the cost to which they are subjected, is asserted to be repugnant to due process of law as a taking of their property without compen- sation, and we recapitulate various contentions as to discrimination against corporations and against individuals predicated on provisions of the act dealing with the subject: 2277 (a) Corporations indebted upon coupon and registered bonds are dis- criminated against, since corporations not so indebted are relieved of any labor or expense involved in deducting and paying the taxes of individuals on the income derived from bonds. 2278 (b) Of the class of corporations indebted as above stated, the law further discriminates against those which have assumed the payment of taxes on their bonds, since, although some or all of their bondholders may be exempt from taxation, the corporations have no means of ascertaining such fact, and it would therefore result that taxes would often be paid by such corporations when no taxes were owing by the individuals to the Government. 2279 (c) The law discriminates against owners of corporate bonds in favor of individuals, none of whose income is derived from such property, since bondholders are, during the interval between the deducting and the paying of the tax on their bonds, deprived of the use of the money so withheld. 2280 (d) Again corporate bondholders are discriminated against because the law does not release them from payment of taxes on their bonds even after the taxes have been deducted by the corporation, and therefore if after deduc- tion the corporation should fail, the bondholders would be compelled to pay the tax a second time. INC. 403 TAX SUPREME COURT DECISIONS. 2281 (e) Owners of bonds the taxes on which have been assumed by the cor- porations are discriminated against because the payment of the taxes by the corporation does not relieve the bondholders of^ their duty to include the income from such bonds in making a return of all income, the result being a double payment of the taxes, labor and expense in applying for a refund, and a deprivation of the use of the sum of the taxes during the interval which elapses before they are refunded. . , , . , i, j 2282 3. The provision limiting the amount of interest paid which may be de- ducted from gross income of corporations for the purpose of fixing the taxable income to interest on indebtedness not exceeding one-half the sum of bonded indebtedness and paid-up capital stock, is also charged to be wanting in due process because discriminating between different classes of corporations and individuals. .... 2283 4. It is urged that want of due process results from the provision allow- ing individuals to deduct from their gross income dividends paid them by corporations whose incomes are taxed and not giving such rights of deduction to corporations. i ^ ..t, 2284 5 Want of due process is also asserted to result from the fact that the act allows a deduction of $3,000 or $4,000 to those who pay the normal tax that is, whose incomes are $20,000 or less, and does allow the deduction to those whose incomes are greater thati $20,000; that is, such persons are not allowed for the purpose of the additional or progressive tax a second right to deduct the $3,000 or $4,000 which they have already enjoyed. And a further violation of due process is based on the fact that for the purpose of the addi- tional tax no second right to deduct dividends received from corporations is permitted. , . . 2285 In various forms of statement, want of due process, it is moreover in- sisted, arises from the provisions of the act allowing a deduction for the purpose of ascertaining the taxable income of stated amounts on the ground that the provisions discriminate between married and single people and dis- criminate between husbands and wives who are living together and those who l?8G°7. Discrimination and want of due process results, it is said, from the fact that the owners of houses in which they live are not compelled to estimate the rental value in making up their incomes, while those who are living in rented houses and pay rent are not allowed, in making up their taxable income, to deduct rent which they have paid, and that want of due process also results ’from the fact that although family expenses are not as a rule permitted to be deducted from gross, to arrive at taxable income, farmers are permitted to omit from their income return, certain products of the farm which are sus- ceptible of use by them for sustaining their families during the year. 2287 So far as these numerous and minute, not to say in many respects hyper- critical contentions, are based upon an assumed violation of the uni- formity clause, their want of legal merit is at once apparent, since it is settled that that clause exacts only a geographical uniformity and there is not a sem- blance of ground in any of the propositions for assuming that a violation of such uniformity is complained of. Knowlton v. Moore, 178 U. S. 41; Patron v. Brady 184 U. S. 608, 622; Flint v. Stone Tracy Co. 220 U. S. 107, 158; Billings V. United States, 232 U. S. 608, 622. r-r i a • i 2288 So far as the due process clause of the Fifth Amendment is relied upon, it suffices to say that there is no basis for such reliance since it is equally well settled that such clause is not a limitation upon the taxing power conferred upon Congress by the Constitution; in other words, that the Constitution does not conflict with itself by conferring upon the one hand a taxing power and takino- the same power away on the other by the limitations of the due process clause Treat v. White, 181 U. S. 264; Patton v. Brady, 184 U. S. 608; McCray V United States, 195 U. S. 27, 61; Flint v. Stone Tracy Co., supra; Billings v. United States, 232 U. S. 261, 282. And no change in the situation here would arise even if ’it be conceded, as we think it must be, that this doctrine would have no application in a case where although there was a seeming exercise of the taxing power, the act complained of was so arbitrary as to constrain to the conclusion that is was not the exertion of taxation but a confiscation of property, that is, a taking of the same in violation of the Fifth Amendment, or, what is equivalent thereto, was so wanting in basis for classification as to produce such a gross and patent inequality as to inevitably lead to the same conclusion. We say this because none of the propositions relied upon in the remotest degree present such questions. It is true that it is elaborately insisted that although INC. 404 TAX SUPREME COURT DECISIONS. t]iere be no express constitutional provision prohibiting it, the progressive feature of the tax causes it to transcend the conception of all taxation and to be a mere arbitrar}" abuse of power which must be treated as wanting in due process. But the proposition disregards the fact that in the very early history of the Government a progressive tax was imposed by Congress and that such authority was exerted in some if not all of the various income taxes enacted prior to 1894 to \yliich we have previously adverted. And over and above all this the con- tention but disregards the further fact that its absolute want of foundation in reason was plainly pointed out in Knowlton v. Moore, supra, and the right to urge it was^ necessarily foreclosed by the ruling in that case made. In this situation, it is, of course, superfluous to say that arguments as to the expediency of levying such taxes or of the economic mistake or wrong involved in their imposition are beyond judicial cognizance. Besides this demonstration of the want of merit in the contention based upon the progressive feature of the tax, the error in the others is equally well established either by prior decisions or by the adequate bases for classification which are apparent on the face of the assailed provisions, that is, the distinction between individuals and corporations, the difference between various kinds of corporations, etc., Knowlton v. Moore, supra Flint v. Stone Tracy Co., supra; Billings v. United States, supra; National Bank v. Commonwealth, 9 Wall 353; Ffational Safe Deposit Co. v. Illinois, 232 IJ. S. 58, 70._ In fact, comprehensively surveying all the contentions relied upon, aside from the erroneous construction of the Amendment which we have pre- viously disposed of, we cannot escape the conclusion that they all rest upon the mistaken theory that although there be differences between the subjects taxed, to differently tax them transcends the limit of taxation and amounts to a want of due process, and that where a tax levied is believed by one who resists its enforcement to be wanting in wisdom and to operate injustice, from that fact in the nature of things there arises a want of due process of law and a resulting authority in the judiciary to exceed its powers and correct what is assumed to be mistaken or uinvise exertions by the legislative authority of its lawful powers, even although there be no semblance of warrant in the Constitution for so doing. 2289 We have not referred to a contention that because certain administrative powers to enforce the act were conferred by the statute upon the Secre- tary of the Treasury, therefore it was void as unwarrantedly delegating legislative authority, because we think to state the proposition is to answer it. Flint v. (dark, 1’43 U. S. 649; Buttfield v. Stranahan, 192 U. S. 470, 496; Oceanic Steam Navigation Co. v. Stranahan, 214 U. S. 320. Affirmed. ^Ir. Justice McReynolds took no part in the consideration and decision of this case. Tyee Realty Company vs. Anderson and Edwin Thorne vs. Anderson. (240 U. S. 115.) 2290 The' appended decision of the Supreme Court of the United States in the case of Tyee Realty Co. v. Anderson, collector, and Edwin Thorne v. Anderson, collecter, is published for the information of internal revenue officers and others concerned. (T. D. 2300, March 3, 1916.) (February 21, 1916.) Mr. Chief Justice White delivered the opinion of the Court. 2291 Both the plaintiffs in error, the one in 393 a corporation, and the other in 394 an individual, paid under protest to the Collector of Internal Revenue, taxes assessed under the Income Tax section of the Tariff Act of October 3, 1913 (Sec. II, ch. 16, 38 Stat. 166). After an adverse ruling by the Commissioner of Internal Revenue on appeals which were prosecuted con- formably to the statute (Rev. Stat. Sections 3220, 3226) by both the parties for a refunding to them of the taxes paid, these suits were commenced to recover lhc amounts paid on the ground of the repugnance to the Constitution of the Section of the Statute under which the taxes had been collected, and the cases are here on direct writs of error to the judgments of the court below sustaining demurrers to both coniplaints on the ground that they stated no cause of action. 2292 }*'vcry contention relied u])on for reversal in the two cases is embraced within the following proposition: (a) that the lax imposed by the statute was not sanctioned by the Sixteenth Amendment because the statute exceeded INC. 405 TAX SUPREME COURT DECISIONS. the exceptional and limited power of direct income taxation for the first time conferred upon Congress by that Amendment and, being outside of the Amend- ment and governed solely therefore by the general taxing authority conferred upon Congress by the Constitution, the tax was void as an attempt to levy a direct tax without apportionment under the rule established by Pollock v. Farmers’ Loan & Trust Company, 157 U. S. 429; 158 U. S. 601. (b) That the statute is moreover repugnant to the Constitution because of the provision therein contained for its retroactive operation for a designated time and because of the illegal discrmiination and inequalities which it creates, including the provision for a progressive tax on the income of individuals and the method provided in the statute for computing the taxable income of corporations. 2293 But we need not now enter into an original consideration of the merits of these contentions, because each and all of them were considered and adversely disposed of in Brushaber v. Union Pacific Railroad Company [^2260]. That case, therefore, is here absolutely controlling and decisive. It follows chat for the reasons stated in the opinion in the Brushaber case the judgments in these cases must be and they are AFFIRMED. Dodge vs. Brady. (240 U. S. 122.) 2294 The appended decision of the Supreme Court of the Utrlted States jn the case _of Dodge v. Brady, collector, is published for the information of internal-revenue officers and others concerned, (T. D. 2302, March 3, 1916.) (February 21, 1916.) Mr. Chief Justice White clelivered the opinion of tlie Court. 2295 The appellants are the same persons who sued in Dodge v. Osborn, just decided [t[2167]. After the dismissal of that suit by the Supreme Court of the District of Columbia for want of jurisdiction the parties, on June 10, 1914, filed their bill in the court below against the Collector of Internal Revenue to enjoin the collection of the surtaxes assessed against them which were dis- puted in the previous case on substantially the same grounds alleged in the complaint in that case. The bill alleged, however, that plaintiffs had filed with the Collector “an appeal or claim for the remission and abatement of the sur- taxes” because of the unconstitutionality of the statute imposing them and that the Commissioner of Internal Revenue to whom the claim bad been forwarded by the Collector had such protest under advisement. Upon the filing of the bill the plaintiffs moved for a preliminary, injunction which ^vus denied July 29 , 1914. On the same day by leave of court a supplemental bill was filed which alleged that since the filing of the original bill the Commissioner of Internal Revenue had ruled adversely upon plaintiffs’ pretest and that thereupon they had paid the surtaxes to the Collector under protest, and they prayed a recovery of the amount paid to the Collector and for the other relief asked in the original bill. The defendant moved to dismiss the bill for w'ant of jurisdiction because the suit was brought to enjoin the collection of a tax contrary to the provisions of Section 3224 Revised Statutes and for want of equity because the Income Tax Law was constitutional and valid. The court sustained the motion on^ the latter ground and dismissed the bill on the merits and the case is here on direct appeal because of the constitutional questions. 2293 The Government insists that the court belorv was rvtihout jurisdiction to decide the merits and we come first to that quesetion. It is apparent if the original bill alone is taken into view that the suit was^ brought to enjoin the collection of a tax and the court was without jurisdiction by the reasons stated in the previous case. And it is argued by tlie Government that there was no jurisdiction under the supplemental bill since it fails to allege that an appeal was taken to the Commissioner of Internal Revenue after the payment of the taxes and that he refused to refund them and therefore fails to allege a 'compliance with the conditions imposed by sections 3220 and 3226 of the Revised Statutes as prerequisites to a suit to recover taxes_ wrongfully collected. But broadly considering the whole situation and taking into view the peculiar facts of the case, the protest to the Commissioner and his exertion of authority over it and his adverse ruling upon the merits of the tax, thereby passing upon every question which he would be called upon to decide on an_ appeal for a refunding of the taxes paid, we think that this case is so exceptional in char- acter as not to justify uf in holding that reversible error was committed by the court below in passing upon the case upon its merits, thus putting an end to further absolutely useless and unnecessary controversy. We say useless and INC. 406 TAX SUPREME COURT DECISIONS. unnecessary because on the merits all the contentions urged by the appellants concerning the unconstitutionality of the law and of the surtaxes which it imposes have been considered and adversely disposed of in Brushaber v. Union Pacific Railroad Company [([2260]. Judgment Affirmed. Stanton v. Baltic Mining Co. (240 U. S. 103.) 2297 The appended decision of the Supreme Court of the United States in the case of Stanton v. Baltic Mining Co. is published for the information of internal-revenue officers and others concerned. (T. D. 2303, March 3. 1916.) (February 21, 1916.) Mr. Chief Justice White delivered the opinion of the Court. 2298 As in Brushaber v. Union Pacific Railroad Company [lf2260], this case was commenced by the appellant as a stockholder of the Baltic Mining Com- pany, the appellee, to enjoin the voluntary payment by the corporation and its officers of the tax assessed against it under the Income Tax section of the Tariff Act of October 3, 1913 (38 Stat. 166, 181). As the grounds for the equitable relief sought in this case so far as the question of jurisdiction is concerned are substantially the same as_ those which were_ relied upon in the Brushaber case, It follows tliat the luling in that case upholding the power to dispose of the con- troversy in controlling here and v;e put that subject out of view. 2299 Further also like the Brushaber case this is before us on a direct appeal prosecuted for the purpose of reviewing the action of the court below in Ciisuiissriig on motion tlie bill for want of equity. 2oOO dhe bill averred: “Tliat under and by virtue of the alleged authority con- tained in said Income Tax Law, if valid and constitutional, the respondent coinpany is taxable at the rate of 1% upon its gross receipts from all sources, during the calendar year ending December 31, 1914, after deducting (1) its ordi- nary and necessary expenses paid within the year in the maintenance and oper- ation of its business and properties and (2) all losses actually sustained within the year and not compensated by insurance or otherwise, including depreciation arising from depletion of its ore deposits to the limited extent of 5% of the ‘gross value at the mdne of the output’ during said year.” It was further alleged that the company would li: not restrained make a return for taxation conformably to the statute and would pay the tax upon the basis stated without protest and that to do so would result in depriving the complainant as a stockholder of rights secured by the Constitution of the United States as the tax which it was proposed to pay without protest was void for repugnancy to that Constitution. The bill contained many averments on the following subjects which may be divided into two generic classes: (A) Those concerning the operation of the law in question upon individuals generally and upon other mining corporations and the discrim- ination against mining corporations which arose in favor of such other cor- porations and individuals by the legislation, as well as discrimination which the provisions of the act operated against mining corporations because of the separate and more unfavorable burden cast upon them by the statute than was placed upon other corporations and individuals— averments all of which were obviously made to support the subsequent charges which the bill contained as to the re- pugnancy of the law imposing the law to the equal protection, due process and uniformity clauses of the Constitution. And (B) those dealing with the practical results on the company of the operation of the tax in question evidently alleged for the purpose of sustaining the charge which the bill made that the tax levied was not what was deemed to be the peculiar direct tax which the Sixteenth Amendment exceptionally authorized to be levied without apportionment and of t^he resulting repugnancy of the tax to the Constitution as a direct tax on property because of its ownership levied without conforming to the regulation of appor- tionment generally required by the Constitution as to such taxation. 2301 We need not more particularly state the averments as to the various con- tentions in class (A), as their character will necessarily be made manifest by the statement of the legal propositions based on them which we shall hereafter have occasion to make. As to the averments concerning class (B), it suffices to say that it resulted from copious allegations in the bill as to the value of the ore body contained in the mine which the company worked and the total output for the year of the product of the mine after deducting the expenses as previously stated, that the 5 % deduction permitted by the statute was inadequate to allow for the depletion of the ore body and therefore the law to a large extent taxes not the mere profit arising from the operation of the mine, but taxes as income the INC. 407 TAX SUPREME COURT DECISIONS. yearly product which represented to a large extent the yearly depletion or ex- haustion of the ore body from which during the year ore was taken. Indeed, the following alleged facts concerning the relation which the annual production bore to the exhaustion or diminution of the property in the ore bed must be taken as true for the purpose of reyiewing the judgment sustaining the motion to dismiss the bill. , . , , , ^ ^ “That the real or actual yearly income deriyed by the respondent company from its business or pronerty, does not exceed $550,000. ihat, undp- the Income Tax the said company is held taxable in an ayerage year, to the amount of approximately $1,150,000, the same being ascertained by deducting from its net receipts of $1 400,000 only a depreciation of $100,000 on its plant and a depletion of its ore supply limited by law to 5 per cent of the yalue of its annual gross re- ceipts and amounting to $150,000; whereas, in order properly to ascertain its actual income $750,000 per annum should be allowed to be deducted for such depletion, or fiye times the amount actually allowed.” j r i 2302 Without attempting minutely to state eyery possible ground ot attack which might be deduced from the ayerments of the bill, but in substance embracing eyery material grieyance therein asserted and pressed in argument upon our attention in the elaborate briefs which haye been submitted, we come to separately dispose of the legal propositions adyanced in the bill and arguments concerning the two classes. . . 2303 Class A Under this the bill charged that the proyisions oi the statute are “unconstitutional and yoid under the Fifth Amendment, in that they deny to mining companies and their stockholders equal protection of the laws and depriye them of their property without due process of law, for the following reasons^ecause all other individuals or corporations were given a right to deduct a fair and reasonable percentage for losses and depreciation of their capital and they were therefore not confined to the arbitrary 5% fixed as the basis for deduc- tions by mining corporations. , . . (2) Because by reason of the difference in the allowances which the statute permitted the tax levied was virtually a net income tax on other corporations and individuals and a gross tax on mining corporations.^ , (3) Because the statute established a discriminating rule as to individuals and other corporations as against mining corporations on the subject of the method of the allowance for depreciations. , j . r .t • (4) Because the law permitted all individuals to deduct from their net income dividends received from corporations which had paid the tax on their incomes, and did not give the right to corporations which had paid their income tax. This was illustrated by the averment that 99 % of the stock of the defendant company was owned by a holding company and that under the statute not only was the corporation obliged to pay the tax on its income, but so also was the holding company obliged to pay on the dividends paid it by the defendant company. (5) Because of the discrimination resulting from the provision of the statute providing for a progressive increase of taxation or surtaxes to individuals and (6) Because of the exemptions which the statute made of individual incomes below $4,000 and of incomes of labor organizations and various other exemptions which were set forth. u But it is apparent from the mere statement of these contentions that each and all of them were adversely disposed of by the decision in the Brushaber case and they all therefore may be put out of view. Class B Under this class these propositions are relied upon: ^ (1) That as the Sixteenth Amendment authorized only an exceptional direct income tax without apportionment, to which the tax in question does not con- form it is therefore not within the authority of that amendment. ( 2 ) Not being within the authority of the Sixteenth Amendment the tax is therefore within the ruling of Pollock v. Farmers’ Loan & Trust Company, 157 U S. 429; 158 U. S. 601, a direct tax and void for want of compliance with the regulation of apportionment. _ , . , . n- . -.i • r c- 2304 As the first proposition is plainly in conflict with the meaning of the Six- teenth Amendment as interpreted in the Brushaber case it may also be nut out of view As to the second, while indeed it is distinct from the subjects considered in the Brushaber case to the extent that the particular tax which the statute levies on mining corporations here under consideration is distinct from the tax on corporations other than mining and on individuals which was disposed of in the Brushaber case, a brief analysis will serve to demonstrate that the dis- INC. 408 TAX SUPREME COURT DECISIONS. tinction is one without a difference and therefore that the proposition is also fore- closed by the previous ruling. The contention is that as the tax here imposed is not on the net product but in a sense somewhat equivalent to a tax on the gross product of the working of the mine by the corporation, therefore the tax is not within the purview of the Sixteenth Amendment and consequently it must be treated as a direct tax on property because of its ownership and as such void for want of apportionment. But aside from the obvious error of the proposition intrinsically considered, it manifestly disregards the fact that by the previous ruling it was settled that the provisions of the Sixteenth Amendment conferred no new power of taxation but simply prohibited^ the previous complete and plenary power of income taxation possessed by Congress from the beginning from being taken out of the category of indirect taxation to which it inherently belonged and being placed in the category of direct taxation subject to appor- tionment by a consideration of the sources from which the income was derived, that is by testing the tax not by what it was — a tax on income, but by a mistaken theory deduced from the origin or source of the incomie taxed. Mark, of course, in sa 3 dng this we are not here considering a tax not within the provisions of the Sixteenth Amendment, that is, one in which the regulation of apportionment or the rule of uniformity is wholly negligible because the tax is one entirely beyond the scope of the taxing power of Congress and where consequently no authority to impose a burden either direct or indirect exists. In other 'words, we are here dealing solely with the restriction imposed by the Sixteenth Amendment on the right to resort to the source whence an income is derived in a case where there is power to tax for the purpose of taking the income tax out of the class of indirect to which it generically belongs and putting in the class of direct to which it would not otherwise belong in order to subject it to the regulation of apportionment. But it is said that although this be undoubtedly true as a general rule, the peculiarity of mining property and the exhaustion of the ore body which must result from working the mine, causes the tax in a case like this where an inadequate allowance by way of deduction is made for the exhaustion of the ore body to be in the nature of things a tax on property because of its ownership and therefore subject to apportionment. Not to so hold, it is urged is as to min- ing property but to say, that mere form controls, thus rendering in substance the command of the Constitution that taxation directly on property because of its ownership be apportioned, wholly illusory or futile. But this merely asserts a right to take the taxation of mining corporations out of the rule established by the Sixteenth Amendment when there is no authority for so doing. It, moreover, rests upon the wholly falacious assumption that looked at from the point of view of substance a tax on the product of a mine is necessarily in its essence and nature in every case a direct tax on property because of its ownership unless adequate allowance be made for the exhaustion of the ore body to result from working the mine. We say wholly fallacious assumption because independently of the effect of the operation of the Sixteenth Amendment it was settled in Stratton’s Independence v. Howbert 231 U. S. 399 that such a tax is not a tax upon property as such because of its ownership, but a true excise levied on the results of the business of carrying on mining operations. (Pp. 413 et seq.) 2305 As it follows from what we have said that the contentions are in substance and effect controlled by the Brushaber case and in so far as this may not be the case are without merit, it results that for the reasons stated in the opinion in that case and those expressed in this, the judgment must be and it is Affirmed. Gould vs. Gould. (245 U. S. 151.) November 19, 1917. Mr. Justice McReynolds delivered the opinion of the Court. 2300 A decree of the Supreme^ Court for New York County entered in 1909 forever separated the parties to this proceeding, then and now citizens of the United States, from bed and board; and further ordered that plaintiff in error pay to Katherine C. Gould during her life the sum of three thousand dollars ($3,000.00) every month for her support and maintenance. The question pre- sented is whether such monthly payments during the years 1913 and 1914 con- stituted parts of Mrs. Gould’s income within the intendment of the Act of Con- gress approved October 3, 1913 (38 Stat. 114, 166), and were subject as such to the tax prescribed therein. The court below answered in the negative; and we think it reached the proper conclusion. INC. 409 TAX SUPREME COURT DECISIONS. 2307 Pertinent portions of the Act follow: “Section II, A. Subdivision 1. That there shall be levied, assessed, col- lected and paid annually upon the entire net income arising or accruing from all sources in the preceding calendar year to every citizen of the United States, whether residing at home or abroad, and to every person residing in the United States, though not a citizen thereof, a tax of 1% per annum upon such income, except as hereinafter provided; * * * “B. ihat, subject only to such exemptions and deductions as are hereinafter allowed, the net income of a taxable person shall include gains, profits, and in- come derived from salaries, wages, or compensation for personal service of what- ever kind and in whatever form paid, or from professions, vocations, businesses, trade, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in real or personal property, also from interest, rent, dividends, securities, or the transaction of any lawful business carried on for gain or profit, or gains or profits and income derived from any source whatever, including the income from but not the value of property acquired by gift, bequest, devise, or descent: * ^ ^ 230^ In the interpretation of statutes levying taxes it is the established rule not to extend their provisions, by implication, beyond the clear import of the language used or to enlarge their operations as to embrace matters not specifically pointed out. In case of doubt they are construed most strongly against the Government, and in favor of the citizen. United States v. Wiggles- worth, 2 Story 369; American Net and Twine Company v. Worthington, 141 U. S. 468, 474; Benziger v. United States; 192 U. S. 38, 55. 2809 As appears from the above quotations, the net income which sub- division 1 directs an annual tax shall be assessed, levied, collected and paid is defined in division B. The use of the word itself in the definition of “income” causes some obscurity, but we are unable to assert that alimony paid to a divorced wife under a decree of court falls fairly within any of the terms employed. 2310 In Audubon v. Shufeldt, 181 U. S. 575, 577, 578, we said: “Alimony does not arise from any business transaction, but from the relation of mar- riage. It is not founded on a contract, express or implied, but on the natural and legal duty of the husband to support the wife. The general obligation to support is made specific by the decree of the court of appropriate jurisdiction, ♦ * * Permanent alimony is regarded rather as a portion of the husband’s estate to which the wife is equitably entitled, than as strictly a debt; alimony from time to time may be regarded as a portion of his current income or earn- ings; * * * 2311 The net income of the divorced husband subject to taxation v/as not de- creased by payment of alim.ony under the court’s order; and, on the other hand, the sum received by the wife on account thereof cannot be regarded as income arising or accruing to her within the enactment. 2312 The judgment of the court below is Affirmed. Towne v. Eisner. (245 U. S. 418.) 2313 The appended decision of the Supreme Court of the United States in the case of Henry R. Towne v. Mark Eisner, collector, is published for the information of internal-revenue officers and others concerned. (T. D. 2634, Tan. 21, 1918.) (January 7, 1918.) Mr. Justice Holmes delivered the opinion of the Court. 2314 This is a suit to recover the amount of a tax paid under duress in respect of a stock dividend alleged by the Government to be income. A de- murrer to the declaration was sustained by the District Court and judgment was entered for the defendant, 242 Fed. Rep. 702. The facts alleged are that the corporation voted on December 17, 1913, to transfer $1,500,000 surplus, being profits earned before January 1, 1913, to its capital account, and to issue fifteen thousand shares of stock representing the same to its stockholders of record on December 26; that the distribution took place on January 2, 1914, and that the plaintiff received as his due proportion four thousand and one hundred and seventy-four and a half shares. The defendant compelled the plaintiff to pay an income tax upon his stock as equivalent to $417,450 income in cash. The District Court held that the stock was income within the mean- ing of the Income I' ax Act of October 3, 1913, c. 16, Section II; A, subdivision 1 and 2; and B. 38 Stat. 114, 166, 167. It also held that the Act so constructed < « « c INC. 410 TAX SUPREME COURT DECISIONS. was constitutional, whereas the declaration set up that so far as the Act pur- ported to confer power to make this levy it was unconstitutional and void. 2315 The Government in the first place moved to dismiss the case for want of jurisdiction, on the ground that the only question here is the construction of the statute, not its constitutionality. It argues that if such a stock dividend is not income within the meaning of the constitution, it is not income within the intent of the statute, and hence that the meaning of the Sixteenth amendment is not^ an immediate issue, and is important only as throwing light on the con- struction of the Act. But it is not necessarily true that income means the same thing in the Constitution and the Act. A word is not a cr3^stal, trans- parent and unchanged; it is the skin of a living thought and may vary greatly in color and content according to the circumstances and the time in which it is used. Larnar v. United States, 240 U. S. 60, 65. Whatever the meaning of the Constitution, the Government had applied its force to the plaintiff on the assertion that the statute authorized it to do so, before the suit was brought, and the Court below has sanctioned its course. Bhe plaintiff says that the statute as it is construed and administered is unconstitutional. He is not to be defeated by the reply that the Government does not adhere to the construction by virtue of which alone it has taken and keeps the plaintiff’s money, if this Court should think that the construction would make the Act unconstitutional. While it keeps the money it opens the question whether the Act construed as it has construed It can be maintained. The motion to dismiss is overruled. Billings v. United States 232 U. S. 261, 276. B. Altman-Comany v. United States 224 U. S. 583, 396, 597. 2316 The case being properly here, however, the construction of the Act is open, as well as its constitutionality, if construed as the Government has construed it by its conduct. Billings v. United States ubi supra. Notwithstanding the^ thoughtful discussion that the case received below we can not doubt that the dividend^ was capital as well for the purposes of the Income Tax Law as for distribution between tenant for life and remainderman. What was said by this Court upon the latter question is equally true for the former. “A stock dividend really takes nothing from the property of the corporation, and adds nothing to the interest of the shareholders. Its property is not diminished and their inter- ests are not increased. * * * The proportional interest of each shareholder r-emains the same. The only change is in the evidence which represents that interest, the new shares and the original shares together representing the same proportional interest that the original shares represented before the issue of the new ones.” Gibbons v. Mahon, 136 U, S. 549, 559, 560. In short, the corporation IS no poorer and the stockholder is no richer than they were before Logan County V. United States, 169 U. S. 255, 261. If the plaintiff gained any small advantage by the change it certainly was not an advantage of $417,450, the sum upon which he was taxed. It is alleged and admitted that he received no more in the way of dividends and that his old and new certificates together are worth only what the old ones were worth before. If the sum had been carried from ^ capital account without a corresponding issue of stock certificates, which there was nothing in the nature of things to prevent, we do not suppose that any one would contend that the plaintiff had received an accession to his income PresumaMy his certificate would have the same value as before. Again it certificates for $1,000 par were split up in ten certificates, each for $100 we presume that no one would call the new certificates income. What has happened IS that the plaintiff’s old certificates have been split up in effect and have dim- inished in value to the extent of the value of the new. ^ . Judgment reversed. Mr. Justice McKenna concurs in the result. [For refund, because of above decision, of taxes paid, see [[2129.] [For the bearing of the above on the question of the taxing of stock dividends as income under the Revenue Acts of 1916, 1917 and 1918, see [[850.] [For U. S. District Court decision on “stock dividends” under Revenue Act of 1916 see [[853.] 2317 Digest of the Recert Decisions of the Supreme Court.— [Comment: Of the cases referred to those brought under the Act of October 3, 1913 only, are reproduced in full as indicated by the paragraph references. The other cases digested were brought under the Excise Tax Act of August 5, 1909.) The following propositions of law, slated for the information and guidance of internal revenue officers and others concerned, are expressed or implied in the recent decisions of the Supreme Court of the United States, in United States INC. 411 TAX SUPREME COURT DECISIONS. V. Biwabik Mining Company (T, D. 2721) (247 U- S 116) Goldfield Consolidated Mines Company v. Scott (T. D. 2722) (247 U. S. 126) Doyle v. Mitchell Br^. Co (T D 2723) (247 U. S. 179), Hays v. Gauley Mountain Coal Company (i. U. 'nxi U ^ 189). United States v. Cleveland, Cincinnati, Chicago & St. Louis Railway Company (T, D, 2725) (247 U. S. 195), William E. Peck & Co. (Inc.) V. Lowe (T. D. 2726 [1123291, Lynch v. Turnsh (T. D. 2729) [|23511 South- ern Pacific V. Lowe (T. D. 2730 [[[2380], Lynch v Hornby (T. D. 2731) [112337], and Peabody v. Eisner (T. D. 2732) [^2378] : , • m t a * =: 2318 1. In the determination of net income the Excise^ iax ot August t), 1909, permitted the deduction from gross income of “a reasonable allow- ance for depreciation of property, if any”; the Income Tax Act of October 3, 1913 permitted “a reasonable allowance, for the exhaustion, wear and tear of property arising out of its use or employment in the business, not to exceed, in the case of mines, 5 per centum of the gross value at the mine ot the output for the year for which the computation is made ; and the Income Act of September 8, 1916, as amended permits, in the case of mines, a reponable allowance for depletion thereof not to exceed the market value in the mine of the product thereof which has been mined and sold during the year for which the return and computation are made.” 2319 (a) As mining leases are not conveyances of the ore in place, but are grants of the privilege of entering upon the premises and mining and removing the ore, under none of the Acts of 1909, 1913 or 1916, may a lessee of mining property deduct as so much depletion of capital assets the propor- tionate value in place on January 1, 1909, or any other date, of each ton of ore mined during the taxable year. See T. D. 1606 (75); Article 145 of Regulations No 33- and Article 8, 171 and 172 of Regulations No. 33 (revised). (United States V. Biwabik Mining Company. See Von Baumbach v. Sargent Land Com- pany, 242 U. S. 503.) . .... 2320 (b) Under the Act of 1909 a mining corporation owning its mine is not entitled to a deduction from its gross income of any amount whatever on account of depletion or exhaustion of the ore bodies caused by its operations for the year for which the tax is assessed, nor to a deduction against the gross proceeds from the mining and treatment of ores to the extent of the cost value of the ore in the ground before it was mined. T. D. 1675 (80-89) and T. D. 1742 (96-105) are modified accordingly. In view of their different provisions this rule is inapplicable to situations arising under the Acts of 1913 and 1916. See Articles 141 and 142 of Regulations No. 33; and Articles 8, 171 and 172 of Re-^mlations No 33 (revised). (Goldfield Consolidated Mines Company v. Scott. See Stratton’s Independence v. Howbert, 231 U. S. 399; Stanton v. Baltic Mining Compan}'-, 240 U. S. 103.) i .i 2321 2. The Excise Tax Act of August 5, 1909, measured the tax by the net income of a corporation “received” by it from all sources during the taxable year; the Income Tax Act of October 3, 1913, imposed the tax upon the net income “arising or accruing” from all sources during the taxable year; and the Income Tax Act of September 8, 1916, as amended upon the net income “received” from all sources during the taxable year. 2322 (a) Where property is acquired by a corporation and subsequently sold for a higher price, under all three Acts the gain on the sale is income to the corporation. If, however, the property was acquired before January 1, 1909 only such portion of the gain as accrued subsequent to December 31, 1908, was ’taxable under the Act of 1909, and if it was acquired before March 1, 1913, only such portion of the gain as accrued subsequent to February 28, 1913, was taxable under the Act of 1913, or is taxable under the Act of 1916. See Regu- lations No. 31, T. D. 1606 (40, 50, 76), T. D. 1675 (37, 48, 75) T. D. 1742 (43, 55, 91); and Articles 88, 101 and 116 of Regulations No. 33 (revised) (Doyle v. Mit’chell Bros. Co.; Hays v. Gauley Mountain Coal Company; United States v. Cleveland, Cincinnati, Chicago & St. Louis Railway Company.) 2323 (b) In order to determine whether there has been gain or loss on a sale, and the amount of the gain, if any, in general under all three Acts an amount must be withdrawn from the gross proceeds sufficient to restore the cost of the property or the capital value that existed at the commencement of the period under consideration (either January 1, 1909, or March 1, 1913). Interest should not be added to the purchase price in order to ascertain the cost of the property. In apportioning the profits derived from a disposition of property acquired before and sold after January 1, 1909, for the purpose of the Act of 1909, or acquired before and sold after March 1, 1913, for^ the purpose of the Act of 1913 the division may be pro rata according to the time elapsed or may be based INC. 412 TAX SUPREME COURT DECISIONS. on an appraisal or inventory taken as of December 31, 1908, or February 28, 1913. This is a matter of detail, to be settled according to the best evidence obtainable and in accordance with valid departmental regulations. For the purpose of the Act of 1916, however, the fair market price or value as of March 1, 1913, to be ascertained in any practicable manner, is the statutory basis for deter- mining the amount of gain on a sale of property acquired before that date. See Regulations No. 31, T. D. 1578, T. 1588, T. D. 1606 (37, 71), T. D. 1675 (36, 55,^69), T. D. 1742 (42, 62, 86); Articles 4, 90, 91, 92, 93, 101, 109, 111, 112 and 116 of Regulations No. 33 (revised), and T. D. 2649. (Doyle v. Mitchell Bros. Co.; Hays v. Gauley Mountain Coal Company; United States v. Cleveland, Cincinnati, Chicago & St. Louis Railway Company.) 2424 (c) The Act of 1913 is valid and constitutional in taxing net income derived from sales in foreign commerce. The same principle applies to the Acts of 1909 and 1916. (William E. Peck & Co. (Inc.) v. Lowe.) 2325 (d) Where a stockholder in a corporation receives as a liquidation divi- dend, representing his share in the distribution of the proceeds of the sale of the property of the corporation upon dissolution, a sum greater than the cost of his stock, under the Acts of both 1913 and 1916 the gain is income to the stockholder. If, however, he acquired the stock before March 1, 1913, only such portion of the gain as accrued subsequent to February 28, 1913, was taxable under the Act of 1913 or is taxable under the Act of 1916. Compare the case of a dividend in ordinary course in paragraph (f) below. See the citations in paragraphs (a) and (b) above. (Lynch v. Turrish). 232<3 (c) Vvherc a corporation owns all the stock and operates a lease all the property and business of another corporation, acting as banker for it and the two corporations being in substance identical and merged for all prac- tical purposes, under the Acts of both 1913 and 1916 surplus of the lessor cor- poration accrues as income to the lessee corporation as and when accumulated by the lessor corporation, notwithstanding the formal distribution of such surplus in dividends to the lessee corporation ma}'- not occur during the taxable year. This special situation forms an exception to the general rule stated in paragraph (f) below. See Articles 125, 207 and 208 of Regulations No. 33 (revised). (Southern Pacific Company v. Lowe.) 2327 (f) Where a stockholder of a corporation receives dividends paid in the ordinary course of business, even though extraordinary in amount, under the Acts of both 1913 and 1916 such dividends are income in the year in which they are received by the stockholder. If paid out of surplus accrued to the corporation prior to March 1, 1913, they were subject to tax under the Act of 1913, although expressly exempt from tax under the Act of 1916. A dividend paid by a going corporation out of current earnings or accumulated surplus when declared by the directors in their discretion, being in the nature of a recurrent return upon the stock, is distinguishable from a so-called dividend in liquidation of the entire assets and business of the corporation, which is a return to the stockholder of the value of his stock upon the surrender of his entire interest in the corporation. Compare the case of a liquidation dividend in para- graph (d) above. Sec Articles 105, 106 and 107 of Regulations No. 33 (revised), T. D. 2659 and T. D. 2678. (Lynch v. Hornby; Peabody v. Eisner.) 2328 (g) A dividend in ordinary course paid on stock of a corporation in prop- erty or stock other than its own is income to the stockholders to the amount of its cash value when received under the Acts of both 1913 and 1916. A dividend paid in stock of another corporation is not a stock dividend. See Articles 4 and 106 of Regulations No. 33 (revised). (Peabody v. Eisner. Compare Towne v. Eisner (245 U. S. 418.) [^2313.] (T. D. 2740, June 24, 1918.) Peck vs. Lowe. (247 U. S. 165.) 2.329 The appended decision of the United States Supreme Court in the case of William E. Peck & Company (Inc.) v. John Z. Lowe, Jr., collector of internal revenue, is published for the information of internal revenue officers and others concerned. (T. D. 2726, June 4, 1918.) (May 20, 1918.) Mr. Justice Van Devanter delivered the opinion of the Court. 2330 This was an action to recover a tax paid under protest and alleged to have been itnposed contrary to the constitutional provision (Art. 1, sec. 9, cl. 5) tliat “No tax or duty shall be laid on articles exported from any State.” The judgment below was for the defendant. 234 Fed. 125. INC. 413 TAX SUPREME COURT DECISIONS. 2331 The plaintiff is a domestic corporation chiefly engaged in buying goods in the several States, shipping them to foreign countries and there selling them. In 1914 its net income from this business was $30,173.66, and from other sources $12,436.24. An income tax for that year, computed on the aggregate of these sums, was assessed against it and paid under compulsion. It is conceded that so much of the tax as was based on the income from other sources was valid, and the controversy is over so much of it as was attributable to^ the income from shipping goods to foreign countries and there selling them. The tax was levied under the Act of October 3, 1913, c. 16, sec. It, 38 Stat. 166, 172, which provided for annually subjecting ever}'’ dom^estic corporation to the payment of a tax of a specified per centum of its “entire net income arising or accruing from all sources during the preceding calendar year,” Certain fraternal and other corporations, as also income from certain enumerated sources, were specifically excepted, but none of the exceptions included the plaintiff or any part of its income. So, tested merely by the terms of the act, the tax collected from the plaintiff was rightly computed on its total net income. But as the act obviously could not impose a tax forbidden by the Constitution, we proceed to consider whether the tax, or rather the part in question, was forbidden by the constitutional provision on which he plaintiff relies, 2332 The Sixteenth Amendment, although referred to in argument, has no^real bearing and may be put out of view. As pointed out in recent decisions, it does not extend the taxing power to new or excepted subjects, but merely removes all occasion which otherwise might exist, for an apportionment among the States of taxes laid on Income, whether to be derived from one source or another. Brushaber v. Union Pacific R. R. Co., 240 U. S. 1, 17-19; Stanton v. Baltic Mining Co., 240 U. S. 103, 112-113. 2333 The Constitution broadly empov/ers Congress not only “to lay and collect taxes, duties, imposts and excises,” but also “to regulate commerce with foreign nations.” So, if the prohibitory clause invoked by the plaintiff be not in the way. Congress undoubtedly has power to lay and collect such a tax as is here in question. That clause says, “No tax or duty shall be laid on articles exported from any State.” Of course it qualifies and restricts the power to tax as broadly conferred. But to what extent? The decisions of this court answer that it excepts from the range of that power articles in course of exportation, Turpin v. Burgess, 117 U. S. 504, 507; the act or occupation of exporting. Brown V. Maryland, 12 Wheat, 419, 445; bills of lading for articles being exported. Fair- bank V. United States; 181 U. S. 283; charter parties for the carriage of cargoes from state to foreign ports. United States v. Hvoslef, 237 U. S, 1; and policies of marine insurance on articles being exported — such insurance being uniformly re- garded as “an integral part of the exportation” and the policy as “one of the ordinary shipping documents,” Thames and Mersey Inc. Co. v. United States, 237 U. S. 19. In short, the court has interpreted the clause as meaning that exporta- tion must be free from taxation, and therefore as requiring “not simply an omis- sion of a tax upon the articles exported, but also a freedom from any tax which directly burdens the exportation.” Fairbank v. United States, supra, pp. 292-293. And the court has indicated that where the tax is not laid on the articles them- selves while in course of exportation the true test of its validity is whether it “so directly and closely” bears on the “process of exporting” as to be in substance a tax on the exportation. Thames and Mersey Inc. Co. v. United States, supra, p. 21 In this view it has been held that the clause does not condemn or invalidate charges or taxes, not laid on property while being exported, merely because they affect exportation indirectly or remotely; thus a charge for stamps which each package of manufactured tobacco intended for export was required to bear before removal from the factory was upheld in Pace v. Burgess, 92 U. S. 372, and Turpin v. Burgess, 117 U. S. 504; and the application of a manufacturing tax on all filled cheese to cheese manufactured under contract for export, and actually exported, was upheld in’ Cornell v. Coyne, 192 U. S. 418. In that case it was said, p. 427: “The true construction of the constitutional provision is that no burden by way of tax or duty can be cast upon the exportation of articles, and does not mean that articles exported are relieved from the prior ordinary burdens of taxation which rest upon all property similarly situated. The exemption attaches to the export and not to the article before its exportation.” 2334 While fully assenting and adhering to the interpretation^ which has been put on the clause in giving effect to its spirit as well as its letter, we are of opinion that to broaden that interpretation would be to depart from both the spirit and letter. INC. 414 TAX SUPREME COURT DECISIONS. 2335 The tax in question is unlike any of those heretofore condemned It is laid on articles in course of exportation or on anything which in- I ^ ^ commerce is embraced in exportation or any of its processes On the contrary it is an income tax laid generally on net incomes ’d*" t', t'?'’ Congress has no power to tax (see Stamon v. Laltic Mining Co., supra, p. 113), it is both nominally and actually a genera ta.x. It is not laid on income from exportation because of its wo"rds’o?‘',lm A but just as it is laid on other income The words oi the Act aie net income arising or accruing from all sources” There mnL°l At most, exportation is affected only indirectly and re- naW and rV after exportation is completed, after all expenses are paid and losses adjusted and after the recipient of the income is free to use it as he chooses. Thus what is taxed-the net income-is as far remOTed from exportation as are artimes for export before the exportation begins. If articles nn‘‘"o‘'tlie'thiie'''the'' “'’bj'act to taxation under general laws up to the t.inc they arc pul m course of exportation, as we have seen they are unavoidable that the net income from the venture wheu^com- P eted, that is to say, after the exportation and sale are fully conLmimted s likewise subjec to taxation under general laws. In that respect ”he status ?xporh“'' articlerprior to the w°en‘ grounded"' “bjeclion urged against the tax is not Judgment Affirmed. Lynch v. Hornby. (247 U. S. 339.) -23. °! ‘be United States Supreme Court in the case IUl„.d < d collector of internal revenue, v. H. C. Hornby is pub- D 2731 JunV"l°‘l9r8')°" revenue officers and others concerLd. ^(T. Af T .• 3, 1918.) ^ Pitney delivered the opinion of the Court. HornMq the respondent, recovered a judgment in the United States Dis- f against Lynch, as Collector of Internal Revenue for the re 9l" (Cld 10 38® sL ll/"lt^U“°r' October 3, A ' S 'rr ’ 166), and paid under protest. The Circuit Court of Appeals affirmed the judgment, 236 Fed. Rep. 661, and the case corak here on posL'TTld at the same time with Lynch, Collector v. Ttirrish F°sner ^Collector ’nost V2378 ‘°r. Post, 112380, and Peabody v! 2330 ’ TP. fCt ’ f i’ arising under the same Act, and this day decided .=830 The facts m brief, are as follows: Hornby, from 1906 to 1915 was the T nmbe '0,000) shares of the capital stock of the Cloquet Lumbei Conipany, an Iowa corporation, which for more than a quarter of a been engaged in purchasing timber lands, manufacturing the timber entir^eapilarstock pWOOo! Yorind'^^^^ 1914^^fhe°/on Li, 400, had become worth at least $150,000. In^the year Imld '.""’'L’ pb"g*“'Vbfmber, anrdislribiUing "hUmoc'^fs amZglts'M^ek' .$210 000 jr" idUrceiR ‘oMlm"i.ar"l‘T' aggregating $650,000, of which owned or in which it had an interest on March 1 1913 Hornhv’s C A C C' ;D?sSctcb°Ca^^d“l If. he Circuit Court of Appeals together with Lynch, Collector, v. Turrish (236 Fed Ron and was treated as prcscnlin.g suhstanlially Ihc .sanic ufsLn ur.on tim n, ’ Jn our oiunion it is distinguishable from the Turrish case whoro r ^ .\”t.rits. m question was a single and (inal dividend received by' TiirHsh froin t be I'f ,T’ Company in hquidalion of tbe entire assets and biisiimss .ImL," ‘ layette return to him of the value of his stock upon the surrender of hifeXfintefest INC. 415 TAX SUPREME COURT DECISIONS. in the company, at a price that represented its intrinsic value at and before March 1 1Q1 1 when the Income Tax Act took effect. .... r r-i 4 - 2^41 ’in the present case there was no winding up or I'^dt'^Ktiono. tne Cloque T limber Comoanv, nor any surrender of Hornby s stock. He was but one of manv%tockholders, and had but the ordinary f ^ ff al ana Lrplus of the company, that is, a right to have them devoted^ to the nroDer business of the corporation and to receive from the current earning^ mcmi ulate r surplus such dividends as the directors in their discretion might Sare Qbbons v. Mahon, 136 U. S. 549, 557. The operations of this company in the year 1914 were, according to the facts pleaded, ot a nature essentially like 'those in which it had been engaged for more ^^^ing'' fact that thev resulted in converting into money, and thus setting ^^e tor ms tribution as dividends, a part of its surplus assets accumulated prior to March 1, 1913 does not render Hornby’s share of those dividends any the less a part of hL income within the true intent and meaning of the Act, the pertinent language ‘lubdivisiorA That^‘heri®s'haU be levied, assessed, collected and paid annually upon the entire net income arising or accruing from all sources m the or^ceding calendar year to every citizen of the United States * * and to ^rerfre^sorretding in the United States, * * a tax of 1 per centum per annum uDon such income, except as hereinafter provided ^ “R Th?t subject only to such exemptions and deductions as are hereinafter allo^!md, the’nefinconie o'i a taxable person. shall include gfins Fofits, and income derived from salaries, wages, or compensation for personal service, from interest rent, dividends, securities or the transaction of any lawful business carried on for gain or profit, or gains or profits and income derived from any 2342 '^ Amon^^^ deductions allowed for. the purpose of the normal tax U “seventh, the amount received as dividends upon the stock 01 from t e net carningrof any corporation, * * - which is taxable upon its net income "s here nafter proHded.” There is a graduated additional tax, commonly known fs a “surtax,” upon net income in excess of $20,000, ^including income dends and for the purpose of this additional tax the taxable income of any imlividual shall embrace the share to which he .would be entitled of the gams and profits if divided or distributed, whether divided or distiibuted or not, of A I emporations * * * formed or fraudulently availed of for the puipos^ of prevetUiug the imposition of such tax through the .medium of permitting such eains and profits to accumulate instead of being divided or distributed. 2343 It is evident that Congress intended to dravc and did draw a distinction between a stockholder’s undivided share or interest in the gams and profits of a corporation, prior to the declaration of a dividend, and his participation m the* divicknds declared and paid; treating the latter, m ormnary circumstances, as a part of his income for the purposes of the surtax, and not regarding the former as taxable income unless fraudulently accumulated for the purpose of 3844" TMs treatment of undivided profits applies only to profits permitted to accumulate after the taking effect of the Act, since only with these is a fraudulent purpose of evading the tax predicable. Corporate Profits that accumulated before the Act took effect stand on a different footing. As to the'^e however, just as we deem the legislative intent mamfest to tax the stock- holder with respeet to such accumulations , only if . and when, and to the .extent that his interest in them comes to fruition as income, that is, m dividends declared so we can perceive no constitutional obstacle that stands m the way of cairyini? out this intent when dividends are declared out of a pre-existing surplus The Act took effect on March 1, 1913, a few days after the lequis.ite number of States had given approval to the Sixteenth Amendment, under which for the first time Congress was empowered to tax income from property without PDDortioning the tax among the States according to population. Southern Pacific Co V Lowe^ supra. That the retroactivity of the Act. from the date of its passage (October 3, 1913) to a date not prior to. the adoption of the Amendment was ncrniissible is settled by Brushaber v. Union Pacific R. R., 240 U. S. 1, 20. And we deem it equally clear that Congress was at liberty under the Amendment to tax as income, without apportionment, everything that became income, o^-dinarv sense of the word, after the adoption of the Amendment, including divi- dends received in the ordinary course by a stockholder from a coiporation even hoimh they were extraordinary in amount and might appear upon, analysis to be hnere realization in possession of an inchoate and contingent interest that INC. 416 TAX SUPREME COURT DECISIONS. the stockholder had in a surplus of corporate assets previously existing. Divi- dends are the appropriate fruit of stock ownership, are commonly reckoned as income, and are expended as such by the stockholder without regard to whether they are declared from the most recent earnings, or from a surplus accumulated from the earnings of the past, or are based upon the increased value of the property of the corporation. The stockholder is, in the ordinary case, a different entity from the corporation, and Congress was at liberty to treat the dividends as coming to him ab extra, and as constituting a part of his income when thev came to hand. 2345 Hence we construe the provision of the Act that “the net income of a taxable person shall include gains, profits, and income derived from interest, rent, dividends, * * * oj- income de- rivea frorn any source whatever’ as including (for the purposes of the additional tax) all dividends declared and paid in the ordinary course of business by a cot poration to its stockholders after the taking effect of the Act (March 1 1913) whether froin current earnings, or from the accumulated surplus made up of past earnings or increase in value of corporate assets, notwithstanding it accrued to the corpomtion in whole or in part prior to Alarch 1, 1913. In short, the word . was employed in the Act as descriptive of one kind of gain to the maividual stockholder; dividends being treated as the tangible and recurrent re- turns upon his stock, analogous to the interest and rent received upon other forms ot invested capital. 234G In the more recent Income Tax Acts, provisions have been inserted for the purpose of excluding from the effect of the tax any dividends declared out of earnings or profits that accrued prior to March 1, 1913. This originated 7 September 8, 1916 and has been continued in the Act of October 3, 1917.* We are referred to the legislative history of the Act of 1916 which it is contended indicates that the new definition of the term “dividends” was intended to be declaratory of the meaning of the term as used in the 1913 Act. We cannot accept this suggestion, deeming it more reasonable to regard the chancre as a concession to the equity of stockholders granted in the 1916 Act in view of constitutional questions ffiat had been raised in this case, in the corApanion case of Lynch, Collector v. Turrish and perhaps in other cases. These two cases were commenced in October, 1915; and decisions adverse to the tax were rendered in the District Court in January, 1916, and in the Circuit Court of Appeals Sen tember 4, 1916. ^ ^ ^ 2347 We repeat that under the 1913 Act dividends declared and paid in the ordinary course by a corporation to its stockholders after March 1 1913 whether from current earnings or from a surplus accumulated prior ti that date, were taxable as income to the stockholder * In Act of September 8, 1916 (Ch. 463, 39 Stat. 756 757) which tnnh place of the Act of 1913, (f,e substance of what we have quoted from pLagraph P. of the 1913 Act y/as embodied m Sec. 2 (a), but with this proviso; “ProfidS hat the terrn dividends as used in this title shall be held to mean any dis- tribution made or ordered to be made by a corporation * * * •- earnings or profits accrued since March first, nineteen hundred and thirteen and payable to its shareholders, whether in cash or in stock of the corporation ’’ e^c October 3, 1917 (Ch. 63, 40 Stat. 300, 329! 337-8^ Sec 2 of the 1916 Act was amended by being repeated without the proviso (p’ 329) while sLjiSMb)! Tfoifow^r' a sub! . /'■^'^''''’ation made to the shareholders or members of a corporation 1 ti 7 a" ^‘'i rf hundred and seventeen, or subsequent tax yea?" shah be deemed to have been made from the most recently accumulated undivided profits or surplus, and shall constitute a part of the annual income of the distrih! iitec for the year in which received, and shall be taxed to the distributee at the rates prescribed by law for the years in which such profits or surplus were acem mulated by the corporation, * * * but nothing herein shall be construed ?s axing any earnings or profits accrued prior to March first, nineteen hundred and thirteen, but such earnings or profits may be distributed in stock dividends ?r otherwise, exempt from the tax, after the distribution of earnings and profits accrued since March first, nineteen hundred and thirteen, has been made The subdivision shall not apply to any distribution made prior to August six h nine tec, himdred and seventeen out of the earnings or profits akrued pidor to' March first, nineteen hundred and thirteen. puor lo INC. 417 TAX SUPREME COURT DECISIONS. 3348 We do not overlook the fact that every dividend distribution diminishes bv iust so much the assets of the corporation, and m a theoretical sense reduces thi intrinsic value of the stock. But. at the same time, it demonstrates the capacity of the corporation to pay dividends, holds out a promise of 1 vidimds in the future, and quite probably increases the market value of the scares irour opiidon. Congress laid hold of dividends paid in the ordmary hurse as de facto Income of the stockholder, without regard to the ultima e effect upon the corporation resulting from their payment. , 2349 Of course we are dealing here with the o.rdinary dends declared in the ordinary way of business. Lyjich, Turrish and Southern Pacific Co. v. Lowe, Collector, this day decided, rest upon their special facts and are plainly distinpishable. return 2350 It results from what we have said that it was erroneous to of the tax collected from the respondent, and that the judgment should be ^ Reversed, and the cause remanded to the District Court for further proceed- ings in conformity with this opinion. Lynch v. Turrish. (247 U. S 221.) . 2351 The appended decision of the United States Supreme Court of E l. Lynch, as collector of internal revenue, v. Henry iurrisn, is PubUsbecl for tiie information of internal revenue officers and others concerne . (T. D. 2929, June 11, 1918.) (June 3, 191o.) Mr Justice McKenna delivered the opinion of the Court. the 2352 Suit to recover an income tax, paid under protest, assessed under the Act of October 3, 1913, 38 Stat. 166. , o- • u 33.13 The facts, as admitted by demurrer, are these; ^"^foV^the was plaintiff in the trial court, made a return of his income tor the calendar year 1914 which showed that he had no net income for that year, after- ^m?Ss"Yhe"TomLssioner of Internal Revenue / -pplemen^ Tefause o showing that he had received a net income of $32,712.08, which because oi soecific deductions and exemptions, resulted in no normal tax, but as the net incLe exceeded the sum of $20,000 the Commissioner assessed f/^^mnal nr suner-tax of one per cent upon the excess, resulting in a tax of $127.12, whmh wnc: sonedit to be recovered. The reassessment was based upon certain surns received by the plaintiff in the year 1914 as distributions from corporations sub- icet to the Income Tax Law and held bv the Commissioner to be income derived Lorn divMendr ^ by the plaintiff on stock of domestic corporations; of which the sum of $79,975, received as a distribution from the Payette Lumber & Manufacturing Company, and without which no lax could have been levie agains 2354 to MarclT lfm\ and continuously thereafter until the surrender of his stock as hereinafter mentioned, plaintiff was 3 , stockholder in tne Payette Company; which was organized in the year 1903 with Pfwer to buy hold and seH timber lands, and in fact never engaged in any other business than’ this except minor business incidental to it. Immediately ato its organ- ization this company began to invest m tunber lands, and prior to March 1, 1913, had thus invested approximately $1,375,000. onn 000 of 2355 On March 1, 1913, the value of its assets was not less 875 000^ Avhich sum the value of the timber lands ^as not less than $2,875,0^. The increase was due to the gradual rise in the market value of the lands. At that date the value of Turrish’s stock was twice its par value, or $159,950, and about that time he and all the other stockholders gave an option to sell their s^ock for twice its par value. The holders of the option formed another corn nanv called the Boise-Payette Lumber Company, and transferred the options to U The options having been extended to December 31, 1913, the new company informed the Payette Company and its stockholders shortly before this df^e that instead of exercising the option it preferred and proposed to purchase all of the assets of the Payette Company, paying to that company such a purchase price ?hat there would be available for distribution to its stockholders twice he par value of their stock. The stockholders by resolution authorized this sale, and, pmsLnt to this and a resolution of the directors, the Payette Company trans- ferred to the new company all of its assets, property, and franchises and upon the completion of the transaction found itself Muth uo assents or property except cash to the amount of double the par value of its stock which had been paid to it by INC. 418 TAX SUPREME COURT DECISIONS. the new company, and with no debts, liabilities, or obligations except those which the new company had assumed. The cash was distributed to the stockholders on the surrender of their certificates of stock, and the company went out of business. In this way, upon the surrender of his shares, Turrish received $159,- 9^)0, being double their par value. 2356 The Commissioner of Internal Revenue considered that of this sum one- half was not taxable, being the liquidation of the par value of Turrish’s stock, but that the other was income for the year 1914 and taxable under the Act of 1913. 23o7 The question in the case is thus indicated. The District Court took a different view from that of the Commissioner of Internal Revenue and therefore overruled the demurrer to Turrish’s complaint and entered judgment for him for the sum prayed, which judgment was affirmed by the Circuit Court of Appeals for the Eighth Circuit, 236 Fed. 653. 2358 The point in the case seems a short one. It, however, has provoked much • discussion on not only the legal but the economic distinction between capital and income and by what processes and at what point of time the former produces or becomes the latter. And this in resolution of a statute which con- cerns the activities of men and intended, it might be supposed, to be without perplexities and readily solvable by the off-hand conceptions of those to whom it was addressed. 2359 The provisions of the Act, so far as material tp be noticed, are the following: That there^ is assessed “upon the entire net income arising or accruing from all sources in the preceding calendar year to every ♦ ♦ ♦ person residing in the United States * * a tax of one per centum per annum upon such income.” * * * Par. A, Subdiv. 1. 2360 In addition to that tax, which is denominated the normal income tax it is , provided that there shall be levied “upon the net income of every indi- vidual an additional tax^ p^j. centum per annum upon the amount by which the total net income exceeds” certain amounts, and the person subject to the tax is required to make a personal return of his total net income from all sources imder rules a,nd regulations to be prescribed by the Commissioner of Internal Revenue. Subdiv. 2. 236 By Paragraph B it is provided that, subject to certain exemptions and deductions, the^ net income of a taxable person shall include gains, prohts, and income denved from salaries, wages, or compensation for personal service also frorn interest, rent, dividends, securities, or the transaction ot any lawful business carried on for gain or profit, or gains or profits and income derived from any source whatever.” 2362 After specifying the exemptions and deductions allowed, the law declares as follows: Ihe said tax shall be computed upon the remainder of said net income of each person subject thereto, accruing during each preceding calen- dar year ending December thirty-first: Provided, however. That for the year ending December thirty-first, nineteen hundred and thirteen, said tax shall be computed on the net income from March first to December thirty-first, nineteen hundred and thirteen, both dates inclusive.” *, * * p^r D 2363 It will be observed, therefore, that the statute levies' a normal tax and an additional tax upon net incomes, derived from whatever source, “arising or accruing each preceding calendar year ending December 31, except that for the year ending December 31, 1913, the tax shall be computed on the net income accruing from March 1, 1913, to December 31, 1913. 2364 And in determining the application of the ‘statute to Turrish we must keep in miml that on the admitted facts the distribution received by him from the Paye te Company manifestly was a single and final dividend in liqtiida- lon of the entire assets and business of the company, a return to him of the value of his stock upon the surrender of his entire interest in the company. when the ^crtoolc effecU""' 2365 The District Court and the Circuit Court of Appeals decided that the cf distributed to durrush was not income within the meaning of nf decision on two propositions as expressed in the opinion Appeals, by Sanborn, Circuit Judge— (a) The amount was the realization of an investment made some years before, representing its gradual oTthflaw'^tTn? effective date f the law, that is, before March 1, 1913, and the mere change of form of the proo- to il^ hnlH?r?h'® P^perty, or from stock to cash" was not income to Its holders because the value of the property was the same after as before the INC. 419 TAX SUPREME COURT DECISIONS. income, gams 2366 For proposition change: (b) The timber lands were the property, capital and capital assets of their legal and equitable owner and the enhancement of their value diming a series of years “prior to the effective date of the income tax law, although divided or distributed by dividend or otherwise, subsequent to that date, does not become or profits taxable under such an act. rur uiuposition “a” the court cited Collector v. Hubbard, 12 Wall, 1; Bailey v. Railroad Company, 22 Wall. 604, and the same case in 106 U. S. 109. For proposition “b” Gray v. Darlington, 15 Wall. 63, was relied on. 2367 The Government opposes both contentions by an elaborate argument con- taining definitions of capital and income drawn from lepl and economic sources and given breadth to cover a number of other cases submitted with this. The argument, in effect, makes any increase of value of property income, emerg- ing as such and taxable at the moment of realization by sale or some act ot separation, as by dividend declared or by distribution, as in the^^instant^ case. 2368 To sustain the argument these definitions are presented: “1.^ Capital is anything, material or otherwise, capable of ownership, viewed in its static condition at a moment of time, or the right of ownership therem. 2. Incorne is the service or return rendered by capital during^ a peiiod of time. * * * 7 ’ Net income (‘profits’) is the difference between income and outgo. ^ /. In the actual production and distribution of capital there is a constant conversion of capital into income, and vice versa. 8 . The attempt to conceal this con- version by treating ‘‘income’ as the standard return from capital only leads to confusion of the value of capital with capital itself. 2369 From these definitions are deduced the following propositions, which are said to be decisive of the problems in the cases: ^ “1. Income being derived from the use of capital, the conversion or trai^fer of capital always produces income. 2. Mere appreciation of capital not produce ‘income,’ nor mere depreciation ‘outgo. 3. Net income is the dif- ference between actual ‘income’ and actual ‘outgo.’ 4. Income is not confined to money income, but includes anything capable of easy valuation in money. 2370 It will be observed that the breadth of definition and the breadth of application are necessarv to the refutation of the reasoning of the Circuit Court of Appeals. There is direct antagonism, the court basing its reliance, it says, upon what it asserts is the common sense and understanding of the words of the law, and the exposition of like laws by the decisions of this court. Ifie Government’s resource is the discussion of economists and the fa(^, concrete and practical, of wealth not only increased but come to actual hand. case is an example. Turrish’s stock doubled in value. He paid for it $79,975, he received $159,950. It requires a struggle to resist the influence of the fact, but we are aided and fortified by our own precedents and saved from mucti in- tricate and subtle discussion and an elaborate review of other cases cited in confirmation or opposition. 2371 In Collector v. Hubbard, supra, the distinction between a corporation and its stockholders was recognized and that the stockholder had not title for certain purposes to the earnings of the corporation, net or other, prior to a dividend being declared, but they might become capital by investment in permanent improvements and thereby increase the market value of the shares, “whether held bv the original subscribers or by assignees. In other words, it was held that the investments of the corporation were the investments of the stockholders; that is, the stockholders could have an interest, taxable under the act considered, though not identical with the corporation. This was repeated in Bailey v. Railroad Company, 22 Wall. 604, 635, 636. 2372 The latter case came here again in 106 U. S. 109, and it was then declared that the purpose of an income tax law was to tax the income for the year that it accrued; in other words, no tax in contemplation of the law accrued upon something except for the year in which that something— earnings, profits, gams or income— accrues. In that case the subject of the tax was scrip dividend, but the certificates did not show the year of the earnings and testimony as to the particular year was admitted. The principle applies to the case at bar. If increase in value of the lands was income, it had its particular time and su^ch time must have been within the time of the law to be subject to the law, that is, it must have been after March 1, 1913. But, according to the fact admitted, there was no increase after that date and therefore no increase subject to the law. There was continuity of value, not gain or increase. In the first proposi- tion of the Court of Appeals we, therefore, concur. INC, 420 TAX SUPREME COURT DECISIONS. 2373 In support of its second proposition it adduced, as we have seen, Gray v. Darlington, 15 Wall. 63 . The case arose under the income tax law of 1867, which levied “upon the gains, profits, and income of every person, ♦ * ♦ whether derived from any kind of property * hj * or from any other source whatever * * * ^ tax of five per centum on the amount so derived over $1,000 * * for the year ending the thirty-first of December next preceding the time for levying, collecting and paying said tax.” 2.374 Darlington, in 1865, being the owner of certain United States Treasury notes, exchanged them for United States bonds. In 1869 he sold the bonds at an advance of $20,000 over the cost of the notes and upon this amount was levied a tax of five per centum as gains, profits and income for that year. He paid the_ tax under protest and sued to recover, and prevailed. This court, by Mr. Justice Field, said; “The question presented is whether the advance in the value of the bonds, during this period of four years, over their cost, real- ized by their sale, was subject to taxation as gains, profits, or income of the plaintifi: for the 3 '^ear in which the bonds were sold. The answer which should be given to this question does not, in our judgment, admit of any doubt. The advance in the value of property during a series of years can, in no just sense be considered the gains, profits, or income of any one particular year of the series, although the entire amount of the advance be at one time turned into money by the sale of the property. The statute looks, with some exceptions, for^subjects of taxation only to annual gains, profits and income.” 2375 And again, “The mere fact that propeity has advanced in value between the date of its acquisition and sale does not authorize the imposition of a tax on the amount of the advance. Mere advance in value in no sense consti- tutes the gains, profits, or income specified by the statute. It constitutes and can be treated merely as increase of capital.” This case has not been since questioned or modified. 237G The Government feels the impediment of the case and attempts to confine its ruling to the exact letter of the Act of March 2, 1867, and thereby distinguish that act from the act of 1913 and give to the latter some- thing of retrospective effect. Opposed to this there is a presumption, resistless except against an intention imperatively _ clear. The Government, however, makes its view depend upon disputable differences between certain words of the two acts. ^ It urges that the act of 1913 makes the income taxed one “arising or accruing” in the preceding calendar year, while the act of 1867 makes the in^ come one “derived.” Granting that there is a shade of difference between the words, it cannot be granted that Congress made that shade a criterion of intention apd committed the construction of its legislation to the disputes of purists. Be- sides, the contention of the Government does not reach the principle of Gray v. Darlington, w’hich is that the gradual advance in the value of property during a series of years in no just sense can be ascribed to a particular year, not therefore as “arising or accruing,” to meet the challenge of the words, in the last one of the years, as the Government contends, and taxable as income for that year oir when turned into cash. Indeed, the case decides that such advance in value is not irmome at all, but merely increase of capital and not subject to a tax as income. 2377 We concur, therefore, in the second proposition of the Circuit Court of Appeals as well as in the first and affirm the judgment. Mr. Justice Brandeis and Mr. Justice Clarke concur in the result. Peabody vs. Eisner. (247 U. S. 347.) 2378 The appended decision of the United States Supreme Court in the case ol Charles A. Peabody v. Mark Eisner, as collector of internal revenue, is published for the information of internal-revenue officers and others concerned (T. D. 2732, June 11, 1918.) (June 3, 1918.) Mr. Justice Pitney delivered the opinion of the Court. 2379 This case arose under the Federal Income Tax Act of October 3, 1913 (Ch. 16, 38 Stat. 114, 166). The controversy is over the first cause of action set up by plaintiff in error in a suit against the collector for the recovery of an additional tax exacted in respect of a certain dividend received by plaintiff in the year 1914, the facts being as follows: On and prior to March 1, 1913, and thenceforward until payment of the dividend in question, petitioner was owner of 1,100 shares (out of a total of 2,000,000 shares outstanding) of common stock of the Union Pacific Railroad Company, of the par value of $100 each INC. 421 TAX SUPREME COURT DECISIONS. and during the same period the company had large holdings of the common and preferred stocks of the Baltimore & Ohio Railroad Company. On March 2, 1914, the Union Pacific declared and paid an extra dividend upon each share of its common stock, amounting to $3 in cash, $12 in par value of preferred stock of the Baltimore & Ohio, and $22.50 in par value of the common stock of the same company; the result being that petitioner received as his dividend upon his holdings of Union Pacific common stock $3,300 in cash, 132 shares of Baltimore & Ohio preferred and 247i^ shares of Baltimore & Ohio common stock. In his income return for 1914 he included as taxable income $4.12 per share of this dividend, or $4,532 in all, and paid his tax upon the basis of this return. After- wards he was subject to additional assessment upon a valuation of the balance of his dividend, and this, having been paid under protest, is the subject of the present suit, the theory of which is that the entire earnings, income, and profits from all sources realized by the Union Pacific Railroad Company from March 1, 1913, to March 2, 1914, remaining after the payment of prior charges did not exceed $4.12 per share of the Union Pacific common stock, and that the cash and Baltimore & Ohio stock, disposed of in the extra dividend (so far as they ex- ceeded the value of $4.12 per share of Union Pacific) did not constitute a gain, profit, or income of the Union Pacific, and therefore did not constitute a gain, profit, or income of the plaintiff arising or accruing either in or for the year 1914 or for any period subsequent to March 1, 1913, the date when the Income Tax Law took effect. The District Court overruled this contention upon the au- thority of Southern Pacific Co. v. Lowe, Collector, 238 Fed. Rep. 847, and Towne V. Eisner, Collector, 242 Fed. Rep. 702. The latter case has since been reversed (245 U. S. 418), but only upon the ground that it related to a stock dividend which in fact took nothing from the property of the corporation and added noth- ing to the interest of the shareholder, but merely changed the evidence which represented that interest. Southern Pacific Co. v. Lowe, Collector, has been reversed this day, post 112380, but only upon the ground that the Central Pacific Railway Company, which paid the dividend, and the Southern Pacific Company, which received it, were in substance identical corporations because of the com- plete ownership and control which the latter possessed over the former as stockholder and in other capacities, so that while the two companies were sep- arate legal entities, yet in fact and for all practical purposes the former was but a part of the latter, acting merely as its agent and subject in all things to its direction and control; and for the further reason that the funds represented by the dividend were in the actual possession and control of the Southern Pacific Company as well before as after the declaration of the dividend. In this case the plaintiff in error stands in the position of the ordinary stockholder, whose interest in the accumulated earnings and surplus of the company are not the same before as after the declaration of a dividend; his right being merely^ to have the assets devoted to the proper business of the corporation and to receive from the current earnings or accumulated surplus such dividends as the directors in their discretion may declare; and without right or power on his part to control that discretion, fit hardly is necessary to say that this case is not ruled by our decision in Towne v. Eisner, since the^ dividend of Baltimore^ & Ohio shares was not a stock dividend but a distribution in specie of a portion of the assets of the Union Pacific, and is to be governed for all present pur- poses by the same rule applicable to the distribution of a like value in money. It is controlled by Lynch, Collector, v. Hornby, this day decided, ante, 1[2337. Judgment Affirmed. Southern Pacific Company vs. Lowe. (247 U. S. 330.) 2380 The appended decision of the United States Supreme Court in the case of Southern Pacific Co. v. John Z. Lowe, Jr., as collector of internal revenue, is published for the information of internal-revenue officers and others concerned. (T. D. 2730, June 11, 1918.) (June 3, 1918.) Mr. Justice Pitney delivered the opinion of the Court. 2381 This case presents a question arising under the Federal Income Tax Act of October 3, 1913 (Ch. 16, 38 Stat. 114, 166). Suit was brought by plaintiff in error against the Collector to recover taxes assessed against it and paid under protest. There were two causes of action, of which only the second went to trial, it having been stipulated that the trial of the^ other might be postponed until the final determination of this one. So far as it is presented to us, the suit is an effort to recover a tax imposed upon certain dividends upon INC. 422 TAX SUPREME COURT DECISIONS. stock in form received by the plaintiff from another corporation in the early part of the year 1914, and alleged by the plaintiff to have been paid out of a surplus accumulated not only prior to the effective date of the Act but pnor to the adoption of the Sixteenth Amendment to the Constitution of the United States The District Court directed a verdict and judgment in favor of the Collector, 238 Fed. Rep. 847, and the case comes here by direct writ of error under Sec. 238, Judicial Code, because of the constitutional question. That our jurisdiction was properly invoked is settled by Tov/ne v. Eisner, 245 U. S. 418, 425. 2382 The case was submitted at the same time with several other cases arising under the same Act and decided this day, viz.. Lynch, Collector, v. Tur- rish, ante, 112351, Lynch, Collector, v. Hornby, ante, 112337, and Peabody v. Eisner, Collector, ante, 1[2378. . i n 2383 The material facts are as follows: Prior to January 1, 1913, and at all times material to the case, plaintiff, a corporation organized under the laws of the State of Kentucky, owned all the capital stock of the Central Pacific Railway Company, a corporation of the State of Utah, including the stock registered in the names of the directors.* This situation existed continuously from the incorporation of the Railway Company in the year 1899. That com- pany is the successor of the Central Pacific Railroad Company and acquired all of its properties, which constitute a part of a large system of railways owned or controlled by the Southern Pacific Company. The latter company, besides being sole stockholder, was in the actual physical possession of^ the railroads and all other assets of the Railway Company, and in charge of its operations, which were conducted in accordance with the terms of a lease made by the predecessor company to the Southern Pacific and assumed by the Railway Com- pany, the effect of which was that the Southern Pacific should pay to the lessor company $10,000 per annum for organization expenses, should operate the rail- roads, branches, and leased lines belonging to the lessor, and account annually for the net earnings, and if these exceeded 6 per cent on the existing capital stock of the lessor the lessee should retain to itself one-half of the excess; ad- vances by the lessee for account of the lessor were to bear lawful interest and the lessor was to be entitled at any time and from time to time to refund to it- self its advances and interest out of any net earnings which might be in its hands. The provisions of the lease were observed by both corporations for bookkeeping purposes. The Southern Pacific acted as cashier and banker for the entire system; the Central Pacific kept no bank account, its earnings being deposited with the bank account of the Southern Pacific; and if the Central Pacific needed money for additions and betterments or for making up of a deficit of current earnings, the necessary funds were advanced by the Southern Pacific. As a result of these operations and of the conversion of certain capital assets of the Central Pacific Company, that company showed upon its books a large surplus accumulated prior to January 1, 1913, principally in the form of a debit against the Southern Pacific, which at the same time, as sole stockholder, was entitled to any and all dividends that might be declared, and being in control of the board of directors was able to and did control the dividend policy. The divi- dends in question, were declared and paid during the first six months of the year 1914 out of this surplus of the Central Pacific accumulated prior to January 1, 1913; but the payment was only constructive, being carried into effect by bookkeeping entries which simply reduced the apparent surplus of the Central Pacific and reduced the apparent indebtedness of the Southern Pacific to the Central Pacific by precisely the amount of the dividends. 2384 The question is whether the dividends received under these circumstances and in this manner by the Southern Pacific Company were taxable as income of that company under the Income Tax Act of 191Tt 2385 The Act provides in Section II, Paragraph A, Subdivision 1 (38 Stat. 166): “That there shall be levied, assessed, collected and paid annually upon the entire net income arising or accruing from all sources in the preceding ♦There was another question, concerning a dividend paid by the Reward Oil Company, whose stock likewise was owned by the Southern Pacific Company, but the contention of plaintiff in error respecting this item has been abandoned. tin addition, a question was made in the District Court as to a special divi- dend declared by the Central Pacific out of the proceeds of sale of certain land on Long Island, taken in satisfaction of a debt and sold in December, 1913. As to this, however, no argument is submitted by plaintiff in error, the facts are not clear, and we pass it without consideration. INC. 423 TAX SUPREME COURT DECISIONS. calendar year” to every person residing in the United States a tax of 1 per centum oer annum with exceptions not now material. By Paragraph G (a) ^386 PitlrprovidedZ Paragraph G (b), as to domestic corporations, that such neHLome shall be ascertained by deducting from the gross amount of the income of the corporation (1) ordinary and necessary expenses paid within the year in the maintenance and operation of its business and properties, \ns ^rentals and the like; (2) losses sustained within the year and not com- oensated by insurance or otherwise, including a reasonable allowance for depre- wear and tear of property, if any, and in the case of mines a certain allowance for depletion of ores and other natural deposits; (3) interest aSued and paid within the year upon indebtedness of the corporation, wi hin nresmibed limits; (4) national and state taxes paid. It will be observed that moneys received as dividends upon the stock of other corporations are not deducted as they are in computing the income of mdividuals for the puipose of the norr;iaT tax ^ this Act (p. 167), , and as they were "^^P^^ing ^ income of the corporation under the Excise Tax Act of August 5, 1909 (Ch. 6, a387^^‘By piragraph^G (c), the tax upon corporations is to be coinputed upon the entire net income accrued within each calendar y^r, but the year 1913 only upon the net income accrued from March 1 to December 31, to brascerta^ned by taking five-sixths of the entire net income for the calendar 2388 The purpose to refrain from taxing income that accrued prior to March 1 1913 and to -exclude from consideration in making the computation anv income that accrued in a preceding calendar year is made plain by the provision last referred to; indeed, the Sixteenth Amendment, under which for ?hrfirst t me Congress was authorized to tax income from property without the tax among the States according to population, received the Tirolhers Co. and Hays, Collector, v. Gauley Mountain CoM Co., decided May 20 1918) the broad contention submitted in behalf of the Governnien^t that all receipts-everything that comes in-are income within the proper definition of th^t^m “groL income,” and that the entire proceeds of a conversion of capital assets in whatever form and under whatever circumstances accomplished, should be treated as gross income. Certainly the term “income” has no broader mean- inVin the 1913 Act than in that of 1909 (see Stratton’s Independence v. Howbert, 731 11 S 399 416 417), and for the present purpose we assume there is no dif- ference in its meaning as used in the two acts. This being so, we are bound t7 consider accumulations that accrued to a corporation prior to January 1, 1913 as being capital, not income, for the purposes of the Act. And we per- ceiv4 no adequate ground for a distinction, in this regard, between an accumu- latTon of surplus earnings, and the increment due to an appreciation in value of 23 W** That the dividends in question were paid out of a surplus that accrued to the Central Pacific prior to January 1, 1913, is undisputed; and we deem it to be equally clear that this surplus accrued to the Southern Pacific Company prior to that date, in every substantial sense pertinent to the present inquiry, and hence underwent nothing more than a change of form when t e WeTTnmtsfthis upon the view that for the purposes of the Act of 1913 stockholders in the ordinary case have the same interest in the accumu- lated earnings of the company before as after the declaration of dividends. T^ act is quite different in this respect from the Income Tax Act of June 30, ISM rrh 173 13 Stat 223, 281, 282), under which this court held,^ in Collector v. Hubbard’, 12 Wall. 1, 16, that an individual was taxable upon his proportion of the earnings of the coporation although not declared as dividends. That de- cision was based upon the very special language of a clause of Sec. 117 of the Act. (13 Stat. 282) that “the gains and profits of all companies, whether incor- INC. 424 TAX SUPREME COURT DECISIONS. entitled to the o^trary deaf^ with dividends as a particular item of jectmg them to the f.^duated surtaxes only individual share- condusio^’in^the Jfefent'c^el/on th/view that it was the ^ ouroose and intent of Congress, while taxing the entire net income p^e^?fnci|3o9 S capacSies While the two companies were separate legal entities, ;rti.‘ri:.'‘SS' srs ■ » »j»;. Ste? thf declaration of the dividends. The fact that the books were kept in atter nrovisions of the lease, so that these funds appeared upon accordance w ^nHehtedness of the lessee to the lessor, cannot be controlling, the identity between lessor and lessee. Aside from the inter- "stroTcrlditL's and is nothing to suggest that the interes^ of either were concerned in the disposition of the surplus of 4 .U Parifir was entitled to dispose of the matter as it saw nt. ihere is^no question of there being a surplus to warrant the dividends at the time they were made, hence any speculation as. to w.hat might have happened in case of fnnnrial reverses that did not occur is beside the mark. .... .^iVs ^-es not ‘"tmfa-^cfo1<^r£d^^^^^^ Gib^bonry'^rUhL^^m see Humphreys' v. McKissock 140 that was accumulated prior to January 1, 1913; it does not appear that any other fair ^erclsrof discretion was open; and the complete ownership and righi ot control of the Southern Pacific and at all times material makes it a matter of iiidif feren« whether the vote was at one time or another. Under the circumstances, the entire matter of the declaration and paympt of the diYclends was a papei transaction to bring the books into accord with the acknowledged rights of the Somhern Pacific: and so far as the dividends represented the surplus of the Cen- »“For the purpose of this additional tax the taxable income of any individ- ual shall embrace Ae share to which he would be entitled of the gams and profits, H divided or* distributed, whether divided or distributed or not, of all corpora- tions ioimt-stock companies, or associations however created or organized, formed o? fraudulently availed of for the purpose of preventmg the imposition of sueh tax through the medium of permitting such gams and profits to accumulate in- stead of being divided or distributed; and the fact that any such corporation stead 01 be^ holding company, or that the gams and Profits are permitted to accumulate beyond the reasonable needs of business shall be prima facie evidence of a fraudulent purpose to escape such tax; but the fact that the gains and profits are in any case permitted to accumulate and become surplus shall not be construed as evidence of a purpose to escape the said tax m such Sse unless the Secretary of the Treasury shall “--yfy ‘;‘%°rs?a“t ® 166 accumulation is unreasonable for the purposes of the business. (38 Stat. 166, 167.) INC B25 TAX SUPREME COURT DECISIONS. tral Pacific that accumulated prior to January 1, 1913, they were not taxable as in- come of the Southern Pacific within the true intent and meaning of the Act of 1913. , 2394 The case turns upon its very peculiar facts, and is distinguishable from others in which the question of the identity of a controlling stock- holder with his corporation has been raised. Pullman Car Co. v. Missouri Pacific Co., 115 U. S. 587, 596; Peterson v. Chicago, Rock Island & Pacific Ry., 205 U. S. 364, 391. , ^ , Judgment reversed, and the cause remanded for further proceedings in conformity with this opinion. Mr. Justice Clarke dissents. Gulf Oil Corporation vs. Lewcllyn. (248 U. S. 71.) Mr. Justice Holmes delivered the opinion of the Court. 2395 The appended decision of the United States Supreme Court in the case of the Gulf Oil Corporation, petitioner, v. C. G. Lewellyn, Collector of Internal Revenue for the 23d District of Pennsylvania, is published for the in- formation of Internal Revenue officers and others concerned. (T. D. 2783, Jan. 7. 1919.) . , . j 2396 This is a suit to recover a tax levied upon certain dividends as income, under the Act of October 3, 1913, c. 16, Section II. 38 Stat. 114, 166. The District Court gave judgment for the plaintiff, 242 Fed. Rep. 709, but this judg- ment was reversed by the Circuit Court of Appeals. 245 Fed. Rep. 1. 158 C. C. A 1. 2397 The facts may be abridged from the findings below as follows: The peti- tioner was a holding company owning all the stock in the other corpora- tions concerned except the qualifying shares held by directors. These companies with others constituted a single enterprise, carried on by the petitioner, of pro- ducing, buying, transporting, refining and selling oil. The subsidiary companies had retained their earnings, although making some loans inter se, and all their funds were invested in properties or actually required to carry on the business, so that the debtor companies had no money available to pay their debts. In January, 1913, the petitioner decided to take over the previously accumulated earnings and surplus and did so in that year by votes of the companies that it controlled. But, disregarding the forms gone through, the result was merely that the petitioner became the holder of the debts previously due from one of its companies to another. It was no richer than before, but its property now was represented by stock in and debts due from its subsidiaries, whereas form- erly it was represented by the stock alone, the change being effected by entries upon the respective companies’ books. The earnings thus transferred had been accumulated and had been used as capital before the taxing year. Lynch v. Turrish, 247 U. S. 221, 228 [1[2351]. . , ^ 2398 We are of opinion that the decision of the District Court was right, it is true that the petitioner and its subsidiaries were distinct beings in con- templation of law, but the facts that they were related as parts of one enterprise, all owned by the petitioner, that the debts were all enterprise debts to members, and that the dividend represented earnings that had been made in former years and that practically had been converted into capital, unite to convince us that the transaction should be regarded as bookkeeping rather than as ‘dividends declared and paid in the ordinary course by a corporation.’ Lynch v. Hornby, 247 U. S. 339, 346 [112337]. The petitioner did not itself do the business of its subsidi- aries and have possession of their property as in Southern Pacific Co. v. Lowe, 247 U S. 330 [112380], but the principle of that case must be taken t^ cover this. By Section H, G, (c) 38 Stat. 174, and S, id. 202, the tax from January 1 to February 28, 1913, is levied as a special excise tax, but in view of our decision that the dividends here concerned were not income it is unnecessary to discuss the further question that has been raised under the latter clause as to the effect of the fact that excise taxes upon the subsidiary corporations had been paid. Alvah Crocker et al.. Trustees vs. Malley. (249 U. S. 223.) Mr. Justice Holmes delivered the opinion of the Court. 2399 The appended decision of the United States Supreme Court in the case of Alvah Crocker et al.. Trustees, v. John F. Malley, Collector of In- INC. 426 TAX SUPREME COURT DECISIONS. ternal Revenue Is published for the information of internal revenue officers and others concerned. (T. D. 2816, April 2, 1919.) 2400 This is an action to recover taxes paid under protest to the Collector of Internal Revenue by the petitioners, the plaintiffs. The taxes were as- sessed to the plaintiffs as a joint-stock association within the meaning of the In- come Tax Act of October 3, 1913, c. 16, Section II, G. (a), 38 Stat 114, 166, 172, and were levied in respect of dividends received from a corporation that itself was taxable upon its net income. The plaintiffs say that they were not an asso- ciation but simply trustees, and subject onl}^ to the duties imposed upon fidu- ciaries by Section II, D. The Circuit Court of Appeals decided that the plain- tiffs, together, it would seem, with those for whose benefit they held the prop- erty, were an association, and ordered judgment for the defendant, reversing the judgment of the District Court. 250 Fed. Rep. 817. 2401 The facts are these. A Maine paper manufacturing corporation with eight shareholders had its mills on the Nashua River in Massachusetts and owned outlying land to protect the river from pollution.^ In 1912 a corpora- tion was formed in Massachusetts. The Maine corporation conveyed to it seven mills and let to it an eighth that was in process of construction, together with the outlying lands and tenements, on a long lease, receiving the stock of the Massachusetts corporation in return. The Maine corporation then transferred to the plaintiffs as trustees the fee of the property subject to lease, left the Massachusetts stock in their hands, and was dissolved. By the declaration of trust the plaintiffs declared that they held the real estate and all other property at any time received by them thereunder, subject to the provisions thereof, ‘for the benefit of the cestui que trusts (who shall be trust beneficiaries only, without partnership, associate or other relation whatever inter sese)’ upon trust to con- vert the same into money and distribute the net proceeds to the persons then holding the trustees’ receipt certificates — the time of distribution being left to the discretion of the trustees, but not to be postponed beyond the end of twenty years after the death of specified persons then living. In the meantime the trustees were to have the powers of owners. They were to distribute what they determined to be fairly distributable net income according to the interests of the cestui que trusts but could apply any funds in their hands for the repair or de- velopment of the property held by them, or the acquisition of other property, pending conversion and distribution. The trust was explained to be because of the determination of the Maine corporation to dissolve without waiting for the final cash sale of its real estate and was declared to be for the benefit of the eight shareholders of the Maine Company who were to receive certificates subject to transfer and subdivision. Then followed a more detailed statement of the power of the trustees and provision for their compensation, not exceeding one per cent, of the gross income unless with the written consent of a majority in interest of the cestui que trusts. A similar consent was required for the filling of a vacancy among the trustees, and for a modification of the terms of the trust. In no other matter had the beneficiaries any control. The title of the trust was fixed for convenience as The Massachusetts [sic: in fact — Wachusett] Realty Trust. 2402 The declaration of trust on its face is an ordinary real estate trust of the kind familiar in Massachusetts, unless in the particular that the trustees’ receipt provides that the holder has no interest in any specific property and that it purports only to declare the holder entitled to a certain fraction of the net proceeds of the property when converted into cash ‘and meantime to income’. The only property expressly mentioned is the real estate not trans- ferred to the Massachusetts corporation. Although the trustees in fact have held the stock of that corporation and have collected dividends upon it, their doing so is not contemplated in terms by the instrument. It does not appear very clearly that the eight Maine shareholders might have demanded it had they been so minded. The function of the trustees is not to manage the mills but simply to collect the rents and income of such property as may be in their hands, with a large discretion in the application of it, but with a recognition that the re- ceipt holders are entitled to it subject to the exercise of the powers confided to the trustees. In fact, the whole income, less taxes and similar expenses, has been paid over in due proportion to the holders of the receipts. 2403 There can be little doubt that in Massachusetts this arrangement would be held to create a trust and nothing more. ‘The certificate holders . . . are in no way associated together nor is there any provision in the [instrument] for any meeting to be held by them. The only act which (under the [declaration of] trust) they can do is to consent to an alteration . . . of the trust’ and to the other matters that we have mentioned. They are INC. 427 TAX SUPREME COURT DECISIONS. confined to giving or withholding assent, and the giving or withholding it ‘is not to be had in a meeting but is to be given by them individually’. ‘The sole right of the cestui que trust is to have the property administered in their interest by the trustees, who are the masters, to receive income while the trust lasts, and their share of the corpus when the trust comes to an end’. Williams v. Milton, 215 Mass. 1, 10, 11; ibid. 8. The question is whether a different view is required by the terms of the present act. As by D. above referred to trustees and associ- ations acting in a fiduciary capacity have the exemption that individual stock- holders have from taxation upon dividends of a corporation that itself pays an income tax, and as the plaintiffs undeniably are trustees, if they arc to^ be sub- jected to a double liability the language of the statute must make the intention clear. Gould v. Gould, 245 U. S. 151, 153 [112306]. United States v. Isham, 17 Wall. 496, 504. , , , . . 2404 The requirement of G. (a) is that the normal tax thereinbefore imposed upon individuals shall be paid upon the entire net income accruing from all sources during the preceding year “to every corporation, joint-stock com- pany or association, and every insurance company, organized in the ^United States, no matter how created or organized, not including partnerships.” The trust that has been described would not fall under any familiar conception of a ioint-stock association, whether formed under a statute or not. Smith v. Anderson, 15 Ch. D. 247, 273, 274, 277, 282. Eliot v. Freeman, 220 U. S. 178, 186. If we assume that the words ‘no matter how created or organized’ apply to ‘as- sociation’ and not only to ‘insurance company’, still it would be a wide departure from normal usage to call the beneficiaries here a joint-stock association when they are admitted not to be partners in any sense, and when they have no joint action or interest and no control over the fund. On the other hand the trustees by themselves cannot be a joint-stock association within the meaning^ of the act unless all trustees with discretionary powers are such, and the special pro- vision for trustees in D. is to be made meaningless. We perceive no ground for grouping the two — beneficiaries and trustees — together, in order to turn them into an association, by uniting their contrasted functions and powers, although they are in no proper sense associated. It seems to be an unnatural perversion of a well-known institution of the law. 2405 We do not see either that the result is affected by any technical analysis of the individual receipt holders’ rights in the income received by the trustees. The description most in accord with what has been the practice would be that, as the receipts declare, the holders, until distribution of the capital, were entitled to the income of the fund subject to an unexercised power in the trustees in their reasonable discretion to divert it to the improvement^ of the capital. But even if it were said that the receipt holders were not entitled to the income as such until they got it, we do not discern how that would turn them into a joint-stock company. Moreover the receipt holders did get it and the question is what portion it was the duty of the trustees to withhold. 2406 We presume that the taxation of corporations and joint-stock companies upon dividends of corporations that themselves pay the income tax was for the purpose of discouraging combinations of the kind now in disfavor, by which a corporation holds controlling interests in other corporations which in their turn may control others, and so on, and in this way concentrates a power that is disapproved. There is nothing of that sort here. Upon the whole case we are of opinion that the statute fails to show a clear intent to subject the dividends on the Massachusetts corporation’s stock to the extra tax imposed by G. (a). 2407 Our view upon the main question opens a second one upon which the Circuit Court of Appeals did not have to pass. The District Court while it found for the plaintiffs, ruled that the defendant was entitled to retain out of the sum received by him the amount of the tax that they should have paid as trustees. To this the plaintiffs took a cross writ of error to the^ Circuit Court of Appeals. There can be no question that although the plaintiffs escape the larger liability, there was probable cause for the defendant’s act. The Com- missioner of Internal Revenue rejected the plaintiff’s claim, and the statute does not leave the matter clear. The recovery therefore will be from the United States. Rev. Sts. Sec. 989. The plaintiffs, as they themselves alleged in their claim, were the persons taxed, whether they were called an association or trustees. They were taxed too much. If the United States retains from the amount re- ceived by it the amount that it should have received, it cannot recover that sum in a subsequent suit. Judgment of the Circuit Court of Appeals reversed. Judgment of the District Court Affirmed. INC. 428 TAX SUPREME COURT DECISIONS. DeGanay vs. Led^rer. (250 U. S. 376.) Mr. Justice Day delivered the opinion of the Court. 2408 The appended opinion of the United States Supreme Court in the case of Emily R. DeGanay v. Lederer, Collector, is published for the information of^mternal revenue officers and others concerned. (T. D. 2876, dated June 25, 2409 The Act of October 3, 1913, c. 16, sec. 2a, subdivision 1, 38 Stat. 166, provides: “That there shall be levied, assessed, collected and paid annually upon the entire net income arising or accruing from all sources in the preceding calendar year to every citizen of the United States, whether residing at home or abroad, and to every person residing in the United States, though not a citizen thereof, a_ tax of 1 per centum per annum upon such income, except as hereinafter pro- vided; and a like tax shall be assessed, levied, collected, and paid annually upon the entire net income from all property owned and of every business, trade, or profession carried on in the United States by persons residing elsewhere.” 2410 Under this statutory provision a question arose as to the taxability of in- come from certain securities of Emily R. DeGanay, a citizen and resident of France. The District Court of the United States for the Eastern District of Pennsylvania held the income from the securities taxable. 239 Fed. 568 [{[2195, Income Tax Service— 1917]. The case is here upon certificate from the Circuit Court of Appeals, from which it appears: That Emily R. DeGanay is a citizen of France, and resides in that country. That her father was an American citizen domiciled in Pennsylvania, and died in 1885, having devised one-fourth of his residuary estate, consisting of real property, to the Pennsylvania Company for Insurance on Lives and Granting Annuities, in trust to pay the net income thereof to her. She also inherited from her father a large amount of personal property in her own right free from any trust. This personal property is invested in stocks and bonds of corporations organized under laws of the United States and in bonds and mortgages secured upon property in Pennsylvania. Since 1885 the Pennsyl- vania Company has been acting as her agent under power of attorney, and has invested and reinvested her property, and has collected and remitted to her the net income therefrom. The certificates of stocks, bonds and mortgages had been and were in 1913 in the Company’s possession in its offices in Philadelphia The Company made a return of the income collected for the plaintiff for the year 1913 both from her real estate, which is not in controversy here, and her net income from corporate stocks and bonds and the bonds and mortgages held by her in her own right. The tax was paid under protest and recovery was sought by the proper action. 2411 The question certified is limited to the net income collected by virtue of the power of attorney from the personal property owned by the plaintiff in her own right. 2412 The power of attorney, which is attached to the certificate, authorizes the agent: “To sell, assign, transfer any stocks, bonds, loans, or other securities now standing^ or that may hereafter stand in my name on the books of any and all corporations national, state, municipal or private, to enter satisfaction upon the record of any indenture or mortgage now or hereafter in my name, or to sell and assign the same and to transfer policies of insurance, and the proceeds also any other moneys to invest and reinvest in such securities as they may in their discretion deem safe and judicious to hold for my account; to collect and receipt for all interest and dividends, loans, stocks, or other securities now or hereafter belonging to me, to endorse checks payable to my order and to make or enter into any agreement or agreements they may deem necessary and best for my interest in the management of my business and affairs also to represent me and in my behalf, to vote and act for me at all meetings con- nected with any company in which I may own stocks or bonds or be inter- ested in any way whatever, with power also as attorney or attorneys under it for that purpose to make and substitute, and to do all lawful acts requisite for effecting the premises, hereby ratifying and confirming all the said attorney or substitute or substitutes shall do therein by virtue of these, presents ” 2413 The question certified is: “If an alien non-resident’ owns stocks bonds and mortgages secured upon property in the United States or payable by persons or corporations there domiciled; and if the income therefrom is collected for and remitted to such non-resident by an agent domiciled in the United States; and if the agent has physical possession of the certificates of INC 429 TAX SUPREME COURT DECISIONS. stock, the bonds and the mortgages; is such income subject to an income tax under the Act of October 3, 1913?” 2414 The question submitted comes to this: “Is the income from the stock, bonds and mortgages, held by the Pennsylvania Company, derived from property owned in the United States? A learned argument is made to the effect that the stock certificates, bonds, and mortgages are not property, that they are but evidences of the ownership of interests which are property; that the property, in a legal sense, represented by the securities, would exist if the physical evidences thereof were destroyed.’ But we are of opinion that these refinements are not decisive of the congressional intent in using the term “property” in this statute. Unless the contrary appears, statutory words pe presumed to be used in their ordinary and usual sense, and with the meaning commonly attributable to them. To the general understanding and with the common meaning usually attached to such descriptive terms, bonds, mortgages, and certificates of stock are regarded as property. By state and federal stat- utes they are often treated as property, not as mere evidences of the interest which they represent. In Blackstone v. Miller, 188 U. S. 189, 206, this court held that a deposit by a citizen of Illinois in a trust company in the city of New York was subject to the transfer tax of the State of New York and said: “There is no conflict between our views and the point decided in the case reported under the name of State Tax on Foreign Held Bonds, 15 Wall. 300. The taxation in that case was on the interest on bonds held out of the State. Bonds and negotiable instruments are more than merely evidences of debt. The debt is inseparable from the paper which declares and constitutes it, by a tradi- tion which comes down from more archaic conditions. Bacon v. Hooker, 177 Mass. 335, 337.” 2415 The Court of Appeals of New York recognizing the same principle, treated such instruments as property in People ex rel, Jeflferson v. Smith, 88 N. Y. 576, 585: ^ “It is clear from the statutes referred to and the authorities cited and from the understanding of business men in commercial transactions, as well as of jurists and legislators, that mortgages, bonds, bills and notes have for many purposes come to be regarded as property and not as the mere evidences of debts, and that they may thus have a situs at the place where they are found like other visible, tangible chattels.” 2416 We have no doubt that the securities herein involved, are property. Are they property within the United States? It is insisted that the maxim mohilia sequuntur personam applies in this instance, and that the situs of the property was at the domicile of the owner in France. But this court has fre- quently declared that the maxim, a fiction at most, must yield to the facts and circumstances of cases which require it; and the notes, bonds and mortgages may acquire a situs at a place other than the domicile of the owner, and be there reached by the taxing authority. . It is only necessary to refer to some of the de- cisions of this court. New Orleans v. Stempel, 175 U. S. 309; Bristol v. Wash- ington County, 177 U. S. 133; Blackstone v. Miller, supra; State Board of As- sessors V. Comptoir National d’Escompte, 191 U. S. 388; Carstairs v. Cochran, 193 U. S. 10; Scottish Union & National Ins. Co. v. Bowland, 196 U. S. 611; Wheeler v. New York, 233 U. S. 434, 439; Iowa v. Slimmer, 248 U. S. 115, 120. Shares of stock in national banks, this court has held, for the purpose of taxation may be separated from the domicile of the owner, and taxed at the place where held. Tappan v. Merchants’ National Bank, 19 Wall. 490. 2417 In the case under consideration the stocks and bonds were those of corporations organized under the laws of the United States, and the bonds and mortgages were secured upon property in Pennsylvania. The cer- tificates of stock, the bonds and mortgages were in the Pennsylvania Company’s offices in Philadelphia. Not only is this so, but the stocks, bonds and mortgages were held under a power of attorney which gave authority to the agent to sell, assign, or transfer any of them, and to invest and reinvest the proceeds of such sales as it might deem best in the management of the business and aflfairs of the principal. It is difficult to conceive how property could be more completely localized in the United States. There can be no question of the power of Con- gress to tax the income from such securities. Thus situated and held, and with the authority given to the local agent over them, we think the income derived is clearly from property within the United States within the meaning of Con- gress as expressed in the statute under consideration. It follows that the ques- tion certified by the Circuit Court of Appeals must be answered in the affirmative. So ordered. Mr. Justice McReynolds took no part in this case. INC. 430 TAX SUPREME COURT DECISIONS. 2418 Law ^469. General Effective Date of the Revenue Act of 1918 of which Title II Relates to ‘Tncome Tax.”— *‘Sec. 1409. That unless otherwise herein specially provided, this Act shall take effect on the day following its passage [i. e., approval by the President].” 2419 Approved by the President, February 24, 1919, at 6.55 P. M. 2420 por 1f2420 see page 433. INC. 431 TAX On the foregoing pages is printed the 1913-1919 compilation. Part II— Current 1920 matters, begins on page 433. All official matters, issued and made avail- able on and after December 22, 1919, will be found in Part II. INC 432 TAX 12 - 6 - 20 . T. D. AND SPECIAL MATTER FINDER. In these tables are shown the locations within this book by paragraph num- bers of all matters printed herein, that appeared in our 1919 Service. Any rUulation. part of a regulation letter or other many contained m our 1919 Service not found in the subiomed tables was repealed, amended, super- seded, or otherwise annulled, or was repeated in a subsequent regulation which has been cited as being the latest ruling. ^TICLES OF REGULATIONS NO. 4S, REVISED, AS AMENDED. (Revised to 1(3017 herein: Complete to December 6, 1920.) Article Paragraph 1 474 2 481 3'.; 511 4 512 11 483 12 486 13;:;::: 488 21 771 22 780 23;::::: 783 24 788 25::;; 799 26 801; A, 2763 31 810,817,869 32 873 33 889; A, 2650 34 890 35 891 36 892 37 893 38 896 39 911 40 912 41 913 42 914; A, 2965 43 931 44 932 45! 936 46 937 47 938 48!. 939; A, 2899 49 941 50 942 51 943 52 945 53 946 54 947 71 1110 72* 1114 73* 1129 Article Paragraph 74 . . . . 1135 75 1136 76 . . . . 1137 77 1139 78 1140 79 1142 80 1144 81 1157 82 1158 83 ... 1162 84 1166 85 . . . . 1167 86 1176 87 1177 88 1178 91 1545 92 1546 92-A. , . 1547 93 1550 101 1198 1 09 1199 103 1200 104 1201 105 1210 106 1214 107 1219 108 1226 109 . . .1231; A, 2900 1 10 897 111 792 191 1236 122. . . . 1243 131 1253 1 39 1254 133.... 1262 1 34 1264 141. .. . 1305; A, 2507 1 42 1306 143- , . ... 1 307 Imcomt Ttx. Fin 1918) Our Paragraph Number Article and Our Paragraph Paragraph Number Number 4— ARTICLE 15. . 903 16. . 904 41. . 1075 46. . 1119 55. . 886 56. . 887 62. . 1552 63. . 1059 8— ARTICLE 93. . 1321 110. . 1203 14— ARTICLE 151. . 704 154.. 495 26— ARTICLE 182. . 1771 30— ARTICLE 213. . 568 38— ARTICLE 243. . 2039 244. . 2039 245. . 2229 41— ARTICLE 252. . 2021 42— ARTICLE 253 . . 2037 52— ARTICLE 286. . 2066 61— ARTICLE 304. . 1783 81— ARTICLE 336. . 1624 89— ARTICLE 350. . 1026 104— ARTICLE 371 . . 910 Income Tax. Finder Page 7. T. D. AND SPECIAL MATTER FINDER. REGULATIONS NO 33, Our Paragraph ' Paragraph Number Number 115— ARTICLE 386. . 1327 138— ARTICLE 443.. 1217 139— ARTICLE 444. . 1222 144— ARTICLE 452. . 1204 145— ARTICLE 453.. 1193 454. .1193 149— ARTICLE 461. . 954 150— ARTICLE 462. . 957 463.-957 464. . 957 152— ARTICLE 467. . 961 468. . 961 469. . 961 470. . 961 153— ARTICLE 471 . . 1309 162— ARTICLE 485. . 1352 163— ARTICLE 488. . 1349 165— ARTICLE 491 . . 1360 166— ARTICLE 492. . 1374 493. . 1374 178— ARTICLE 556. . 1372 REVISED— Concluded. Article and Our Paragraph . Paragraph Number Number 179— ARTICLE 557. .1373 188— ARTICLE 573.. . 1239 574. . 1239 575.. 1239 576.. 1239 189— ARTICLE 577.. 902 199— ARTICLE 593.. 1724 201— ARTICLE 602.. 1723 203— ARTICLE 608.. 1819 205— ARTICLE 612. . 1818 206— ARTICLE 613.. 1784 221— ARTICLE 638.. 2038 227— ARTICLE 647 . . 1969 229— ARTICLE 651. . 1979 233— ARTICLE 658. . 2041 659. . 2042 660. . 2061 234— ARTICLE 661. . 2067 245— ARTICLE 7 13.. 1003 # t (• 1918 INCOME-TAX PRIMER 86.. 1455 SPECIAL LETTERS AND TELEGRAMS . Numbers Tanuarv 7 1914— To the Central Trust Company of New York. .. 1665, 1666 ian^ary li 1914-To Frederick L. Allen.. ; , March 18 1914 — To Diplomatic and Consular Officers ^ March 5 ; 1914-To Robert Lynn Cox 1662 fs: company. 2 ^: e'C^ion-Trun : :: 1 : ■ •■•••••■. ...... March 25, 1915— To Carey, Piper & Hall ! . . .658 October 19, 1915— To Bowers and Sands • • ^^77 January 5, 1916-To White & Case January 11, 1916 — To Herbert M. Teets . . 1676 April 11, 1916— To a Subscriber Income Tax. Finder Page 8 . T. D. AND SPECIAL MATTER FINDER. June July , : : November November December December December December February, February March March April June October October November November November November November December February February March March March March March April April April May May May May July October November November November November January January March March March March March April April April April April April April April April April SPECIAL LETTERS AND TELEGRAMS— Continued. Paragraph Numbers 6, ,1916;: — To The Corporation Trust Company 1036 is, 1916— To The Corporation Trust Company 1023 1, 1916— To. The Central Trust Company of New York 1012 21, .1916^To The Corporation Trust Company. 1060 6, 1916-^To The Corporation Trust Company (Bonds pur- chased by trustee) .1680 6, 1916— To The Corporation Trust Company (Foreign ex- empt corporations) 1014 6, 1916 — To The Corporation Trust Company, (non-resident alien partnerships) 1555 28, 1916— To The Corporation Trust Company. ' 706 3, 1917 8 , 1917 - 3, 1917- 10, 1917 11, 1917- 22, 1917- 8, 1917- 25, 1917- 10, 1917 13, 19 , 21 , 30, 24, 11 , 18 , 14, 22 , 25, 26, 28, 17, 20 , 30, .14,. 20 , To Ropes, Gray, Boyden & Perkins 686 ToW. W. Bacon 111:5 ■To a Subscriber 1072 -To a Subscriber 1073 ■To a Subscriber 965 To Renefick, Cooke, Mitchell & Bass (in part) , . 872 ■To Lee, Higginson & Company 1156 ■To Palmer & Series 1741 To Lee, Higginson & Company 1051 1917-^To Sackett, Chapman & Stevens 1658 1917— To Harris, Forbes & Company 1237 1917-^To Simpson, Thatcher & Bartlett 1651 1917— To Greenbaum, Wolff & Ernst 1220^ 1917 - 7 -To Thie Corporation Trust Company 1449’ 1918— To Lee, Higginson & Company 1663 1918 — To S. W. Straus & Co 1643 1918— To The Corporation Trust Company. .864 1918 — To The Corporation Trust Company 1774 1918 — To Lee, Higginson & Company . 1776 1918' — To The Columbia Trust Company 1670 1918' — ;To The Corporation Trust Company 1740 1918— To Henry W. Beal 1580 19i8^To Brower, Brower & Brower 102f8 1918-;-^To Certified Audit Company of America 875' 1918 — To Hornblower and Weeks 824 1918 — To First National Bank, Cleveland, Ohio 1673 23, 1918 — To The Corporation Trust Company 554 27, 1918' — To Arthur Young & Company .825 12, 1918 — To E. G. Shorrock & Co 1358 1, 1918 — To The Corporation Trust Company (in part) 1554 2, 1918 — To Herbert J. Lyall 2132 12, 1918- — To Ropes, Gray, Boyden & Perkins 840' 26, 1918, — To E. G. Shorrock & Go 909 28, 1918 — To The Corporation Trust Company 1759 3, 1919— To Clark J. Milliron. 115'5 8, 1919 — To The Corporation Trust Company. . 1263 5, 1919 — To The Corporation Trust Company . . . 1712 14, 1919 — Official announcement. 2216 24, 1919 — To Bonbright & Company 17 15’ 25, 1919— To Chas. H. Hubbell 1154 29, 1919^To H. C. Hopson . .2134 1, 1919 — To The Corporation Trust Company 510 7, 1919 — To Southern Pacific Co 1660* 9, 1919 — To The Corporation Trust Company 508. 11, 1919 — To The Corporation Trust Company 1841 13, 1919 — To The Corporation Trust Company 1160' 14, 1919 — To Official Statement 1146 15, 1919 — To Collins & Corbin 1170' 17, 1919 — To The Corporation Trust Company 1839 19, 1919— To H. C. Hopson 1853 22, 1919 — To Hughes, Rounds, Schurman & Dwight 1612 Income Tax. Finder Page 9. T. D. AND SPECIAL MATTER FINDER. April April April May May May May May May May May May May June June June June June June June June June Tune July July July July July July August August August August August August August ' September ‘September September :September September iSeptember September October October ^October October ■October November November November SPECIAL LETTERS AND TELEGRAMS— Concluded. Paragraph Numbers 23, 1919 — Official Announcement 1146 23^ 1919 — To a Subscriber 1846 26^, 1919 — 'To Greenbaum, WolfF & Ernst 930 T 1919 — To The Corporation Trust Company 1573 2’ 1919 — To The Corporation Trust Company 871 (>, 1919 — To Alexander John Lindsay 1772 b’ 1919 — To Alexander John Lindsay 484 13, 1919 — To Oppenheim, Collins & Co 509 20, 1919 — 'To Cleveland Trust Co 1833 21, 1919 — To The Corporation Trust Company 527, 1713 23, 1919 — ^To Equitable Trust Co 1620 26, 1919— To W. B. Reed 1597 31, 1919 — To Douglas, Armitage & McCann 685 2, 1919 — To The Corporation Trust Company 1739 2, 1919— To Farmers Loan & Trust Co 1633 3, 1919 — Opinion of Attorney General 1929 7, 1919 — To The Corporation Trust Company 1255 9, 1919 — To The Corporation Trust Company 1382 9, 1919 — To The Corporation Trust Company 1517 12, 1919 — ^To National Coal Association 1606 21, 1919 — To Levi Cooke 1553 24, 1919 — To The Southern Pacific Co 1668 28, 1919 — To The Corporation Trust Company 1096 9, 1919 — To National Coal Association • • -525 9, 1919 — To The Corporation Trust Company See 915 10, 1919 — To The Corporation Trust Company See 915 22 , 1919 — To Guaranty Trust Company 22, 1919— To The Corporation Trust Company 1063 26, 1919— To The Corporation Trust Company 1621 6, 1919 — To The Corporation Trust Company 915 6, 1919 — To National Coal Association 1608 6, 1919 — To Guaranty Trust Co 1483 14, 1919— To Ropes, Gray, Boyden & Perkins 1459 1919 — Official Announcement 2223 19, 1919 — To Levi Cooke... 1540 26, 1919 — Statemxent by Bureau of Internal Revenue 2230 8, 1919 — To A. Iselin & Co 1631 13, 1919 — To Northwestern Trust Co 870 18, 1919 — To Boissevain & Co 1705 20, 1919 — To Ship Owners Association of the Pacific Coast.520,528, 1548 23’ 1919 — To Guaranty Trust Co . 1632 27, 1919 — To Announcement by Commissioner 2224 29, 1919 — To The Chase National Bank 1694 6, 1919 — To William R. Conklin. ’• -657 9, 1919 — To Ernst & Ernst 2181 13, 1919— To The Equitable Trust Co • ■ ■ • • 656 16, 1919 — To Baker & Baker • • 1081, 1086 24, 1919 — To The Corporation Trust Company 969 5, 1919 — To K. Sheridan Hayes -627 18, 1919— To The Corporation Trust Company. . 2420 20 1919 — To The Corporation Trust Company 1696 Income Tax. Finder Paje 10. T. D. AND SPECIAL MATTER FINDER. February January February March June July October November November January February June March June July August DEPARTMENT LETTERS TO COLLECTORS. Paragraph 10, 1914— To Collectors ^““I'soS 16, 1915— Mimeograph letter No. 1148 to Collectors. 1991 9, 1915 Mimeograph letter No. 1160 to Collectors . 1989 24, 1915— Mimeograph letter No. 1192 to Collectors .. .*.'.‘.2058 2062 22, 1915 Mimeograph letter No. 1232 to Collectors * 1994 8, 1915— Mimeograph letter No. 1242 ’ 1669 1915 — Mimeograph letter No. 1271 ’ ’ ] [ 895 1917— Mimeograph letter to Collectors No. 1663*. *. .' .’ .' . ! i635 Mimeograph letter No. 1675 to Collectors. . . 1904 1937 1918 — Statement to Collectors Qt;n 1918— IT— CLS. Mim. 1795 9100 25, 1918 — To Internal Revenue Agents 1364 13, 1919— IT— Mim. No. 2077... ^ .*.*.' !.*;.* .* 9?t 2, 1919— Mimeograph letter No. 2143 1629 18, 1919 — Mimeograph letter No. 2195 2075 8, 1919 — Mimeograph letter No. 2221 1829 SPECIAL MATTERS. July, 1917— Oral word to The Corporation Trust Company. Re- receipt by mail of Form 17 Second Liberty Loan Act (Sec. 7, as amended) . . . ’. ’. '. '. ’. Act Supplementing Second Liberty Pond Act (Sec. 1) rourth Liberty Loan Act (Sec. 3, as amended). . . . Victory Liberty Loan Act (Sec. 2) Victory Liberty Loan Act (Sec. 4) Surtax rates for 1913, 1914, and 1915 ] Surtax rates for 1916 and 1917 !......!..*.* Executive Order: Inspection of Returns Sample Letter: Offers in Compromise Section 1408, Revenue Act of 1918 Art. 715, Reg. 45, Rev Questions and answers about inventory losses (April 17 1919) Circular^appended to T. D. 2836 /••••. Sixteenth Amendment to the Constitution !..*!!!!!! Section 3165 Revised Statutes. .*..'..*!.'.* Section 3167 Revised Statutes Section 3172 Revised Statutes * Section 3173 Revised Statutes [ ] Section 3176 Revised Statutes \ Section 3184 Revised Statutes Section 3220 Revised Statutes Section 3224 Revised Statutes .......*.' Section 3225 Revised Statutes Section 3226 Revised Statutes Section 3227 Revised Statutes [ Section 3228 Revised Statutes Section 3229 Revised Statutes Proof of 2028 1140 1142 1551 1144 1551 861 862 1957 1944 580 489 1486 1153 2269 1790 1976 1867 1981 . . 1847, 1889 2020 2116 2164 2176 2177 2178 2180 1931 CASES. See Supplementary Page 107 at the back of the book. For running table of contents of current matter see Supplementary Page 109 at the back of the book. Income Tax. Finder Page 1 1. a'ljo iti'-yri i-j:. : I'!Vi t'BO; £ 6 C:. ;i^oi .... ^ d ‘.{ :ov?i O-iB. Qsa 4-dC I I c^' i ? \i' V. .K;M ..n.EGtii’ .fio" 5 lil >'*A .a .'): oKaxTij >:vi U‘ < x/'-Axau oaiio'-) , 2‘!oi CIO. J u1 0 ) ' ( .■ i/I ) j ‘O'i 'i ■ - . „ ; ,4 - 4 i 9 I , 0 I O’ja: I ■ ■ ’C t ? I i o Ai . - v ; [ ' 'C ! ' ' >i . _ bT Vl.u i:. -i ■ d.iyA ^:wl ■-■\r ‘j-Jilo'J OJ M.’ .'-//. i'A-j ’■ .... i'lOJ'v'.i' ' ■ iv'^i .J . . . . 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O/A 10 I 25 JBT ■ q. nr,;r.oq^ui 'j/ 111 K'lO ■ * ' :'ioJJ'’i.I SUI' . 804 - r : 4^5! ,(:!• •^;^- ,'m' :l'.. Ik br.n s,n4'i a-’Oy f ■' -i r : bobnjqofi.T'-b"'-]; J ;/ h^^ivoX Cdib . . . .':.ij£''r i2 b'=>8r/s>L \ ' It nOJlopo . . . .■‘' l<^ bssiv-iX i s It iioM^p2 Oijfij? t' It nobpo2 71- ;bj 8 b^akox bbU iJOiios^ . . . hoid-r^y no|J 93 & ...;,j.u:b 38 b92i79X 4*t^t ,.,^' jLii/?- b')8iv9/i cStt '. 'iSoiDt bo^IvoX btst .•'■J! 'r '8 \jO?d'j2 '••I' ls. / I’Cici/'aM *'ttt no:.t9'jc ”'■../ Pts;t Iiohoob . J:'.: 9 ;iJ '-'•3 ,>IoocJ oHj lo 'Aoi'y oy* 3^qp A • nt T viB^n- rv-olq ;:;2 9 o 3 ■<-3n-nXqrit.8 sea ’o grnuinco Ic ^ddzi -nl/cnui loi .Aoocl ' Hi 1:0 HobH .rX in .1 .xbT oinoPHi. J 3’^£ 1 13 bill 'I 1-12-20. t t % % % Qlnrporatiott ©rwot €ompani| a 1913-1920 INCOME TAX SERVICE ■ l: n 1/ II II i(>' j PART II. ..1 a 2420 Proceeds of Insurance Policies Paid to Partnerships on Death 1114 of the Insured Are Exempt. — Receipt is acknowledged of your . letter dated October 30, 1919, relative to the meaning of Article 72 [111114] of Regulations 45.^ HYou call attention to the fact that Article 72 of the preliminary edition of Regulations 45 provided that ‘‘upon the death of an insured the proceeds of his life insurance policies, whether paid to his estate or to individual beneficiaries (but not if paid to a corpo- ration or partnership), are excluded from the gross income of the beneficiary” and that the same provision is contained in Article 72 of the final edition of the regulations, with the exception of the clause “(but not if paid to a cor- poration or partnership)” being omitted and the words “directly or in trust” substituted therefdr. You also point out that Article 541 [1f809] of the regulations establishes the status of the proceeds of life insurance policies paid upon the death of the insured to corporation beneficiaries, but that nowhere in the regulations is a definite statement to the effect that such proceeds paid to a partnership are or are not to be reported in the gross income of ^the partnership. ^ You ask whether, under the circumstances^, the term “individual beneficiaries” as used in Article 72 of the final edition of Regulations 45 also means partnership beneficiaries. Ifin reply, you are advised that paragraph (1) of Section 213 (b) of the Revenue Act of 1918 specifically provides that the term “gross income” does not include the pro- ceeds of life insurance policies paid upon the death of the insured to individual beneficiaries or to the estates of the insured. Section 218 of the Act provides that in computing the net income of each member of a partnership “there shall be included his distributive share, whether distributed or not, of the net income of the partnership for the taxable year. * * * The net income of the partnership shall be computed in the same manner and on the same basis as provided in Secdon 212, except that the deduction provided in para- graph (11) of subdivision (a) of Section 214 shall not be allowed.” In Section 212 it is specified “that the term ‘net income’ means the gross income as defined in Section 213, less the deductions allowed by Section 214.” These provisions of the Revenue Act of 1918 do not require that the proceeds of life Insurance policies paid upon the death of the insured to a partnership be reported in the gross income of the partnership. In other words, the phrase “Individual beneficiaries” as used In that Act is held to Include partner- ship beneficiaries. (Letter to The Corporation Trust Company, signed by Commissioner Daniel C. Roper, and dated November 18^ 1919.) [The foregoing was omitted from the compilation In error.) INC. 433 TAX (T. D. 2960.) Jackson V. Smietanka {U. S. District Courts December^ 1919.) When income taxable. i , • -j A taxpayer who keeps no books of account, and to whom is paid, upon the termination of services extending over a period of years, a lump sum in amount not previously agreed upon, as compensation for such services, must return as income in the year in which received, the entire amount so paid him, even when such payment is accompanied by a statement proportion- ing the compensation over the years in which the services were rendered. 2421 The appended decision of the United States District Court for the 631 Eastern Division of the Northern District of Illinois, in the case of 778 Jackson v. Smietanka, is published not as a ruling of the Treasury 807 Department, but for the information of internal revenue officers and others concerned. (T. D. 2960, signed by Commissioner Daniel C. Roper, and dated January 7, 1920.) IN THE UNITED STATES DISTRICT COURT EASTERN DIVISION OF NORTHERN DISTRICT OF ILLINOIS (Decided December, 1919.) William J. Jackson vs. Julius F. Smietanka, Collector of the United States Internal Revenue, First District of Illinois. (No. 33109.) 2422 Page, Circuit Judge: This is a demurrer to the declaration. The sole question involved in this case is, was plaintiff erroneously taxed under the Revenue Law of 1918, or should he have been taxed under the several laws of the years 1913 to 1918, as plaintiff contends, on an income received as follows: , o r? ^ 2423 Plaintiff was on May 27, 1913, appointed a receiver of the C. & E. 1. R. R. Co. and served until April 27, 1918, for which he received, under the order of the District Court dated August 4, 1913, $2,000 per month com- mencing July, 1913, to be received on account, with the liberty on his dis- charge to apply for further compensation. When he resigned a general order was entered, on April 27, 1918, allowing him an additional compensation of $100,000. That general order was amended by order of April 22, 1919, as follows : ‘‘That said services of said William J. Jackson as receiver were ren- dered continuously from May 27, 1913, to and including April 27, 1918, and the compensation therefor now allowed was earned and accrued as follows: In the year 1913— $12,144.85, in the year 1914— $20,334.26, in the year 1915--$20,334.26, in the year 1916— $20,334.26, in the year 1917— $20,- 344.26, in the year 1918— $6,518.11.” That amendment was entered as of April 27, 1918. The petition for the amended order was filed and the order made long after the tax was assessed. The Government was not a party thereto. . 2424 Plaintiff cites Sec. 206 [^628] of the Revenue Law of 1918 as a basis 628 for his contention, and says, “If that section cannot reasonably be 631 applied to such a case as that of plaintiff, we ask to what sort of a case it does apply.” Art. 1641 [1[63l] of Treasury Department Regu- lations 45, under the Revenue Act of 1918, says that Sec. 206 refers to other and wholly different matters, and this interpretation is supported, and in the 434 TAX INC. 1 - 18 - 20 . opinion of the court conclusively, by Secs. 201 and 205 of the same act, in the former of which direct reference is made to said Sec. 206. 2425 After specifying in detail what the gross income includes. Sec. 213 778 ^ [1[807] provides: 807 ^ “The amount of all such items shall be included in the gross 873 i income for the taxable year in which received by the taxpayer, unless, 945 I under methods of accounting permitted under subdivision (b) of Section 212, any such amounts are to be properly accounted for as of a different period.” Subdivision (b) of Sec. 212 [1[778] provides: “The net income shall be computed upon the basis of taxpayer’s annual accounting period * * * in accordance with the method of accounting regularly employed In keeping the books of such taxpayer.” Plaintiff kept no books, so that clause does not apply. It further pro- vides [1f779] that: “If no such method of accounting has been so employed or If the method employed does not clearly reflect the income, the computation shall be made upon such basis and in such manner as in the opinion of the Commissioner does clearly reflect the income The only language which might apply to plaintiff is, “If no such method of accounting has been so employed * * * com- putation shall be made upon such basis and in such manner as in the opinion of the Commissioner does clearly reflect the income.” This seems to leave the burden upon the plaintiff here to show that the method of accounting Insisted upon by him has been prescribed as a basis by the Commissioner. Art. 52 [1[945] of Regulations 45 provides: “Gains, profits and income are to be Included In the gross income for the taxable year In which they are received by the taxpayer, unless they are included when they accrue to him In accordance with the approved method of accounting followed by him.” Art. 32 [1[873] of said Regulations 45 states: “Where no determination of compensation Is had until the completion of the services, the amount received Is Income for the calendarjyear of its determination.” 2426 The demurrer Is sustained. (Opinion appended to T. D. 2960, [1[2421].) (T. D. 2961.) 2427 Inspection of returns. — Section 2 of the Tariff Act of October 3, 1955 1913, imposes an Income tax on Individuals, corporations, joint- stock companies or associations, and Insurance companies, and para- graph G (d) of said section provides: “When the assessment shall be made, as provided In this section, the returns, together with any corrections thereof which may'^have been made by the Commissioner, shall be filed in the office of the Commissioner of Internal Revenue and shall constitute public records and be open to inspection as such: Provided^ That any and all such returns shall be open to inspection only upon the order of the President, under rules and regulations to be prescribed by the Secretary of the Treasury and approved by the President: * * * /» INC. 435 TAX 2428 Title I of the Revenue Act of 1916 imposes an income tax on individ- uals, corporations, joint-stock companies or associations, and insure ance companies, and Section 14 (b) of said Title provides: “When the assessment shall be made, as provided in this Title, the returns, together with any corrections thereof which may have been made by the Commissioner, shall be filed in the office of the Com- missioner of Internal Revenue and shall constitute public records and be open to inspection as such: Provided^ That any and all such returns shall be open to inspection only upon order of the President, under rules and regulations to be prescribed by the Secretary of the Treasury and approved by the President: * * * yj 2429 Title II of the Revenue Act of 1917 imposes a war excess-profits tax on individuals, partnerships, corporations, joint-stock companies or associations, and insurance companies, and Section 212 of said Title provides: “That all administrative, special, and general provisions of law, in- cluding the laws in relation to the assessment, remission, collection, and refund of internal revenue taxes not heretofore specifically repealed, and not inconsistent with the provisions of this title are hereby extended and made applicable to all the provisions of this title and to the tax herein imposed, and all provisions of Title I of such Act of September eighth, nineteen hundred and sixteen, as amended by this Act, relating to returns and payment of the tax therein imposed, including penalties, are hereby made applicable to the tax imposed by this title.” 2430 Title II of the Revenue Act of 1918 imposes an income tax on indi- viduals, associations, joint-stock companies and insurance companies, and Section 257 of said Title provides: “That returns upon which the tax has been determined by the Commissioner shall constitute public records; but they shall be open to inspection only upon order of the President and under rules and regulations prescribed by the Secretary and approved by the President: * ♦ * » 2431 Title III of the Revenue Act of 1918 Imposes a war-profits and excess profits tax on corporations, associations, joint-stock companies and insurance companies, in addition to other taxes imposed by the Act, and Section 336 of said Title provides: “That every corporation, not exempt under Section 304, shall make a return for the purposes of this title. Such returns shall be made, and the taxes imposed by this title shall be paid, at the same times and places, in the same manner, and subject to the same conditions, as is provided in the case of returns and payment of income tax by corpora- tions for the purposes of Title II, and all the provisions of that title not inapplicable including penalties, are hereby made applicable to the taxes imposed by this title.” 2432 Section 1000, Title X, of the Revenue Act of 1918 Imposes on corporations a special excise tax with respect to carrying on or doing business, and subdivision (d) of said section provides: “Section 257 shall apply to all returns filed with the Commissioner for purposes of the tax imposed by this section.” 2433 Pursuant to these provisions of law the President orders that returns of individuals, partnerships, associations, joint-stock companies, and insurance companies filed under the provisions of Section 2 of the Tariff Act of October 3, 1913, Title I of the Revenue Act of 1916, Title II, of the Revenue Act of 1917, and Titles II and III and Section 1000, Title X, of INC. 436 TAX 1 - 13 . 20 . the Revenue Act of 1918 or under laws hereafter enacted in substitution or amendment of the income tax or capital stock tax provisions thereof and not inconsistent herewith shall be open to inspection in accordance and upon compliance with the following rules and regulations: 2434 1. These regulations deal only with inspection or returns, as the statutes expressly require the approval of the President of regula- tions on this subject. Other uses to which returns may be lawfully put, without action by the President, are not covered by these regulations. 2435 2. The word “corporation” when used alone herein «hall, unless other- wise indicated, include corporations, associations, joint-stock com- panies, and insurance companies. The word “return” when so used shall, unless otherwise indicated, include income and profits tax returns; and also ^special excise tax returns of corporations filed pursuant to Section 1000, Title X, of the Revenue Act of 1918. 2436 3. Written statements filed with he Commissioner of Internal Revenue designed to be supplemental to and to become a part of tax returns shall be subject to the same rules and regulations as to inspection as are the tax returns themselves. ' 2437 4. Except as hereinafter specifically provided, the Commissioner of Internal Revenue may, in his discretion, upon written application setting forth fully the reasons for the request, grant permission for the inspection of returns in accordance with these regulations. The appli- cation will be considered by the Commissioner and a decision reached by him whether the applicant has met the conditions imposed by these regulations and whether the reasons advanced for permission to inspect are sufficient to permit the inspection. Such written application is not required of the officers and employees of the Treasury Department whose official duties require inspection of a return, or of the Solicitor of Internal Revenue. 2438 5. The return of an individual shall be open to inspection as follows: (a) By the officers and employees of the Treasury Department whose official duties require such inspection and by the Solicitor of Internal Revenue; (b) by the person who made the return, or by his duly constituted attorney- in-fact; (c) by the administrator, executor or trustee of the taxpayer’s estate, or by the duly constituted attorney-in-fact of such administrator, executor or trustee, where the maker of the return has died; and (d) in the discretion of the Commissioner of Internal Revenue, by one of the heirs at law or next of kin of such deceased person upon showing that he has a material interest which will be affected by information contained in the return. 2439 6. A joint return of a husband and wife shall be open to inspection (a) by the officers and employees of the Treasury Department whose official duties require such inspection, and by the Solicitor of Internal Rev- '•enue; and (b) by either spouse for whom the return was^made,^or his or her duly constituted attorney, upon satisfactory evidence of such relationship being furnished. 2440 7. The return of a partnership shall be open to inspection (a) by the officers and employees of the Treasury Department whose official duties require such inspection and by the Solicitor of Internal Revenue; and (b) by anv individual (or his duly constituted attorney-in-fact, or legal representative) who was a member of such partnership during any part of the time covered by the return, upon satisfactory evidence of such fact being • furnished. 2441 8. The return of a corporation shall be open to inspection (a) by the officers and employees of the Treasury Department whose official duties require such inspection and by the Solicitor of Internal Revenue; INC. ^2>7 TAX (b) upon satisfactory evidence of identity and official position, by the presi- dent, vice-president, secretary or treasurer of such corporation or if none, its principal officer; and (c) by a stockholder of such corporation as provided in paragraph 9 hereof. 2442 9. A stockholder of record owning one per centum or more of the stock of the outstanding stock of a corporation may be permitted to inspect its return. Such permission will only be granted upon an appli- cation in writing to the Commissioner of Internal Revenue accompanied by an affidavit showing applicant’s address, the name of the corporation, the period of time covered by the return he desires to inspect, and a certificate from the officials of the corporation or other satisfactory evidence showing the amount of the corporation’s outstanding capital stock, the number of shares owned by the applicant, the date when such stock was acquired, and satis- factory proof of identity. This privilege of inspection is personal and will be granted only to the stockholder. This rule has no application to the return of a corporation filed pursuant to the Revenue Act of 1918; specific provision, independent of Presidential regulation, being made in that act for inspection by a stockholder of a return of a corporation filed thereunder (second proviso of Section 257). 2443 10. When the head of an executive department (other than the Treasury Department) or of any other United States Government establishment, desires to inspect or to have some other officer or employee of his branch of the service inspect a return in connection with some matter officially before him, the inspection may, in the discretion of the Secretary of the Treasury, be permitted upon written application to him by the head of such executive department of other Government establishment. The application must be signed by such head and must show in detail why the inspection is desired, the name and address of the taxpayer who made the return, and the name and official designation of the one it is desired shall in- spect the return. When the head of a bureau or office in the Treasury Department, not a part of the Internal Revenue Bureau, desires to inspect a return in connection with some matter officially before him, other than an income, profits tax or corporation excise tax matter, the inspection may, in the discretion of the Secretary, be permitted upon written application to him by the head of such bureau or office showing in detail why the inspection is desired. The reasons submitted for permission to inspect as provided in this paragraph shall be considered by the Secretary and a decision reached by him whether the reasons are sufficient to permit the inspection. 2444 11. When it becomes necessary for the Department to furnish returns or copies thereof for use in legal proceedings, inspection of such returns or copies that necessarily results from such use is permitted. 2445 12. Except as provided in paragraph 11 returns may be inspected only in the office of the Commissioner of Internal Revenue, Wash- ington, District of Columbia. 2446 13. A person who, under these regulations, is permitted to inspect a return may make and take copy thereof or a memorandum of data contained therein. 2447 14. By Section 3167 R. S. [^[1976], as amended by the Revenue Act of 1918, it is made a misdemeanor for any person to print or publish in any manner whatever not provided by law any income return, or any part thereof or source of income, profits, losses, or expenditures appear- ing in any income return, which misdemeanor is punishable by a fine not exceeding $1,000 or by Imprisonment not exceeding one year, or both, at the discretion of the Court, and if the offender be an officer or employee of the United States, by dismissal from office or discharge from employment. INC. 438 TAX 1 - 18 - 20 . 2448 15. All former regulations bearing on the subject of inspection of returns are hereby superseded. 2449^ 16.. These regulations shall remain in force until expressly withdrawn or overruled. (T. D. 2961, signed by Carter Glass, Secretary of the Treasury and approved by President Wilson, January 7, 1920.) (T. D. 2962.) 2450 Regulations Governing the Furnishing of Copies of Income Returns; 1955 the Giving to State Officials Access to Income Returns of Corpo- 1969 rations, Associations, Joint-Stock Companies and Insurance Com- 1970 panies; the Examination by a Stockholder of the Annual Income 1972 Returns of a Corporation.— 1 . Furnishing of copies of income return^. No specific provision is made in the statutes for furnishinK ^ copy of an income return to any one. Authority to permit inspection does not carry with it authority to furnish a copy. Implied authority to furnish a copy is contained in several provisions of law constituting returns public records, and ip Sections 161 and 251 R. S., which confer upon the Secretary of the T'reasury broad power to make rules and regulations concerning ‘‘custody, use and preservation of the records, papers and property” of the Department and the enforcement of the Internal Revenue laws. Because of the pro- visions contained in Section 3167 R. S., as amended by the Revenue Act of 1918, making it unlawful for any officer or employee of the United States ^‘to divulge or to make known in any manner whatever not provided by law to any person * * * the amount or source of income, profits, losses, expenditures, or any particular thereof, set forth or disclosed in any income return, or to permit any income return or copy thereof or any book containing any abstract or particulars thereof to be seen or examined by any person except as provided by law;” and also unlawful “for any person to print or publish in any manner whatever not provided by law any income return, or any part thereof or source of income, profits, losses, or expenditures appearing in any income return;”, a copy of an income return cannot be furnished, except as provided by law, to any one except the person or persons who made the return. Furnishing the maker with a copy of his return is not a divulging of informa- tion contained therein to any person, within the meaning of Section 3167 R. S., as amended. There are numerous provisions in the Statutes constiuit- ing the doing or failure to do certain things offenses against the United States, and providing for collecting unpaid taxes by suits in court and for bringing suits to recover taxes and penalties wrongfully collected. These provisions would be of no avail were it held that the returns themselves, or certified copies thereof provided for in Section 882 R. S., could^ not be used by the Government as evidence in such litigation or in preparation for same. Manifestly Congress did not, when it enacted Section 3167 R. S., intend to defeat prosecutions and suits in court for which it has specifically provided. 24.51 Incorpe returns filed with the Department are public records of the Department, and public records in the Treasury Department are of right available as evidence in litigation in court unless there Is some statute making it unlawful to use them as such (Winn v. Patterson, 9 Pet. 663, 677; Evanston v. Gunn, 99 U. S. 660; 17 Cyc. 306; Williams v. Conger, 125 U. S. 397, 410;. Iron Silver Min. Co. v. Campbell, 135 U. S. 286, 298; Oakes V. U. S.; 174 U. S. 778; Texas, etc., Ry. Co. v. Swearingen, 196 U. S. 51, 60). As therefore the use of income returns or copies thereof in connection with litigation in court, where the United States Government is interested in the INC. 439 TAX result, is provided for by law, such returns or copies may be furnished for such use without a violation of the provisions of Section 3167 R. S., as amended. 2452 The following rules and regulations are therefore prescribed: 2453 1. The original income return of an individual, partnership, corpo- ration, association, joint-stock company,- insurance company, or fiduciary, or a copy thereof may be furnished by the Commissioner of Internal Revenue to a United States Attorney for use as evidence before a United States grand jury or in litigation in any court, where the United States is interested in the result, or for use in the preparation for such litigation, or to any attorney connected with the Department of Justice designated by the Attorney General to handle such matters if and when the Attorney General states to the Commissioner in writing that such attorney is so designated. When an income return or copy thereof is thus furnished, it must be limited in use to the purpose for which it is furnished and is under no conditions to be made public except where publicity necessarily results from such use. In case the original return is necessary, it shall be placed in evidence by the Commissioner of Internal Revenue or by some other officer or employee of the Internal Revenue Bureau designated by the Commissioner for that purpose, and after it has been placed in evidence it shall be returned to the files in the Office of the Commissioner in Washington. An original return will be furnished only in exceptional cases and then only when it is made to appear that the ends of justice may otherwise be defeated. Neither the original nor a copy of an income return desired for use in litigation in court where the United States Government is not interested in the result and where such use might result in making public the information contained therein will be furnished, except as otherwise provided in the next succeeding paragraph. 2454 2. A copy of an income return may be furnished by the Commissioner of Internal Revenue to the person who made the return or to his duly constituted attorney, or if the person is deceased, to his executor or adminis- trator; or if the entity is in the hands of a receiver, trustee in bankruptcy, guardian or similar legal custodian, to the receiver, trustee or other similar Custodian -Upon written application for same accompanied by satisfactory evidence that the applicant comes within this provision.’ “The person who made the return” as herein used refers in the case of an individual return to the individual whose return is desired, and in the case of a return of a corpo- ration, association, joint-stock company, insurance company or fiduciary to the corporation, association, joint-stock company or fiduciary, a copy of whose, return is desired. A corporation may also 'designate by proper action of its Bpard of Directors the officer or individual to whom a copy of a return made by the corporation may be furnished, and upon sufficient evidence of such action and of the identity of the officer or individual, a copy may be furnished to such person. A copy of a partnership, income return will bei furnished to the partners only in case all the partners join in the request therefor, it matters not what particular partner or officer of the partnership made the return. If the partnership, has been dissolved the members' sur- viving may be furnished a copy if all the members surviving join in the request. . 2455 3. All former regulations bearing on the subjects herein covered are hereby superseded. : 2456 II. Givin?^ to state officials access to income returns of corporations, associations, joint-stock companies, and insurance companies. Section 2 of the Tariff Act of October 3, 1913, imposes an income tax on corp.-^ rations, INC. 440 TAX % % 1 - 13 - 20 . joint-stock companies or associations and insurance companies, and requires them to file income returns. Paragraph G (d) of said Section provides among other things: “That the proper officers of any State imposing a general income tax may, upon the request of the governor thereof, have access to said returns or to an abstract thereof, showing the name and income of each .. such corporation, joint-stock company, association, or insurance com- pany, at such times and in such manner as the Secretary of the Treasury may prescribe.’’ 2457 Title I of the Revenue Act of 1916 imposes an income tax on corpo- rations, joint-stock companies or associations, and insurance companies and requires them to file income returns. Section 14 (b) of said Title provides among other things: “That the proper officers of any State imposing a general income tax may, upon the request of the governor thereof, have access to said returns or to an abstract thereof, showing the name and income of each such corporation, joint-stock company or association, or insurance company, at such time and in such manner as the Secretary of the Treasury may prescribe.” 2458 Title II of the Revenue Act of 1917 imposes a war excess-profits tax on corporation, joint-stock companies or associations, and insurance companies and Section 212 of said Title provides: “That all administrative, special, and general provisions of law, in- cluding the laws in relation to the assessment, remission, collection, and refund of internal-revenue taxes not heretofore specifically repealed, and not inconsistent with the provisions of this title are hereby extended and made applicable to all the provisions of this title and to the tax herein iniposed, and all provisions of Title I of such Act of September eighth, nineteen hundred and sixteen, as amended by this Act, relating to returns and payment of the tax therein imposed, including penalties, are hereby made applicable to the tax imposed by this title.” 2459 Title II of the Revenue Act of 1918 imposes an income tax on cor- porations, associations, joint-stock companies, and insurance com- panies and requires them to file income returns. Section 257 of said Title provides among other things: “That the proper officers of any State imposing an income tax may, upon the request of the governor thereof, have access to the returns of any corporation, or to an abstract thereof showing the name and income of the corporation, at such times and in such manner as the Secretary may prescribe.” 2460 Section 1 of Title I of said Revenue Act of 1918 provides: “That when used in this Act * * * term ‘corporation’ includes associations, joint-stock companies, and insurance companies.” 2461 Title III of the Revenue Act of 1918 imposes a war-profits and excess-profits tax on corporations, associations, joint-stock com- panies, and insurance companies, in addition to other taxes Imposed by the Act, and Section 336 of said title provides: “That every corporation, not exempt under section 304, shall make a return for the purposes of this title. Such returns shall be made, and the taxes imposed by this title shall be paid, at the same times and places, ^ in the same manner, and subject to the sqme conditions, as is provided in the case of returns and payment of income tax by corpora- tions for the purposes of Title II, and all the provisions of that title INC. 441 TAX not inapplicable, including penalties, are hereby made applicable to the , taxes imposed by this title.” 2462 Section 1000, Title X, of the Revenue Act of 1918 imposes on cor- porations a special excise tax with respect to carrying on or doih^ business, and subdivision (d) of said section provides: “Section 257 shall apply to all returns filed with the Commissioner for purposes of the tax imposed by this section.” 2463 Pursuant to the authority contained in these provisions of law or under laws heretofore enacted in substitution or amendment thereof and not inconsistent herewith the following rules and regulations are pre- scribed. 2464 1. The proper officers of a state Imposing an Income tax are entitled as of right upon the request of its governor to have access to the Income and profits tax returns of a corporation, association, joint-stock com- pany or insurance company or to an abstract thereof showing Its name and income. Proper officers In this connection are only those officers of the state who are charged with the enforcement of the state income tax law and who are to use the information gained by the access only In connection with such enforcement. 2465 2. The request or application of the governor must be in writing Tgned by him under the seal of his state and^must show: (a) That the state imposes an Income tax. (b) The name and address of the corporation, association, joint-stoch company, or insurance company making the returns to which access is desired. (c) Why access Is desired. (d) The names and official positions of the officers deslgnate4 to have the access. (e) That such designated officers are charged with the enforcement of the state Income tax law. (f) That the Information to be gained by the access is to be used only in connection with such enforcement. 2466 3 . The request or application of the governor may be ^addressed either to the Secretary of the Treasury or to the Commissioner of Internal Revenue but should be transmitted to the Commissioner who will set a convenient time for the access to the returns (or to an abstract thereof as he may determine). 2467 4. Access shall be given only In the office of the Commissioner of Internal Revenue in Washington. 2468 5. The officers designated by the governor will not be permitted to name another person or persons to examine the returns (or abstracts) for them. 2469 6. The officers designated will be given access only to the returns of those corporations, associations, joint-stock companies, or insurance companies organized or doing business In their state. 2470 7. The officers designated may have access to lists furnished to supplement and become a part of the returns to which they are given access. 2471 8. The proper officers, as defined In paragraph 1, may have access to the capital stock tax returns filed under the provisions of Section 1000 of the Revenue Act of 1918 under the same conditions prescribed In the pre- ceding paragraph for access to the income and profits tax returns of corpora- tions, associations, joint-stock companies, and Insurance companies. This right does not extend to the examination of capital stock tax returns filed pursuant to prior acts of Congress. INC 442 TAX 1 - 14 - 20 . 2472 9. All former regulations bearing on the subjects herein covered are hereby superseded. 2473 III. Examination by a stockholder of the a.nnual income returns of a corporation made pursuant to Titles II and III and Section 1000, Title X, of the Revenue Act of 1918. Title II of the Revenue Act of 1918 imposes an income tax on corporations and requires them to file income returns. Section 257 of said title provides among other things: “That all bona fide stockholders of record owning 1 per centum or more of the outstanding stock of any corporation shall, upon making re- quest of the Commissioner, be allowed to examine the annual income re- turns of such corporation and of its subsidiaries. Any stockholder who pursuant to the provisions of this section is allowed to examine the return of any corporation, and who makes known in any manner whatever not provided by law the amount or source of income, profits, losses, ex- penditures, or any particular thereof, set forth or disclosed in any such return, shall be guilty of a misdemeanor and be punished by a fine not exceeding $1,000, or by imprisonment not exceeding one year, or both.” 2474 Title III of the Revenue Act of 1918 imposes a war-profits and excess- profits tax on corporations, in addition to other taxes imposed by the Act, and Section 336 of said title provides: “That every corporation, not exempt under section 304, shall make a return for the purposes of this title. Such returns shall be made, and the taxes imposed by this title shall be paid, at the same times and places, in the same manner, and subject to the same conditions, as is provided in the case of returns and payment of income tax by corporations for the purposes of Title II, and all the provisions of that title not - inapplicable, including penalties, are hereby made applicable to the taxes imposed by this title.” 2475 Section 1000, Title X, of the Revenue Act of 1918 imposes on corpora- tions a special excise tax with respect to carrying on or doing business, and subdivision (d) of said section provides: “Section 257 shall apply to all returns filed with the Commissioner for purposes of the tax imposed by this section.” 2476 Pursuant to these provisions of law and any other laws that may be hereafter enacted in substitution or amendment thereof and not in- consistent herewith, a bona fide stockholder of record owning 1 per centum or more of the outstanding stock of a corporation shall be entitled as of right, upon making request of the Commissioner of Internal Revenue, to examine the annual income returns of such corporation and of its subsidiaries made under Titles II and II of the Revenue Act of 1918, and all returns of corpo- rations filed for purposes of the tax imposed by Section 1000, Title X, of said act. His request for permission to examine such returns must be made in writing and must be in the form of an affidavit showing his address, the name of the corporation, the period of time covered by the return he desires to inspect, the amount of the corporation’s outstanding capital stock, the number of shares owned by him, the date when he acquired them and whether he has the beneficial as well as the record title to such shares. It must also show that he has not acquired his shares for the purpose of the examination of the income returns of the corporation. If he has acquired them for this purpose he is not a bona fide stockholder within the meaning of the statute. The application must be supported by satisfactory evidence showing that the applicant is a bona fide stockholder of record of the required amount of stock of the corporation. The supporting evidence may be partly in the form INC. 443 TAX of a certificate signed by the president or vice-president of the corporation, and countersigned by the secretary under the corporate seal. Upon being satisfied from the evidence presented that the applicant has fully met these conditions the Commissioner will grant the permission to examine the returns and set a convenient time for the examination in the office of the Com- missioner. This privilege is personal and will be granted only to the stock- holder who cannot delegate it to another. 2477 All former regulations bearing on this subject are hereby supepeded. 2478 IV. Inspection of Returns in all other cases is governed by Presidential 2427 order and regulations [112427], to which reference is made. (T. D. 2962, signed by Commissioner Daniel C. Roper, and dated January 7, 1920.) (T. D. 2963.) Amendment of Article 1568 of Regulations 45. 2479 Determination of gain or loss from subsequent sale of stock and 1087 securities received in exchange on reorganization, merger, or con- solidation. — Article 1568 of Regulations 45 is hereby amended to read as follows: “Art. 1568. Determination of gain or loss from subsequent sale.— The new stock and securities received as described in the preceding article [Art. 1567, 111085] take the place of the old stock and securities. For the purpose, therefore, of ascertaining the gain derived or 'loss sustained from the sub- sequent sale of any stock of A or of the consolidated corporation, so received, the original cost to the taxpayer or the fair market value as of March 1, 1913, of the stock of B or A in respect of which the new stock was issued, less any untaxed distribution made to the taxpayer by A out of the former capital or surplus of B, or by the consolidated corporation out of the former capital or surplus of A or B, is the basis for determining the amount of such gain or loss. When securities of a single class are exchanged for new securities of the same total par value but of different classes, for purposes of determining profit or loss on subsequent sale of any of the new securities, the proportion of original cost (or value as of March 1, 1913) to be allocated to each class of new securities is that proportion which the market value of the particular class bears to the market value of all securities received on the date of the exchange. For example, if 100 shares of common stock par value $100 are exchanged for 50 shares of preferred and 50 shares of common each of $100 par value, and the cost of the old stock was $250 per share, or $25,000, but the market value of the preferred on the date of exchange was $110 per share, or $5,500 for the 50 shares, and the market value of the common was $440 per share, or $22,000 for the 50 shares of common, one-fifth of the original cost, or $5,000, would be regarded as the cost of the preferred and four-fifths, or $20,000, as the cost of the common. Similarly, the cost after reorganization, merger or consolidation of the assets of A or of the consolidated corporation is the sum of the cost (or the fair market value as of March 1, 1913) of the assets of A and of B for the purpose of ascertaining the gain or loss upon a subsequent sale. The new invested capital of A or of^ the consolidated corporation is to be determined as if A and B were rendering a consolidated return as affiliated corporations. See sections 240 and 326 of the statute and articles 631-638 [for consolidated returns, beginning at 111826] and 864-869 [for invested capital of affiliated corporations for excess-profits tax purposes — War Tax Service].” (T. D. 2963, signed by Commissioner Daniel C. Roper, and dated January 12, 1920.) INC. 444 TAX 1 - 24 - 20 . 2480 Taxable and exempt status of War Finance Corporation Bond in- 1133 terest. — War Finance Corporation bonds are issued under the 1138 authority of the Act of April 5, 1918, which provides that the interest on the amount of such bonds, the principal of which does not exceed $5,000, shall be exempt from normal taxes, surtaxes, excess profits and war profits taxes, and that the interest received by a taxpayer, independent of the amount of his holdings, is exempt from normal Federal tax [which includes the income tax on corporations]. (Official announcement by the Bureau of Internal Revenue, April 5, 1919.) 2481 [Comment: Section 16 of the Act of April 5, 1918 (The War Finance Corporation Act) reads in part as follows:] “Sec. 16. That any and all bonds issued by the Corporation shall be exempt, both as to principal and interest, from all taxation now or hereafter imposed by the United States, any State, or any of the pos- sessions of the United States, or by any local taxing authority, except (a) estate or inheritance taxes, and (b) graduated additional income taxes, commonly known as surtaxes, and excess-profits and war-profits taxes, now or hereafter imposed by the United States, upon the income or profits of individuals, partnerships, corporations, or associations. The interest on an amount of such bonds the principal of which does not exceed in the aggregate $5,000, owned by any individual, partnership, corporation, or association, shall be exempt from the taxes referred to in clause (b).” [Comment: Any exemption provided by the above is distinct from and in addition to any exemption applicable to interest on Liberty Bonds, Victory Notes, Treasury Certificates of Indebtedness, War Savings Certificates, and other United States Government obli- gations.] 2482 Dividends received from foreign corporations sub'ect to income tax 1325 are exempt from the tax on corporations as well as from normal tax 1514 on individuals. — Receipt is acknowledged of your letter of October 1517 ’ 31, 1919, in which you refer to a letter which this office addressed to " The Corporation Trust Company on June 9, 1919, appearing at page 474 of The Corporation Trust Company’s 1919 Income Tax Service [111517 of the 1920 Service], and request to be advised if the ruling contained in that letter applies to a domestic corporation as well as an individual owning stock in and receiving dividends from a foreign corporation. In the letter referred to it was held that: “Article 301 of the Regulations contemplates that the normal tax imposed by Section 210 of the Act does not apply to dividends, regardless of the amount of such dividends, received from a foreign corporation taxable upon income from sources within the United States, however small such income may be.” 2483 The above ruling applies to both individuals and corporations. Accordingly, dividends received from a foreign corporation taxable on its net income from sources within the United States, however small such income may be, are not subject to normal tax in the hands of the recipient domestic corporation. (Letter to a subscriber, signed by J. H. Callan, Assistant to the Commissioner, by N. T. Johnson, Head of Division, and dated November 21, 1919.) NC. 445 TAX 2484 Excise taxes on sales imposed on the manufacturer, producer or 1254 importer, not deductible by consumers. — May war excise taxes imposed by section 900 be deducted by individual purchaser in computing net income for taxable year. Automobile companies are notifying individual purchasers that they may deduct amount of tax which is levied on account of sale of automobile. Wire reply collect. (Answer.) Excise taxes im- posed under section^900 upon^^manufa'cturer, producers or importers not deductible by individual purcha/ser in computing net income. (Telegram of inquiry from The Cleveland Trust Company, Cleveland, Ohio, and the reply thereto signed by George V. Newton, Acting Assistant to the Commissioner, and dated January 7, 1920.) 2485 Manner of determining gain or loss on the assignment of a life 1177 insurance policy to the writing company, — Receipt is acknowledged of your letter of October 4, 1919, asking this office to reconsider the case presented in your letter of September 5, 1919, in regard to Policy No. , issued by your Company on the life of . 2486 It is your opinion that the amount of $360, representing a part of the premiums paid by Mr. previous to March 1, 1913, but not included in the cash surrender value of the policy as of that date, should for income tax purposes be an allowable deduction from the amount re- ceived by the insured at the maturity of the policy instead of a gain over the value of the policy since March 1 , 19 13, as is held in office letter of September 19 by using as the basis for ascertaining the gain or loss the cash surrender value of the policy as of March 1, 1913, the date upon which the income tax law became effective. In this connection, you are advised that the expressed intent of the law in other sections, for the purpose of determining the gain or loss sustained from the disposition of property real, personal or mixed is that the basis in the case of property acquirecl before March 1, 1913, shall be the fair market price or value of such property as of that date, the value to be used when referring to an insurance policy being explicitly stated in Article 87 [If 1177] of Regulations 45, as its cash surrender value as of that date. 2487 In view of the foregoing statement, you are advised that this office holds that the first method presented in office letter of September 19, 1919, is the correct method for determining the gain or profit resulting from the disposition of a life insurance policy which was acquired prior to March 1, 1913, where the insured transfers the policy and his rights thereunder to another than the insurance company which wrote the policy in consideration of a stated price. 2488 However, Section 213j1flll3] of the Revenue Act of 1918 provides that “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 men- tioned in the contract or upon surrender of the contract,” is exempt from the Federal income tax. Therefore, this office further holds that where, as in the case of Mr. , the insured sur- rendered his policy and all his rights thereunder to the insurance company which wrote the policy, the aggregate amount of premiums paid during the period the policy was held, or the cash surrender value of the policy as of March 1, 1913, whichever is the greater in amount, is to be taken as the basis in computing the amount of profit derived therefrom, and the differ- ence between such aggregate amount or cash surrender value and the amount received upon surrender is the amount to be returned as income for the year during which the cancellation took place. (Letter to The Provident Life and Trust Company of Philadelphia, signed by Commissioner Daniel C. Roper, and dated January 5, 1920.) INC. 446 TAX 2 - 5 - 20 . 2489 A discussion of “reasonable allowance for salaries.”— Receipt i» 1208 s ckcowledged of your letter of November 29, 1919, inquiring whether or not the Department has arrived at any general conclusion witB respect to salaries of executives which may be properly deducted in determin- ing tax liability. ^ 2480 In reply you are advised that the probien compensation for personal services is one are few general rules which can be laid down as gi factors are involved, among them being the character and amount ot respon- . sibility, ease or difficulty of the work itself, tirne required, working conditions, future prospects, living conditions of the locality, individual ability, technical training, profitableness to the employer of the services rendered, and the number of available persons capable of performing the duties of the position. 248 1 A very comprehensive study of the returns of various classes ot cor- porations has been made by the Department and has been reduced to a chart of statistical curves showing the average relationship of deductions for officers’ compensation to gross income, to total deductions, and to net income plus compensation to officers. In cases where the salaries may be properly questioned, the chart is used as a guide, but the precise results oi the study are not applied in such cases because of the varying circumstances^, surrounding the determination of the salaries. These circumstances arc given full weight in the consideration of each particular case. 2492 Th« test of deductibility in the case of compensation payments Is whether they are reasonable and are in fact payments purely for services. 2493 Cases in which the compensation paid is not in fact the purchase price of the services rendered are likely to occur (1) where a corpo- ration has few stockholders, practically all of whom draw salaries, (2) where salaried employees are in control of the corporation through holding directly or indirectly a majority of its stock, and (3) in the case of a large corporation with many stockholders where the salaried employees hold a substantial; minority of its stock. In such cases there is an opportunity for the officer®, unduly to inflate their salaries or to pool their interests in such a way that part of the compensation is not in fact payment for services rendered. 2494 The Department will question such salaries when they are excessive and appear to have relation to stockholdings, or to have been made as a result of the pooling of the interests of those in control of the corporation.. 2495 But the Department does not question compensation which is paid as the result of open bargaining, or as the result of bona fide contracts and arrangements entered into and followed prior to the years in which the tax rates have been exceedingly high, provided such payments are in fact purely for services. For example — compensation paid in 1918, which is apparently excessive, but which was paid as the result of open bargaining entered into and followed prior to 1917, will not be questioned by the De- partment. 2496 When on the audit of a return, it appears that salaries are excessive^ and the conditions stated in the previous paragraph do not exist, the taxpayer is given an opportunity of presenting facts which will show that the amount deducted on his account is reasonable, and is in fact the pur- chase price of the services. Before a decision is made, the facts presented are given careful consideration. There is enclosed a copy of Regulations. No. 45, Articles 105 [^[1210] and 106 [If 12 14] of which bear on the subject.. (Letter to Thomas A. Fernley, Secretary-Treasurer, The National WholesaJc: Dry Goods Association, Philadelphia, Pa., signed by G. V. Newton, Acting Assistant to the Commissioner, by N. T. Johnson, H^^id of Division, and dated December 13, 1919.) . of determining reasonable of difficulty, in that therc> tides to a decision. Many INC 447 TAX 2497 Returns in respect of money and other property of enemies surren- 1699 dered to the Alien Property Custodian. — Receipt is acknowledged of 1854 your letter dated October 30, 1919, stating that the Trust Company is attorney-in-fact for a nonresident alien client who is held to be an enemy by the Alien Property Custodian. On August 22, 1918, the Trust Company surrendered to the Alien Property Custodian all money and securities in its possession belonging to its client. Your statement is noted, referring to Article 446 of Regulations 45, that apparently the Trust Company was required to render a return at the time the money and securi- ties were relinquished, * * *. ^In reply, you are advised that at the time the Trust Company turned over the money and securities of its enemy client to the Alien Property Custodian, the provisions of Treasury Decision 2673, dated March 18, 1918, were in force. Under that decision, it was required that ‘‘All persons who on October 6, 1917, had, or since have had, or may hereafter have, control of any money or other property for any enemy or ally of enemy, or who on October 6, 1917, were, or since have been, or may hereafter be, indebted to any enemy or ally of enemy, shall hold and deliver all said money and property in all respects subject to the provisions of the Trading with the Enemy Act and to the order of the Presi- dent of the United States and of the Alien Property Custodian thereunder, and shall in due course file returns of income in respect of all said money and property for such periods as may elapse or have elapsed prior to the actual delivery of said money and property to the Alien Property Custodian.” ^This decision was substantially repeated in Article 446. Neither the lan- guage of the original ruling nor that of Article 446 can be so construed as to require the filing of returns at the time of surrendering the rnoney and prop- erty of enemies to the Alien Property Custodian. But as indicated in the last sentence of the decision given above, returns of income are to be filed in due course^ which is held to mean by the next regular due date for the filing of returns of income. The following ruling of the Alien Property Custodian under Treasury Decision 2673 is approved and quoted for your informa- tion, to wit: “Return of income is required to be filed in due course in respect of all money or other property for such part of the year 1918, or any subsequent year as may elapse prior to the actual delivery of the money or other property to the Alien Property Custodian, but no withholding or the payment of any taxes is required.” (Letter to The Corporation Trust Com- pany, signed by Commissioner Daniel C. Roper, and dated January 19, 1920.) 2498 Procedure when foreign item is presented without ownership cer- 1704 tificate and owner is unknown. — In case foreign item_ is unaccom- 1751 panied by certificate and owner is unknown, affidavit and Form 1001-A, revised, showing name and address of payee should be executed by first bank unless item represents interest on bonds containing tax free covenant issued by foreign country or corporation having paying agent in U. S. in which case affidavit and Form 1000, revised, should be executed by first bank in accordance with Article 368 [lfl704]. For audit purposes payee will be considered actual owner. (Telegram to the Equitable Trust Company, New York, signed by Commissioner Daniel C. Roper, and dated January 20, 1920.) INC. 448 TAX 2 . 7 - 20 . (T. D. 2966.) [Matter in italics is new; that in boldface brackets [ ] shows old matter cut out.] 2499 Charitable contributions: Article 251, Regulations 45, amended. — 1448 Article 251 of Regulations 45 is hereby amended to read as follows: Article 251. Charitable contributions. — Contributions or gifts with- in the taxable year are deductible to an aggregate amount not in excess of fifteen per cent of the taxpayer’s net income including such payments, if made (a) to corporations or associations of the kind exempted from tax by sub-division (6) of section 231 of the statute or (b) to the special fund for vocational rehabilitation under the Vocational Rehabilitation Act of June 27, 1918. For a discussion of what corporations and associations are included within (a) see article 517 [^[760]. A gift to a common agency (as a war chest) for several such corporations or associations is treated like a gift direct [directly] to them. In connection with claims for this deduction there shall be stated on returns of income the name and address of each or- ganization to which a gift was made, and the approximate date and the amount of the gift in each case. Where the gift is other than money, the basis for calculation of the amount of the gift shall be the cost of the property, if acquired after February 28, 1913, or its fair market value as of March 1, 1913, if acquired prior thereto, after deducting from such cost or value the amount, if any, which has been or which should have been set aside and deducted in the current year and previous years from gross income on account of depreciation, and which has not been paid out in making good the depreciation sustained [fair market value of the property at the time given]. A gift of real estate to a city to be maintained perpetually as a public park is not an allowable deduction. This article does not apply to gifts by partnerships, estates and trusts, or cor- porations. See sections 218 [for partnerships, 1[552] and 219 [for estates and trusts, ^652] of the statute and articles 561 and 562 [for corporations 1[1 181 and ^1227]. (T. D. 2966, signed by J. H. Callan, Acting Commissioner of Internal Revenue, and dated February 4, 1920.) (T. D. 2967.) [Matter in italics is new; that in bold face brackets [ ] is old matter cut out.] 2500 Amending Article 367, Regulations 45, concerning the use of sub- 1700 stitute certificates. — The final edition of Regulations 45 is amended 1702 by^^changing Article 367 to read as follows: Art. 367. Use of substitute certificates. — Resident collecting agents and responsible banks and bankers, receiving interest coupons for collection with ownership certificates attached, may present the coupons with the original certificate to the debtor corporation or its duly authorized with- holding agent for collection or may detach and forward the original certi- ficates directly to the Commissioner, provided each such collecting agent shall substitute for such original certificates its own certificates (form 1058, (revised) or form 1059 (revised)) and shall keep a complete record of each trans- action, showing (a) serial number of item received; (b) date received; (c) name and address of person from whom received; (d) name of debtor corporation; (e) class of bonds from which coupons were cut (whether con- taining a tax-free covenant or not); and (f) face amount of coupons. The original certificate for which the certificate of the collecting agent is substituted INC. 449 TAX shall he indorsed^ preferably follows: with a rubber stamps by the collecting agent as Owner^s certificate No {Name of collecting agent) {Give date of certificate.) The^fcounterpart of the within certificate bearing like number was^ attached to the coupons within mentioned for delivery to the debtor or withholding agent, by whom the coupons are payable. For the purpose of identification the substitute certificates shall be numbered consecutively, reverting to the numeral 1 at the beginning of each calendar year, and corresponding numbers given the original certificates of ownership. The use of substitute certificates by collecting agents, banks and bankers is not permitted, however, in the case of ownership certificates presented with coupons for collection by nonresident alien individuals, partnerships or corporations. (T. D. 2967, signed by J. H. Callan, Acting Commissioner of Internal Revenue and dated February 4, 1920.) 2501 On the use of Form 1001-B generally and its use for prior years 1650 during which there was statutory provision for personal exemption to nonresident aliens. — Receipt is acknowledged of your letter of Januarv 8, 1920, in which you make an inquiry on behalf of — , in regard to Form 1001-B. Mr. y desires to know whether a nonresident alien in making out Form 1001-B is required only to repoit interest received during the year from coupons maturing during that year; also whether a nonresident alien should file Form 1001-B for every year in respect of which he has received interest during the calendar year. 2502 In reply you are advised that the purpose of Form 1001-B is to pro- vide for relief of domestic corporations which have assumed payment of income tax with respect to tax-free covenant bonds owned by nonresident aliens who are entitled to credit for personal exemption and dependents but whose incomes from sources in the United States do not exceed such credit therefor. A nonresident alien who files Form 1001-B, should report in the space provided for that purpose, all othey incoine^ for the calendar year last ended, from sources in the United States in addition to the in^rest due during that year from coupons maturing during the year. While Form 1001-B was intended, primarily, for reporting 1919 income, it may be adopted for reporting any interest received in respect of the years 1916 and 1918, in which case a separate form should be filed for each of those years, in respect of which the nonresident alien has received interest during the calendar year. (Letter to The Corporation Trust Company, signed by Commissioner Daniel C. Roper, and dated February 3, 1920.) INC. 450 TAX 2 - 11 - 20 . (T. D. 2969.) [Matter in italics is new; that in hold face brackets [ ] is old matter cut out,] 2503 Ownership Certificates — Alien Property Custodian: Article 375, |I699 Regulations 45, Amended. — ^Article 375, Treasury Department Reg- 2497 ulations 45, is hereby amended to read as follows: “Payments made after October 6, 1917, to the alien property custodian are in the same category as payments made to or for citizens or residents of the United States. Withholding at the source is accordingly unnecessary except in the case of interest payments on corporate bonds or other obligations containing a tax- free covenant where no exemption is claimed. The alien property custodian should use form 1000 (revised) in collecting interest on bonds containing a tax-free covenant and in all other cases should use form 1001 (revised), except that in cases in which the alien property custodian shalf under the trad- ing with the enemy act^ demand payment to himself of interest accrued upon bonds or other securities not yet reduced to his custody {even though they be regis- tered in the name of an enemy ^ ally of enemy, or his agent or trustee), the cor- poration paying such income to the alien property custodian is authorized to accept from the alien property custodian ownership certificates, forms 1000 {re- vised) and 1001 {revised), altered by the substitution {in lieu of the certificate required thereon) of a certificate that the alien property custodian is entitled to the interest entered therein with or without deduction of tax, as the case may be. No distinction is to be made between payments directly to the alien prop- erty custodian and to his depositaries and between interest on registered bonds and interest on coupon bonds. In the case of enemies or allies of enemies holding a license granted under the provisions of the Trading with the Enemy Act, withholding is required as in the case of any nonresident alien not an enemy or ally of enemy. See Article 446 [for extension of time for filing returns in the case of enemies. If 1854]. (T. D. 2969, signed by J. H. Callan, Acting Commissioner of Internal Revenue, and dated February 4, 1920.) 2504 Amended returns in connection with changes in accounting methods. 784 — Reference is made to your letter of January 16, 1920, requesting advice as to the application of the provisions of Treasury Decision 2873 [11783] with respect to the filing of amended returns in the case of taxpayers who change their method of accounting. IfYou are advised that Treasury Decision 2873 contemplates the filing of statements setting forth any changes which affect the returns for the years 1916 and 1917. Upon the facts in each particular case the Commissioner will determine whether or not it is necessary to file amended returns for any prior years. (Letter to The Corporation Trust Company, signed by Commissioner Daniel C. Roper, and dated February 6, 1920.) INC. 451 TAX (T. D. 2970.) [Matter in italics is new; that in hold face brackets [ ] is old matter cut out.] 2605 Amending Article 307, Regulations 45, dealing with nonresident 1572 alien individual entitled to personal exemption and credit for depen- dents. — The final edition of Regulations 45 is amended by changing Article 307 to read as follows: Art. 307. When nonresident alien individual entitled to personal exemp- tion: (a) The following is an incomplete list of countries which either impose no income tax or in imposing an income tax allow both a personal exemption and a credit for dependents which satisfy the similar credit requirement of the statute: Argentina; Belgium; Bolivia; Bosnia; Brazil; Bukowina; Canada; Carinthia; Carniola; China; Chile; Cuba; Czechoslovakia, including Bohemia, Moravia and Slovakia; Dalmatia; Denmark; Ecuador; Egypt; France; Galicia; Goritz; Gradisca; Greece; Guatemala; Herze- govina; Istria; Cowo-r Luxemburg; Mexico; Montenegro; Morocco, Newfoundland; Nicaraugua; Norway; Panama; Paraguay; Persia; Pern; Portugal; Roumania; Russia (including Poles owing allegiance to Russia); Slaxburg; Santo Domingo; Serbia; Siam; Silesia; Styria; Spain; Switzer- land; Trieste; Tyrol; Upper Amstria; Union of South Africa; Venezuela, (b) The following is an incomplete list of countries which in imposing an in- come tax allow a personal exemption which satisfies the similar credit require- ment of the statute, but do not allow a credit for dependents: Bachka; Banat of Temesvar; Croatia; Finland; India; Italy; Salvador; Slovonia; Transylvania, (c) The following is an incomplete list of countries which in imposing an income tax do not allow to citizens of the United States not residing in such country either a personal exemption or a credit for dependents and, therefore, fail entirely to satisfy the similar credit requirement of the statute; Australia; Costa Rica; Great Britain and Ireland; Japan; The Netherlands; New Zealand; Sweden. The former names of certain of these territories are here used for convenience, in spite of an actual or possible change in name or sovereignty. A nonresident alien individual who is a citizen or subject of any country in the first list is entitled for the purpose of the normal tax to such credit for a personal exemption and for dependents as his family status may warrant. If he is a citizen or subject of any country in the second list he is entitled to a credit for personal exemption, but to none for dependents. If he is a citizen or subject of any country in the third list he is not entitled to credit for either a personal exemption or for dependents. If he is a citizen or subject of a country which is in none of the lists, then to secure credit for either a personal exemption or for dependents he must prove to the satisfaction of the Commissioner that his country does not impose an income tax or that in imposing an income tax it grants the similar credit required by the statute. (T. D. 2970, signed by J. H. Callan, Acting Commissioner of Internal Revenue, and dated February 4, 1920 [released February 10, 1920].) ♦ (• m INC. 452 TAX 2 - 13 - 20 . (T. D. 2971.) [Matter in italics is new; that in bold face brackets [ ] is old matter cut out.] 2506 Method of determining gain or loss on exchange of property. — 1077 Article 1563 of Regulations 45, amended. — Regulations 45 are here- 1081 by amended by substituting for article 1563 as it now stands the fol- lowing: Art. 1563. Exchange of Property. — Gain or loss arising from the acquisi- tion and subsequent disposition of property is realized when as the result of a transaction between the owner and another person the property is con- verted into cash or into property (a) that is essentially different from the property disposed of and (b) that has a market value. In other words, both (a) a change in substance and not merely in form, and (b) a change into the equivalent of cash, are required to complete or close a transaction from which income may be realized. By way of illustration, if a man owning ten shares of listed stock exchanges his stock certificate for a voting trust certificate, no income is realized, because the conversion is merely in form; or if he ex- changes his stock for stock in a small, closely held corporation, no inconae is realized if the new stock has no market value, although the conversion is more than formal; but if he exchanges his stock for a liberty bond, income may be realized, because the conversion is into independent property having a market value. ‘‘Market value” is the price at which a seller willing to sell at a fair price and a buyer willing to buy at a fair price ^ both having reasonable knowledge of the facts, will trade. Property received in exchange for other prop- erty has no “fair market value” for the purpose of determining gain or loss result- ing from such exchange when, owing to the condition of the market, there can be no reasonable expectation that the owner of the property, though wishing to sell and any person wishing to buy will agree upon a price at which to trade unless, one or the other is under some peculiar compulsion. It does not follow that property has no “fair market value” merely because there is no price therefor established by public sales or sales in the ivay of ordinary business. The prop- erty received in exchange may be real estate, personal property, or a chose in action. [The exchange of a so-called convertible bond for stock pursuant to such a privilege granted in the bond will produce income if the stock re- ceived in exchange has a fair market value in excess of the cost or fair market value as of March 1, 1913, of the bond.] Where the owner of a bond exercises the right, provided for in the bond, of converting the bond into stock in the obligor corporation, such transaction does not result in a realization of profit or loss, the transaction not being closed for purposes of income taxation until such stock is sold. (T. D. 2971, signed by J. H. Callan, Acting Commissioner of Internal Revenue, and dated February 4, 1920 [released February 10, 1920]. INC, 453 TAX (T. D. 2972.) [Matter in italics is nm; that in bold face brackets [ ] is old matter cut out,] 2607 Amendment to Article 141 of Regulations 45: Losses —Article 141 1305 of Regulations 45 is hereby aniended to read as follows: Art 141. Losses. — Losses sustained during the taxable year and not compensated for by insurance or otherwise are fully deductible (except by nonrLident aliens)^if (a) incurred in the taxpayer s trade or business,^ (b) incurred in any transaction entered into for profit> ^ W hes, storms, shipwreck or other casualty, or from theft. They must usually be evidenced by closed and completed transactions. In the case of the sale of assets the loss will be the difference between the cost ciation sustained since acquisition, or the fair inarket 1913 if acquired before that date, less depreciation since sustained, and the price at which they were disposed of. See section 202 of articles 39-46 [for sale of certain assets, beginning at 1[911] and 1561 (for l>=»sis for determining gain or loss from sale, If 1058]. When the loss is claimed through the destruction of property by fire, flood or other casualty, the amount deductible will be the difference between the [cost of the fair market value oj the property as of March 1, 1913, ij J date or if acquired on or after that date, its cost, and the salvage value thereof, alter deducting from [the] such cost, or such value as of March 1, 1913, the amount if any, which hL been or should have been set aside and deducted in he current year and previous years from gross income on account of depreciation and which has not been paid out in making good the depreciation sustained. But the loss should be reduced by the amount of any insurance or other compensation received. See articles 49 [for compensation for 1°^, 1194 J and 50 [for replacement fund for loss, 1[942]. _ A _ loss in the sale of an indivi- dual’s residence is not deductible. Losses in illegal transactions are not deductible. Where a person gives property away, or is divested thereoj Oy death, no realization of loss results therefrom. (T. D. 2972, signed by Com- missioner Daniel C. Roper, and dated February 7, 1920.) (T. D. 2973.) 2508 Instructions relative to acceptance of Treasury certificates of indebt- 2092 edness for income and profits taxes. Collectors of Intel nal Revenue are authorized and directed to receive at par United States d reasury certificates of indebtedness of Series T 8, dated July ’ dated September 15, 1919, Series TM 3-1920, dated December 1 919, and Series TM 4-1920,^ dated February 2, 1920, all maturing Mai cn 15,^19-0, in payment of income and profits taxes payable on March 15, 1920. Collec- tors are authorized and directed to receive at par, Treasury certificates o! indebtedness of Series TJ 1920, dated December 15, 1919, 1920, in payment of income and profits taxes payable on Jone 15, 1^- ^ Treasury certificates of indebtedness of Series T 10, dated September 15, 1919, maturing September 15, 1920, in payment of income and profits taxes payable on September 15, 1920; and Treasury certific^es of Series TD 1920, dated January 2, 1920, maturing December 5, L 2 , in pavment of income and profits taxes payable on December 15, 192U. Collectors are further authorized and directed to receive at par, in payment of income and profits taxes payable at the maturity of the certificates, respectively, Treasury certificates of indebtedness of any series maturing INC. 454 TAX 2-1S-20. on March 15, June 15, September 15, or December 15, 1920, respectively, and expressed to be acceptable in payment of income and profits taxes. Col- lectors are not authorized hereunder to receive in payment of income or profits taxes any Treasury certificates of indebtedness not expressed to be acceptable in payment of income and profits taxes, or maturing on a date other than the date on which the taxes are payable. Collectors are authorized to receive Treasury certificates of indebtedness which are acceptable as above provided in paym.ent of income and profits taxes, in advance of the respective dates on which the certificates mature. Treasury certificates acceptable in payment of incom.e and profits taxes have one or more interest coupons attached, including as to each series a coupon payable at the maturity of of the certificates, but all interest coupons must in each case be detached by the taxpayer and collected in ordinary course when due. The amount, at par, of the Treasury certificates of indebtedness presented by any tax- payer in payment of income and profits taxes must not exceed the amount of the taxes to be paid by him, and collectors shall in no case pay interest on the certificates or accept them for an amount other or greater than their face value. 2509 Deposits of Treasury certificates of indebtedness received in payment of income and profits taxes must be made by collectors, unless other- wise specifically instructed by the Secretary of the Treasury, with the Federal Reserve Bank of the district in wliich the collector’s head office is located, or in case such head office is located in the same city with a branch Federal Reserve Bank, with such branch Federal Reserve Bank. Specific instructions may be given in certain instances for the deposit of the certificates with Federal Reserve Banks of other districts and branch Federal Reserve Banks. The term “Federal Reserve Bank,” where it appears herein, unless otherwise indicated by the context, includes branch Federal Reserve Banks. Treasury certificates accepted by the collector prior to the dates when the certificates respectively mature, should be forwarded by the collector to the Federal Reserve Bank to be held for account of the collector until the date of matur- ity, and for deposit on such date. 2610 Collectors of internal revenue are not authorized, unless otherwise notified by the Secretary of the Treasury, to receive in payment of income or profits taxes interim receipts issued by Federal Reserve Banks in lieu of definitive certificates of the series herein described. 251 1 Certificates of indebtedness should in all cases be. stamped as follows by the Collector, and when so stamped forwarded to the Federal Re- serve Bank by registered mail uninsured: 192. . . . “This certificate has been accepted in payment of income and profits taxes and will not be redeemed by the United States except for credit of the undersigned. Collector of Internal Revenue for the district of. ... _ ” 2512 Collectors should make in tabular form a schedule in duplicate of the certificates of indebtedness to be forwarded to the Federal Reserve Bank, showing the serial number of each certificate, the date of issue and maturity, and face value. Certificates of indebtedness accepted prior to the date of maturity must be scheduled separately. At the bottom of each schedule there should be written or stamped “Income and Profits Taxes $ which amount must agree with the total shown on the schedule. One coi)y of this schedule must accompany certificates sent to the Federal INC. 455 TAX Reserve Bank, and the other be retained by the collector. The income and profits tax deposits resulting from the deposits of such certificates must in all cases be shown on the face of the certificate of deposit (National Bank Form 15) separate and distinct from the item of miscellaneous internal revenue collections (formerly called Ordinary), but it is not necessary to give the separation into corporation income, individual income and profits taxes. 2513 Until certificates of deposit are received from the Federal Reserve Banks, the amounts represented by the certificates of indebtedness forwarded must be carried by collectors as cash on hand, and not credited as collections, as the dates of certificates of deposit determine the dates of collections. ^ . . 2514 For the purpose of saving taxpayers the expense or transmitting - such certificates as are held in F ederal Pveserve cities or F ederal Reserve branch bank cities to the office of the collector in whose district ^e taxes are payable, taxpayers desiring to pay income and profits taxes by Treasury*, certificates of indebtedness acceptable in payment of such taxes, should communicate with the collector of the district in which the taxes are payable and request from him authority to deposit such certificates with the h ederal Reserve Bank or branch in the city in which the certificates are held. Col- lectors are authorized to permit deposits of Treasury certificates of indebted-. , ess in any Federal Reserve Bank or branch with the distinct understanding that the Federal Reserve Bank or branch is to issue a certificate of deposit in the collector’s name covering the amount of the certificates of indebtedness at par and to state on the face of the certificate of deposit that the amount represented thereby is in payment of income and profits taxes. The r ederal Reserve Bank or branch should forward the original certificate of deposit . to the Treasurer of the United States with its daily transcript, and transmit to the collector the duplicate and triplicate, accompanied by a statement- giving the name of the taxpayer for whom the payment is made in order that the collector may make the necessary record and forward the duplicate to the office of the Commissioner of Internal Revenue. ^ ^ ■ 2515 This Treasury Decision amends and supplements the provisions ot Articles 1731 [112092] and 1732 [112093] of Regulations 43 (Rey^e^., and supersedes Treasury Decisions 2907 [112094] and 2918 [1[2094]. (T D 2973, signed by Commissioner Daniel C. Roper, and dated February 9, 1920.) INC 456 TAX 2 - 20 - 20 . (T. D. 2977.) l^Matter in italics is ncwj that in hold face brackets [ ] is old matter cut outi] 2516 Amendment of Article 251 of Regulations 45, as amended by T. D. 1448 2966. Article 251 of Regulations 45 is amended to read as follows: 2499 Art. 251. Charitable contributions. — Contributions or gifts within the taxable year are deductible to an aggregate amount not in excess of fifteen per cent of the taxpayer’s net income including such payments, if made (a)^ to corporations or associations of the kind exempted from tax by subdivision (6) of Section 231 of the statute, or (b) to the special fund for vocational rehabilitation under the Vocational Rehabilitation Act of June 27, 1918. For a discussion of what corporations and associations are included within (a) see Article 517 [^760]. A gift to a common agency (as a war chest) for several such corporations or associations is treated like a gift [direct] directly to them. In connection with claims for this deduction there shall be stated on returns of Income the name and address of each organization to which a gift was made, and the approximate date and the amount of the gift in each case. Where the gift is other than money, the basis for cal- culation of the amount of the gift shall be the cost of the property [if acquired after February 28, 1913,] or its fair market value as of March 1, 1913, if acquired prior thereto [after deducting from such cost or value the amount, if any, which has been or which should have been set aside and deducted in the current year and previous years from gross income on account of depreciation, and which has not been paid out in making good the deprecia- tion sustained] less any depreciation sustained. A gift of real estate to a city to be maintained perpetually as a public park is not an allowable deduction. [This article does not apply to gifts by partnerships, estates and trusts, or corporations. See sections 218 and 219 of the statute and articles 561 and 562.] ^ The proportionate share of contributions made by a partnership to cor- porations or associations of the kind included in {a) above and to the special fund for vocational rehabilitation specified in (Jb) may be claimed as deductions in the personal returns of the partners to an amount which, added to the amount of such contributions made by the partner individually, is not in excess of fifteen per cent of the partner s net income computed without the benefit of the deduction for such contributions. However, the contributions made by the partnership shall not be deducted from its gross income in ascertaining the amount of its net income to be reported on Form 1065 {Revised). See Article 321 f1[553], (T. D. 2911 , signed by Commissioner Daniel C. Roper and dated Februarv 11, 1920.) INC. 457 TAX {Decision,) (Acts of Aug. 5, 1909 and Oct. 3, 1913.) Insurance companies i — 1. Premiums collected by agents but not trans- mitted to the company during the taxable year. 2. “Net addition to re- serve funds.” 3. “Released reserve” as taxable income. 4. A question as to the Statute of Limitations. Supreme Court of the United States. Maryland Casualty Company, Appellant, ) Appeal from the Court vs. > of Claims. The United States. ) [January 12, 1920.] Mr. Justice Clarke delivered the opinion of the Court. 2517 Under warrant of the Act of Congress, approved August 5,1909 985 (36 Stat., Ch. 6, pp. 11, 113), the Government collected from the 993 claimant, a corporation organized as an insurance company under the laws of Maryland, an excise tax for the years 1909, 1910, 1911 and 1912, and, under warrant of the Act of Congress of October 3, 1913, (38 Stat., Ch. 16, pp. 114, 166), it likewise collected an excise tax for the first two months of 1913, and an income tax for the remaining months of that year. 2518 This suit, instituted in the Court of Claims, to recover portions of such payments claimed to have been unlawfully collected, is here for review upon appeal from the .judgment of that court. 2519 The claimant was engaged in casualty, liability, fidelity, guaranty • and surety insurance, but the larger part of its business was em- ployers’ liability, accident, and, in the later of the years under consideration in this case, workmen’s compensation insurance. 2520 By process of elimination the essential questions of difference between the parties ultimately became three, viz.: (1) Should claimant be charged, as a part of its gross income each ye^r, with premiums collected by agents, but not transmitted by them to its treasurer within the year.^ (2) May the amount of gross income of the claimant be reduced by the aggregate amount of the taxes, salaries, brokerage and re-insurance unpaid at the end of each year, under the provisions in both the excise and income tax laws allowing deductions of “net addition, if any, required by law to be made within the year to reserve funds’’.^ (3) Should the decrease in the amount of reserve funds reqmredby law for the year 1913 from the amount required for 1912 be treated as “re- leased reserve” and charged to the company as income for 1913.^ 2521 Of these in the order stated. 2 522 Section 38 of the Excise Tax Act (36 Stat. 112) provides that every corporation, organized under the laws of any State as an insurance company “shall be subject to pay annually a special excise tax with respect to the carrying on or doing business * * * equivalent to one per centum upon the entire net income * * * received hy it from all sources during such year.” 2523 The Income Tax Act (38 Stat. 172) provides (Section G, paragraph (a) ) that the tax shall be levied upon the entire “net income arising or accruing from all sources during the preceding calendar year.’ Butin INC. 458 TAX 2 - 20 ^ 20 . paragraph (b), providing for deductions, gross income is described as that '‘^received within the year from all sources.” So that, with respect to domestic corporations, it is clear enough that no change was intended by the use of the expression “arising or accruing” in the Income Tax Act, and that the tax should be levied under both acts upon the income “received” during the year. Southern Pacific Co. v. Lowe, 247 U. S. 330, 335. 2524 The claimant did business in many States, through many agents, with whom it had uniform written contracts which allowed them to extend the time for payment of the premiums on policies, not to exceed thirty days from the date of policy, and required that on the fifth day of each calen- dar month they shoujd pay or remit, in cash or its equivalent, the balance due claimant as shown by the last preceding monthly statement rendered to it. 2525 Under the provisions of such contracts obviously the agents were not required to remit premiums on policies written in November until the fifth of January of the next ye^ar and on policies written in December not until the following February. 2526 Much the largest item of the gross income of the company was pre- miums collected on policies of various kinds. Omitting reference to earlier and tentative returns by the claimant and amendments by the Gov- exnme;it, it came about that claimant took the final position that the only premiums with which it could properly be charged as net income “received by it * * * during each year” were such as weje collected and actually paid to its treasurer within the year. This involved omitting from gross income each year “premiums in course of collection by agents, not reported on December 31st,” which varied in amount from $584,000 in one year to $1,020,000 in another. The amount, if deducted one year, might appear in the return of the claimant for the next year, but the. rate might be different. 2527 The Government, on the other hand, contended that the claimant should return the full amount of premiums on policies written in each year, whether actually collected or not. 2528 The Court of Claims refused to accept the construction of either of the parties and held that the claimant should have returned, not all premiums written by it, but all which were actually received by it during the year and that receipt by its agents was receipt by the company, v/ithin the meaning of the act of Congress. 2529 The claimant contends that premiums paid to its agents but not remitted to its treasurer were not “received by it during the year,” chiefly for the reason that while in possession of the agents the money could not be attached as the company’s property {Maxwell v. McGee, 66 Mass. 137), and because money, while thus in the possession of agents was not subject to beneficial use by the claimant and therefore cannot, with propriety, be said to have been received by it, within the meaning of the act. 2530 On the other hand it is conclusively argued: That payment of the premium to the agent discharged the obligation of the insured and called into effect the obligation of the insurer as fully as payment to the treasurer could have done; that in the popular or generally accepted mean- ing of the words “received by it” (which must be given to them, Maillard v. Lawrence, 16 Kow. 251), receipt by an agent is regarded as receipt by his principal; that under their contract collected premiums in possession of the agents of the claimant were subject to use by it in an important respect before they were transmitted to the treasurer of the company, for the agency con- tract, provided that “the agent will pay on demand, out of any funds col- lected by him for account of premium and not remitted to the company, such drafts as may be drawn on him by the company * * * purpose of settling claims, deducting the amount from the next succeeding monthly 459 TAX INC. remittance;” and that only imperative language in the statute would justify a construction which would place it in the power of the claimant, by private contract with its agents, to shift payment of taxes from one taxing year into ancnherThe withheld from its returns collections in the custody of its accents at the end of each year, and because in its amendments the Gcvernment^had included all premiums written in each year whether or not collected, the Court of Claims, having reached the conclusion thus approved by us, allowed the claimant ninety days in which to show the amount ot premiums received by it and its agents within each of the years in controversy, but the claimant failed to make such a showing, and thereupon the court treated the return of premiums written as the correct one and very properly, so far as this item is concerned, dismissed claimant’s petiti^. 2532 Second: In the same words the Excise and Income Tax Acts provide that ‘hhe net addition, if any, required by law to be made within the year to reserve funds” may be deducted from gross, in determining the amount of net, income to be taxed. _ , , , , , • ^ • .11 2533 Finding its authority in this provision of the law the claimant in ad of its returns treated as “reserves,” for the purpose of determining whether the aggregate amount of them each year was greater or less than in the preceding year, and of thereby arriving at the net addition to reserve funds” which it was authorized to deduct from gross income, the following, among others, viz.: “Reserve for unearned premiums. Special reserve lor unpaid liability losses,” and “Loss claims reserve.” Unearned premiuni re- serve and special reserve for unpaid liability losses are familiar types o in surance reserves, and the Government, in its amended returns, allowed these tw^o items, but rejected the third, “Loss claims reserve. 1 • 1 v 2534 The Court of Claims, somewhat obscurely, held that the third item should also be allowed. This “Loss claims reserve was intended to provide for the liquidation of claims for unsettled losses (other than those provided for by the reserve for liability losses) which had accrued at the end of the tax year for which the return was made and the reserve computed. The finding that the Insurance Department of Pennsylvania, pursuant to statute, has at all times since and including 1909 required claimant to keep on hand, as a condition of doing business in that State, assets as reserves sufficient to cover outstanding losses,” justifies the deduction of this reserve as one required by law* to be maintained, and the holding that it should have been allowed for all of the years involved is approved. . 2535 But the Court of Claims approved the action of the Government in rejecting other claimed deductions of reserves for unpaid taxes, salaries, brokerage and re-insurance due other coinpanies. ’ The court ga\ e as its reason for this conclusion that the “net addition, if any, required b\ law to be made within the year to reserve funds” which the act ot Congress permitted to be deducted from gross income w^as limited to reserves require bv express statutory provision and did not apply to reserves required by the rules and regulations of State Insurance Departments, wTen promulgated in the exercise of an appropriate power conferred by statute. , , 2536 In this the Court of Claims fell into error. ^ It is settled by man> recent decisions of this court that a regulation by a department o Government, addressed to and reasonably adapted to the en orcement of an act of Congress, the administration of which is confided to such depart- ment, has the force and effect of law if it be not in conflict with express statutory provision. United States v. Grimaud, 220 U. S. 506; United States V. Birdsall, 233 U. S. 223, 231; United States v. Smull, 236 U S 405 409, 411; United States v. Morehead, 243 U. S. 607. The law is not different t « # INC. 460 TAX 2 - 20 - 20 . with respect to the rules and regulations of a department of a state govern- ment. 2537 But it is contended by the claimant that it was required to provide “reserves” for the payment of the rejected items of liability: because the Court of Claims found that pursuant to statutes the Insurance Depart- ment of Pennsylvania required the company, as a condition of doing business in that State, to keep on hand “assets as reserves” sufficient to cover all claims against the company “whether due or accrued;” because the depart- ment of New York required it to maintain “reserves sufficient to meet all of its accrued but unpaid indebtedness in each year;” and because the depart- ment of Wisconsin required it to carry “sufficient reserves to cover all of its outstanding liabilities.” 2538 Whether this contention of the claimant can be justified or not depends upon the meaning which is to be given to the words “reserve funds” in the two acts of Congress we are considering. 2539 The term “reserve” or “reserves” has a special meaning in the law of insurance. While its scope varies under different laws, in general it means a sum of money, variously computed or estimated, which, with accretions from interest, is set aside, “re^served,” as a fund with which to mature or liquidate, either by payment or reinsurance with other companies future unaccrued and contingent claims, and claims accrued, but contingent and indefinite as to amount or time of payment. 2540 In this case, as we have seen, the term includes “unearned premium reserve” to meet future liabilities on policies, “liability reserve” to satisfy claims, indefinite in amount and as to time of payment, but accrued on liability and workmen’s compensation policies, and “reserve for loss claims” accrued on policies other than those provided for in the “liability reserve,” but it has nowhere been held that “reserve” in this techuical sense, must be maintained to provide for the ordinary running expenses of a busi- ness, definite in amount and which must be currently paid by every company from its income if its business is to continue, such as taxes, salaries, re-insur- ance and unpaid brokerage. 2541 The requirements relied upon, of the Insurance Departments of New* York, Pennsylvania and Wisconsin that “assets as reserves” must be maintained to cover “all claims,” “all indebtedness,” “all outstanding liabilities,” in terms might include the rejected items we are considering, but plainly the departments, in these expressions used the word “reserves” in a non-technical sense as equivalent to “assets,” as is illustrated by the Massachusetts requirement that each company shall “hold or reserve assets” for the payment of all claims and obligations. The distinction between the “reserves” and general assets of a company is obvious and familiar and runs through the statements of claimant and every other insurance company. That provision for the payment of ordinary expenses such as we are considering was not intended to be provided for and included in “reserve funds” as the term is used in the acts of Congress is plain from the fact that the acts permit deductions for such charges from income if paid within the year, and the claimant was permitted in this case to deduct large sums for such ordinary expenses of the business — specifically, large sums for taxes. The claimant did not regard any such charges as properly covered by “reserves” and did not so include them in its statement for 1909. In its 1910 return “unpaid taxes” and “salaries” first appear as “reserves” and in 1911 “brokerage” and “re-insurance” are added. This earlier, though it is now claimed to have been an uninstructed or inexpert, interpretation of the language of the acts, was nevertheless the candid and correct interpretation of it, and the judgmont of the Court of Claims in this respect is approved. INC. 461 TAX 2542 Third: The year 1913 was the only one of those under consider- ation in which the aggregate amount of reserves which the claimant was required by law to keep fell below the amount so required for the pte- ceding year. The Government allowed only ‘‘unearned^ prenamm ^and “unpaid liability loss,” reserves to be considered in determining deductions. In 1913 the “unpaid liability loss reserve” decrease, exceeded the unearned premium resen^e” increase, by over $270,000, and this amount the^ Govern- ment added to the gross income of the claimant for the year, calling it released reserve,” on the theory that the difference in the amount of the reserves for the two years released the decrease to the claimant so that it could use it for its general purposes, and therefore constituted free income for the year 1913, in which the decrease occurred. 2543 This theory of the Government v/as accepted by the Court ot Claims and the addition to the gross income was approved. 2544 The statute does not in terms dispose of the question thus presented. 2545 Reserves, as we have seen, are funds set apart as a liability in the accounts of a com.pany to provide for the payment or reinsurance of specific, contingent liabilities. They are held not only as security for the payment of claims but also as funds from which payments are to be made. The amount “reserved” in any given year m.ay be^greater than is necessc^ry for the required purposes, or it may be less than is necessary, but the lact that it is less in one year than in the preceding year does not necessarily show either that too much or too little was reserved for the former year,— it simply shows that the aggregate reserve requirem,ent for the second year is less than for the first, and this may be due to various causes. If, m this case, it were due to an over-estimate of reserves for 1912 with a resulting excessive deduc- tion for that year from gross income and if such excess was released to the general uses of the company and increased its free assets in 1913, to that extent it should very properly be treated as incomj.e in the year in which it became so available, for the reason that in that year, for the first time, it became free income, under the system for determining net income provided by the statute, and the fact that it came into the possession of the company in an earlier year in which it could be used only in a special manner, which permitted it to become non-taxable would not prevent its being considered as received in 1913 for the purposes of taxation, within the meaning of the act. 2546 The findings of fact in this case, however, do not show that the diminu- tion in the amount of required reserves was due to excessive reserves in prior years or to any other cause by wTich the free^ass^s of the com- pany were increased in the year 1913, and the following finding of tact makes strongly against such a conclusion: ^ j 2547 “The decrease in employers’ liability loss reserve for 1913, designated as ‘released reserve’ did not in any respect affect or change claimant s gross income or disbursements, as shown by the State insurance reports. 2548 It would not be difficult to suggest conditions under which the statu- tory permit to deduct net additions to reserve funds would result in double deduction in favor of an insurance com^pany, but such deductions can be restored to income again only where it is clearly shown that subsequent business conditions have released the amount of them to the free beneficial use of the company in a real, and not in a mere bookkeeping sense. this seemingly favorable treatment of insurance companies is to be otherwise cor- rected or changed, it is for Congress, and not for the courts, to amend the law. 2549 Since the findings of fact before us do not make the clear showing, which must be required, that the statutory deduction of net^ reserves in prior years was restored to the free use of the claimant in 1913, it should not have been charged as income with the decrease in that year, and, on ' the record before us, the holding of the Court of CGims must be reversed. INC. 462 TAX MO-20. 2550 There remains the question as to the Statute of Limitations. 2551 The Government concedes that the case is in time with respect to the amended returns but claims that it is barred by R. S. 3226 [1f^2177l, 3227 [If 2178] and 3228 [If 2180], with respect to taxes paid on the original returns for all of the years but 1913. The claimant made its original returns without protest except for the year 1909 and, without appeal to the Commissioner of Internal Revenue, voluntarily paid the taxes computed on them for each of the years. Payment was made for 1909 in June, 1910; for 1910 in June, 1911 ; for 191 1 in June, 1912; for 1912 in June, 1913. No claim for a refund of any of these payments was made until April 30, 1915, and then the claim was in general terms, “For amounts paid by it in taxes which, through lack of information as to requirements of law or by error in computation, it may have paid in excess of the amount legally due.” 2552 This claim was rejected subsequent to the institution of this suit, which was commenced on February 8, 1916. 2553 This statement shows the right of the claimant plainly barred by its failure to appeal to the Commissioner of Internal Revenue, R. S. 3226 [This is fundamental. King’s County Savings Institution v. Blair ^ 116 U. S. 200], and also by its failure to institute suit within two years after the cause of action accrued, R. S. 3227. 2554 The claimant contends that the amended returns filed by the Com- missioner of Internal Revenue were not amendments or modifica- tions^ of the original returns, but were based upon a different principle and, within the scope of Cheatham, et al. v. United States, 92 U. S. 85, constituted new assessments from which appeals were taken in time. 2555 But they are denominated “amended returns” and while in dealing with the same items the basis of computation was in some cases varied, in each case the purpose and effect of them was to increase the pay- ment which the claimant was required to make under the law and the pay- ments made on the original returns were credited on the amounts computed as due on the returns as amended. 2556 The inapplicability of Cheatham, et al v. United States, 92 U. S. 85, is obvious, and the contention that the Fling of the amended returns constituted the beginning of new proceedings which so superseded the original returns as to release the claimant from its entire failure to observe the statu- tory requirements for review of the latter is so unfounded that we cannot consent to enter upon a detailed discussion of it. This conclusion renders Section 14 of the Act of Congress of September 8, 1916 (39 Stat. 772), in- applicable. 2557 It results that the judgment of the Court of Claims is modified, and as so modified affirmed, and the case is remanded to that court for proceedings in accordance with this opinion. 2558 *‘The date of hisTax return” for continued holding of Fourth Liberty 1142 Loan bonds and Victory Liberty Loan Notes originally subscribed 1144 for, in relation to the conditional additional exemptions of interest 1153 on certain prior bond issues, is held to be the date of filing. — Reference is made to your letter of January 24, 1920 in which you quote office telegram* sent to the Cleveland Trust Company under date of January ”6, 1 920, which telegram contained a ruling to the effect that the date of the actual filing of an income tax return governs as to the exemption against Liberty Bond holdings which may be claimed by a taxpayer because of his original subscription to and continued holding of bonds of the Fourth Liberty Loan. 463 TAX INC. 2569 You advance the opinion that such ruling is erroneous and not in harmony with the law. It is your contention that the intent of that partiof the supplement to the Second Liberty Loan Act which provides for the"' $45,000.00 exemption conditioned^upon the amount of Fourth Liberty Loan Bonds subscribed for and still held at the date of the taxpayer’s return is that the date of the return shall be the end of the tax year. In support of your contention, you cite several cases w’hich might arise. In some in- stances you feel a hardship would be worked by the ruling, in others the circumstances would be such that the ruling could not be observed. 2660 In reply you are advised that before the ruling was sent to the Cleveland Trust Company, careful consideration was given to the question and it is the opinion of the office that the ruling is in accordance with the provisions of the supplement to the Second Liberty Loan Act. The office is, therefore, constrained to adhere to its decision that the “date of the return” for the purpose of determining the exemption which may be claimed by a taxpayer because of his subscription to and continued holding of Fourth Liberty Loan Bonds is the date upon which the return is actually filed with the Collector. (Letter to The Corporation Trust Company signed by Commissioner Daniel C. Roper, and dated February 16, 1920.) *[Comment: The telegram of inquiry from The Cleveland Trust Company read as follows: “Does phrase ‘owned by him at the date of his tax return’ in provisions Fourth Liberty Loan upon which forty-five thousand^exemption is predicated mean actual time of filing return or date it is due March fifteenth or the end of taxable year? If answer is actual time of filing return does it then apply to amended returns? Wire reply collect.” The Commissioner’s reply reads as follows: . “Date of actual filing of original return with Collector governs. Roper, Commissioner.” The content of the Commissioner’s letter to us sufficiently outlines our thought on the interpretation of the Bureau of the words “still owned by him at the date of his tax return” contained in the Supplement to the Second Liberty Loan Act, approved September 24, 1918 (and presumably of the identic words in the Victory Liberty Loan Act of March 3, 1919), to explain our initial unwillingness to give general publicity to such an interpretation by the Commissioner of Internal Revenue of a law provision found in an Act authorizing the Secretary of the Treasury to borrow money on account of the Government. Attention is called to Notes A and B of Item 13 on page 1 of Form 1040 and then to the wording of the affidavit at the bottom of that page, i. e., “is a true and complete return in good faith for the taxable period as statedd^ We had assumed that' the Bureau, in providing for an oath that a return is true and complete for a taxable period, intended the words “still held” to mean still held at the last possible moment of such taxable period, thereby giving the interpretation to the words “the date of his tax return,” which we had thought should be given to them. Attention is called also to what is apparently true, namely, that neither the date of the oath nor the date of placing in the mails, but rather the date of receipt by the Collector is held to be the date of filing. Flowever — such is the Commissioner’s ruling and taxpayers will be governed accordingly. — The Corporation Trust Company.] INC. 464 TAX 8 - 8 - 20 . 2661 On the deduction of the Alabama State Income Tax for Federal 1253 Income Tax purposes. — Reference is made to your letter of February 5, 1920, which is quoted as follows: “The Alabama Income Tax Law, embodied in the Act to provide for the revenue of the State of Alabama, approved September 15, 1919, pro- vides at Section 324 and at Section 339, coveting individuals and cor- porations respectively, for allowable deductions in computing net income. Among the items are ‘taxes paid or accrued within the taxable year imposed (a) by the authority of the United States.’ In other words, in determining the amount of net income subject to State Tax the Federal Income Tax paid or accrued within the taxable year may be de- ducted. Now, for the purposes of the Federal Tax, State income taxes paid or accrued during the year are a proper deduction in ascertaining net taxable income. You can readily see that one of those endless chain propositions is formed here. In other words, the amount of net taxable income becomes undeterminable both for Federal and for State pur- poses. We assume that this matter has been brought to your attention. “We inquire if the Bureau of Internal Revenue has offered any sug- gestion to Alabama taxpayers to aid them in the solution of the prob- lem thus presented.” 2562 In reply you are advised that the following ruling has been made which is applicable to Alabama taxpayers: Income tax actually paid to a State is deductible before computing Federal income and excess profits taxes if books are kept on cash receipts abd expenditures basis. If books are kept on the accrual basis. State income taxes accrued during the year are deductible. (Letter to The Corporation Trust Company, signed by Com- missioner Daniel C. Roper, and dated February 19, 1920.) [Comment: Under date of February 2, 1920, we received a letter from The State Tax Commission of Alabama signed by the Chairman, John S. Mooring, who is also Income Tax Supervisor, reading as follows: “I have your letter of the 24th ult. in reference to the deduction permitted of State tax from the Federal income return, and of Federal tax from the State income teturn. “Wherever a tax is due the Federal Government as well as the State on income, the law of this State is that the State return is to be made within thirty days after the Federal return is made. The State law clearly con- templates that the Federal income return shall be complete before any attempt is made to make out the return for the State income tax. It follows from this that there is no confusion so far as the Alabama return is concerned. After the Federal return is complete and the tax determined, that tajx can be deducted as an expense in making out the Alabama tax return.” — The Corporation Trust Company.] (T. D. 2987.) 2663 Adding Article 347 to Regulations 45, dealing with estates and trusts 656 which cannot be treated as a unit. — Regulations 45 are amended 657 by adding thereto Article 347 to read as follows: 2664 Art. 347. Estates and trusts which cannot be treated as a unit. In the case of certain estates and trusts, it is recognized that the estate or trust cannot be treated as a unit for income tax purposes and may represent an aggregate of distinct interests to all of which the fiduciaries are responsible; in such cases the procedure stated in this article should govern. The following are recognized as cases which cannot be treated as a unit and must, therefore, be governed by this article: fa) when there is income distributable periodically and also income which is to be accumulated in 465 TAX INC. trust, held for future distributioii, or added to the corpus; (b) when there is income distributable periodically and also income (according to the Federal income tax statutes and regulations) which is not distributable periodically under state law, e. g., gains from sale of capital assets, stock dividends; (c) when there is income distributable periodically and deductions (according to Federal income tax statutes and regulations) which are not deductible under state law from the distributable income, e. g., losses from the sale of capital assets, depletion, depreciation. 2565 In ascertaining whether an estate or trust comes within any one of the cases just enumerated, the provisions of the Federal statutes and regulations — rather than the provisions of the will or trust and the pro- visions of state laws — shall determine what items constitute taxable gross income or allowable deductions; the provisions of the will or trust and of state laws shall determine the allocation of items of gross income or de- duction; that is, to which of the different interests making up the whole such items shall be charged or allowed. In cases which are to be treated under this article, the items of gross income and deduction as determined by the Federal income tax statutes and regulations must be scrutinized and classified in accordance with the provisions of the will or trust or rules^ of local law into two classes, one subject to the procedure specified in subdivision (c) of Section 219, and the other to the procedure specified in subdivision (d) of Section 219. The result will be that the beneficiary to whom income is to be distributed periodically must include in computing his net income the amount actually distributable to him (except exempt income) even though the aggregate of the distributive shares should be larger than the net income of the estate or trust computed as a unit. Any gain, profit, or income which is not periodically distributable, must be included in computing the net income of the estate or trust so that the fiduciary will pay the tax upon any excess of the net income of the estate or trust computed as a unit over the aggregate distributive shares. 2566 For example, a trust is created the income of which is distributable periodically for the life of the beneficiary, the remainder over to others. The trust has the following items of income: rent, $3,000; interest, $2,000; gain on sale of capital assets, $1,500; cash dividend, $1,000; and deductions: general expenses (all deductible from distributable income), $700; depreciation, $300; loss on sale of capital assets, $3,000. Under the terms of the trust $5,300 Jwill be distributed to the beneficiary, viz., rent, $3,000; plus interest, $2,000; plus dividend, $1,000;^ less general expenses, $700. The gain and loss on the sale of capital assets will be considered capital items affecting the corpus only, and the items of depreciation will not affect the amount to be distributed, there being no rule of state law or provision of the trust requiring this deduction from distributable income. In such a case the fiduciary must report on form 1041 showing a net income for the trust of $3,500, and must show as the distributive share of the beneficiary the $5,300 to which he is entitled. The beneficiary must account for the amount actually distributable to him as income, viz., $5,300, as provided in Section 219 (d), and will be entitled to a credit of $1 ,000 on account of the dividends in comput- ing the normal tax, but not to any deduction on account of depreciation or capital losses. 2567 If there had been no loss on the sale of capital assets so that the net income of the estate or trust was $6,500, form 1041 should show the distributive share of the beneficiary as $5,300, and the distributive share of the fiduciary as $1,200; and the fiduciary should file a separate return on form 1040A, reporting $1,200 for taxation. (T. D. 2987, signed by Daniel C. Roper, and dated March 1, 1920.) ♦ » I t INC. 466 TAX »> 9 . 20 . 2668 Status of board and lodging furnished seamen. — Receipt is acknowl- 889 edged of your letter of July 2, 1919, transmitting a letter addressed 173(9 to you by , Auditor for the Steamship Com- pany, in which a ruling is requested as to the value which should be placed on board and lodging furnished seamen in the employ of that company for the purpose of including same as part of their compensation in their per- sonal income tax returns. 1|You ask to be advised further whether the Department has decided upon a fixed sum for all steamship companies cover- ing the value of such board and lodging. Ijin reply you are advised that this office holds that board and lodging furnished seamen in addition to their cash compensation is supplied for the convenience of their employers and for this reason the value thereof is not required to be reported in such em- ployees’ income tax returns. ^Accordingly, the seamen employed by the Steamship Company are not required to include in any income tax returns they may be required to render the value of board and lodging supplied them by that Company. (Letter to the Collector of Internal Revenue, Jacksonville, Fla., signed by Commissioner Daniel C. Roper, and dated July 21, 1919.) (T. D. 2988.) 2569 Amending Article 29, paragraph 200, Regulations No. 33. — Paragraph 705 200, of Article 29, Regulations No. 33, is hereby amended to read as follows: “Nonresident alien beneficiary. — Where a fiduciary in the United States is the recipient of trust income for which there is but one beneficiary and that beneficiary a nonresident alien, the fiduciary will be required to make full and complete return on Income Tax Form 1040, or 1040 A, as the case may be, for this trust income on behalf of the nonresident alien and pay any and all normal tax found by such return to be due, and any and all surtax provided the income is not returned for the purpose of the tax by the bene- ficiary. Where there are two or more beneficiaries, one or all of whom are nonresident aliens, the fiduciary shall render a return on Form 1041, and a personal return on Form 1040 or 1040 A, for each nonresident alien bene- ficiary.” (T. D. 2988, signed by J. H. Callan, Acting Commissioner of In- ternal Revenue, and dated March 3, 1920.) 2570 Extension of time for the filing of returns by corporations to May 1810 15, 1920; tentative returns; payment of first instalment. — ‘Tn view 1848 of the fact that considerable difficulty is being experienced by cor- porations and their representatives in the preparation of income tax returns for the year 1919, collectors of internal revenue are hereby author- ized to accept tentative corporation returns for the calendar year 1919 on or before March 15, 1920. Each return must be accompanied by at least one-fourth of the estimated amount of tax due, together with a statement setting forth the reason why the return cannot be completed within the pre- scribed time and a formal request for the extension. Any deficiency in the first instalment will bear interest at the rate of 6 per cent, per annum. 2571 “An extension of time is hereby granted to corporations in such cases to file completed returns on or before May 15, 1920. The tentative return submitted in accordance with the foregoing should be on Form 1120, on which should be written plainly across the face ‘Tentative return.’ Only the estimated amount of tax due need be stated. 2672 “Tentative returns filed under this authority will be handled in col- lectors’ offices in the manner prescribed for the handling of similar returns last year. INC. 467 TAX 2573 further extension of time within which to file returns will not be granted except in extraordinary cases and upon proper application to the Commissioner of Internal Revenue, setting forth the reasons why the returns cannot be completed. ,t at i 2574 “I. T. Mim. 2383 is modified accordingly.’’ (I. T. Mim. 2420, March 4, 1920.) {Decision.) Stock Dividends are not income and hence are not taxable as such. Supreme Court of the United States. Mark Eisner, as Collector of United States In-) In Error to the District ternal Revenue for the Third District of the! Court of the United State of New York, Plaintiff in Error, States for the Southern District of New York. Myrtle H. Macomber. J William L. Frierson, Assistant Attorney General of the United States, Coun- sel for plaintiff in error. Alexander C. King, Solicitor General of the United States, Attorney for plaintiff in error. Charles E. Hughes, George Welwood Murray, ^ Counsel for defendant in error. Murray, Prentice & Howland, Attorneys for defendant in error. [March 8, 1920.]^ 2575 ■ Mr. Justice Pitney delivered the opinion of the Court. 848 This case presents the question whether, by virtue of the Sixteenth 853 Amendment, Congress has the power to tax, as income of the stock- 865 holder and without apportionment, a stocK aividend made lawfully, ^2129 and in good faith against profits accumulated by the corporation f2132 since March 1, 1913. It arises under the P.evenue Act of September '2242 8, 1916 (Ch. 463, 39 Stat. 756, et seq.), which, in our opinion (not- withstanding a contention of the Governmient that will be noticed), plainly evinces the purpose of Congress to tax stock dividends as income. 2575 The facts, in outline, are as follows: On January 1, 1916, the Stand- ard Oil Company of California, a corporation of that State, out of an authorized capital stock of $100,000,000, had shares pf stock outstanding, par value $100 each, amounting in round figures to $50,000,000. In addi- tion, it had surplus and undivided profits invested in plant, property, and business and reauired for the purposes of the corporation, amounting to about $45,000,000, of which about $20,000,000 had been earned prior to March T 1913, the balance thereafter. In January, 1916, m order to read- just the capitalization, the board of directors decided to issue additional shares sufficient to constitute a stock dividend of 50 per cent, of the out- standing stock, and to transfer from surplus account to capital stock a^ccount an amount equivalent to such issue. Appropriate resolutions were adopted, an amount equivalent to the par value of the proposed new stock was trans- ferred accordingly, and the new stock duly issued against it and divided among the stockholders. r i u i 2577 Defendant in error, being the owner of 2,200 shares of the old stock, received certificates for 1,100 additional shares, of which 18.07 per cent., or 198.77 shares, par value $19,877, were treated as representing sur- plus earned between March 1, 1913, and January, 1 1916. She was called 46S TAX INC. 4 - 14 - 20 . upon to pay, and did pay under protest, a tax imposed under the Revenue Act of 1916, based upon a supposed income of §19,877 because of the new shares; and an appeal to the Commissioner of Internal Revenue having been disallowed, she brought action against the Collector to recover the tax. In her complaint she alleged the above facts, and contended that in imposing such a tax the Revenue Act of 1916 violated Art I, sec. 2, cl. 3, and Art. I, sec. 9, cl. 4, of the Constitution of the United States, requiring direct taxes to be apportioned according to population, and that the stock dividend was not income within the meaning of the Sixteenth Am.endment. A general demurrer to the complaint was overruled [U 853] upon the authority of Towne V. Eisner 2313 herein], 245 U. S. 418; and, defendant having failed to plead further, final judgment went against him. To review it, the present writ of error is prosecuted. 2578 The case was argued at the last term, and reargued at the present term, both orally and by additional briefs. 2579 We are constrained to hold that the judgment of the District Court must be affirmed: First, because the question at issue is con- trolled by Towne v. Eisner, supra; secondly, because a reexamination of the question, with the additional light thrown upon it by elaborate arguments, has confirmed the view that the underlying ground of that decision is sound, that it disposes of the question here presented, and that other fundamental considerations lead to the same result. 2580 In Towne v. Eisner, the question was whether a stock dividend made in 1914 against surplus earned prior to January 1, 1913, was taxable against the stockholder under the Act of October 3, 1913 (Ch. 16, 38 Stat. 114, 166), which provided (sec. B, p. 167) that net income should include ‘‘dividends,” and also “gains or profits and income derived from any source whatever.” Suit having been brought by a stockholder to recover the tax assessed against him by reason of the dividend, the District Court sustained a demurrer to the complaint. 242 Fed. Rep. 702. The court treated the construction of the act as inseparable from, the interpretation of the Sixteenth Amendment; and, having referred to Pollock v. Farmers Loan & Trust Co., 158 U. S. 601, and quoted the Amendment, proceeded very properly to say (p. 704) : “It is manifest that the stock dividend in question cannot be reached by the Income Tax Act, and could not, even though Congress expressly declared it to be taxable as income, unless it is in fact income.” It declined however, to accede to the contention that in Gibbons v. Mahon, 136 U. S. 549, “stock dividends” had received a definition sufficiently clear to be con- trolling, treated the language of this court in that case as obiter dictum in respect of the matter then before it (p. 706), and e,xamined the question as res nova, with the result stated. When the case came here, after overruling a motion to dismiss made by the Government upon the ground that the only question involved was the construction of the statute and not its consti- tutionality, we dealt upon the merits with the question of construction only, but disposed of it upon consideration of the essential nature of a stock divi- dend, disregarding the fact that the one in question was based upon surplus earnings that accrued before the Sixteenth Amendment took effect. Not only so, but we rejected the reasoning of the District Court, saying (245 U. S., p. 426): “Notwithstanding the thoughtful discussion that the case received below we cannot doubt that the dividend was capital as well for the putposes of the Income Tax Law as for distribution between tenant for life and re- mainderman. What was said by this court upon the latter question is equally true for the former. ‘A stock dividend really takes nothing from the property of the corporation, and adds nothing to the interests of the shareholders. Its property is not diminished, and their interests are not increased. . 469 TAX INC. The propo;rtional interest of each shareholder remains the same. The only change is in the evidence which represents that interest, the new shares^ and the original shares together representing the same proportional interest that the original shares represented before the issue of the new ones.’ Gibbons V. Mahon, 136 U. S. 549, 559, 560. In short, the corporation is no poorer and the stockholder is no richer than they were before. Logan County v. United States, 169 U. S. 255, 261. [If the plaintiff gained any small advantage by the change, it certainly was not an advantage of $417,450, the sum upon which he was taxed. . . . What has happened is that the plaintiff’s old certificates have been split up in effect and have diminished in value to the extent of the value of the new.” 2581 This language aptly answered not only the reasoning of the District Court but the argument of the Solicitor General in this court, which discussed the essential nature of a stock dividend. And if, for the reasons thus expressed, such a dividend is not to be regarded as “income” or “divi- dends” within the meaning of the Act of 1913, we are unable to see how it can be brought within the meaning of “incomes” in the Sixteenth Amendment; it being very clear that Congress intended in that Act to exert its power to the extent permitted by the Amendment. In Tozvne v. Eisner it was not con- tended that any construction of the statute could make it narrower than the constitutional grant; rather the contrary. 2582 The fact that the dividend was charged against profits earned before the Act of 1913 took effect, even before the Amendment was adopted was neither relied upon nor alluded to in our consideration of the merits in that case. Not only so, but had we considered that a stock dividend con- stituted income in any true sense, it would have been held taxable under the Act of 1913 notwithstanding it was based upon profits earned before the Amendment. We ruled at the same term, in Lynch v. Hornby, 247 U. S. 339, that a cash dividend extraordinary in amount, and in Peabody v. Eisner, 247 U. S. 347, that a dividend paid in stock of another company, were taxable as income although based upon earnings that accrued before acioption of the Amendment. In the former case, concerning “corporate profits that ac- cumulated before the Act took effect,” we declared (pp. 343-344) : “Just as we deem the legislative intent manifest to tax the stockholder with respect to such accumulations only if and when, and to the extent that, his interest in them comes to fruition as income, that is, in dividends declared, so we can perceive no constitutional obstacle that stands in the way of carrying out this intent when dividends are declared out of a preexisting surplus. . ^ . Congress was at liberty under the Amendment^ to tax as income, without apportionment, ever 3 rthing that became income, in the ordinary sense of the word, after the adoption of the Amendment, including dividends received in the ordinary course by a stockholder from a corporation, even though they were extraordinary in amount and might appear upon analysis to be a mere realization in possession of an inchoate and contingent interest that the stockholder had in a surplus of corporate assets previously existing. ^ In Peabody v. Eisner (pp. 349-350), we observed that the decision of the District Court in Tozvne v. Eisner had been reversed “only upon the ground that it related to a stock dividend which in fact took nothing from the property of the corporation and added nothing to the interest of the shareholder, but merely changed the evidence which represented that interest;” and we^^dis- tinguished the Peabody case from the Tozvne case upon the ground that ‘^^the dividend of Baltimore & Ohio shares was not a stock dividend but a distribu- tion in specie of a portion of the assets of the Union Pacific.” 2583 Therefore, Tozvne v. Eisner cannot be regarded as turning upon the point that the surplus accrued to the company before the Act took effect and before adoption of the Amendment. And what we have INC. 470 TAX 8 ^ 20 . quoted from the opinion in that case cannot be regarded as obiter dictum, it * having furnished the entire basis for the conclusion reached. We adhere to the view then expressed, and might rest the present case there; not because that case in terms decided the constitutional question, for it did not; but be- cause the conclusion there reached as to the essential nature of a stock divi- dend necessarily prevents its being regarded as income in any true sense. 2584 Nevertheless, in view of the importance of the matter, and the fact that Congress in the Revenue Act of 1916 declared (39- Stat. 757) that a ‘'stock dividend shall be considered income, to the amount of its cash value,” we will deal at length with the constitutional question, incidentally testing the soundness of our previous conclusion. 2585 The Sixteenth Amendment must be construed in connection with the taxing clauses of the original Constitution and the effect attri- buted to them before the Amendment was adopted. In Pollock v. Farmers Loan & Trust Co., 158 U. S. 601, under the Act of August 27, 1894 (Ch. 349, sec. 27, 28 Stat. 509, 553), it was held that taxes upon rents and profits of real estate and upon returns from investments of personal property were in effect direct taxes upon the property from which such income arose, im- posed by reason of ownership; and that Congress could not impose such taxes without apportioning them among the States according to population, as required by Art. I, sec. 2, cl. 3, and sec. 9, cl. 4, of the original Constitution. 2586 Afterwards, and evidently in recognition of the limitation upon the taxing power of Congress thus determined, the Sixteenth Amendment was adopted, in words lucidly expressing the object to be accomplished: “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.” As repeatedly held, this did not extend the taxing power to new subjects, but merely removed the necessity which otherwise might exist for an apportionment among the States of taxes laid on income. Brnshaber v. Union Pacific R. R. Co., 240 U. S. 1, 17-19; Stanton v. Baltic Mini7ig Co., 240 U. S. 103, 112 et seq.; Peck & Co. V. Lozi'e, 247 U. S. 165, 172-173. 2587 A proper regard for its genesis, as well as its very clear language, requires also that this Amendment shall not be extended by loose construction, so as to repeal or modify, except as applied to income, those provisions of the Constitution that require an apportionment according to population for direct taxes upon property, real and personal. This limita- tion still has an appropriate and important function, and is not to be over- riden by Congress or disregarded by the courts. 2588 In order, therefore, that the clauses cited from Article 1 of the Con- stitution may lia\c proper force and effect, save only as modified b\' the Amendment, and that tlie latter also may have proper effect, it becomes essential to distinguish between what is and what is not “income,” as the term is there used; and to apply the distinction, as cases arise, according to truth and substance, without regard to form. Congress cannot by any defini- tion it may adopt conclude the matter, since it cannot by legislation alter the Constitution, from which alone it derives its power to legislate, and wit tin whose limiitations alone that power can be lawfully exercised. 2589 4 he fundamiental relation of “capital” to “income” has been much discussed by economists, the former being likened to tlie tree or the land, tlie latter to the fruit or the crop; the former depicted as a reservoir supplied from springs, the latter as the outlet stream, to be measured by its flow during a period of time. For the present purpose we require only a clear definition of the term “income,” as used in common speech, in order to de- termine its meaning in the Amendment; and, having formed also a correct 47 1 TAX INC. • judgment as to the nature of a stock dividend, we shall find it easy to decide the matter at issue. ' t T-k c^- ^ ^ 2590 After examining dictionaries in common use (bouv.^ L. U.; Otanaam Diet.; Webster’s Internat. Diet.; Century Diet.), we find little to add to the succinct definition adopted in two cases arising under the Corporation 1 ax Act of 1909 (Stratton's Independence v. Howhert, 231 U. S. 399, 415; Doyle V. Mitchell Bros. Co., 247 U. S. 179, 185)— “Income may be defined as the gam derived from capital, from labor, or from both combined, provided it be understood to include profit gained through a sale or conversion of capital assets, to which it was applied in the Doyle case (pp. 183,^ 185). ^ 2951 Brief as it is, it indicates the characteristic and distinguishing attri- bute of income essential for a correct solution of the present contro- versy. The Government, although basing its arguinent upon the definition as quoted, placed chief emphasis upon the word “gain,’ which was extended to include a variety of meanings; while the significance of the next three words was either overlooked or misconceived. **Derwed from capital ; the gain — derived — from — capital," etc. Here we have the essential inatter. not a gain accruing to capital, not a growth or increment of value in the invest- ment; but a gain, a profit, something of exchangeable value proceeding from the property, severed from the capital however invested or ernployed, and coming in, being ^^derived", that is, received or drawn by the recipient (the tax- payer) for his separate use, benefit and disposal; that is income derived from property. Nothing else answers the description. ^ , c- u 2592 The same fundamental conception is clearly set forth m the Sixteenth Amendment— “incomes, /row whatever source derived —the essential thought being expressed with a conciseness and lucidity entirely m harmony with the form and style of the Constitution. 2593 Can a stock dividend, considering its essential character, be brought within the definition ? To answer this, regard must be had to the nature of a corporation and the stockholder’s relation toiL. We refer, of course, to a corporation such as the one in the case at bar, organized for profit and having a capita] stock divided into shares to which a nominal or par value is attri- 2594 Certainly the interest of the stockholder is a capital interest, and his certificates of stock are but the evidence of it. They state the number of shares to which he is entitled and indicate their par value and how the stock may be transferred. They show that he or his assignors, immediate or remote, have contributed capital to the enterprise, that he is entitled to a corresponding interest proportionate to the whole, entitled to have the pro- perty and business of the company devoted during the corporate existence to at- tainment of the common objects, entitled to vote at stockholders meetings, to receive dividends out of the corporation’s profits if and when declared, and, in the event of liquidation, to receive a proportionate share of the net assets, if any, remaining after paying creditors. Short of liquidation, or until dividend declared, he has no right to withdraw any part of either capital or profits from the common enterprise; on the contrary, his interest pertains not to any part, divisible or indivisible, but to the entire assets, business, and affairs of the company. Nor is it the interest of an owne^ since the corporation has full title, legal and equitable, to the whole. The stock- holder has the right to have the assets employed m the enterpnse, with th^e incidental rights mentioned; but, as stockholder, he has no right to with- draw, only the right to persist, subject to the risks of the enterprise, and looking only to dividends for his return. If he desires to dissociate himself from the company he can do so only by disposing of his stock. 2595 For bookkeeping purposes, the company acknowledges a liability in form to the stockholders equivalent to the aggregate par value INC. 472 TAX a.9-20- of their stock, evidenced by a “capital stock account.” If profits have been made and not divided they create additional bookkeeping liabilities under the head of “profit and loss,” “undivided profits,” “surplus account,” or the like. None of these, however, gives to the stockholders as a body, much less to any one of them, either a claim against the going concern for any particular sum of money, or a right to any particular portion of the assets or any share in them unless or until the directors conclude that dividends shall be made and a part of the company’s assets segregated from the common fund for the purpose. The dividend normally is payable in money, under exceptional circumstances in some other divisible property; and when so paid, then only (excluding, of course, a possible advantageous sale of his stock or winding-up of the company) does the stockholder realize a profit or gain which becomes his separate property, and thus derive income from the capital that he or his predecessor has invested. 2596 In the present case, the corporation had surplus and undivided profits invested in plant, property, and bminess, and required for the purposes of the corporation, amounting to about $45,000,000, in addition to outstanding capital stock of $50,000,000. In this the case is not extraordinary. The profits of a corporation, as they appear upon the balance sheet at the end of the year, need not be in the form of money on hand in excess of what is required to meet current liabilities and finance current operations of the company. Often, expecially in a growing bitsiness, only a part, sometimes a small part, of the year’s profits is in property capable of division; the remainder having been absorbed in the acquisition of in- creased plant, equipment, stock in trade, or accounts receivable, or in decrease of outstanding liabilities. When only a part is available for dividends, the balance of the year’s profits is carried to the credit of undivided profits, or surplus, or some other account having like significance. If thereafter the company finds itself in funds beyond current needs it may declare dividends out of such surplus or undivided profits; otherwise it may go on for years conducting a successful business, but requiring more and more working capital because of the extension of its operations, and therefore unable to declare dividends approximating the amount of its profits. Thus the surplus may increase until it equals or even exceeds the par value of the outstanding capital stock. This may be adjusted upon the books in the mode adopted in the case at bar — by declaring a “stock dividend.” This, however, is no more than a book adjustment, in essence not a dividend but rather the opposite; no part of the assets of the company is separated from that common fund, nothing distribured except paper certificates that evidence an ante- cedent increase in the value of the stockholder’s capital interest resulting from an accumulation of profits by the company, but profits so far absorbed in the business as to render it impracticable to separate them for withdrawal and distribution. In order to make the adjustment, a charge is made against surplus account with corresponding credit to capital stock account, equal to the proposed “dividend”; the new stock is issues against this and the certi- ficates delivered to the existing stockholders in proportion to their previous holdings* This, hov/ever, is merely bookkeeping that does not affect the aggregate assets of the corporation or its outstanding liabilities; it affects only the form, not the essence, of the “liability” acknowledged by the cor- poration to its own shareholders, and this through a readjustment of accounts on one side of the balance sheet only, increasing “capital stock” at the ex- pense of “surplus”; it does not alter the preexisting proportionate interest of any stockholder or increase the intrinsic value of his holding or of the aggregate holdings of the other stockholders as they stood before. The new INC. 473 TAX certificates simply increase the number of the shares, with consequent dilution of the value of each share. i j ^ 2597 A “stock dividend” shows that the company s accumulated protits have been capitalized, instead of distributed to the stockholders or retained as surplus available for distribution in money or in kind should opportunity offer. Far from being a realization of profits of the stockholder, it tends rather to postpone such realization, in that the fund represented by the new stock has been transferred from surplus to capital, and no longer is available for actual distribution. , , , , , • j 2698 The essential and controlling fact is that the stockholder has received nothing out of the company’s assets for his separate use and beneiit; on the contrary, every dollar of his original investment, together with ever accretions and accumulations have resulted from employment oi nis money and that of the other stockholders in the business of the company, still remains the property of the company,^ and subject to business risks which may result in wiping out the entire investment. Having regard o the very truth of the matter, to substance and not to form, he has received nothing that answers the definition of income within the meaning oi t e Sixteenth Amendment. j rr f u o 2599 Being concerned only with the true character and effect ot sucn a dividend when lawfully made, we lay aside the question whether in a particular case a stock dividend may be authorized by the local law govern ing the corporation, or whether the capitalization of profits may be the result of correct judgment and proper business policy on the part of its manage- ment, and a due regard for the interests of the stockholders. And we are considering the taxability of bona fide stock dividends only. 2600 We are clear that not only does a stock dividend really tal^ nothing from the property of the corporation and add nothing to that ot the shareholder, but that the antecedent accumulation of profits evidenced thereby, while indicating that the shareholder is the richer because ot an increase of his capital, at the same time shows he has not realized or received any income in the transaction. • j 2601 It is said that a stockholder may sell the new shares acquired in t stock dividend; and so he may, if he can find a buyer. It is equally true that if he does sell, and in doing so realizes a profit, such profit like any other, is income, and so far as it may have arisen since the Sixteenth Amend- ment is taxable by Congress without apportionment. The same wou d be true were he to sell some of his original shares at a profit. i5ut it a snare- holder sells dividend stock he necessarily disposes of a part ot fiis capital interest, just as if he should sell a part of his old stock, either before or alter the dividend. What he retains no longer entitles him to the same propor- tion of future dividends as before the sale. His part in the control ot the company likewise is diminished. Thus, if one holding $60,000 out of a total $100,000 of the capital stock of a corporation should receive m common with other stockholders a 50 per cent, stock dividend, and should sell his part he thereby would be reduced from a majority to a minority stockholder, hav- ing six-fifteenths instead of six-tenths of the total stock outstanding A corresponding and proportionate decrease in capital interest and in voting power would befall a minority holder should he sell dividend stock; it being in the nature of things impossible for one to dispose of any part of such an issue without a proportionate disturbance of the distribution of the entire capital stock, and a like diminution of the seller’s comparative voung power —that “right preservative of rights” in the control of a corporation. Yet without selling, the shareholder, unless possessed o,! the wherewithal to pay an income tax upon the dividend stock. Nothing # 9 9 % % % I INC. 474 TAX 8 - 9 - 20 . could more clearly show that to tax a stock dividend is to tax a capital in- crease, and not income, than this demonstration that in the nature of things it requires conversion of capital in order to pay the tax. 2602 Throughout the argument of the Government, in a variety of forms, runs the fundamental error already mentioned — a failure to appraise correctly the force of the term “income” as used in the Sixteenth Amend- ment, or at least to give practical effect to it. Thus, the Government con- tends that the tax “is levied on income derived from corporate earnings,” when in truth the stockholder has “derived” nothing except paper certifi- cates which, so far as they have any effect, deny him present participation in such earnings. It contends that the tax may be laid when earnings “are received by the stockholder”, whereas he has received none; that the profits are “distributed by means of a stock dividend,” although a stock dividend distributes no profits; that under the Act of 1916 “the tax is on the stock- holder’s share in corporate earnings,” when in truth a stockholder has no such share, and receives none in a stock dividend; that “the profits are segre- gated from his former capital, and he has a separate certificate representing his invested profits or gains,” whereas there has been no segregation of profits, nor has he any separate certificate representing a personal gain, since the certificates, new and old, are alike in what they represent — a capital interest in the entire concerns of the corporation. 2603 We have no doubt of the power or duty of a court to look through the form of the corporation and determine the question of the stock- holder’s right, in order to ascertain whether he has received income taxable by Congress without apportionment. But, looking through the form, we cannot disregard the essential truth disclosed; ignore the substantial differ- ence between corporation and stockholder; treat the entire organization as unreal; look upon stockholders as partners, when they are not such; treat them as having in equity a right to a partition of the corporate assets, when they have none; and indulge the fiction that they have received and realized a share of the profits of the company which in truth they have neither received nor realized. We must treat the corporation as a substantial entity separate from the stockholder, not only because such is the practical fact but because it is only by recognizing such separateness that any dividend — even one paid in money or property — can be regarded as income of the stockholder. Did we regard corporation and stockholders as altogether identical, there would be no income except as the corporation acquired it; and while this would be taxable against the corporation as income under appropriate provisions of law, the individual stockholders could not be separately and additionally taxed with respect to their several shares even when divided, since if there were entire identity between them and the company they could not be re- garded as receiving anything from it, anymore than if one’s money were to removed from one pocket to another. 2604 Conceding that the mere issue of a stock dividend makes the recipient no richer than before, the Government nevertheless contends that the new certificates measure the extent to which the gains accumulated by the corporation have made him the richer. There are two insuperable diffi- culties with this: In the first place, it would depend upon how long he had held the stock whether the stock dividend indicated the extent to which he had been enriched by the operations of the company; unless he had held it throughout such operations the measure would not hold true. Secondly, and more important for present purposes, enrichment througli increase in value of capital investment is not income in any proper meaning of the term. 2606 The complaint contains averments respecting the market prices of stock such as plaintiff held, based upon sales before and after the INC. 475 TAX stock dividend, tending to show that the receipt of thejadditional 1,100 shares did not substantially change the market value of her entire holdings. This tends to show that in this instance market quotations reflected intrinsic yalues— a thing they do not always do. But we regard the market prices of the securities as an unsafe criterion in an inquiry such as the present, when the question must be, not what will the thing sell for, but what is it in trtth and in essence. ^ .... . , i j- • 2606 It is said there is no difference in principle between a simple stock divi- dend and a case where stockholders use money received as cash dividends to purchase additional stock contemporaneously issued by the cor- poration. But an actual cash dividend, with a real option to the stockholder either to keep the money for his own or to reinvest it in new shares, would be as far removed as possible from a true stock dividend, such as the one we have under consideration, where nothing of value is taken from the com- pany’s assets and transferred to the individual ov/nership of the several stockholders and thereby subjected to their disposal. 2607 The Government’s reliance upon the supposed analogy between^ a dividend of the corporation’s own shares and one made by dis- tributing shares owned by it in the stock of another company, calls for no comm^ent beyond the statement that the latter distributes assets of the com- pany among the shareholders while the former does not; and for no citation of authority except Peabody v. Eisner, 247 U. S. 347, 349-350. 2608 Two recent decisions, proceeding from courts of high jurisdiction, are cited in support of tlie position of the Government. 2609 Swan Brewery Co., Ltd. v. Rex, [1914] A. _C. 231, arose under the Dividend Duties Act of Western Australia, which provided^ that “dividend” should include “every dividend, profit, advantage, or gain in- tended to be paid or credited to or distributed among any members or directors of any company,” except, etc. There was a stock dividend, the new shares being allotted among the shareholders pro rata; and the question was whether this was a distribution of a dividend within the meaning of the act. The Judicial Committee of the Privy Council sustained the dividend duty upon the ground that, although “in ordinary language the new shares would not be called a dividend, nor would the allotment of them be a distribution of a dividend,” yet, within the meaning of the act, such new shares were an “advantage” to the recipients. There being no constitutional restriction upon the action of the lawmaking body, the case presented merely a question of statutory construction, and manifestly the decision is not a precedent for the guidance of this court when acting under a duty to test an act of Congress by the limitations of a written Constitution having superior force. 2610 In Tax Commissioner v. Putnam (1917), 227 hlass. 522, it was held that the 44th Amendment to the Constitution of Massachusetts, which conferred upon the Legislature full power to tax incomes, “must be interpreted as including every item which by any reasonable understanding can fairly be regarded as income” (pp. 526, 531); and that under it a stock dividend was taxable as income, the court saying (p. 535): “In essence the thing which has been done is to distribute a symbol representing an accumu- lation of profits, which instead of being paid out in cash is invested in the business, thus augmenting its durable assets. In this aspect of the case the substance of the transaction is no different from what it would be if a cash dividend had been declared with the privilege of subscription to an equivalent amount of new shares.” We cannot accept this reasoning. Evidently, in order to give a sufficiently broad sweep to the new taxing provision, it was deemed necessary to take the symbol for the substance, accumulation for dis- tribution, capital accretion for its opposite; while a case where money is paid INC. 476 TAX 5 ^ 20 . 'into > the hand of the stockholder Vv^ith an option to buy new shares with it, 'fallowed by a hypothetical acceptance of the option, was regarded as identical tntaubstance with a case where the stockholder receives no money and has no option. The Massachusetts court was not under an obligation, like the one which binds us, of applying a constitutional amendment in the light of other constitutional provisions that stand in the way of extending it by construction, 1 Upon the second argument, the Government, recognizing the force of the decision in Towne v. Eisner^ supra, and virtually abandoning 'the»contention that a stock dividend increases the interest of the stockholder or otherwise enriches him, insisted as an alternative that by the true construc- 'trion of the Act of 1916 the tax is imiposed not upon the stock dividend but 'rather upon the stockholder’s share of the undivided profits previously .'adcumulated by the corporation; the tax being levied as a matter of conven- ience at the time such profits become manifest through the stock dividend. If -s-o construed, would the Act be constitutional.^ 2612 That Congress has power to tax shareholders upon their property interests in the stock of corporations is beyond question; and that such interests mdght be valued in view of the condition of the company, in- cluding its accummlated and undivided profits, is equally clear. But that this would be taxation of property because of ownership, and hence would re- quire apportionment under the provisions of the Constitution, is settled .beyond peradventure by previous decisions of this court. 2613 The Governmient relies upon Collector v. Huhha-rd (1870), 12 Wall. 1, 17, which arose under see. 117 of the Act of June 30, 1864 (Ch. 173; i3;'Stat. 223, 282), providing that ‘‘the gains and profits of all companies, whether incorporated or partnership, other than the companies specified m this section, shall be included in estimating the annual gains, profits, or income of any person entitled to the same, whether divided or otherwise.” The court held an individual taxable upon his proportion of the earnings of a corporation although not declared as dividends and although invested in assets not in their nature divisible. Conceding that the stockholder for cer- tain purposes had no title prior to dividend declared, the court nevertheless said (p. 18): “Grant all that, still it is true that the owner of a share of stock m a corpc)ration holds the share with all its incidents, and that among those •mcidents is the right to receive all future dividends, that is, his proportional share of all profits not then divided. Profits are incident to the share to wltich the owner at once becon:es entitled provided he remains a member of the corporation until a dividend is made. Regarded as an incident to the shares undivided profits are property of the shareholder, and as such are ■the proper subject of sale, gift, or devise. Undivided profits invested in real f estate, machinery, or raw material for the purpose of being manu'actured are investments in which the stockholders are interested, and when such .profits are actually appropriated to the payment of the debts of the cor- poration they servm to increase the market value of the shares, wdiether held by the original subscribers or by assignees.” In so far as tliis seems to upliold =the right of Congress to tax witliout apportionment a stockholder’s interest iin accumulated earnings prior to dividend declared, it must be regarded as overruled by Pollock v. Farmers Loan & Trust Co. 158 IJ. S. 601, 627, 628, 637. Conceding Collector v. Hubbard w^as incor.sistcnt with the eloctrine of that case, because it sustained a direct tax upon property not apportioned among the States, the Government nevertheless insists that the Sixteenth Amendment removed this obstacle, so that now t\\Q Hubbard case is authority for the power of Congress to levy a tax on the stockholder’s share in the accurnulated profits of the corporation even before division by the declaration of a dividend of any kind. Manifestly this argument must be rejected, since 477 TAX INC. the Amendment applies to income only, and what is called the stockholder’s share in the accumulated profits of the company is capital, not income. As we have pointed out, a stockholder has no individual share in accumulated profits, nor in any particular part of the assets of the corporation, prior to dividend declared. 2614 Thus, from every point of view, we are brought irresistibly to the conclusion that neither under the Sixteenth Amendment nor other- wise has Congress power to tax without apportionment a true stock dividend made lawfully and in good faith, or the accumulated profits behind it, as income of the stockholder. The Revenue Act of 1916, in so far as it imposes a tax upon the stockholder because of such dividend, violates the provisions of Article I, Section 2, clause 3, and Article I, Section 9, clause 4, of the Constitution, and to this extent is invalid notv/ithstanding the Sixteenth Amendment. Judgment affirmed. Mr. Justice Holmes, dissenting. 2615 I think that Towne v. Eisner, 245 U. S. 418, was right in its reason" ing and result and that on sound principles the stock dividend was not income. But it was clearly intimated in that case that the construction of the statute then before the Court might be different from that of the Con- stitution, 245 U. S. 425. I think that the word ‘incomes’ in the Sixteenth Amendment should be read in “a sense most obvious to the common under- standing at the time of its adoption.” Bishop v. State, 149 Ind. 223, 230; State V. Butler, 70 Fla. 102, 133. For it was for public adoption that it was proposed. McCulloch v. Maryland, 4 Wheat. 316, 407. The known pur- pose of this Amendment was to get rid of nice questions as to what might be direct taxes, and I cannot doubt that most people not lawyers would suppose when they voted for it that they put a question like the present to rest. I am of opinion that the Amendment justifies the tax. See Tax Commissioner V. Putnam, 227 Mass. 522, 532, 533. Mr. Justice Day concurs in this opinion. Mr. Justice Brandeis delivered the following dissenting opinion, in which Mr. Justice Clarke concurs: 2616 Financiers, with the aid of lawyers, devised long ago two different methods by which a corporation can, without increasing its indebt- edness, keep for corporate purposes accumulated profits, and yet, in effect, distribute these profits among its stockholders. One method is a simple one. The capital stock is increased; the new stock is paid up with the accumulated profits; and the new shares of paid-up stock are then distributed among the stockholders pro rata as a dividend. If the stockholder prefers ready money to increasing his holding of the stock in the company, he sells the new stock received as a dividend. The other method is slightly more complicated. Arrangements are made for an increase of stock to be offered to stockholders pro rata at par and, at the same time, for the payment of a cash dividend equal to the amount which the stockholder will be required to pay to the company, if he avails himseff of the right to subscribe for his pro rata of the new stock. If the stockholder takes the new stock, as is expected, he may endorse the dividend check received to the corporation and thus pay for the new stock. In order to ensure that all the new stock so offered will be taken, the price at which it is offered is fixed far below what it is believed will be its market value. If the stockholder prefers ready money to an increase of his holdings of stock, he may sell his right to take new stock pro rata, which INC. 478 TAX 8 - 9 - 20 . IS evidenced by an assignable instrument. In that event the purchaser of the rights repays to the corporation, as the subscription price of the new stock, an amount equal to that which it had paid as a cash dividend to the stock- holder. ^ ^ 1 -1 • rr 2617 Both of these methods of retaining accumulated profits while in effect distributing them as a dividend had been in common use in the United States for many years prior to the adoption of the Sixteenth Amend- ment. They were recognized equivalents. Whether a particular corpora- tion employed one or the other method was determined sometimes by re- quirements of the law under which the corporation was organized; some- times it was determined by preferences of the individual officials of the cor- poration; and sometimes by stock market conditions. Whichever method was employed the resultant distribution of the new stock was commorily referred to as a stock dividend. How these two methods have been employed may be illustrated by the action in this respect (as reported in Moody’s Manual, 1918 Industrial, and the Commercial and Financial Chronicle), of some of the Standard Oil companies, since the disintegration pursuant to the decision of this court in 1911. Standard Oil Co. v. United States, 221 U. S. 1. 2618 (a) Standard Oil Co. (of Indiana), an Indiana corporation. It had on December 31, 1911, $1,000,000 capital stock (all common), and a large surplus. On May 15, 1912, it increased its capital stock to $30,000,- 000, and paid a simple stock dividend of 2900 per cent, in stock to stock- holders of record May 15, 1912.^ 2619 (b) Standard Oil Co. (of Nebraska), a Nebraska corporation. It had on December 31, 1911, $600,000 capital stock (all common), and a substantial surplus. On April 25, 1912, it paid a simple stock dividend of 33j^ per cent., increasing the outstanding capital to $800,000. During the calendar year 1912 it paid cash dividends aggregating 20 per cent.; but it earned considerably more, and had at the close of the year again a sub- stantial surplus. On June 20, 1913, it declared a further stock dividend of 25 per cent., thus increasing the capital to $1,000,000.^ 2620 (c) The Standard Oil Co. (of Kentucky), a Kentucky corporation. It had on December 31, 1913, $1,000,000 capital stock (all common) and $3,701,710 surplus. Of this surplus $902,457 had been earned during the calendar year 1913, the net profits of that year having been $1,002,457 and the dividends paid only $100,000 (10 per cent.). On December 22, 1913, a cash dividend of $200 per share was declared payable on February 14, 1914, to stockholders of record December 31, 1913; and these stockholders were offered the right to subscribe for an equal amount of new stock at par and to apply the cash dividend in payment therefor. The outstanding stock was thus increased to $3,000,000. During the calendar years 1914, 1915 and 1916, quarterly dividends were paid on this stock at an annual rate of be- tween 15 per cent, and 20 per cent., but the company’s surplus increased by $2,347,614, so that on December 31, 1916, it had a large surplus over its $3,000,000 capital stock. On December 15, 1916, the company issued a cir- cular to the stockholders, saying; “The company’s business for this year has shown a very good increase m volume and a proportionate increase in profits, and it is estimated that by Jan. 1, 1917, the company will have a surplus of over $4,000,000. ^ The board feels justified in stating that if the proposition to increase the capital stock is acted on favorably, it will be proper in the near future to declare a cash divi- 'Moodys, p. 1545; Commercial and Financial Chronicle, Vol. 94, p. 851; Vol. 98, pp. 1005, 1076. _ ^ . .r 1 ' . * Moodys, p. 1548; Commercial and Financial Chronicle, Vol. 94, p. 771; Vol. 96, p. 1428; Vol. 97, p. 1434; Vol. 98, p. 1541. 479 TAX INC. dend of 100%; and to allow stockholders the privilege pro rata according to their holdings, to purchase, the new stock at par, the plan being to allc^ the stockholders, if they desire to use their cash dividend to pay for the new stock.’’ 2621 The increase of stock was voted. The company then paid a cash dividend of 100 per cent., payable May 1, 1917, again offering to such stockholders the right to subscribe for an equal amount of new stock at par and to apply the cash dividend in payment therefor. 2622 Moodys Manual, describing the transaction with exactness,: says first that the stock was increased from $3,000,000 to $6,000,000,- a cash dividend of 100%, payable M^y 1, 1917, being exchanged for one share of new stock, the equivalent of a 100% stock dividend.” But later in the report giving, as custom^ary in the Manual, the dividend record of the com- pany, the Manual says: “A stock dividend of 200% Was paid Feb. 14, 1-914, and one of 100% on May 1, 1917.” And in reporting specifically the income account of the company for a series of years ending Deceniber 31,. covering, net profits, dividends paid and surplus for the year, it gives, as the aggregate of dividends for the year 1917, $660,000; (which was the aggregate paid on the quarterly cash dividend- — 5 per cent. January and April;^ 6 per cent. Juty and October); and adds in a note: “In addition a stock dividend of 100 /h was paid during the year.”^. The Wall Street Journal of May 2, 1917, P- quotes the 1917 “High” price for Standard Oil of Kentucky as “375 Ex. Stock Dividend.” ^ • -u • 2623 It thus appears that among financiers and investors the distribution of the stock by whichever method effected is called a stock dividend; that the two methods by which accumulated profits are legally retained for corporate purposes and at the same timm distributed as dividends are recog- nized by them to be equivalents; and that the financial results to the corpo-^ ration and to the stockholders of the tv/o methods ame substantiaUy the sarnie— unless a difference results from the application of the federal income tax law. ^ ^ . 2624 Mrs. Macom.ber, a citizen* and resident of New York, was,- in- the year 1916, a stockholder in the Standard Oil^ Company (of Cali- fornia), a corporation organized under the laws of California and having its principal place of business in that State. During that year she received from the comipany a stock dividend representing profits earned since March 1, 1913. I'he dividend was paid by direct issue of the stock to her according to the simple method described above, pursued also by the Indiana and Nebraska companies. In 1917 she was taxed under tlie federal law on the stock dividend so received at its par value of $100 a share, as incorcie received during the year 1916. Such a stock dividend is incomie as distinguished from capital both under the law of New York and under the law of California; because in both States every dividend representing profits is deem^ed to be income whether paid in cash or in stock. It had been so held in New York, where the question^ arose as between life-tenant and remiaindermian, Lowery v. Farmers Loan & Trust Company^ 172 N. Y. 137; Matter of Oshorne^ 209 N. Y. 450; and al^, where the question arose in matters of taxation. People v. Glynn, 130 N. Y. App. Div. 332; 198 N. Y. 605. it has been so held in California, where the question appears to have arisen only in controversies between life-tenant and< remainderman. Estate of Duf field, 58 Calif. Dec. 97; 183 Pac. 337. 2 Moodys, p. 1547; O'oiuir.trciai and I inancial Chronicle, "Vol. 97 , pp. 1589, 1827, 1903; Vol. 98, pp. 76, 457; \g 1. 103, p. 2.-)38. Poor's P'anual of induslrials (I9l8), p. 22-10, in gi\'ing the “Coini:iaratit'e Income Account” of the company describes the 1914 dividend as “Stock lOividend paid (200C )— $2,000,000”; and describes the 1917 dividend as “$3,000,000 special cash di\'idcnd.” 480 ! ING. TAX 3 - 9 - 20 . 2625‘T It is conceded th at if the ^stock' dividend paid to Mrs. Maciombei* • had been -made by:' the more complicated method pursued by the ^ Standard Gil Company* -of ^Kentucky, that is, issuing rights to take new stock pro rata and paying’ to* each 'Stockholder simultaneously a dividend in ^ cash sufficient ih'amount‘to ena,ble him to pay for this pro rata of new stock to be purchased=^the dividend so paid to him would have been taxable as income, whether he retained the cash or whether- he teturned it to the corporation ' in payment for his pno'rata: of new'stock. ^'Butut is contended that, because the simple method was adopted of having the new stock issued direct to the* ^ stockholders as paid-up* stock, ’ the new ' stock is not ' to be deemed income^- whether she retained it -or’ converted it -into cash by sale. If such a^different result can' flow merely frOm the* difference in the method pursued, it must be because' Congress is without power to tax as 'income of the stockholder eithef the stock received under the ’latter method or the proceeds of its sale; for Congress has; by the'^provisions In 'the Revenue Act of 1916, expressly de- ' dared its purpose to make 'Stock* dividends’,' by whichever method paid, taxable as income. ■ - t-il t. :■;}»■■: i i - M i - . r 2626' The Sixteenth Amendment proclairhed February 25,Xl913, de- " i ‘ ■ claresi ■ . !• j si. ■ j I. ^ r. ‘ ‘‘The Congress' ' shall * have power ' tO’ lay and ’ collect taxes on incomes from whatever soiirce derived,'* without apportionment among the several" States and withou t tegard to 'any census dr enumeration.’’ : r < -- 2G27 ‘ The Revenue 'Act ’of September' 8, 1916, c. 463, 39 Stat. 756, 757, • provided * ’** * ’• * i ;- mu -i ■' -> > “That the term ‘dividen'ds’“as' used in this' title shall be held to mean*' any distribution made drordered to be made by a corporation, . . . out- of its earnings or profits accrued since March first, nineteen hundred and thir- teen, and payable to its shareholders, whether in 'cash or in stocks of the Cdr^ " poratiob’* . .• which dividend'* shall "be considered income, to the amount of its cash 'value.'’'’' "I ^'*’ • 2628 Hitherto powers conferred **upon Congress by the Constitution * * " ^ have been liberally eonsttuedp and 'have ‘been held to extend to every ' rrieans appropriate to 'attain the 'eiid' sought. In determining the scope of i the power the substance of' the transaction, not its form has been regarded.'" Martin Y. Hunter^ 1 Wheaton '304, 326.;'' McCullough y. Mary land:, 4 Wheaton*’ 316^ 407, 415; Brown y. Maryland', 12 Wheaton 419, 446; Craig v. Missourr^y 4 Pet. 410, 433; ’ Jarrolt YjMoberly,' 103''U.' S. 580, 585, 587; Legal Tender ] Case, \\i) U. S. Ar2\;'^ Liihdgraph Co. v. Sarony, III U*. S. 53, 58; United Stated' V. Realty Co., 162> \]. Si >427, 440, 441, 442; South Carolina v. United States, 199 13. S. 437*; 448-^9.'* ’ Is there anything in the phraseology of the ^ Sixteenth Amendment or in the nature of corporate dividends w^hich should ' lead to a departure frorh these rules of construction and compel this court • to' hold, that Congress 'is powerless' to' prevent a result so extraordinary as * that here contended for' by the Stockholder 2629 First: Tl\^ term' “income,’’ *when applied to the investment of the " stdckholdet in a corporation* had, before the adoption of the Six^" tdenth Amend mebt; been* commonly understood to mean the returns from ’ time to time "received 'by the stockholder from gains Or earnings of the cor- poration. A dividend recei\^ed by a stodkliolder from a corporation may be’either in distribution of capital assets 'or in distribution of profits. Whether it ibthe one or the other ist in no* way affected by the medium in which it is paid, nor by the method- oi* means through which the particular thing dis- tributed as a dividend was procured. If the dividend' is declared payable*^ in cash, the money with which to pay it is ordinarily taken from surplus cash in the treasury. But (if there are profits legally available for distribu- IN^.a t; 481 , ? TAj;,. tion ^nd' the l^w under which the company w^as incjorppr^ted so permits) the company may raise the mopey by discounting nego^able papeti; or by selling bonds, scrip or stock of another corporation then in. the treasury; or by selling its own bonds, scrip or stoqk then in, the treasury;, or by selling its own bonds, scrip or stock issued expressly fpr that purpose. How the, money shall be raised is wholly a matter pf financial management,. The manner in which it is raised in no way affects the question whether the dividend re- ceived, by the stockholder is income or capital; nor cau it conceivably affect the question whether it is taxable as incpme. 263,0 Likewise whether a dividend declared payable frpm profits, shall be paid in cash or in some pther medium is also wholly a matter pf financial management. If some other medium is decided uppn, it is also wholly a question of financial management whether the distribution^ shall be, for instance, in bonds, scrip or stpck of anpther cprppratipn or in issues of its own. And if the dividend is paid in its own issues, why should there be a difference in result dependent upon whether the distribution W^'S made from such securities then in the treasury or from others to be created, and issued by the company expressly for that purpose.^ So fat as the distribu- tion may be made from its own issues of bonds, or preferred s.tock created expressly for the purpose, it clearly would, m^ke no difference in the decision of| the question whether the dividend was a distribution of profits, that the securities had to be created expressly for the purpose pf distribution. If a dividend paid in securities of that nature represents a distribution pf profits Congress may, of course, tax it as income of the stockholder. Is the result different where the security distributed is, common stock 263^1 Suppose that a corporation having power to buy and. sell its own stock, purchases, in the interval between its regular dividend dates, with monies derived from current profits, some of its own common stock a^ a temporary investment, intending at the tin>e of purchase to^sell it before the next dividend date and to use the proceeds in paying^ dividends, but la, ter, deeming it inadvisable either to sell this stock or to raise by borrowing the money necessary to pay the regular diyidjend in cash, declares a dividend payable in this stock: — Can anyone doubt that in su,ch a case the dividend in common stock would be income of the stockholder and constitutionally taxable as such.^ See Green v. BUsell, 79 Cpnn. 547; Leland v. Hayden, 102 Mass. 542. And would it not likewise be income of the stockholder sub- ject to taxation if the purpose of the company in buying the stock so dis- tributed had been from the beginning to take it off the market and distribute it among the stockholders as a dividend, and the company actually did so? And proceeding a short step further: Suppose that a corporation decided to capitalize some of its accumulated profits by preating additional common stock and selling the same to raise working capital, but after the stock has been issued and certificates therefot are delivered to the bankers for sale, general financial conditions make it undesiralDLe. to market the stock and the company concludes that it is wiser to husband;, for working capital, the cash which it had intended to use in paying stockholders a dividend, and, instead, to pay the dividend in the common stock which it had planned to sell: Would not the stock so distributed be a distribution of profits, and, hence, when received, be income of the stockholder and taxable such? If this be con- ceded, why should it not be equally income of the stockholder, and taxable as such, if the common stock created by capitalizing profits, had been originally created for the express purpose of being distributed as a dividend to the stock- holder who afterwards received it? t INC. 482 TAX 8 - 9 - 20 . 2632 Second: It has been said that a dividend payable in bonds or preferred stock created for the purpose of distributing profits may be income and taxable as such, but that the case is different where the distribution is in common stock created for that purpose. Various reasons are assigned for making this distinction. One is that the proportion of the stockholder’s ownership to the aggregate number of the shares of the company is not changed by the distribution. But that is equally true where the dividend is paid in its bonds or in its preferred stock. Furthermore, neither maintenance nor change in the proportionate ownership of a stockholder in a corporation has any bearing upon the queston here involved. Another reason assigned is that the value of the old stock held is reduced approximately by the value of the new stock received, so that the stockholder after receipt of the stock dividend has no more than he had before it was paid. That is equally true whether the dividend be paid in cash or in other property, for instance, bonds, scrip or preferred stock of the company. The payment from profits of a large cash dividend, and even a small one, customarily lowers the then market value of stock because the undivided property represented by each share has been correspondingly reduced. The argument which appears to be most strongly urged for the stockholders is, that when a stock dividend is made, no portion of the assets of the company is thereby segregated for the stockholder. But does the issue of new bonds or of preferred stock created for use as a dividend result in any segregation of assets for the stockholder? In each case he receives a piece of paper which entitles him to certain rights in the undivided property. Clearly segregation of assets in a physical sense is not an essential of income. The year’s gains of a partner is taxable as income although there, likewise, no segregation of his share in the gains from that of his partners is had. 2633 The objection that there has been no segregation is presented also in another form. It is argued that until there is a segregation, the stockholder cannot know whether he has really received gains; since the gains may be invested in plant or merchandise or other property and perhaps be later lost. But is not this equally true of the share of a partner in the year’s profits of the firm or, indeed, of the profits of the individual who is engaged in business alone? And is it not true, also, when dividends are paid in cash? The gains of a business, whether conducted by an individual, by a firm or by a corporation, are ordinarily reinvested in large part. Many a cash dividend honestly declared as a distribution of profits, proves later to have been paid out of capital, because errors in forecast prevent correct ascertainment of values. Until a business adventure has been completely liquidated, it can never be determined with certainty whether there have been profits unless the returns have at least exceeded the capital originally invested. Business men, dealing with the problem practically, fix necessarily periods and rules for determining whether there have been net profits — that is income or gains. They protect themselves from being seriously misled by adopting a system of depreciation charges and reserves. Then, they act upon their own determination, whether profits have been made. Congress is legislating has wisely adopted their practices as its own rules of action. 2634'^^ Third :T,.The Government urges that it would have been within the power of Congress to have taxed as income of the stockholder his pro rata share of undistributed profits earned, even if no stock dividend representing it had been paid. Strong reasons may be assigned for such a view See The Collector v. Ilubhardy 12 Wall. 1. The undivided share of a partner in the year’s undistributed profits of his firm is taxable as income of the partner although the share in the gain is not evidenced by any action taken by the firm. Why may not the stockholder’s interest in the gains of the company? 483 INC. TAX The law finds no difiiculty in disregarding the corporate fiction whenever that is deemed necessary to attain a just result. Linn Timber Co. v. United States, 236 U. S. 574; see Morawetz on Corporations (2d ed.), secs. 227-231; Cook on Corporations, (7th ed.), secs 663, 664. The stockholder’s interest in the property of the corporation differs, not fundamentally but in form only, from the interest of a partner in the property of the firm. There is much authority for the proposition that, under our law, a partnership or joint stock company is just as distinct and palpable an entity in the idea of the law as distinguished from the individuals composing it, as is a corporation.^ No reason appears, why Congress, in legislating under a grant of power so cornprehensive as that authorizing the levy of an income tax, should be limited by the particular view of the relation of the stockholder to the corporation and its property which may, in the absence of legislation, have^ been taken by this court. But we have no occasion to decide the question whether Congress might have taxed to the stockholder his undivided share of the corporation’s earnings. For Congress has in this act limited the income tax to that share of the stockholder in the earnings which is, in effect, distri- blited by means of the stock dividend paid. In other words to render the stockholder taxable there mmst be both earnings made and a dividend^ paid. Neither earnings without dividend — nor a dividend without earnings subjects the stockholder to taxation under the Revenue Act of 1916. 2636 Fourth: The equivalency of all dividends representing profits, whether paid in cash or in stock, is so complete that serious question of the taxability of stock dividends would probably never have been made, if Congress had undertaken to tax only those dividends which^ represented profits earned during the year in which the dividend was paid or in the year preceding. But this court, construing liberally not only the constitu- tional grant of power but also the revenue act of 1913, held that Congress might tax, and had taxed, to the stockholder dividends received during the year, although earned by the com^pany long before; and even prior to the adoption of the Sixteenth Amendment. Lynch v. Hornby, 247 U. S. 339. That rule, if indiscriminatingly applied to all stock dividends representing profits earned, mighty, in view of corporate practice, have worked consider- able hardship, and have raised serious questions. Alany corporations, with- out legally capitalizing any part of their profits, had assigned definitely some part or all of the annual balances remaining after paying the usual cash dividends, to the uses to which permanent capital is ordinarily applied. of the corporations doing this transferred such balances on their books to “Surplus” account, — distinguishing between such permanent Surplus and the “Undivided Profits” account. Other corporations, without this formality, had assumed that the annual accumulating balances carried as undistributed profits were to be treated as capital permanently invested in the business. And still others, without definite assumption of any kind, had so used undivided profits for capital purposes. To have made the revenue law apply retroactively so as to reach such accumulated profits, if and when ever it should be deemed desirable to capitalize them legally by the issue of additional stock distributed as a dividend to stockholders, would have worked great injustice. Congress endeavored in the Revenue Act of 1916 ^See “Some Judicial Myths,” by Francis M. Burdick, 22 Harvard Law Review, 394- 396; The Firm as a Legal Person, by William Hamilton Cowles, 57 Cent. L. J., 348; Lstates of Non-Bankrupt Partners, b> J. D. Brannan, 20 Harvard law Review, 589-592; compare Harvard Law Review, Vol 7, p. 426; Vol. 14, p. 222; Vol. 17, p. 194. _ 'The hardship supposed to have resulted from such a decision has teen removed in the Revenue Act of 1916 by providing in Section 201 (b) that such cash dividends shall thereafter be exempt from taxation, if before they are made, all earnings made since February 28, 1913, shall have been distributed. 484 TAX INC. 3 - 9 - 20 . to guard against any serious hardship which might otherwise have arisen frorn making taxable stock dividends representing accumulated profit. It did not limit the taxability to stock dividends representing profits earned within the tax year or in the year preceding; but it did limit taxability to such dividends representing profits earned since March 1, 1913. Thereby stockholders were given notice that their share also in undistributed profits accumulating thereafter was at some time to be taxed as income. And Con-f gress sought by section 220 to discourage the postponement of distribution for the illegitimate purpose of evading liability to surtaxes. 2636 Fifth: ^ The decision of this court, that earnings made before the adoption of the Sixteenth Amendment but paid out in cash dividend after its adoption were taxable as income of the stockholder, involved a very liberal construction of the Amendment. To hold now that earnings both made and paid out after the adoption of the Sixteenth Amendment cannot be taxed as income of the stockholder, if paid in the form of a stock dividend, involves an exceeding narrow construction of it. As said by Mr. Chief Justice Marshall in Brown v. Maryland, 12 Wheat. 419, 446: “To construe the power so as to impair its efficacy, would tend to defeat an object, in the at- tainment of which the American public took, and justly took, the strong in- terest which arose from a full conviction of its necessity.’’ 2637 No decision heretofore rendered by this court requires us to hold that Congress, in providing for the taxation of stock dividends, exceeded the power conferred upon it by the Sixteenth Amendment. The two cases mainly relied upon to show that this was beyond the power of Congress are Towne v. Eisner, 245 U. S. 418, which involved a question not of con- stitutional power but of statutory construction, and Gibbons v. Mahon, 136 U. S. 549, which involved a question arising between life-tenant and remain- derman. So far as coneerns Towne v. Eisner we have only to bear in mind what was there said (p. 425), “But it is not necessarily true that income means the same thing in the Constitution and the [an] act.”* Gibbons v. Mahon is even less an authority for a narrow construction of the power to tax incornes conferred by the Sixteenth Amendment. In that case the court was required to determine how, in the administration of an estate in the Dis- trict of Columbia, a stock dividend, representing profits, received after the decedent’s death, should be disposed of as between life-tenant and remain- derman. The question was in essence: What shall the intention of the tes- tator be presumed to have been.i^ On this question there was great diversity of opinion and practice in the courts of English-speaking countries. Three well-defined rules were then competing for acceptance: two of these involve an arbitrary rule of distribution, the third equitable apportionment. See Cook on Corporations (7th ed.), sections 552-558. 2638 1. The so-called English rule, declared in 1799, by Brander v. Brander, 4 Ves. 800, that a dividend representing profits, whether in cash, stock or other property, belongs to the life-tenant if it was. a regular or ordinary dividend, and belongs to the remainderman if it was an extraor- dinary dividend. 2639 2. The so-called Massachusetts rule, declared in 1868 by Minot v. f Paine, 99 Mass. 101, that a dividend representing profits, whether regular, ordinary or extraordinary, if in cash belongs to the life-tenant, and if in stock belongs to the remainderman. ‘Compare Rugg, C. J., in Tax Commissioner v. Putnam, 227 Mass. 552, 533: “However strong such an argument might be when urged as to the interpretation of a statute, k is not of prevailing force as to the broad considerations involved in the interpretation of an amendment to the Constitution adopted under the conditions preceding aad attendant upon the ratification of the Forty-fourth Amendment.” INC. 485 TAX 2640 3. The so-called Pennsylvania rule declared in 1857 by Earp’s Appeal, 29 Pa. St. 368, that where a stock dividend is paid, the court shall inquire into the circumstances under which the fund had been earned and accumulated out of which the dividend, whether a regular an ordinary or an extraordinary one, was paid. If it finds that the stock dividend was paid out of profits earned since the decedent’s deatn, the stock dividend be- longs to the life-tenant; if the court finds that the stock dividend was paid from capital or from profits earned before the decedent s death, the stock dividend belongs to the remainderman. ... 2041 This court adopted in Gibbons v. Mahon as the rule of administra- tion for the District of Columbia the so-called Massachusetts rule, the opinion being delivered in 1890 by Mr. Justice Gray. Since same question has come up for decision in many of the States. called Massachusetts rule, although approved by this court, has found favor in only a few States. The so-called Pennsylvania rule, on the other hand has been adopted since by so many of the States (including York and California), that it has come to be known as the American Rule. Whether, in view of these facts and the practical results of the operation of the two rules as shown by the experience of the thirty years which have elapsed since the decision in Gibbons v. Mahon, it might be desirable for this court to re- consider the question there decided, as some other courts have done (see 29 Harvard Law Review 551), we have no occasion to consider in this case. For, as this court there pointed out (p. 560), the question involved was one be- tween the owners of successive interests in particular shares, and not, as in Bailey v. Railroad Co., 22 Wall. 604, a question “between the corporation and the government, and [which] depended upon the terms of a statute care- fully framed to prevent corporations from evading payment of the tax upon their earnings.” i i • v 2642 We have, however, not merely argument, we have examples which should convince us that “there is no inherent, necessary and im- mutable reason why stock dividends should always be treated as capital.” Tax Commissioner v. Putnam, Til Mass. 522, 533. The Supreme Judicial Court of Massachusetts has steadfastly adhered, despite ever-renewed protest, to the rule that every stock dividend is, as between life-tenant and remainder- man, capital and not income. But in construing the Alassachusetts Income Tax Amendment, which is substantially identical with the Federal Amend- ment, that court held that the legislature was thereby empowered to levy an income tax upon stock dividends representing profits. The courts of England have, with some relaxation, adhered to their rule that every extra- ordinary dividend is, as between life-tenant and remanderman, to be deemed capital. But in 1913 the Judicial Committee of the Privy Council held that a stock dividend representing accumulated profits was taxable like an ordinary cash dividend. Swan Brewery Company, Limited v. The King, A. C. (1914) 231. In dismissing the appeal these words of the Chief Justice of the Supreme Court of Western Australia were quoted (p. 236) which show that the facts involved were identical with those in the case at bar; Had the company distributed the 101,450£ among the shareholders and had the shareholders repaid such sums to the company as the price of the 81,160 new shares, the duty on the 101,450£ would clearly have been payable. Is not iJiis virtually the effect of what was actually done? I think it is.” 2643 Sixth: If stock dividends representing profits are held exempt from taxation under the Sixteenth Amendment, the owners of the most successful businesses in America will, as the facts in this case illustrate, be able to escape taxation on a large part of what is actually their income. So far as their profits are represented by stock received as dividends they will 8 - 10 - 20 . pay these taxes not upon their income but only upon the income of their income. That such a result was intended by the people of the United States when adopting the Sixteenth Amendment is inconceivable. Our sole duty is to ascertain their intent as therein expressed.^ In terse, comprehensive language befitting the Constitution, they empowered Congress “to lay and collect taxes on incomes from whatever source derived.” They intended to include thereby everything' which by reasonable understanding can fairly be regarded as income. That stock dividends representing profits are so regarded, not only by the plain people but by investors and financiers, and by most of the courts of the country, is shown, beyond peradventure, by their acts and by their utterances. It seems to me clear, therefore, that Congress possesses the power which it exercised to make dividends represent- ing profits, taxable as income, whether the medium in which the dividend is paid be cash or stock, and that it may define, as it has done, what dividends representing profits shall be deemed income. It surely is not clear that the enactment exceeds the power granted by the Sixteenth Amendment. And, as this court has so often said, the high prerogative of declaring an Act of Congress invalid, should never be exercised except in a clear case* “It is but a decent respect due to the wisdom, the integrity, and the patriotism of the legislative body, by which any law is passed, to presume in favor of its validity, until its violation of the Constitution is proved beyond a reasonable doubt.” Ogden v. Saunders^ 12 Wheaton 213, 270. ^Compare Rugg, C. J., Tax Commissioner v. Putnam, 227 Mass 522, 533: “It is a grant from the sovereign people and not the exercise of a delegated power. It is a statement of general principles and not a specification of details. Amendments to such a charter of government ought to be construed in the same spirit and according to the same rules as the original. It is to be interpreted as the Constitution of a State and not as a statute or an ordinary piece of legislation. Its words must be given a construction adapted to carry into effect its purpose.” *‘Tt is our duty, when required in the regular course of judicial proceedings, to declare an act of Congress void if not within the legislative power of the United States; but this declaration should never be made except in a clear case. Every possible presumption is in favor of the validity of the statute, and this continues until the contrary is shown beyond a rational doubt. One branch of the Government cannot encroach on the domain of another without danger.. The safety of our institutions depends in no small degree on a strict observance of this salutary rule.” The Sinking Fund Cases, 99 U. S. 700, 718 (1878). See also Legal Tender Cases, 12 Wall. 457, 531 (1870); Trade Mark Cases, 100 U. S. 82, 96 (1879). See American Doctrine of Constitutional Law by James B. Thayer, 7 Harvard Law Review 129, 142. “With the exception of the extraordinary decree rendered in the Dred Scott Case, . . . all of the acts or the portions of the acts of Congress invalidated by the courts before 1868 related to the organization of courts. Denying the power of Congress to make notes legal tender seems to be the first departure from this rule.” Haines, American Doc- trine of Judical Supremacj, p. 288. The first legal tender decision was overruled in part two years later (1870), Legal Tender Cases, 12 Wall. 457; and again in 1883, Legal Tender Case, 110 U. S. 421. 2644 Credit and refund claims on account of taxes paid on stock divi- 2123 dends. — Following the decision of the United States Supreme Court 2433 in the case of Eisner vs. Macomber [TI2575], which holds that stock dividends are not taxable, the following letter of instruction outlining the procedure to be followed by taxpayers in claiming credit for taxes paid on stock dividends, was issued to collectors of internal revenue by Com- missioner Daniel C. Roper today: 2646 “The Supreme Court handed down on Monday a decision in the case of Eisner vs. Macomber, which in substance is as follows: “A true stock dividend made lawfully and in good faith by a corporation, either against profits invested in lands, buildings, equipment or working INC. 487 TAX assets of a corporation, or against accumulated and undivided profits, is not taxable as income to the shareholder recipient, it being held that to tax such stock dividends would be to tax property without apportionment in violation of the provisions of Article 1, Section 2, Clause 3, and Article 1, Section 9, Clause 4, of the Constitution, notwithstanding the Sixteenth Amendment, there being no realization of profit taxable as income until a sale of shares is made. 2646 “The Bureau has telegraphed to the collectors of Internal Revenue as follows: “ ‘Claims for credit against first installment March fifteen on account of tax paid in prior years on stock dividends may be accepted but must not be permitted to reduce payment on March fifteenth installment unless Claim on Form Forty-seven A is -filed setting forth full details of dividends received and taxes paid thereon and a statement of all details of any subsequent sale of shares received as a stock dividend and unless claim is accompanied by statements from the corporations which distributed dividends as to amount distributed to taxpayer and years in which profits distributed were earned.’ 2647 “In filing returns for prior years taxpayers reported dividends re- ceived, including both cash and stocl^diyidends, without segregation. It will therefore be necessary for the Department to have specific information, verified by the corporations declaring the dividends, as to the amount of dividends distributed to each taxpayer,, the year in which the profits distrib- uted were earned and a statement disclodng all details of subsequent sales of the shares in order that the amount of credit allowable and the validity of the claim may be correctly and justly determined. 2648 “In accordance with this the taxpayer should present to the Collector formally a claim for credit for any overpayment of taxes in prior years on the regular form for that purpose (Form 47 A) and on this form must be set forth the full details of dividends received and taxes paid chereon. This claim must be accompanied by a statement or certificate from the corpo- ration distributing the dividends, showing’’ the amount distributed to the taxpayer and the years in which profits distributed were earned. 2649 “Taxpayers on complying with these requirements will be permitted by the collectors to credit the amounts due them against any install- ment of taxes remaining unpaid. In case the credit to which the taxpayer is entitled exceeds the amount of taxes remaining unpaid, a claim for refund of the difference may be filed.” (Letter of instructions signed by Com- missioner Daniel C. Roper, and dated March 10, 1920.) 4r (0 0 § INC. 488 TAX. 8 - 27 - 20 . (T. D. 2992.) [Matter in italics is new; that in bold face brackets [ ] is old matter cut out,] 2660 Gross income defined: Inclusions. Article 33, Regulations 45, 889 amended* — ^Article 33 of Regulations 45 is hereby amended to read 2568 as follows: Art. 33. Compensation paid other than in cash. — Where services are paid for with something other than money, the fair market value of the thing taken in payment is the amount to be included as income. If the services were rendered at a stipulated price, in the absence of evidence to the contrary such price will be presumed to be the fair value of the compensation received. Compensation paid an employee of a corporation in its stock is to be treated as if the corporation sold the stock for its market value and paid the employee in cash. When living quarters such as camps are furnished to employees for the convenience of the employer, the ratable value need not be added to the cash compensation of the employee, but where a person receives as com- pensation for services rendered a salary and in addition thereto living quarters, the value to such person of the quarters furnished constitutes income subject to tax. Premiums paid by an employer on [life, accident or health policies in favor of his employees as additional compensation of such employees are income to the employees] policies of group life insurance covering the lives of employees, the beneficiaries of which are designated by the employees, are not income to such employees. (T. D. 2992, signed by Paul F. Myers, Acting Commissioner of Internal Revenue, and dated March 20, 1920.) {Decision.) (Act of October 3, 1913.) United States Supreme Court. March 22, 1920. Profits earned in 1912 but distributed as cash dividends in 1913 are taxable income of 1913. The Union Pacific Coal Co., Petitioner, vs. Mark A.. Skinner, Collector of Internal Revenue. 2661 [Comment: ^ The Union Pacific Coal Co. owned all the capital stock 2327 of the Superior Coal Co. The latter, on June 19, 1913, paid to the plaintiff a dividend on the profits of its business for the fiscal year extending from July 1, 1912, to June 30, 1913, of 50% amounting to $500,000. In March, 1914, the plaintiff made its income tax return, but instead of in- cluding in its income the entire $500,000, included only one-half, $250,000, stating that the other half was not income of the calendar year 1913 for the reason that it was earned by the Superior Coal Co. during the latter half of the calendar year of 1912. The defendant amended the plaintiff’s return so as to include the $250,000 and levied a tax thereon. Plaintiff paid the tax under protest and brought this action to recover it. The Circuit Court held that the income tax law does not deal with the period during which the corporation accumulates the profits upon which the dividend is paid but is concerned only with the income of the corporation receiving the dividend. Viewed in that light the dividend accrued to the Union Pacific Coal Co. in the year 1913, and all of it was taxable. The judgment of the District Court was reversed by the Circuit Court in favor of the defendant, Skinner, and the Supreme Court now (March 22, 1920) affirms, per curiam, the judgment of the Circuit Court — The Corporation Trust Company.] INC. 489 TAX 2652 Excise and stamp taxes are deductible by the one only against 1254 whom such taxes are levied.— Receipt is acknowledged of your letter 2484 of February 28, 1920, in which you inquire as to the taxpayer who is entitled to the benefit of a deduction from gross income in respect of excise and stamp taxes levied by the Federal Government. ^In reply you are advised that the general rule which applies in respect of a deduction for all taxes is that the deduction may be taken only by the person against whom such taxes are levied. The fact that one person ultimately pays a tax levied upon another does not give such person a right to the benefit of the deduction. ®,lAs to the person against whom excise and stamp taxes are levied, your at- tention is directed to Sections 900 to 907, and 1006, 1100 to 1107, inclusive, of the Revenue Act of 1918. (Letter to Leslie, Banka & Company, New York, N. Y., signed by G. V. Newton, Acting Assistant to the Commissioner, and dated A'larch 6, 1920.) {Mim. 2436.) 2653 Further instructions relative to overpayments of taxes on stock 2123 dividends. (Supplementing M. 2429 [T|2644j.) — A claim for credit 2133 on Form 47A for payment of tax on stock dividends is to be accepted 2644 as a suspension of immediate collection of tax due only — 2654 (1) Against income or income and excess-profits taxes due and unpaid. 2655 (2) If amount claimed as a credit does not exceed the amount of 865 tax collected on the stock dividend less any additional tax due and unpaid upon the sale of stock received as a dividend or stock upon which the dividend was declared. (The basis of determining the gain or loss upon sale of stock is stated in R-egulations 45, article 1547, paragraphs 1 and 2 [1(865 (1) and (2)]. That article provides that the cost of each share of stock is the quotient of the cost of the old stock divided by the number of old and new shares added together.) 2656 (3) When accompanied by an affidavit of the taxpayer (supported by statements from the corporation which distributed the dividends as to the amount distributed to the taxpayer and years in which the profits distributed were earned) covering the following information: 2657 {a) Whether the dividend consists of stock of the corporation dis- tributing the dividend to the taxpayer, or of stock of another corpo- ration acquired by the distributor. 2658 {b) The name of each corporation declaring, the declaration of, and the date of receipt by the taxpayer of, the stock dividends, the tax on which was paid and is covered by the claim. 2659 (c) The year in which the stock dividend was included in the tax- payer’s return of income. 2660 id) The number of shares the taxpayer received and the value placed upon the dividend in the return. (If no sale of stock was made, the taxpayer need not furnish the following information.) 2661 {e) If any sale has been made of stock of the corporation declar- ing the dividends, whether the stock be that acquired by a dividend, or upon which the dividend was declared, state — (1) The number of shares sold. (2) The selling price. (3) The date or .dates of sale. (4) The portion, if any, of the selling price included as taxable profit in the return of net income for the year the sale was made and the item in the return under which the amount was reported. 490 TAX INC. 4 - 1 ^ 20 . 2662 (J) State how many shares of stock the taxpayer owned at the time he received the first stock dividend; how much that stock cost the taxpayer and the date the stock was acquired. (If acquired prior to March 1, 1913, state its value on that date and manner of determining the value.) 2663 (g) State separately the dates from March 1, 1913, upon which you received stock dividends, the number of shares received on each date, and the names of the corporations distributing the dividends. 2664 The receipt or canceled check covering the payment of tax involved in the claim should be attached to the claim. (Mim. 2436, signed by Commissioner Daniel C. Roper, and dated March 12, 1920.) 2665 Depreciation of fruit trees and the computation of deductible loss in 1305 event of death. — Receipt is acknowledged of your letter dated 1331 February 24, 1920, quoted here as follows: “I have a 20-acre prune orchard of two thousand (2,000) six-year old trees. Last year, two hundred and fifty (250) of them died from some unavoidable cause. Am I allowed any depreciation on same?’’ Uln reply, you are advised that the loss sustained by the killing of the trees is the cost of the trees killed, and the amount of such loss is deductible from your income for the taxable year 1919. If the orchard had not reached an income producing stage at the time the trees were killed, the cost of the trees would be the initial cost, or fair market value on March 1, 1913, if the trees were acquired prior to that date, plus the capitalized expenditures incurred in bringing them to maturity. In the event the orchard had reached the income producing stage at the time the trees were destroyed, the cost would be the initial cost or fair market value as of March 1, 1913, plus the capitalized expenditures incurred in bringing them to maturity less depreciation sustained. ^The basis of computing depreciation is the cost of the trees at the time the orchard has reached an income producing stage, including initial cost and capitalized expenditures incurred in bringing them to maturity, and the rate of depreciation is to be determined by the average life of the trees from the income producing stage under normal conditions. (Letter to C. M. McKinney, Walla Walla, Wash- ington, signed by G. V. Newton, Acting Assistant to the Commissioner, by S. Alexander, Head of Division, dated March, 1920, and made available through the courtesy of Moore and Booth of Seattle, Washington.) (T. D. 2998.) [Matter in italics is new; that in hold face brackets [ ] is old matter cut out.\ 2666 Charitable contributions, Article 251, Regulations 45, amended. — 1448 Article 251 of Regulations 45 is hereby amended to read as follows: r2449 Art. 251. Charitable Contributions. — Contributions or gifts within [2516 the taxable year are deductible to an aggregate amount not in excess of fifteen per cent of the taxpayer’s net income, including such payments, if made (a) to corporations or associations of the kind exempted from tax by subdivision (6) of Section 231 of the statute, or, (b) to the special fund for vocational rehabilitation under the vocational rehabilitation act of June 27, 1918. For a discussion of what corporations and associations are included within (a) see Article 517. A gift to a common agency (as a war chest) for several such corporations or associations is treated like a gift [directly] direct to them. In connection with claims for this deduction there INC. 491 TAX shall be stated on returns of income the name and address of each organiza- tion to which a gift was made, and the approximate date and the amount of the gift in each case. Where the gift is other than money the basis for calculation of the amount of the gift shall be the cost of the property, if acquired after February 28, 1913, or its fair market value a.s of March 1, 1913, if acquired prior thereto, [less any depreciation sustained] after deducting from such cost or value the amount, if any, which has been or which should have been set aside and deducted in the current year and previous years from gross income on account of depreciation, and which has not been paid out in making good the depreciation sustained. K gift of real estate to a city to be maintained perpetually as a public park is not an allowable deduction. The proportionate share of contributions made by a partnership to cor- porations or associations of the kind included in (a) above and to the special fund for vocational rehabilitation specified in (b) may be claimed as deduc- tions in the personal returns of the partners to an amount which, added to the amount of such contributions made by the partner individually, is not in excess of fifteen per cent of the partner’s net income computed without^ the benefit of the deduction for such contributions. However, the contributions made by the partnership shall not be deducted from its gross income in ascer- taining the amount of its net income to be reported on Form 1065 (revised). See Article 321. This article does not apply to gifts by estates and trusts or corporations. See section 219 oj the statute and articles 561 and 562. 2 S 67 This decision supersedes Treasury Decisions 2966 [1(2499] and 2977 [1(2516]. (T. D. 2998, signed by Paul F. Myers, Acting Commissioner of Internal Revenue, and dated April 10, 1920.) (T. D. 3001.) 2668 [Comment: This Treasury Decision merely incorporates a decision 2319 under the Revenue Act of 1916, of the United States Circuit Court of Appeals for the Sixth Circuit (March 2, 1920 — No. 3360), in the case of Weiss vs. Mohawk Mining Company, which “is published not as a ruling of the Treasury Department, but for the information of Internal Revenue officers and others concerned.” The decision sustains the govern- ment’s contention that the lessee of mining property is entitled to no depletion allowance by the terms of the Revenue Act of 1916 (see 1(2319). — The Cor- poration Trust Company, April 15, 1920.] {Decision.) (262 Fed. 550.) Evans, District Judge, v. Gore, Deputy and Acting Collector. Salaries of United States Judges. 2869 Brief Summary: Walter Evans, United States District Judge for 803 the Western District of Kentucky, in making his return of income in March, 1919, under the Revenue Act of 1918, included, under protest, in his gross income, his salary, as judge, for the preceding year, and paid the tax, shown by such return to be due, under protest. Having filed a claim for refund, which was adversely decided by the Commissioner, Judge Evans filed his petition in a suit against the deputy and acting collector for recovery, the sole basis of the suit being that to^ include a United States judge’s salary in his gross taxable income is to diminish his compensation as judge and thus to violate the provisions of article 3, section I of the Federal Constitution. To the petition the collector demurred. The court sustained the demurrer, saying in part: “It seems, therefore, that the tax which the plaintiff now sues to recover is at most but an indirect or incidental^burden upon judicial compensation, resulting from a uniform and general|mcome tax, and is therefore not a diminution of such compensation within the mean- ing of the Constitution.” (262 Fed. 550.)--The Corporation Trust Company. INC. 492 TAX 4-27-20. 2670 Purchase and sale of acceptances on behalf of foreign corporation 1618 having no office or place of business in United States. Reference is made to office telegram of April 2, 1920, and your letter of July 22, 1919, in regard to discount on bank acceptances. Further consideration has been given to the question presented by you as to whether income deiived by a foreign corporation through buying and selling bank acceptances in this country represents income from sources within the United States v/hich is subject to the withholding provisions of the taxing act. lIThe ordinary bank acceptances do not bear interest. The excess of the face value of a so- called bank acceptance as collected at its maturity over the amount paid there- for by the person collecting the acceptance at maturity is discount, not in- terest. ^Discount is a compensation for the use of money and ^as such resembles interest. But it has many features which distinguish it from interest. Interest is usually payable annually or at shorter periods before the maturity of the obligation. Discount is never paid by the obligor until the maturity of the obligation. A bank which loans money on a non-interest-bearing note payable in the future receives upon the payment of the note “discount.” Such discount is not “interest” and is not, therefore, subject to the with- holding provisions of Sections 221 (a) and 237 of the Revenue Act of 1918. Where a trust company purchases acceptances for a foreign corporation, the foreign corporation is required to make a return of income derived from such transactions and pay the tax shown to be due by such return. 1|Since dis- count is not be be regarded as interest or as a fixed, determinable annual or periodical income within the meaning of the taxing act, a trust company purchasing and selling acceptances for a foreign corporation and making a profit for the foreign corporation from such transactions, is not required to withhold income tax upon the profits realized. The foreign corporation is required to account for the gains and profits made on such transactions the same as is indicated in the preceding paragraph. ^The ruling in this letter supersedes the ruling contained in office letter of July 1, 1919.^ [See ruling on page 232 of the 1919 Cumulative Bulletin.] (Letter to M. F. Frey, the Guaranty Trust Company, New York, N. Y., signed by Commis- sioner Wm. M. Williams, and dated April 17, 1920.) 2671 Continued use of 1919 ov/nership certificates. — All of ownership 1694 certificates referred to in your telegram April 15 (i. e., revisions of February, May and September, 1919) may still be used. No date has been set beyond which they may not be used. (Telegram to M. R. Dickey, the Cleveland Trust Company, Cleveland, Ohio, signed by Deputy Commissioner G. V. Newton, and dated April 17, 1920.) 2672 Isolated sales of real and personal property on the installnient or 914 deferred payment plan. — Reference is made to your communication to of February 19, 1920, in which you ask whether the provisions of 937 Articles 42 to 46 of Regulations 45 (Revised), relative to the sale of real or personal property on the installment plan or on the deferred payment plan have to do only with transactions entered into by those who are regularly engaged in the business of selling real or personal property or whether such sales are also applicable to isolated individual transactions. ^You are advised that for the purpose of the income tax any sales of real or personal property on the installment or deferred payment plan, as described under Articles 42 to 46 of Regulations 45, shall be treated as therein provided, regardless of whether the sale is made by a dealer or other individual. (Letter to The Corporation Trust Company, signed by Commissioner Wm. M. Williams, and dated ApriL20, 1920.) 493 TAX INC. {Decision.) (Act>f Oct. 3;:i913.) Premiums received during the year are not to be further reduced for purpose of determining net taxable income by amdends paid in excess of those representing actual return of current year s premiumo. Supreme Court of the United States. The Penn Mutual Life Insurance Com pany, Petitioner, vs. Ephraim Lederer, Collector of Internal Revenue. On Writ of Certiorari to the • United States Circuit Court of Appeals for the Third Circuit. . [April 19, 1920.] Mr. Justice Brandeis delivered the opinion of the Court. 2673 The Penn Alutual Life Insurance Company, a purely mutual legal 988 reserve company which issues level-premium insurance, brought this action in the District Court of the United States for the Eastern District of Pennsylvania to recover $6,865.03 which was assessed^ and col- lected as an income tax of one per cent, upon the sum of $686, 50o, alleged to have been wrongly included as a part of its gross-income, and hence also of its net-income, for the period from Alarch 1, 1913 to December 31, 1913, The latter sum equals the aggregate of the am.ounts paid during that period by the company to its policy holders in cash dividends^which were not used by them during that period in payment of premiums. I he several amounts making up this aggregate represent m-ainly a part of the sO’-called ^redundancy in premiums paid by the respective policyholders in some previous year or years.^^ They are, in a sense, a repayment of that part of the premium pre- viously paid which experience has proved was in excess of the amount which had been assumed would be required to m.eet the policy obligations ^(ordin- arily termed losses) or the legal reserve and the expense of conducting the business. 1 The District Court allowed recovery of the full amount with interest. (247 Fed. 559.) The Circuit Court of Appeals for the Idiird Circuit, holding that nothing was recoverable except a single small item, reversed the judgment and awarded a new trial. (258 Fed. 81.) A writ of certiorari from tliis court was then allowed. (250 U. S. 656.) 2674 Whether the plaintiff is entitled to recover depends wlrolly upon the construction to be given certain provisions in Section II G. (b) of the jR.evenue Act of October 3, 1913, c. 16, 38 Stat. 114, 172, 173. The Act enumerates aivong the corporations upoji which the income tax is imposed, ‘‘every insurance company” “other than fraternal benefidary societies, orders or associations operating under the lodge system or for the exclusive benefit of the members of a fraternity Itself operating under a lodge system.” It provides (G. (b) pp. 172-174) how the net income of insurance companies shall be ascertained for purposes of taxation, prescrib- ing what shall be included to determine the gross-income of any year, and also specifically what deductions from the ascertained gross-income shall ^The manner in which mutual level-premium life insurance companies conduct their business, and the nature and application of dividends are fully set forth in hlutual Benefit Life Ins. Co. v. Herold, 198 Fed. 199; Connecticut General Life Ins. Co. v. Eaton, 218 Fed- 188; Connecticut Mutual Life Ins. Co. v. Eaton, 218 ted. 206» INC, 494 TAX be made in order to determine the net-income upon which the tax is assessed. Premium receipts are a part of the gross-income to be accounted for. 2675 In applying to insurance companies the system of income taxation in which the assessable net-income is to be ascertained by making enumerated deductions from the gross-income (including premium receipts) Congress naturally provided how, in making the computation^, repayment of the redundancy in the premium should be dealt with. In a mutual company whatever the field of its operation, the premium exacted is necessarily greater than the expected cost of the insurance, as the redundancy in the premium furnishes the guaranty fund out of which extraordinary losses may be met, while in a stock company they may be met from the capital stock subscribed. It is of the essence of mutual insurance that the excess in the premium over the actual cost as later ascertained shall be returned to the policyholder. Some payment to the policyholder representing such excess is ordinarily made by every mutual company every year; but the so-called repayment or divi- dend is rarely made within the calendar year in which the premium (of which it is supposed to be the unused surplus) was paid. Congress treated the so- called repayments or dividends in this way (p. 173); (a) Mutual fire companies “shall not return as income any portion of the premium deposits returned to their policyholders.” (b) Mutual marine companies “shall be entitled to include in deductions from gross income amounts repaid to policyholders on account of premiums previously paid by them and interest paid upon such amounts between the ascertainment thereof and the payment thereof.” (c) Life insurance companies (that is both stock and strictly mutual) “shall not include as income in any year such portion of any actuaj premium received from any individual policyliolder as shall have been paid back or credited to such individual policyholder, or treated as an abatement of prem- ium’ of such individual policyholder, within such year.” (d) For all insurance companies, whatever their field of operation, and whether stock or mutual, the Act provides that there be deducted from gross-income “the net addition, if any, required by law to be made vyithin the year to reserve funds and the sums other than dividends paid within the year on policy and annuity contracts.” 2676 1 he Governm.ent contends, in substance, for the rule that in figuring the gross-income of life insurance companies, there shall be taken the aggregate of the year’s net premium receipts made up separately for each policyholder.^ The Penn-h'Iutual Compan>^ contends for the rule that in figuring the gross-income there shall be taken the aggregate full premiums received by the company less the aggregate of all dividends paid by it to any policyholder by credit upon a premium or by abatemient of a premium and also of all diridends whatsoever paid to an)^ policyholder in cash whether applied in payment of a premium or not. The non-inclusion clause, (c) above, excludes from gross-income those preniium-receipts which Avere actually or in effect paid by applying diaddends. Tlie comipany seeks to graft upon the clause so restricted a provision for what it calls non-including, but which ^The percentage of the redundancy to the premium varies, from year to year, greatly in the several fields of insurance, and likewise in the same year in the several companies in the same field. Where the margin between the probable losses and those reasonably possible is very large, the return premiums rise often to 90 per cent or more of the premium paid. This is true of the manufacturers’ mutual fire insurance companies of New I'mgland. Sec Report Tvlassachusctts Insurance Commissioner (1913), Vol. 1, p. 16. ^ A separate account is kept by the company with each policyholder. In that account there is entered each year the charges of the premiums payable and all credits cither for cash payments or by way of credit of dividends, or by way of abatement of premium. 495 TAX INC. in fact is deducting, all cash dividends not so applied. In support of this contention the company relies mainly, not upon the words of the statute, but upon arguments which it bases upon the nature of mutual insurance, upon the supposed analogy of the rules prescribed in the statute for mutual fire and marine companies and upon the alleged requirements of consistency. 2677 First: The reason for the particular provision made by Congress seems to be clear : Dividends may be made, and by many of the companies have been made largely, by way of abating or reducing the amount of the renewal premium.'* Where the dividend is so made the actual premium receipt of the year is obviously only the reduced amount. But, as a matter of book- keeping, the premium, is entered at the full rate and the abatement (that is, the amount by which is was reduced) is entered as a credit. The financial result both to the company and to the policyholders is, however, exactly the same whether the renewal premium is reduced by a dividend or whether the renewal premium remains unchanged but is paid in part either by a credit or by cash received as a dividend. And the entries in bookkeeping would be substantially the same. Because the several ways of paying a dividend are, as between the company and the policyholder, financial equivalents. Congress, doubtless, concluded to make the incidents the same, also, as respects incomm taxation. Where the dividend was used to abate or reduce the full or gross prem.ium — the direction to eliminate from the apparent premium receipts is aptly expressed by the phrase ‘‘shall not include,” used in clause (c) above. Where the premium was left unchanged, but was paid in part by a credit or cash derived from the dividend the instruction would be more properly expressed by a direction to deduct those credits. Congress doubtless used the words “shall not include” as applied also to these credits because it eliminated them from the aggregate of taxable premiums as being the equivalent of abatement of premiums. 2678 That such was the intention of Congress is confirmed by the history of the non-inclusion clause, (c) above. The provision in the Revenue Act of 1913, for taxing the incom.e of insurance companies is in large part identical with the provision for the special excise tax upon them imposed by the Act of August 5, 1909, c. 6, sec. 38, 36 Stat. 112. By the latter act thi net incomie of insurance com.panies was, also, to be ascertained by deducting from gross-income “sums other than dividends, paid within the year on policy and renewal contracts;” but there was in that act no non-inclusion clause whatsoever. The question arose whether the provision in the Act of 1913, indentical with (c) above, prevented using in the computation the reduced renewal premiums instead of the full premiiums, where the reduction in the premium had been effected by means of dividends. In Mutual Benefit Life Insurance Co. v. Herold^ 198 Fed. 199, decided July 29, 1912, it was held that the renewal prem^ium as reduced by such dividends should be used in com- puting the gross-premium; and it was said (p. 212) that dividends so applied in reduction of renewal prerniumis “should not be confused with dividends declared in the case of a full-paid participating policy, wherein the policy- holder has no further premium payments to make. Such payments having been duly met, the policy has become at once a contract of insurance and of ^The dividend provision of the Mutual Benefit Life Insurance Company involved in the Herold Case, supra, 198 Fed. 199, 204, was, in part: “After this policy shall have been in force one year, each year’s premium subsequently paid shall be subject to reduction by such dividend as may be apportioned by the directors.” The dividend-provision in some of the participating policies involved in the Connecticut General Life Ins. Co. Case, supra 218 Fed 188, 192, was: “Reduction of premiums as determined by the company will be made annually beginning at the second year or the insur.d may pay the full premium and instruct the company to apply the amount of the reduction apportioned to him in any one of the following plans;” (Then follow four plans.) INC. 496 TAX 4 - 27 - 20 . investment. The holder participates in the profits and income of the invested funds of the company.” On writ of error sued out by the Government the judgment entered in the District Court was affirmed by the Circuit Court of Appeals on January 21, 1913, 201 Fed. 918; but that court stated that it refrained from expressing any opinion concerning dividends on full paid policies, saying that it did so “not because we wish to suggest disapproval, but merely because no opinion about these matters is Called for now, as they do not seem to be directly involved.” The non-inclusion clause in the Revenue Act of 1913, (c) above, was doubtless framed to define what amounts involved in dividends should be “non-included,” or deducted, and thus to prevent any controversy arising over the questions which had been raised under the Act of 1919.® The petition for writ of certiorari applied for by the Government was not denied by this court until December 15, 1913, (231 U. S. 755), that is, after the passage of the act. 2679 Second: It is argued that the nature of life insurance dividends is the same, whatever the disposition made of them; and that Con- gress could not have intended to relieve the companies from taxation to the extent that dividends are applied in payment of premiums and to tax them to the extent that dividends are not so applied. If Congress is to be assumed^ to have intended, in obedience to the demands of consistency, that all dividends declared under life insurance policies should be treated alike in connection with income taxation regardless of their disposition, the rule of consistency would require deductions more far-reaching than those now claimed by the company. Why allow so-called non-inclusion of amounts equal to the dividends paid in cash but not applied in reduction of renewal premium and disallow so-called non-inclusion of amounts, equal to the dividends paid by a credit representing amounts retained by the company for accumulation or to be otherwise used for the policyholders’ benefit.^ The fact is, that Congress has acted with entire consistency in laying down the rule by which in computing gross-earnings certain amounts only are excluded; but the company has failed to recognize what the principle is which Congress has consistently applied. The principle applied is that of basing the taxation on receipts of net-premiums, instead of on gross-premiums. The amount equal to the aggregate of certain dividends is excluded, although they are dividends, because by reason of their application the net-premium receipts of the tax year are to that extent less. There is a striking difference between an aggregate of individual premiums, each reduced by means of dividends, and an aggregate of full premiums, from which it is sought to deduct amounts paid out by the company which have no relation whatever to premiums received within the tax year but which relate to some other premiums which may have been received many years earlier. The difference between the two cases is such as may well have seemed to Congress sufficient to justify the application of different rules of taxation. 2680 There is also a further significant difference. All life insurance has in it the element of protection. That afforded by fraternal bene- ficiary societies, as originally devised, had in it only the element of protection. There the premiums paid by the member were supposed to be sufficient, and only sufficient, to pay the losses which will fall during the current year; just as premiums in fire, marine, or casualty insurance are supposed to cover only the losses of the year or other term for which the insurance is written. Fraternal life insurance has been exempted from all income taxation; Con- ^Substantially the same questions were involved, also, in Connecticut General Life Ins. Co. V. Eaton, 218 Fed. 188, and Connecticut Mutual Life Ins. Co. v, Eaton, 21 S Fed. 206, in which decisions were not, however, reached until the following'year. INC. 497 TAX gress having differentiated these societies, in this respect as it had in others, from ordinary life insurance companies. Compare Royal Arcanum Supreme Council V. Behrend^ 247 U. S. 394. But in level premium life insurance, while the motive for taking it may be mainly protection, the business is largely that of savings investment. The premium is in the nature of a savings deposit. Except where there are stockholders, the savings bank pays back to the depositor his deposit with the interest earned less the necessary expense of management. The insurance company does the same, the difference being merely that the savings bank undertakes to repay to each individual depositor the whole of his depsoit with interest; while the life insurance company undertakes to pay to each member of a class the average amount (regarding the chances of life and death); so that those who do not reach the average age get more than they have deposited, that is, paid in premiums (including interest) and those who exceed the average age less than they deposited (including interest). The dividend of a life insurance company may be regarded as paying back part of these deposits called premiums. The dividend is made possible because the amounts paid in as premium have earned more than it was assumed they would when the policy contract was made, or because the expense of conducting the business was less than it was then assumed it would be or because the mortality, that is the deaths in the class to which the policyholder belongs, proved to be less than had then been assumed in fixing the premium rate. When for any or all of these reasons the net cost of the investment (that is, the right to receive at death or at the endowment date the agreed sum) has proved to be less than that for which provision was made, the difference may be regarded either as profit on the investment or as a saving in the expense of the protection. When the dividend is applied in reduction of the renewal premium, Congress might well regard the elem.ent of protection as predominant and treat the reduction of the premium paid by means of a dividend as merely a lessening of the ex- pense of protection. But after the policy is paid up, the element of investment predominates and Congress might reasonably regard the dividend substan- tially as profit on the investment. 2681 The dividends, aggregating $686,503, which the Penn Mutual Company insists should have been “non-included,” or more properly deducted, from the gross income, were, in part, dividends on the ordinary limited payment life policies which had been paid up. There are others which arose under policy contracts in which the investment feature is more striking; for instance, the Accelerative Endowment Policy or such special form of contract as the 25-year “6% Investment Bond” matured and paid March, 1913, on which the policyholder received besides dividends, interest and a ‘‘share of forfeitures.” In the latter, as in “Deferred Dividend” and other semi-tontine policies, the dividend represents in part what clearly could not be regarded as a repayment of excess-premium of the policyholder receiving the dividend. For the “share of the forfeiture” which he receives is the share of the redundancy in premium of other policyholders who did not persist in premium-payments to the end of the contract period. 2682 Third: The non-inclusion clause here in question, (c) above, is found in Section II G. (b) in juxtaposition to the provisions, con- cerning mutual fire and mutual marine companies, clauses (a) and (b) above. The fact that in three separate clauses three different rules are prescribed by Congress for the treatment of redundant premiums in the three classes of insurance, would seem to be conclusive evidence that Congress acted with deliberation and intended to differentiate between them in respect to income- taxation. But the company, ignoring the differences in the provisions con- cerning fire and marine companies respectively, insists that mutual life insur- INC. 498 TAX 4 ^ 7 - 20 . ance rests upon the same principles as mutual fire and^ marine and that as the clauses concerning fire and marine companies provide specitically tor non-inclusion in or deduction from gross-income of all portions of premiums returned, Congress must have intended to apply the same rule to all. Neither premise not conclusion is sound. . 2683 Mutual fire, mutual marine and mutual life insurance companies are analogous in that each performs the service called insuring wholly for the benefit of their policyholders and not like stock insurance companies in part for the benefit of persons who as stockholders have provided working capital on which they expect to receive dividends representing pyohts their investment. In other words, these mutual companies are alike in that they are cooperative enterprises. But in respect to the service performed fire and marine companies differ fundamentally,^ as above pointed, out, from legal reserve life companies. The thing for which a fire or marine insur- ance premium is paid is protection, which ceases^ at the end of the term. If after the end of the term a part of the premium is returned to the policy- holder, it is not returned as something purchased with the premium, but as a part of the premium which was not required to pay for the protection, that is the expense was less than estimated.^ On the other hand, the service performed in level-premium life insurance is both protection and myestrn^ent. Premiums paid— not in the tax year, but perhaps a generation earlier— have earned so much for the cooperators, that the company is able to pay to each not only the agreed amount but also additional sums called dividends, and have earned these additional sums, in part at least, by transactions not among the members, but with others; as by lending the money of the cooperators to third persons who pay a larger rate of interest than it was assumed would be received on investments. The fact that the investrnent^ resulting in accumulation or dividend is made by a cooperative as distinguished from a capitalistic concern does not prevent the amount thereof being properly deemed a profit on the investment. Nor does the fact that the profit was earned by a cooperative concern afford basis for the argument that Congress did not intend to tax the profit. _ Congress exempted certain co-operative enterprises from all income taxation, among others, mutual savings banks; but, with the exception of fraternal beneficiary societies, it imposed in express terms such taxation upon “every insurance company.”® . 2684 The purpose of Congress to differentiate between mutual fire and marine insurance companies on the one hand and life insurance companies on the other is further manifested by this: Fhe provision con- cerning return-premiums in computation of the gross income of fire and marine insurance companies is limited in terms to mutual companies, whereas the non-inclusion clause, (c) above, relating to life insurance companies, applies whether the company be a stock or a mutual one. There is good reason to believe that the failure to differentiate between stock and mutual life insurance companies was not inadvertant. For while there is a radical dif- ference between stock, fire and marine companies and mutual fire and marine companies, both in respect to the conduct of the business and in the results to policyholders, the participating policy commonly issued by the stock life insurance company is, both in rights conferred and in financial results, substantially the same as the policy issued by a purely mutual life insurance company. The real difference between the two classes of life companies as •^Thc alleged unwisdom and injustice of taxing mutual life insurance companies while mutual savings banks were exempted had been strongly pressed upon Congress. and statements filed with Senate Committee on Finance on H. R. 3321 Sixty-third Congress, First Session, Vol. 3, pp. 1955-2094. 499 TAX INC. now conducted lies in the legal right of electing directors and ofhcers. In the stock company stockholders have that right; in the mutual companies, the policyholders who are the members of the corporation. 2685 The Penn Mutual Company, seeking to draw support for its argu- ment from legislation subsequent to the Revenue Act of 1913, points also to the fact that by the Act of September 8, 1916, c. 463, section 12, subsection second, subdivision c, 39 Stat. 756, 768, the rule for computing gross-income there provided for mutual fire insurance companies was made applicable to mutual employers’ liability, mutual workmen’s compensation and mutual casualty insurance companies. It asserts that thereby Congress has manifested a settled policy to treat the taxable income of mutual concerns as not including premium refunds; and that if mutual life insurance companies are not permitted to “exclude” them, these companies will be the only mutual concerns which are thus discriminated against. Casualty insurance, in its various forms, like fire and marine insurance, provide only protection, and the premium is wholly an expense. If such later legislation could be considered in construing the Act of 1913, the conclusion to be drawn from it would be clearly the opposite of that urged. The later Act would tend to show that Congress persists in its determination to differentiate between life and other forms of insurance. 2686 Fourth: It is urged that in order to sustain the interpretation given to the non-inclusion clause by the Circuit Court of Appeals (which was, in effect, the interpretation set forth above) it is necessary to interpolate in the clause the words “within such year,” as shown in italics in brackets, thus: “And life insurance companies shall not include as Income in any year such portion of any actual premiums received from any individual policy- holder [within such year] as shall have been paid back or credited to such in- dividual policyholder, or treated as an abatement of premium of such indi- vidual policyholder, within such year.” 2687 What has been said above shows that no such interpolation is neces- sary to sustain the construction given by the Circuit Court of Appeals. That court did not hold that the permitted non-inclusion from the year’s gross-income is limited to that portion of the premium received within the year which, by reason of a dividend, is paid back within the same year. What the court held was that the non-inclusion is limited to that portion of the premium which,' although entered on the books as received, was not actually received, within the year, because the full premium was, by means of the dividend, either reduced, or otherwise wiped out to that extent. Nor does the Government contend that any portion of a premium, not received within the tax year shall be included in computing the year’s gross income. On the other hand what the com.pany is seeking is not to have “non-included” a part of the premiums which were actually received within the year, or which appear, as matter of bookkeeping to have been received but actually were not. It is seeking to have the aggregate of premiums actually received within the year reduced by an amount which the company paid out within the year: and which it paid out mainly on account of premiums received long before the tax year. What it seeks is not a non-inclusion of amounts paid in — but a deduction of amounts paid out. 2688 If the terms of the non-inclusion clause, (c) above, standing alone permitted of a doubt as to its proper construction, the doubt would disappear when it is read in connection with the deduction clause, (d) above. The deduction there prescribed is of “the sums other than dividends paid within the year on policy and annuity contracts.” This is tantamount to a direction that dividends shall not be deducted. It was argued that the INC. 500 TAX 5 - 21 - 20 . dividends tliere referred to are ‘'commerciar’ dividends like tnose upon capital stock; and that those here involved are dividends of a different character. But the dividends, which the deduction-clause says, in ettect shall not be deducted, are the very dividends here in question, that is divi- dends .“on policy and annuity contracts.” None such may be deducted by any insurance company except as expressly provided for in the Act, m clauses quoted above, (a) (b) and (c). That is, clauses [a) (bj and (c) are, m effjct, exceptions to the general exclusion of dividends from the permissible deduc- tions as prescribed in clause (d) above. . , , • i • r 2689 In support of the company’s contention that the interpolation ot the words “within the year” is necessary in order to support the construction given to the Act by the Circuit Court of Appeals we are asked to consider the legislative history of the Revenue Act of 1918 (enacted February 24, 1919, c. 18, 40 Stat. 1057); and specilically to the fact that in the bill as introduced in and passed by the House, the corresponding section (233 (a) ) contained the words “v/ithin the taxable year” and that these words were stricken out by the Conference Committee (Report No. 1037, bixty- fifth Congress, Third Session. The legislative history of an act may, where the m-eanine of the words used is doubtful, be resorted to as an aid to con- struction. Caminetti v. United States, 242 U. S. 470, 490. But no aid cou d possibly be derived from the legislative history of another act passed nearly six years after the one in question. Further answer to the argument bped on the legislative history of the later act would, therefore, be inappropriate. 2690 We find no error in the judgment of the Circuit Court of Appeals. Affirw-ed. 2691 2575 2692 896 898 899 2693 (T. D. 3010.) Macomber vs. Eisner Case. — [Comment: The opinion of the Supreme Court in the stock dividend case is reproduced in this 1 . U. 1 he Corporation Trust Company.] (T. D. 3011.) Inventories of Livestock Raisers and Other farmers.— Regulations 45 are hereby amended by inserting after Article 1585 HI 10951 a paragraph to be known as Article 1585 (a), reading as follows. Art. 1585 (a). Inventories of livestock raisers and other farmers.— Because of the impracticability of identifying livestock purchased and livestock raised, and the difficulty of ascertaining actual cost ot livestock and other farm products raised, farmers who render their returns accrual basis may at their option value their inventories for the taxable year according to the farm price method which contemplates a valuation ol inven- tories at market price less cost of marketing. If the use of the farm price method of valuing inventories for any taxable year represents a change in method of taking inventories from that employed in prior yeara, the opening inventory for the taxable year in which the change is made should be brough in at the same value as the closing inventory for the preceding taxab e year (this being the same in effect as valuing the opening inventory on the new basis and crediting income with the excess valuation brought in). However, if such treatment of the opening inventory for the taxable year m which the INC. 501 TAX change is made results in abnormally large income for that year, by reason of the fact that certain livestock or other farm products which were on hand at the beginning is still on hand at the end of the year, then adjustments in the form of an adjustment sheet attached to the return for such taxable year may be made of the taxes for 1915 and each succeeding year to the year in which the change is made. In making such adjustments the farm price method of valuing inventories should be used for each of the preceding tax- able years. (T. D. 3011, signed by Commissioner Wm. M. Williams, and dated April 26, 1920.) (T. D. 3013.) 2694 Maryland Casualty Company Case. — [Comment. The opinion of 2517 the Supreme Court in this case is reproduced in this T. D. — ^The Corporation Trust Company.] {Decision.) (Act of September 8, 1916.) Building erected on leased ground by lessee as income to lessor. District Court, Northern District of California, Second Division. Cryan vs. Y/ardell, Collector. (263 Fed. 248.) 2695 Van Fleet, District Judge. Action to recover an item of income tax 939 assessed against plaintiff under section 2a of the act of September 8, 1231 1916 (39 Stat. 756 [Comp. St. § 6336b]), which provides that — “The net income of a taxable person shall include gains, profits, and in- come derived from * * * sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in real or personal property, also from interest, rent, dividends * * * or gains * * * from any source whatever.” 2696 Plaintiff is the owner of a lot of land in the city of San Francisco, upon which, under the terms of a lease made by plaintiff in 1908 for a term of 26 years, there was erected by her tenant a class A steel and concrete building, the lease providing that “in no event shall the lessee hereunder have any right to remove any building from said premises.” The building was completed in 1910. In 1916, the tenant defaulting in accrued rent, the lease was by mutual arrangement canceled and terminated, and possession of the leased premises surrendered to plaintiff. 2697 The tax in question was assessed for the year 1916 upon the then value of the building erected under the lease, upon the theory that the structure represented “gains, profits, and income” accruing to plaintiff for that year, under an interpretative rule of the Treasury Department, made for the guidance of taxing officers, that: “Permanent improvements under lease or rental contracts, when improve- ments become a part of real estate, the difference between cost of the improve- ments and allowable depreciation during the lease term, is gain or profit to the lessor at the end of the lease term, and is to be accounted for as income at that time.” Paragraph 50, Regulation No. 33, Treasury Dept. 2698 The government claims that under the provisions of the act, and this regulation made thereunder, the tax was properly assessed and collected; but I am unable to sustain this view. The right to levy the tax INC. 502 TAX 5-21-20. turns upon the question: When did the title to this building vest in plaintiff and become a part of her property for the purpose of taxation?. ^ I am of opinion that under well-settled principles, aptly expressed in section 1013, Civil Code of California, the moment the building was^ erected, which the terms of the lease show was to become and remain an integral part of the land upon which it was constructed, the title thereto vested as completely in the plaintiff as though constructed by the plaintiff herself. The terms of the lease clearly disclose that the erection of the building was a part of the consideration for the lease, and that it was provided for and taken into con- sideration in the rent reserved. It therefore became, upon its completion, a part and parcel of plaintiff’s income-bearing property, and was subject to taxation in her as of that date. City of Oakland v. Albers Bros. Milling Co. (Cal. App.) 184 Pac. 868. 2699 The regulation of the Treasury Department cannot be applied to such a state of facts; if so intended, it must give way, as the depart- ment has no power to abrogate a substantive rule of law. This conclusion is not affected by the principles stated in Board of Education v. Grant, 118 Cal. 39, 50 Pac. 5, or San Francisco v. McGinn, 67 Cal. 110, 7 Pac. 187, relied on by defendant. Nor do the considerations urged by defendant as arising from the relation of landlord and tenant, between plaintiff and her lessee, apply to the terms of the lease here involved. ^ 2700 It results that whatever accession of value resulted to plaintiff s property from the erection of the building in question accrued and became vested in her in 1910, and not upon the termination of the lease. As this was prior to the enactment under which the tax was levied, the case falls by analogy within the principles of Doyle v. Mitchell Brothers Co., 247 U. S. 179, 38 Sup. Ct. 467, 62 L. Ed. 1054, and Hays v. Gauley Mountain Coal Co., 247 U. S. 189, 38 Sup. Ct. 470, 62 L. Ed. 1061. Those cases dealt with the act imposing a corporation exci^e^tax, but, like the present act, the tax was imposed on income, and not upon capital invested, or property as such, and it was held that increase in the value of property invested, accruing before the act took effect, could not be taken into account or treated as income not realized upon until after that fact. 2701 The demurrer of the defendant will be overruled. 2702 Manner of adjusting corrected tax liability oyer a period of prior [i994 years. — Reference is made to your undated inquiry in which you 2119 set out the following facts: Examination made of the returns of an individual filed for the years 1914 to 1918, inclusive, disclosed a fur- ther tax due, which has been assessed. Before the assessment is paid, the individual finds that in the 1917 return a bonus was reported as compensa- tion received, although the bonus was actually credited to his account and subject to his withdrawal in 1916. You inquire, ‘Ts it proper to file amended returns for 1916 and 1917 and file a claim for abatement as to the assessment for 1917 and pay the additional tax due on account of the 1916 return being increased.” 1|In reply, you are informed that neither the filing of amended returns for 1916 and 1917 nor the payment of the additional tax alleged to be due on account of an adjustment of 1916 income js necessary. Upon receipt of notice of assessment from the Collector covering the further taxes for the years 1914 to 1918, inclusive, the individual may file a claim for abate- ment on Form 47 for an amount representing the difference between the amount assessed and the tax which he claims to be due. Such claim must be supported by an affidavit setting forth in detail the basis on which the claim is made. (Letter to M. R. Dickey, the Cleveland Trust Company, Cleveland, O., signed by Deputy Commissioner G. V. Newton, by B. G. Murphy, hlead of Division, and dated May 5, 1920.) INC. 503 TAX (T. D. 3018.) [Matter in italics is new; that in bold face brackets [ ] is old matter cut out.] 2703 Interest coupons presented without ownership certificates. — The 1704 final edition of Regulations 45 is amended by changing Article 368, to read as follows: Art. 368. Interest coupons without ownership certificates. — When [where] interest coupons are received unaccompanied by certificates of owner- ship, the first bank shall require of the payee an affidavit showing the name and address of the payee, the name and address of the debtor corporation, the date of the maturity of the interest, the name and address of the person from whom the coupons were received, the amount of the interest, and a state- ment that the owner of the bonds is unknown to the payee. Such affidavit shall be forwarded to the collector with the monthly return on form 1012 (revised). The first bank receiving such coupons shall also prepare a certi- ficate on form 1000 (revised), crossing out “owner” and inserting “payee” and entering the amount of interest on line 6 [in the space provided for a foreign corporation having no office or place of business within the United States], and shall stamp or write across the face of the certificate “Affidavit furnished,” adding the name of the bank. (T. D. 3018, signed by Com- missioner Wm. M. Williams, and dated May 18, 1920.) (T. D. 3019.) [Note: To hidicate changes herein would prove more confusing than helpful ^ 2704 Premiums on business insurance. — Article 294 of Regulations 45 1197 is hereby amended to read as follows: Art. 294. Premiums on business insurance. — Premiums paid by a taxpayer on an insurance policy on the life of an officer, employee or other Individual financially interested in the taxpayer’s business, for the purpose of protecting tlie taxpayer from loss in the event of the death of the officer or employee insured are not deductible from the taxpayer’s gross income. If, liowever, the taxpayer is in no sense a beneficiary under such a policy, except as he may derive benefit from the increased efficiency of the officer or employee, premiums so paid are allowable deductions. See Articles 33 [^[889] and 105 to 108 [beginning at •[11210]. In either case the proceeds of such policies paid upon the death of the insured may be excluded from gross income if the beneficiary is an individual, but must be included in gross income if the beneficiary is a corporation. See Section 213 (b) (1) and Articles 72 [^[1114] and 541 [1[809]. (T. D. 3019, signed by Commissioner Wm. \L Williams, and dated May 18, 1920.) 2705 Basis for determination of gain or loss on sale of securities by a 671 committee for an incompetent. — Reference is made to your telegram 1058 of May 14, 1920, wherein you make inquiry as to the proper basis for determining profit from the sale of securities by a. committee of an incompetent. In reply you are informed that the gain or loss to be reported from the sale of securities by a committee of an incompetent should be the difference between the purchase price of the securities by the incompetent if acquired subsequent to [March 1, 1913, and the sale price. If acquired prior to jMarch 1, 1913, the difference between their fair market value as of that date and the sale price applies. (Letter to [Morris F. I rey, the Guaranty Trust Company, New York, N. Y., signed by Deputy Commissioner G. V. Newton, by S. Alexander, Head of Division, and dated [May 17, 1920.) 504 TAX INC. 6 - 9 - 20 . (T. D. 3024.) 2706 Inventories of lumber manufacturers.— Regulations 45 are hereby 1092 amended by inserting after Article 1585 (a) a paragraph to be known as Article 1585 (b), reading as follows: 2707 Art. 1585 (b). Inventories of lumber manufacturers. — 1. Be- cause of the impracticability of determining accurately the costs properl}^ assignable to each species, grade and dimension of lumber making up the product of the mill, lumber manufacturers may use as a basis for pricing inventories the average cost to the manufacturer of producing the inventoried products during the taxable year for which the return of net income is made. 2708 2. If the quantity of lumber on hand at the time of inventory is greater than the total quantity of lumber produced during the current taxable year, it is evident that the excess stock has been carried over from the previous year’s production, and such excess shall be valued at the average cost of production for the preceding taxable year. 2709 3. A taxpayer who regularly allocates in his books of account such average cost to the different kinds and grades of lumber in proportion to the selling value of such kinds and grades may, subject in each case to the approval of the Commissioner upon audit of the return, make his returns of net incouie on tliat basis. 2710 4. The term lumber manufacturer, as used in this article, means a person who manufactures lumber from logs, as distinguislied from a remanufacturer of lumber. (T. D. 3024, signed by Commissioner Wm. M. Williams, and dated June 2, 1920.) (T. D. 3028.) 2711 Concerning countries which do or do not satisfy the simiiar credit 1286 requirement of Section 222 (a) (3) of the Revenue Act of 1918. — The final edition of Regulations 45 is amended by inserting imme- diately after Article 384, a paragraph, to be known as Article 385, as follow^s: Art. 385. Countries which do or do not satisfy the similar credit re- quirement. — (a) Tbie followdng is an inco.mplete list of the countries wdiich satisfy the similar credit requirement of Section 222 (a) (3) of the Revenue Act of 1918; Canada; Italy; NewToundland; Salvador, (b) llie following is an incomplete list of the countries which do not satisfy the similar credit requirements of Section 222 (a) (3), of the Revenue Act of 1918: Argentina; Bahama; Belgium; Bermuda; Bolivia; Bosnia; Brazil; dule; Cliina; Costa Rica; Ecuador, Egypt; Finland; France; Great Britain and Ireland; Guatemala; Herzegovina; India; Jamaica; Japan; Montenegro; Morocco; New Zealand; Nicaragua; Panama; Paraguay; Persia; Peru; Portugal; Roumania; Santo Domingo; Serbia; Siam; Sweden; Switzerland; Venezuela. The form.er names of certain of these territories are here used for convenience in spite of the actual or possible clumgc in the name or sovereignty. A resident of the United States who is a citizen or subject of any country in the first list is entitled, for the puiqiose of the total tax due the United States, for 1918 and subsequent years, to a credit for the amount of any income, w^ar profits and excess profits taxes paid or accrued during the taxable year to such country upon income fiom sources therein. If he is a citizen or subject of any country in the second list, he is not entitled to such credit. If he is a citizen or subject of a country wTich is in neither list, then to secure the desired credit, Ire must prove to the 505 INC. TAX satisfaction of the Commissioner that the country of which he is a citizen or subject either imposes no income, war profits or excess profits taxes, or in imposing such taxes allows to citizens of the United States residing in such country a credit for the amount of income, war profits or excess profits taxes paid to the United States on incomes derived from sources therein. (T. D. 3028, signed by Commissioner Wm. M. Williams, and dated June 2, 1920.) {Law.) Special exemption granted to owners of vessels documented under the laws of the United States and built prior to January 1, 1914, on the proceeds of the sale thereof. Second paragraph of Section 23 of the “Merchant Marine Act, 1920.” (Public — No. 261 — 66th Congress.) In effect June 5, 1920. 2712 That during the period of ten years from the enactment of this Act 90 any person a citizen of the United States who may sell a vessel docu- 804 mented under the laws of the United States and built prior to Janu- uary 1, 1914, shall be exempt from all income taxes that would be payable upon any of the proceeds of such sale under Title I, Title II and Title III of the Revenue Act of 1918 if the entire proceeds thereof shall be invested in the building of new ships in American shipyards, such ships to be documented under the laws of the United States and to be of a type approved by the board [i.e., the United States Shipping Board provided for byj^^Section 3 of the Act]. “IMerchant Marine Act, 1920,” of which the above is the second para- graph of Section 23, approved by the President, June 5, 1920. Important Note: To the extent only that this special legislation is in- terpreted and administered by the Bureau of Internal Revenue in official rules and regulations will it be covered in the Service. — The Corporation Trust Company. {Decision.) Salaries of United States Judges and of the President of the United States. SUPREME COURT OF THE UNITED STATES. No. 654. — October Term, 1919. Walter Evans, Plaintiff in Error,) In Error to the District Court of the vs. ^ United States for the Western J. Rogers Gore, Acting Collector, etc.] District of Kentucky. [June 1, 1920.] Mr. Justice Van Devanter delivered the opinion of the Court. 2713 This is an action to recover money paid under protest as a tax alleged 89 to be forbidden by the Constitution. The plaintiff is the United 803 States District Judge for the Western District of Kentucky, and holds 2241 that office under an appointment by the President made in 1899 with 2669 the advice and consent of the Senate. The tax which he calls in question was levied under the Act of February 24, 1919, c. 18, 40 506 TAX 1 % INC. 6 - 9 - 20 . Stat. 1062, on his net income for the year 1918, as computed under that act. His compensation or salary as District Judge was included in the compu- tation. Had it been excluded he would not have been called on to pay any income tax for that year. The inclusion was in obedience to a provision in §213 requiring the computation to embrace all gains, profits, income and the like, “including in the case of the President of the United States, the judges of the Supreme and inferior courts of the United States, [and others] . . . the compensation received as such.” Whether he could be subjected to such a tax in respect of his salary, consistently with the Constitution, is the matter in issue. If it be resolved against the tax he will be entitled to recover what he paid; otherwise his action must fail. It did fail in the District Court. 262 Fed. 550 [1[2669]. 2714 The Constitution establishes three great coordinate departments of the National Government, — the legislative, the executive, and the judicial, — and distributes among them the powers confided to that Govern- ment by the people. Each department is dealt with in a separate Article, the legislative in the first, the executive in the second and the judicial in the third. Our present concern is chiefly with the third Article. It defines the judicial power, vests it in the Supreme court and such inferior courts as Congress may from time to time ordain and establish, and declares: “The Judges, both of the supreme and inferior Courts, shall hold their Offices during good Behaviour, and shall at stated Times, receive for their Services, a Compensation, which shall not be diminished during their Continuance in Office.” 2715 The plaintiff insists that the provision in §213 which subjects him to a tax in respect of his compensation as a judge by its necessary operation and effect diminishes that compensation and therefore is repug- nant to the constitutional limitation just quoted. 2716 Stated in its broadest aspect, the contention involves the power to tax the compensation of federal judges in general, — and also the salary of the President, as to which the Constitution (Art. H, §1, cl. 6) contains a similar limitation. Because of the individual relation of the members of this court to the question, thus broadly stated, we cannot but regret that its solution falls to us; and this although each member has been paying the tax in respect of his salary voluntarily and in regular course. But jurisdiction of the present case cannot be declined or renounced. The plaintiff was entitled by law to invoke our decision on the question as respects his own compensation, in which no other judge can have any direct personal interest; and there was no other appellate tribunal to which under the law he could go. He brought the case here in due course, the Government joined him in asking an early determination of the question involved, and both have been heard at the bar and through printed briefs. In this situation, the only course open to us is to consider and decide the cause, — a conclusion supported by precedents reaching back many years. Aforeover, it appears that, when this taxing provision was adopted. Congress regarded it as of un- certain constitutionality and both contemplated and intended that the question should be settled by us in a case like this.* *Scc House Report, No. 767, p. 29, 65th Cong., 2d Sess.; Senate Report, No. 617, p. 6, 65th Cong., 3rd Sess. And see Cong. Record, Vol. 56, p. 10370, where the Chairman of the House Committee, on asking the adoption of the provision, said: “I wish to say, Mr. Chairman, that while there is considerable doubt as to the constitutionality of taxing Federal judges’ or the President’s salaries, ... we cannot settle it; we have not the power to settle it. No power in the world can settle it except the Supreme Court of the United States. Let us raise it, as we have done, and let it be tested, and it can only be done by some one protesting his tax and taking an appeal to the Supreme INC. 507 TAX 2717 With what purpose does the Constitution provide that the com- pensation of the judges “shall not be diminished during their con- tinuance in office?” Is it primarily to benefit the judges, or rather to promote the public weal by giving them that independence which makes for an im- partial and courageous discharge of the judicial function? ^ Does the pro- vision merely forbid direct diminution, such as expressly reducing the compen- sation from a greater to a less sum per year, and thereby leave the way open for indirect, yet effective, diminution, such as withholding or calling back a part as a tax on the whole? Or, does it mean that the judge shall have a sure and continuing right to the compensation, whereon he confidently may rely for his support during his continuance in office, so that he need have no appre- hension lest his situation in this regard may be changed to his disadvantage? 2718 The Constitution was framed on the fundamental theory that a larger measure of liberty and justice would be assured by vesting the three great powers, — the legislative, the executive, and the judicial,— in separate departments, each relatively independent of the others; and it was recognized that without this independence if it was not made t)Oth real and enduring — the separation would fail of its purpose.^ All agreed that restraints and checks must be imposed to secure the requisite measure of independence; for otherwise the legislative department, inherently the strongest, might encroach on or even come to dominate the others, and the judicial, naturally the weakest, might be dwarfed or swayed by the other two, especially by the legislative. 2719 The particular need for making the judiciary independent was elaborately pointed out by Alexander Hamilton in the Federalist, No. 78, from which we excerpt the following: “The Executive not only dispenses the honors, but holds the sword of the community. The legislature not only commands the purse, but prescribes the rules by which the duties and rights of every citizen are to be regulated. The judiciary, on the contrary, has no Influence over either the sword or the purse; no direction either of the strengtii or of the wealth of the society , and can take no active resolution whatever. It may truly be said to have neither force nor will, but merely judgment. . . . This simple view of the matter suggests several important consequences. It proves incontest- ably that the judiciary is beyond comparison the weakest of the three depart- ments of power; that it can never attack with success either of the other two; and that all possible care is requisite to enable It to defend Itself against their attacks.” “The complete Independence of the courts of justice is peculiarly essential In a limited Constitution. By a limited Constitution 1 understand one which contains certain specified exceptions to the legislative authority; such, for instance, as that It shall pass no bills of attainder, no post facto laws, and the like. Limitations of this kind can be preserved in practice no other way than through the medium of courts of justice, whose duty it must be to declare all acts contrary to the manifest tenor of the Constitution void. Without this, all the reservations of particular rights or privileges would amount to nothing.” 2720 At a later period John IMarshall, whose rich experience as lawyer, legislator, and Chief Justice enabled him to speak as no one else could, tersely said (Debates Va. Conv., 1829-1831, pp. 616, 619): “Advert, Sir, to the duties of a Judge. He has to pass between the Court.” And again: “I think really that every man who. has a doubt about this can very well vote for it and take the advice of the gentleman from Pennsylvania [Mr. Grahami, which was sound then and is sound now, that this question ought to be raised by Congress, the only power that can raise it, in order that it may be tested in the Supreme Court, the only power that can decide it.” INC. 508 TAX 6 - 9 - 20 . Government and the man whom that Government is prosecuting: between the most powerful individual in the community, and the poorest and most unpopular. It is of the last importance, that in the exercise of these duties he should observe the utmost fairness. Need I press the necessity of this.? Does not every man feel that his own personal security and the security of his property depends on that fairness.? The Judicial Department comes home ^very man s fireside: it passes on his property, his reputation, his life, his all. Is it not, to the last degree important, that he should be rendered perfectly and completely independent, with nothing to influence or control him but God and his conscience.? ... I have always thought, from my earliest youth till now, that the greatest scourge an angry Heaven ever inflicted upon an ungrateful and a sinning people, was an ignorant, a corrupt, or a dependent Judiciary.” independence was illustrated by ^ Mr Wilson, now the President, in the following admirable statement: It IS also necessary that there should be a judicary endowed with sub- stantial and independent powers and secure against all corrupting or per- verting influences; secure, also, against the arbitrary authority of the ad- ministrative heads of the government. “Indeed there is a sense in which it may be said that the whole efficacy and reality of constitutional government resides in its courts. Our definition ot li^berty is that it is the best practicable adjustment between the powers ot the government and the privileges of the individual.” Our courts are the balance-wheel of our whole constitutional system* and ours is the only constitutional system so balanced and controlled. Other constitutional systems lack complete poise and certainty of operation be- cause they lack the support and interpretation of authoritative, undisputable courts ot law. It is clear beyond all need of exposition tliat for the definite maintenance of constitutional understandings it is indispensable, alike for the preservation of the liberty of the individual and for the preservation of the integrity ot the powers of the government, that there should be some non- politica. lorurn in which those understandings can be impartially debated and determined. That forum our courts supply. There the individual may as&ert his rights; there the government must accept definition of its authority. here the individual may challenge the legality of governmental action and have It adjudged by the test of fundamental principles, and that test the government must abide; there the government can check the too aggressive sel -assertion of the individual and establish its power upon lines which all can comprehend and heed. The constitutional powers of the courts consti- tute the ultimate safeguard alike of individual privilege and of governmental prerogative. It is in this sense that our judiciary is the balance-wheel of our entire system; it is meant to maintain that nice adjustment between in- dividual rights and governmental powers which constitutes political liberty.” Constitutional Government in the United States, pp. 17, 142. 2722 Coriscious of the nature and scope of the power being vested in the courts, recognizing that they would be charged wdth res- ponsi.bilities more delicate and important than any ever before confided to judicial tribunals, and appreciating that they were to be, in the words of George Washingtoifi, “the keystone of our political fabric,” the convention with unusual accord incorporated in the Constitution the provision that the judges shall hold their offices during good behaviour and shall at stated times receive for their services a compensation which shall not be diminished during their continuance in office.” Can there be any doubt that the two ‘Sparks’ Washington, Vol. X, pp. 35 - 36 . INC. 509 TAX things thus coupled in placc-the clause in respect of tenure during good behavior and that in respect of an undimimshable compensation-were equally coupled in purpose? And is it not plain that their purpose was to invest the judges with an independence in keeping with the delicacy and importance of their task and with the imperative need for its impartial and fearless performance? Mr. Hamilton said in explanation and support of the provision (Federalist, No. 79): “Next to permanency in office, nothing can contribute more to the independence of the judges than a fixed provision tor their support. ... In the general course of human nature, a power over a man’s subsistence amounts to a power over hts will. ... e en lightened friends of good government in every state have seen cause to lament the want of precise and explicit precautions in the state constitutions on this head. Some of these indeed have declared that permanent salaries should be established for the judges; but the experiment has in some instances shown that such expressions are not sufficiently definite to preclude legis^atn e evasions. Something still more positive and unequivocal has been evinced to be requis- ite. . . . This provision for the support of the judges bears every mark of prudence and efficacy; and it may be safely affirmed that, together with the permianent tenure of their offices, it affords a better prospect of their independence than is discoverable in the constitutions of any of the States in regard to their own judges.” The several commentators on the Constitu- tion have adopted and reiterated this view,^ — Judge Story adding. V\ i^I^ou this provision [as to an undiminishable compensation], the other, as to the tenure of office, would have been utterly nugatory, and indeed a mere mockery;” and Chancellor Kent observing: “It tends, also, to secure a suc- cession of learned men on the bench, who, in consequence of a certain un- diminished support, are enabled and induced to quit the lucrative pursuits of private business for the duties of that important station. . , 2723 These considerations make it very plain, as we think, that tie primary purpose of the prohibition against diminution was not to benefit the judges, but, like the clause in respect of tenure, to attract good and competent men to the bench and to promote that independence ot action and judgment which is essential to the mai:^enance o t e guaranties, limitations and pervading principles of the Constitution and to the administration of justice without respect to persons and with equal concern for the poor and the rich. Such being its purpose, it is to be con- strued, not as a private grant, but as a limitation imposed in the_ public interest; in other words, not restrictively, but in accord with its spirit an the principle on which it proceeds. ^ 2724 Obviously, diminution may be effected in more ways than one. Some may be direct and others indirect, or even evasive as Mr. Hamilton suggested. But all which by their necessary operation and withhold or take from the judge a part of that which has been promised by law for his services must be regarded as within the prohibition. Nothing short of this will give full effect to its spirit and principle._ Here the plaintiff was paid the full compensation, but was subjected to an involuntary obliga- tion to pay back a part, and the obligation was promptly enforced. Of what avail to him was the part which was paid with one hand and then taken back with the other? Was he not placed in practically the same situation as if it had been withheld in the first instance? ^ Only by subordinating substance to mere form could it be h.eld that his compensation was not diminished. ^ Of course, the conclusion that it was diminished is the natural one. This is 12 Story, §1628; 1 Kent’s Com. *294; 1 Wilson’s Works, 410, 411; 2 Tucker, §364; Miller, 340-343; 1 Carson’s Supreme Court, 6. INC. 510 TAX 6 9 - 20 . illustrated in Dobbins v. Commissioners of Erie County^ 16 Pet. 435, 450, which involved a tax charged under a law of Pennsylvania against a revenue officer of the United States who was a citizen and resident of that State. The tax was adjusted or proportioned to his compensation, and the state court sustained it. 7 Watts 513. In reversing that decision, this court, after showing that the compensation had been fixed by a law of Congress, said: “Does not a tax then by a state upon the office, diminishing the recompense, conflict with the law of the United States, which secures it to the officer in its entireness. ^ It certainly has such an effect; and any law of a state imposing such a tax cannot be constitutional.” 2725 But it is urged that whaUthe plaintiff was made to pay back wp an income tax, and that a like tax was exacted of others engaged in private employment. ^ ^ • r j 2726 If the tax in respect of his compensation be prohibited, it can find no justification in the taxation of other income as to which there is no prohibition; for, of course, doing what the Constitution permits gives no license to do what it prohibits. 2727 The prohibition is general, contains no excepting words and appears to be directed against all diminution, whether for one purpose or another; and the reasons for its adoption, as publicly assigned at the time and commonly accepted ever since, make with impelling force for the conclusion that the fathers of the Constitution intended to prohibit diminution by tax- ation as well as otherwise, — that they regarded the independence of the judges as of far greater importance than any revenue that could come from taxing their salaries. ^ 2728 True, the taxing power is comprehensive and acknowledges tew exceptions. But that there are exceptions, besides the one we here recognize and sustain, is well settled. In Collector v. Day^ 11 Wall. 113, it was held that Congress could not impose an income tax in respect of the salay^ of a judge of a state court; in Pollock v. Farmers' Loan & Trust Co., 157 U. S. 429, 585, 601, 652, 653, it was held— the full court agreeing on this point— that Congress was without power to impose such a tax in respect of interest received from bonds issued by a State or any of its counties or municipalities; and in United States v. Railroad Co., 17 Wall. 322, there was a like holding as to municipal revenues derived by the city of Baltimore from its ownership of stock in a railroad company. None of those decisions was put on any express prohibition in the Constitution, for there is none; but all recognized and gave effect to a prohibition implied from the independence of the States within their own spheres. 2729 When we consider, as was done in those cases, what is compre- hended in the congressional power to tax, — where its exertion is not directly or impliedly interdicted, — it becomes additionally manifest that the prohibition now under discussion was intended to embrace and prevent diminution through the exertion of that power; for, as this court repeatedly has held, the power to tax carries with it “the power to embarrass and destroy;” may be applied to every object within its range “in such measure as Congress may determine;” enables that body “to select one calling and .omit another, to tax one class of property and to forbear to tax another;” and may be applied in different ways to different objects so long as there is “geographical uniformity” in the duties, imposts and excises imposed. McCulloch V. Maryland, 4 Wheat. 316, 431; Pacific Insurance Co.^ v. Soule, 7 Wall. 433, 443; Austin v. The Aldermen, 7 Wall. 694, 699; V eaiie Bank v. Fenno, 8 Wall. 533, 541, 548; Knowlton v. Moore, 178 U. S. 41, 92, 106; Treat v. White, 181 U. S. 264, 268-269; McCray v. United States, 195 U. S. 27, 61; Flint v. Stone Tracy Co., 220 U. S. 107, 158; Billings v. United INC. 511 TAX States, 232 U. S. 261, 282; Brushaher v. Union Pacific R. R. Co., 240 U. S. 1, 24-26. Is it not therefore morally certain that the discerning statesmen who framed the Constitution and were so sedulously bent on securing the independence of the judiciary intended to protect the compensation of the judges from assault and diminution in the name or form of a tax.^ Could not the purpose of the prohibition be wholly thwarted if this avenue of attack were left open.^ Certainly there is nothing in the words of the prohibition indicating that it is directed against onel egislative power and not another; and in our opinion due regard for its spirit and principle requires that it be taken as directed against them all. 2730 This view finds support in rulings in Pennsylvania, Louisiana and North Carolina made under like constitutional restrictions, Common- wealth ex rel. v. Mann, 5 Watts & Serg. 403, 415, et seq.*; New Orleans v. Lea, 14 La. Ann. 197; 48 N. C., Appendix; N. C. Public Documents 1899, Doc. No. 8, p. 95; 131 N. C. 692; Purnell v. Page, 133 N. C. 125, and has strong sanction in the actual practice of the Government, to which we now advert. 2731 No attempt was made to tax the compensation of federal judges prior to 1862. A statute of that year, c. 119, §86, 12 Stat. 472, with is amendments, subjected the salaries of all civil officers of the United States to an income tax of three per cent, and was construed by the revenue officers as including the compensation of the President and the judges. Chief Justice Taney, the head of the judiciary, wrote to the Secretary of the Treas- ury a letter of protest (157 U. S. 701), based on the prohibition we are con- sidering, and in the course of the letter said: “The act in question, as you interpret it, diminishes the compensation of every judge three per cent, and if it can be diminished to that extent by the name of a tax, it may in the same way be reduced from time to time at the pleasure of the legislature. “The Judiciary is one of the three great departments of the government, created and established by the Constitution. Its duties and powers are specifically set forth, and are of a character that requires it to be perfectly independent of the two other departments, and in order to place it beyond the reach and above even the suspicion of any such influence, the power to reduce their compensation is expressly withheld from Congress, and excepted from their powers of legislation. “Language could not be more plain than that used in the Constitution. It is moreover one of its most important and essential provisions. For the articles which limit the powers of the legislative and executive branches of the government, and those wffiich provide safeguards for the protection of the citizen in his person and property, would be of little value without a judici- ary to uphold and maintain them, which was free from every influence, direct or indirect, that might by possibility in times of political excitement warp their judgments. “Upon these grounds I regard an act of Congress retaining in the Treasury a portion of the compensation of the judges, as unconstitutional and void.’’ 2732 The collection of the tax proceeded, and, at the suggestion of the Chief Justice, this court ordered his protest spread on its records. In 1869 the Secretary of the Treasury referred the question to the Attorney General (Judge Hoar) and that officer rendered an opinion in substantial *The tax condemned was levied under a provision, in a general revenue law, charging a tax of tw’O per cent, “upon all salaries and emoluments of office, created or held by or under the constitution or laws of this commonwealth, and by or under any incorporation, institution, or company incorporated by the said commonwealth, where such salaries or emoluments exceed two hundred dollars.” Act No. 232, §2, Penn. Laws 1840, p. 613; Act No. 117, §9, Penn. Laws 1841, p. 310. INC. 512 TAX t 6 - 9 - 20 . accord with Chief Justice Taney’s protest, and also advised that the tax on the President’s compensation was likewise invalid. 13 Op. A. G. 161. The tax on the compensation of the President and the judges was then discontinued, and the amounts theretofore collected were all refunded, — a part through administrative channels and a part through the action of the Court of Claims and ensuing appropriations by Congress. W ayne v. United States, 26 Ct. Cls. 274; c. 311, 27 Stat. 306. Thus the Secretary of the Treasury, the accounting officers, the Court of Claims and Congress accepted and gave effect to the view expressed by the Attorney General. In the Income Tax Act of 1894, c. 349, §27, et seq., 28 Stat. 509, nothing was said about the com- pensation of the judges; but Mr. Justice Field regarded it as included and gave that as one reason for joining in the decision holding the act unconstitu- tional. 157 U. S. 604-606. On the rehearing the Attorney General (Mr. Olney) frankly said in his brief: “There has never been a doubt since the opinion of Attorney General Hoar that the salaries of the President and judges were exempt.” The income tax acts of 1913, 1916 and 1917 (c. 16,38 Stat. 168; c. 463, 39 Stat. 758; c. 63, 40 Stat. 329) severally excepted the compensation of the judges then in office, — also that of the President for the then current term. In short, during a period of more than one hundred and twenty years there was but a single real attempt to tax the judges in respect of their compensation, and that attempt soon^ was^ disapproved and pro- nounced untenable by the concurring action of judicial, executive and legis- lative officers. And so it is apparent that in the actual practice of the Gov- ernment the prohibition has been construed as embracing and preventing diminution by taxation. 2733 Does the Sixteenth Amendment authorize and support this^ tax and the attendant diminution; that is to say, does it bring within the taxing power subjects theretofore excepted? The court below answered in the negative; and counsel for the Government say, “It is not, in view of recent decisions, contended that this Amendment rendered anything taxable as income that was not so taxable before.” We might rest the matter here, but it seems better that our view and the reasons therefor be stated in this opinion, even if there be some repetition of what recently has been said in other cases. 2734 Preliminarily we observe that, unless there be some real conflict between the Sixteenth Amendment and the prohibition, in Article III, section 1, making the compensation of the judges undiminishable, effect must be given to the latter as well as to the former; and also that a purpose to depart from or imperil a constitutional principle so widely esteemed and so vital to our system of government as the independence of the judiciary is not lightly to be assumed. 2735 In Knowlton v. Moore, supra, p. 95, this court said: “The necessities which gave birth to the Constitution, the controversies which pre- ceded its formation, and the conflicts of opinion which were seltled by its adoption, may properly be taken into view for the purpose of tracing to its source any particular provision of the Constitution, in order thereby to be enabled to correctly interpret its meaning.” This sound rule is as applicable to the Amendments as to the provisions of the original Constitution. 2736 Let us turn then to the circumstances in which this Amendment was proposed and ratified and to the controversy it was intended to settle. By the Constitution all direct taxes were required to be apportioned among the several States according to their population, as ascertained by a census or enumeration (Art. I, §2, cl. 3, and §9, cl. 4), but no such requirement was imposed as to other taxes. And apart from capitation taxes, with which we now are not concerned, no rule was given for determining what taxes were INC. 513 TAX direct and therefore to be apportioned, or what were indirect and not within that requirement. Controversy ensued and ultimately centered around the right classification of income from taxable real estate and from investments in taxable personal property. The matter then came before this court in Pollock V. Farmers^ Loan & Trust Co., 157 U. S. 429; 158 U. S. 601; and the decision when announced disclosed that the same differences in opinion, existing elsewhere were shared by the members of the court, — five, the con- . trolling number, regarding a tax on such income as in effect a direct tax on. the . property from which it arose and therefore as requiring apportionment, and four regarding it as. indirect and not to be apportioned. Much of the law-, then under consideration had been framed according to the latter view and because of this and the adjudged inseparability of other portions the entire law was held invalid. Afterwards, to enable Congress to reach all taxable income more conveniently and effectively than would be possible as to much of it if an apportionment among the States were essential, the Sixteenth Amendment was proposed and ratified. In other words, the purpose of the Amendment was to eliminate all occasion for such an apportionment because of the source from which the income came, — a change in no wise affecting the power to tax but only the mode of exercising it. The message of the Presi- dent recommending the adoption by Congress of a joint resolution pro- posing the Amendment, the debates^ on the resolution . by which it was proposed, and the public appeals® — corresponding to those in the Federalist — made to secure its ratification leave no doubt on this point. And that the proponents of the Amendmient in drafting it lucidly and aptly expressed this as its object is shown by its words: ‘‘The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration.” 2737 True, Governor Hughes, of New York, in a message laying the Amend- ment before the legislature of that State for ratification or rejection, expressed some apprehension lest it might be construed as extending the . taxing power to income not taxable before; but his message promptly brought forth from statesmen who participated in proposing the Amendment such convincing expositions of its purpose^, as here stated, that the apprehension was effectively dispelled and ratification followed. 2738 * Thus the genesis and words of the Amendment unite in showing that it does not extend the taxing power to new or excepted subjects, but merely removes all occasion otherwise existing for an apportionment among the States of taxes laid on income, whether derived from one source or another^. And we have so held in other cases. 2739 In Brushaher v. Union Pacific R. R. Co., 240 U. S. 1, where the purpose and effect of the Amendment were first drawn in question the Chief Justice reviewed at length the legislative and judicial action which prompted its' adoption and then, referring to its text and speaking for a unani- mous court, said, pp. 17-18: • “It is clear on the face of this text that it does not purport to confer power to levy income taxes in a generic sense — an authority already possessed Tong. Rec., Vol. 44^ p. 3344. Tong. Rec., Vol. 44, pp. 1568-1570, 3377, 3900, 4067, 4105-4107, 4108-4121, 4389-4441. Tong. Rec., Vol. 45, pp. 1694-1699, 2245-2247, 2539-2540. . Tong. Rec., Yol 45, pp. 1694-1699, 2245-2247, 2539-2540. ®Jn passing the income tax law of 1919 Congress refused to treat interest received from bonds issued bv a State or anv of its counties or municipalities as within the ta.xing power, Co'ngyRcc., col. 57, pp. 553, 774-777,_ 2988; ch. 18, §213, 40_Stat. 1065; and in the regula- tions issued under that law the administrative ofiicers recogni/.e that the salaries and emol'u- inents-of thc.olhccrs of a State and its political subdivisions, arc not taxable by the Uni.te'd States. Reg. 45, published 1920, pp. 47, 313. INC. 514 TAX 6 - 9 - 20 . and never cuestioned-or to limit and distinguish between one kind of income t’xes and another, but that the whole purpose of the Amendment was to re'ieve all income taxes when imposed from apportionment from a consider- ation of th^ source whence the income was derived. _ Indeed in the light of th' historv which we have given and of the decision in the Pollock ®nd Ihe ground upon which the ruling in that case was based there is n° escape fronf the condusion that the Amendment was drawn for fhepypose of doing awav for the future with the principle upon which the Pollock CaiC wa. cided that is, of determining whether a tax on income was not b) a consideration of the burden placed on the taxed income upon which it directly operated, but bv taking into view the burden which resulted on the Proper-Y from which the income was derived, since in express terms the Amendment provides that income taxes, from whatever source the mcome was dented, shall not be subject to the regulation of apportionment. ^ 2740 What was there said was reaffirmed and app'md m Mining Co., 240 U. S. 103, 112-113, and Peck & Co. y. Lowe, 247 U. S. leTm and in Eisner v. Macon:ber,-V . S.-, decided at the presen term we again held, citing the prior cases, that the Amendment did not e.xte:nd the faxing power to new subjects, but merely which otherwise might exist for an apportionment among the States ot taxe 2741*" After* further consideration, we adhere to that view and accordingly hold that the Sixteenth Amendment does not authorize or support Apart frorn his salary, a federal judge is as mu^ within the taxing power as other- men are. If he has a hom-C or other proper y, • be taxed just as if it belonged to another. If he has an income ctheyh^ h s salary it also may be taxed in the same way. And, speaking generally, his duties’and obligations as a citizen areffiot different from But for the common good— to render him, in the words_ of John Marshal “perfectly and completely independent, with nothing to Ifim but God and his conscience”— his compensation is protected ution in any form, whether by a tax or otherwise, and is assured to him in entirety for his support. ^ >• 2743 ’The court below concluded that the compensation was not d'- minished, and regarded this as inferable ftom our decisions in Peck & Co. V. Lowe, 247 U. S. 165, 174-175, and United States Glue Co. v. Oak Greet ibid 321 329. We think neither case tends to support that view. Each’related to’a business-one to exportation, the other ^“yt^y^y.ythe merce-which the taxing power--of Congress m one case, of a State m the other— was restrained from directly burdening;^ and the holding m both wa, that an income tax laid, not on the gross receipts, but on remaining after all expenses were paid and losses adjusted tiotdirectly burden the business, but only indirectly and remotely afccled it. "ore 1 1 Constitution expressly forbids diminution of the ^ ..‘^“^P^erafse’ meaning, as we have shown, diminution by taxation as ^ the taxing act directs that the compensation— the full sum, ^d^c tion for expenses- be included in computing the net income, on whic^he tax is laid If the compensation be the only income, the tax .alls on it alone, and, if there be other income, the inclusion of the compensation augments tlie tax accordingly. In eillier event the compensation suffers a diminution to the extent tliat it is taxed. ' _ 2744 We conclude tlmt the tax was imposed contrary to the constitutional prohibition and so must be adjudged invalid. ‘ Ivdgment reversed. INC. 515 TAX (Dissenting opinion in Evans vs. Gore, above.) Mr. Justice Holmes, dissenting. 2745 This is an action brought by the plaintiff in error against an acting 89 Collector of Internal Revenue to recover a portion of the income tax 803 paid by the former. The ground of the suit is that the plaintiff is entitled to deduct from the total of his net income six thousand dollars, being the amount of his salary as a judge of the District Court of the United States. The Act of February 24, 1919, c. 18, §210, 40 Stat. 1057, 1062, taxes the net incomm of every individual, and §213, p. 1065, requires the compensation received by the judges of the United States to be included in the gross income from which the net income is to be computed. This was done by the plaintiff in error and the tax was paid under protest. He contends that the requirement mentioned and the tax, to the extent that it was enhanced by consideration of the plaintiff’s salary, are contrary to Article 3, Section 1, of the Constitution, which provides that the compensation of the judges shall not be diminished during their continuance in office. Upon demurrer judgment was entered for the defendant, and the case comes here upon the single question of the validity of the above mentioned provisions of the act. 2746 The decision below seems to me to have been right for two distinct reasons: that this tax would have been valid under the original Constitution, and that if not so, it was made lawful by the Sixteenth Amend- ment. In the first place I think that the clause protecting the compensation of judges has no reference to a case like this. The exemption of salaries from diminution is intended to secure the independence of the judges, on the ground, as it was put by Hamilton in the Federalist, (No. 79,) that ‘a power over a man’s subsistence amounts to a power over his will.’ That is a very good reason for preventing attempts to deal with a judge’s salary as such, but seems to me no reason for exonerating him from the ordinary duties of a citi- zen, which he shares with all others. To require a man to pay the taxes that all other men have to pay cannot possibly be made an instrument to attack his independence as a judge. I see nothing in the purpose of this clause of the Constitution to indicate that the judges were to be a privileged class, free from bearing their share of the cost of the institutions upon which their well-being if not their life depends. 2747 I see equally little in the letter of the clause to indicate the intent supposed. The tax on net incomes is a tax on the balance of a mutual account in which there always are some and may be many items on both sides. It seems to me that it cannot be affected by an inquiry into the source from which the items more or less remotely are derived. Obviously there is some point at which the immunity of a judge’s salary stops, or to put it in the language of the clause, a point at which it could not be said that his com- pensation was diminished by a charge. If he bought a house the fact that a part or the whole of the price had been paid from his compensation as judge would not exempt the house. So if he bought bonds. Yet in such cases the advantages of his salary would be diminished. Even if the house or bonds were bought with other money the same would be true, since the money would not have been free for such an application if he had not used his salary to satisfy other more peremptory needs. At some point, I repeat, money re- ceived as salary loses its specific character as such. Money held in trust loses its identity by being mingled with the general funds of the owner. I see no reason why the same should not be true of a salary. But I do not think that the result could be avoided by keeping the salary distinct. I think that the moment the salary is received, whether kept distinct or not, it becomes part of the general income of the owner, and is mingled with the rest, in theory of law, as an item in the mutual account with the United 516 INC. TAX 6 - 9 - 20 . States. I see no greater reason for exempting the recipients while they still have the income as income than when they have investeci it in a house or bond. 2748 The decisions heretofore reached by this Court seem to me to justify my conclusion. In Peck & Co. v. Lowe^ 247 U. S. 165, a tax was levied by Congress upon the income of the plaintiff corporation. More than two-thirds of the income were derived from exports and the Constitution in terms prohibits any tax on articles exported from any State. By construc- tion it had been held to create ‘a freedom from any tax which directly burdens the exportation,’ Fairbank v. United States, 181 U. S. 283, 293. The pro- hibition was unequivocal and express, not merely an inference as in the present case. Yet it was held unanimously that the tax was valid. “It is not laid on income from exportation in a discriminative way, but just as it is laid on other income. . . . There is no discrimination. At most, exportation is affected only indirectly and remotely. The tax is levied . . . after the recipient of the income is free to use it as he chooses. Thus what is taxed — the net income is as far removed from exportation as are articles in- tended for export before the exportation begins.” 247 U. S. 174, 175. All this applies with even greater force when, as I have observed, the Constitu- tion has no words that forbid a tax. In United States Glue Co. v. Oak Creek, 247 U. S. 321, 329, the same principle was affirmed as to interstate com- merce and it was said that if there was no discrimination against such commerce the tax constituted one of the ordinary burdens of Government from which parties were not exempted because they happened to be engaged in commerce among the States. 2749 A second and independent reason why this tax appears to me valid is that, even if I am wrong as to the scope of the original document, the Sixteenth Amendment justifies the tax, whatever would have been the law before it was applied. By that amendment Congress is given power to “collect taxes on incomes from whatever source derived.” It is true that it goes on “without apportionment among the several States, and without regard to any census or enumeration,” and this shows the particular difficulty that led to it. But the ortly cause of that difficulty was an attempt to trace income to its source, and it seems to me that the Amendment was intended to put an end to the cause and not merely to obviate a single result. I do not see how judges can claim an abatement of their income tax on the ground that an item in their gross income is salary, when the power is given expressly to tax incomes from whatever source derived. I Mr. Justice Brandeis concurs in this opinion. INC, 517 TAX Ilii« olidv/ ajfisiq.boi ^dr gnnqmoxo lo't iDJ£3iy on o^?. 1 •bxiod 70 aaufnv s ni ti b'JtaoYnt a/Jid n'^dwr ni.dt omoDni «r> arnoDni :i \ r fjvisd Ylb^ui oi ofn o.t msDs jiiJoO zrdJ y*^ bodoBoi oio^oJ^i^d <:\o\<;’n^A} ‘jdT 5^tS , 2ft7/ XP.l S .6 . d fV.'JoA .'/■ .oO lil .13018;.' loao'-) V fT nsdJ .nohmoqioo BiiniEta o'di to 'joTOoni *oii no qa -fd rrd . 'jl cii nofti/tijanoO odt hnii s.tioqx^ moil bjviiob o;i;o:>ni odf io ebiirlt-.' // 1 — r>t/'rt8;fO') 'rnn nctoi^ hDJioqxj aDhltis 'lo zr. r '.;aB Rtr^Jitioiq aifn )j :8fisbii/d YJtooiib doidv/- xn.t Yftr> raoilAnobs^it ;/ :»tG07j ot bI-j'd n')od bfid ji iioit -oiq lid r ^b8£ .8 /J iHi h%\\ir5 ./ rn;j83Tq^idt ni 8X; oofioiobii hb vbiarn Jon ,88aTqz j bfj : hno nup^nu noitid;:: ■■bir>f JOii 2f jT' .biifo/ xr,j adt l£dt '.'I^uondtif.iiu ci'd anv^ ji id/ .dzcd no bipl 81 Jr 3 B Janr Jud 3 /rtr.aimnDZ/b iii noilBi'ioqxo rno-d ‘yfnr.'jrn no nobiinoqxD /taorn jA .nfdjGarmnDaib on z’ didiI F , . . 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IIA .t\l ^FTI .8 .'J vK '\?Aihod ri- (JBJiv.qz-^ jdt j'loqzD loi b^bnol -nJiJano'J dHj .boviozdo DYbd I zb ^nDiIw dojoI 73 IBD 15 'D'^d dti /.' 8‘.)d iqB zidi -ixiO .V .o'v) v^\h\d \:\\:\\\) riJ .XBt b bi liot o di zinc ■. oii --bH ooi; “Hjod DTB.raisini oj zb bDfmff)B 8BW DlqrDci'iq o nB ' D'F qF b .lb?‘ .0 JJ t4-b doijz jentG^B rioilBniiniiDrib on zbv/ Diorii F JBdt bina zlv/ r- bnr. •/oo r rnoiamovrjO lo znDbind Y'fJ^i'’ib7o d;It lo Df’o boJbjt t.-.noD xbi vdr DDiDijirro. bo^SigHD Dd ot bon-jqqBfi YDd* :>.zn£DDd bDJqrnDXD ioo -o > y bD’Oob r liordv/ m*nt .8D,r.'-to -.di ;,nonij. ; . rB’'ifn''>D ni biUY Dxn 01 sTBoqqs XBt eidt qd '/ fiCMsm in-jbi'ToqDtb. i bfi>> brno^.z / et-TS jnDfnuDob i/ifiipho Ddr >0 sqoDz ndj o; zb rj, i ii liD/o . 1330 ') zi v/b1 dHj HDod dvb'[ blno'//’ iDV'jiBdv/ ,xbj oilt -' .idiJz;.' tn-jrnbnDn- fi oid-jI/:-"' otfi 01 iD’Yoq naviv. fit SfiDigrroO jnDfnbrDnrr. lodj vfl .bDiIqqB :r.v/ ii .Dio'-.jd ji Tiidl Dint 81 il 'bhoTiiDo 377 r/ 08 . idydib;{ 77 moll ajuooni m> JuodJiv; ban ,8DtBi8 Ibid/dz odj qnomB ^JfiDiTiaoin.D q;B Jnoflii'Y" no ^d-j^ vjIndiHib ‘irdnDiJiBq idt z'Yods -drlt briB 'bnofipo nnunD no vob (>t DDBiJ (j.t JqrnDJlB iib sbv/- vorndirb fitd; to d8U£j obio nrfr tcF ti >] boi i£;fj ot bDbnDJni zhv/ JnDiTibnoinA ndj tBn'jorrr ot z.sr-^o. ji i,,nB .DDinoa ^li 01 '.vfioDni Jon ob I -tIn8D7 oli^niz b oJBivdo oj -t J''' ’ bn ft n-aon d I'l i,M bno nr. tnq JB'd; bnnoi^^ 5dr r.:< xnJ omoDni 'TiDdjdo tfiDnivlHOr, idb ntinb iibd -.D^bui v'od dd> ot '(I'.p.o'iqxa aavi-g ai lovroq odi nodv/ qriKiRz ■' Drno-jii! -28 io, uont ni n^Dti fiB .bD'.'iTjf) DOL'Oz TDYD'indv; rr-rtV ^ -.rf^oni xcj I .riouriqo zidt iii zinDno.o r i ; lYAyffi '>Di;2u[ /il/l ' V ; a>ta J XAT .0X1 8-16-20. (T. D.3029.) 2754 Losses incurred outside of one’s principal regular business (Act (1310) of^l913). — The^appendcd decision [beginningat ^2755] of the United States Circuit Court of Appeals, for the Second Circuit, in the case of Eugene W. Mente vs. Mark Eisner, Collector, is published not as a ruling but for the information of internal revenue officers and others concerned. (T. D. 3029, signed by Commissioner Wm. M. Williams, and dated June 9, 1920.) {The opinion referred to in T. D. 3029, 112754, follozvs.) United States Circuit Court of Appeals for the Second Circuit. Eugene W. Mente, Plaintiff-in-Error vs. Mark Eisner, Collector of Internal Revenue, Defendant-in-Error. (May 3, 1920.) WARD, Circuit Judge: 2755 Section II subdivision 2B of the Act of October 3, 1913, provides that in computing net income for purposes of normal tax there shall be allowed as a deduction * * Fourth: I.osses actually sustained during the year, incurred in trade, or arising from fires, storms or shipwreck and not compensated for by insurance or otherwise.” 27 56 Mente, a member of the firm of Mente & Company, engaged in the business of manufacturing jute bags and bagging, cotton bags and materials for covering cotton bales, filed his income returns for the year March 1 to December 31, 1913, and for the whole year of 1914. He had for some three years been buying and selling cotton on the Cotton Exchange for his individual account, in no way connected with the business of Alente & Company, and he deducted from his gross income in each year losses sustained in the year resulting from these transactions as “losses incurred in trade.” 27 57 Eisner, as Collector of Internal Revenue for the Third District of the State of New York, assessed an additional tax upon these de- ductions which Mente paid under protest, taking an appeal to the Com- missioner of Internal Revenue under Secs. 3220 and 3228 U. S. Rev. Stat. and the Regulations of the Secretary of the Treasury in pursuance thereof, who rejected his claim. Thereupon Mente began this action against Eisner as Collector to recover the amounts so paid with interest and costs. 2758 Treasury Decision 2090, dated October 14, 1914, reads: “Loss, to be deductible, must be an absolute loss, not a speculative or fluctuating valuation of continuing investment, but must be an actual loss, actually sustained and ascertained, during the tax year for which the deduction is sought to be made; it must be incurred in trade and be determined and ascertained upon an actual, a completed, a closed transaction. The term dn trade’ as used in the law, is held to mean the trade or trades in which the person making the return is engaged; that is, in which he has invested money otherwise than for the purpose of being employed in isolated transactions, and to which he devotes at least a part of his time and attention. A person may engage in more than one trade, and may deduct losses incurred in all of them; provided, that in each trade the above requirements are met. As to losses on stocks, grain, cotton, etc., if these are incurred by a person engaged in trade to which the buying and selling of stocks, etc., arc incident as a part of the business, as by a member of a stock, grain. INC. 519 TAX or cotton exchange, such losses may be deducted. A person can be engaged in more than one business, but it must be clearly shown in such cases that he is actually a dealer, or trader, or manufacturer, or what- ever the occupation may be, and is actually engaged in one or more lines of recognized business, before losses can be claimed with respect to either or more than one line of business, and his status as such dealer must be clearly established.’’ 2759 Both parties having moved for the direction of a verdict, Judge Grubb directed a verdict in favor of the defendant. 2760 We think that the language “losses incurred in trade” are correctly construed by the Treasury Department as meaning in the actual business of the taxpayer as distinguished from isolated transactions. If it had been intended to permit all losses to be deducted it would have been easy to say so. Some effect must be given to the words “in trade.” 2761 There is an inconsistency in making profits derived from such trans- actions a part of the taxpayer’s gross income and on the other hand allowing him no deduction for losses. But tax laws are not required to be perfect or even consistent. It must be determined from the facts in each case whether or not the losses claimed to be deducted have been incurred in a business. 2762 In this case the court must be taken to have found as matter of fact that these transactions in 1913 and 1914 did not constitute a business. Such a finding is binding upon us. Judgment affirmed. (T. D. 3032.) [Matter in italics is new; that in hold face brackets [ ] is old matter cut out.] 2763 Change in accounting period : Article 26, Regulations 45, amended. — 801 Article 26 of Regulations 45 is hereby amended to read as follows: Art. 26. Change in accounting period. — If a taxpayer changes his accounting period, and not merely his taxable year to conform with his existing accounting period, he shall as soon as possible give to the collector for transmission to the Commissioner written notice of such change and of his reasons therefor. The Commissioner will not approve a change of the basis of computing net income unless such notice is given at a time which is both (a) at least thirty days before the due date of the taxpayer’s return on the basis of his existing taxable year and (b) at least thirty days before the due date of his separate return [on the basis] /or the period between the close of the existing taxable year and the date designated as the close of the proposed taxable year. The due date of the separate return for such period is the fifteenth day of the third month following the close of that period. If the change in the basis of computing the net income of the taxpayer is approved by the Commissioner, the taxpayer shall thereafter make his returns upon the basis of the new accounting period in accordance with the requirements of section 226 of the statute and his net income shall be computed as therein provided. See Article 431 [1fl862]. (T. D. 3032, signed by Commissioner Wm. M. Williams, and dated June 11, 1920.) INC. 520 TAX 7 - 8 - 20 . 2764 Substitution by collecting agent of proper certificate for improper 1659 form accompan3ring item presented for collection. Receipt is ac- knowledged of your letter dated May 5, 1920, stating that numerous coupons are received by you attached to the wrong forms o owners ip certificates, which are returned to the owners with the request that proper forms be substituted. As this practice results m a large number ot coupons being held by you, it is suggested, in case an item comes to your bank tor collection, accompanied by an erroneous form of certificate, t a you v, permitted to transfer the necessary information from the erroneous to the proper form, and the following be stamped in the lower left-hand corner: (Name of bank) By; Assistant Cashier.” 2765 You are advised that the method of procedure suggested has the ap- proval of this office, and you are permitted to execute certificates ot ownership in such cases, provided that you forward the original certificate which was erroneously executed on the wrong form with the proper torm executed by you, the original certificate bearing a notation substantially as follows: “Superseded by ownership certificate. Form , designating the form of certificate executed by you as agent. (Letter to a s^ubscriber, signed by Commissioner Wm. M. Williams, and dated June 10, 1920.) _ *Comment. It is to be noted that the permission granted as above indi- cated is in response to a specific request for authority. The Corporation Trust Company. (T. D. 3037.) 2766 [Comment: T. D. 3037, incorporating a decision of the ^ United 2713 States Supreme Court, in the case of Walter Evans, Plmntm in Error, vs. J. Rogers Gore, Acting Collector of Internal Revenue for the District of Kentucky, (Taxability of Salaries of President and federal Judges) [1I2713I, is published not as a ruling of the Treasury Department, but for the information of Internal Revenue officers and others concerned. — The Corporation Trust Company, June 21, 1920.] (T. D. 3042). 2767 Procedure relative to service of warrants of distraint.— Section 250 (f) 2016 of the Revenue Act of 1918 provides: ^ “In any case in which in order to enforce payment of a tax it > is necessary of a collector to cause a warrant of distraint to be served, ^ there shall also be added as part of the tax the sum of $5.”_ 2768 The $5.00 added as a part of the tax, under the provisions^ contained in Section 250(f) of the Revenue Act of 1918, where it becomes necessary for a collector to cause a warrant of distraint to be served, is ap- plicable only to income, war profits and excess profits taxes. 2769 The following procedure, therefore, is prescribed with respect to the service of warrants of distraint: “In serving distraint warrants the mode of procedure followe^ should conform to the mode of procedure prescribed by the State Territory, in which the warrant of distraint is to be served for the process.” (T. D. 3042 signed by Acting Commissioner Paul F. Myers, and dated July 1, 1920.) INC. 521 TAX (T. D/3043.) 2770 Decision of court— Act of 1916 — Retrospective law — Following assets 1818 of corporation into hands of stockholders for purpose of collecting the tax. — The appended decision [^2771 below] of the District Court of the United States, for the District of Montana, in the case^ of United States vs. John J. McHatton et ah, is published for the information of internal revenue officers and others concerned. (T. D. 3043, signed by Acting Commissioner Paul F. Myers, and dated July 2, 1920.) District Court of the United States, District of Montana. United States vs. John J. McHatton et al. (May 16, 1920). (Revenue Act of 1916.) 2771 BOURQUIN, J.: Herein, the demurrer to the complaint is overruled. 2772 When the corporation was in being and at dissolution, it owed the duty to pay all taxes lawfully imposed upon it for income during its life, at any time. Taxes could be lawfully imposed by retrospective law, and were [see \ 1212 \. If material, the law speaks of and from a time anterior to the dissolution, takes effect as though enacted prior to the dissolution. Taxes are not debts nor government a creditor, in strict sense. Th^y are of higher nature. But no reason is perceived why they are not within the principle that those who gratuitously receive a debtor’s property, to the extent thereof are liable for his debts and obligations then inchoate or vested; within this principle otherwise known as the “trust fund” doctrine in respect to corporations. 2773 Accordingly, when this corporation without consideration dis- tributed part of its assets to these defendants, it was under obliga- tion to plaintiff to pay any taxes that might thereafter be imposed. Defen- dants received the assets subject thereto and to the principles aforesaid. The obligation was contingent, the plaintiff’s right inchoate. The con- tingency happened, the right vested. And the corporation’s assets so dis- tributed, may be pursued in the hands of these defendants, by virtue of the principles aforesaid. 2774 In principle, the case is very like the Brady case, 240 Fed. 665 [^[688]. % % ¥ INC. 522 TAX 7-15-20. 2775 Adjustment of accounts and amended returns on account of refund 1198 by Government in one year of excess taxes (duties) paid in prior 1254 years and reflected in cost of goods sold: Attorney’s fees in con- 1263 nection with refund. — Reference is made to your letter of June 2, 1920, in which you state that during the years 1915, 1916 and 1917 — Company paid customs duties on imported merchandise on the basis of an exchange rate of a franc at 19.3 cents instead of the lower rate prevailing at the time of importation. It appears that the amount so paid as duties were included in the income and profits tax returns as part of the cost of goods sold^uring the years 1915, 1916 and 1917 and the surplus reduced each year to the extent of the duties paid. During the year 1919 the company re- ceived a refund of the amount so paid as customs duties which was in excess of the amount due on the basis of the exchange rate prevailing at the time of importation of the French merchandise. 2776 You submit for consideration the following inquiries relative to the treatment of the transaction for income tax purposes: (a) How should the transaction be treated in computing the annual net income for the years involved.? (b) Is not the amount allowed as a refund for duties overpaid in each year a credit to surplus for that year? (c) Is not the attorney’s fee and expense of collection an item of neces- sary business expense incurred in 1919 when the liability accrued and was paid? 2777 In reply you are advised that the law contemplates that each year’s return both as to gross income and deductions therefrom shall be complete in itself. The effect of the Treasury Decision under which the claim for refund of excess duties paid was allowed is to indicate that the excess revenue, which was paid during the years 1915, 1916 and 1917 and for which the company received a refund during the year 1919, is an amount which has been erroneously deducted in computing net income for the years 1915, 1916 and 1917 respectively rather than an amount which represents income for the year 1919. 2778 Accordingly the company should amend its returns for the years 1915, 1916 and 1917, respectively, excluding from the cost of goods sold during each year the excess duties paid during such year. The surplus account for those years should also be adjusted by restoring to such account the amount paid as revenue in excess of the true liability for those years. 2779 The attorney’s fees and cost of collection of the refund are a neces- sary business expense for the year in which the liability accrued and was paid, which appears to be the year 1919. (Letter to S. D. Leidesdorf & Company, New York, N. Y., signed by Paul F. Myers, Acting Commis- sioner, and dated June 26, 1920.) 2780 Foreign corporations or countries having fiscal or paying agents in 1645 this country under no obligation to withhold on their tax-free- 2750 covenant bond interest in case of domestic or resident foreign cor- poration bondholders. — Receipt is acknowledged of your letter dated June 16, 1920, stating that apparently it is the intent of Treasury Decision 3031 [^[2750] to require a domestic corporation owning bonds of a foreign country, containing a tax-free covenant, to file ownership certificate. Form 1000 Revised, and thereby obtain the credit of two per cent tax paid at the source, and desiring a ruling on this point. INC. 523 TAX 2781 In reply you are advised that Treasury Decision 3031 was issued to amplify the provisions of Article 1078, so as to impose upon the paying agent in the United States, of a foreign country or a foreign corpora- tion which has issued bonds containing a tax-free covenant clause, the liability to withhold as provided in Section 221 (b) of the Revenue Act of 1918, as the original Article 1078 contemplated such withholding only in case the foreign debtor had a fiscal agent in the United States, ignoring the possibility that a foreign corporation or a foreign country might appoint as its agent in this country, a mere paying agent charged only with disbursing monies. 2782 Article 1078 treats primarily of the form of ownership certificate required to be used in connection with foreign items, which is Form 100 1-A Revised, unless the item is an interest paymicnt on bonds containing a tax-free covenant clause issued by a foreign country or a foreign corpo- ration having a fiscal agent in this country in which case the provisions of Section 221 (b) can be enforced against the resident agent in the United States of the foreign organization. Since that section of the statute (Section 221 (b) ), provides for withholding from the interest on tax-free bonds, when the bonds are owned by citizens or residents or nonresident alien individuals, partnerships and nonresident alien corporations (Section 221 (b) being extended to cover nonresident alien corporations by Section 237), no article of the regulations or any amendment thereof could alter the provisions of the statute by requiring withholding in the case of interest on tax-free bonds owned by a domestic or resident corporation. 2783 A resident fiscal agent or resident paying agent of a foreign corporation or a foreign country which has issued bonds containing a tax-free covenant clause, is required to withhold the norm.al tax of two per cent from the interest on such bonds when ownership certificates. Form 1000 Revised, are presented, which certificate should be executed in the following instances: When the owner of the bonds is a citizen or resident of the United States who does not wish to claim exemption from having tax paid at tne source: When the owner of the bonds is a domestic or resident partnership or a per- sonal service corporation: When interest coupons from such bonds are presented unaccompanied by a certificate of ownership. (Letter to Franklin Carter, Jr., The Equitable Trust Company of New York, New York City, signed by Paul F. Myers, Acting Commissioner, and dated July 7, 1920.) (T. D. 3044) 2784 Change in taxable year — loss in inventory — Opinion of Attorney 800 General. — 1. The A company earned a large income during the 1101 fiscal year ended September 30, 1918, and suffered a net loss during 2763 the year ended September 30, 1919. The company in 1920 re- quested permission to change its accounting period for 1918 to the calendar year basis and then to be allowed to deduct the net loss from the taxable income for 1918 under Section 204 of the Revenue Act of 1918. Held, that the accounting period for which the tax liability had accrued and the method of accounting during that period were accomplished facts which could not thereafter be changed by the Commissioner. 2785 2. The company further contended that it was entitled to a deduc-' 1472 tion for inventory loss under subdivision 14, Section 234 (a) of the Revenue Act of 1918, because of certain noncancellable contracts for the future delivery of material which were not completed by delivery prior to the termination of the fiscal year, the value of this material having 524 TAX INC. 7 - 15 - 20 . been greatly decreased as a result of the signing of the armistice on Novem- ber 11, 1918. Held, that as the company did not own the material on Sep- tember 30, 1918, but had only a contract for its purchase, no deduction could be allowed as a loss on inventory based on such contracts. 2786 Below is given a synopsis of an opinion rendered by the Attorney General on May 28, 1920. The opinion is not to be published in full as its publication might disclose unnecessarily the private affairs of the taxpayer. The following may be taken as a fair statement of facts to which the ruling applies: 2787 The A company earned a large income during the fiscal year ended September 30, 1918, and suffered a net loss during the year ended September 30, 1919. The company is now requesting permission to change its accounting period for 1918 to the calendar year basis, and then to be allowed to deduct a net loss for 1919 from the taxable income for 1918 under Section 204 of the Revenue Act of 1918. As an alternative, it contends that it is entitled to a deduction for inventory loss under subdivision 14 of Sec- tion 234(a) of the Revenue Act of 1918, because of certain noncancellable contracts for the delivery of X material, which were not comipleted by the delivery of the X material prior to the termination of the fiscal year; the value of this material having been very greatly decreased as a result of the armistice signed on November 11, 1918. The Commissioner of Internal Revenue has ruled that he is without power to now allow the requested change in an accounting period for 1918, or to allow the deduction for inventory loss. The company in its manufacture uses unusually large quantities of certain material. During the war the company’s plant was entirely devoted to war production. In August, 1918, acting upon information obtained that there would be a shortage in X material, and that it was important therefore for the company to buy for its current needs, this company entered into con- tracts for the future delivery of a large quantity of such material; the quan- tity ordered being reasonably necessary for a six months’ supply on the basis of the then current Government demand for its product. On the signing of the armistice the market price of this material fell to a very low figure. The company’s contracts were legally binding and noncancellable and as a result the company subsequent to November 11, 1918, suffered a loss on these con- tracts. The company’s taxable year ended September 30, 1918. Its earn- ings for that year were considerable and the tax levied thereon correspond- ingly large. In making its tax return the company paid a portion of the tax assessed and filed a claim in abatement for the balance, asking that this claim be allowed as a loss on inventory, because of this loss on X material arising from contracts made during 1918. This claim was denied by the Income Tax Unit apparently on the ground that the claim could not be treated as a loss on inventory, because X material contracts for future delivery entered into in 1918 were not inventoried September 30, 1918. 2788 Since its claim was denied the company’s 1919 taxable year ended September 30, 1919. It later definitely ascertained that during its taxable year 1919 the company suffered an operating loss, a large part of which was due to the money losses actually suffered on the above mentioned X material contracts of 1918. Coupling together these two taxable years in this manner the company’s tax would exceed the earnings for these two years. I'he fiscal year ending September 30 had been determined and fixed at the time of its incorporation in 1912, and Section 204(b) was enacted subsequent to the date when, under existing regulations, it could have secured a change in its accounting period. Attention was directed to the fact that the company incurred its losses on these contracts, not because of any error INC. 525 TAX of business judgment, but because it acted upon the information which it received from the War Industries Board and in a desire to hasten produc- tion. Further, because of the slowness with which the material was being delivered it was not possible to make contracts therefor containing cancella- tion privileges, nor was it possible to obtain deliveries short of several months after order. 2789 Upon substantially these facts the following questions were submitted to the Attorney General. 2790 First: Does the statute authorize the Commissioner to approve a change by this company at this time (January, 1920) in Its account- ing records for the fiscal year ended September 30, 1918, so that its account- ing period for 1918 will be changed to a calendar-year basis, solely because of a tax advantage? 2791 Second: Are the regulations promulgated by the Commissioner with the approval of the Secretary, requiring notice of a change of account- ing periods and forbidding retroactive changes, valid regulations? 2792 Third: Does the statute authorize a deduction by this company under Section 234(a), subdivision 14, by treating this loss on the X mate- rial contracts as a loss which Is of the ‘‘character” of an inventory loss? 2793 The Attorney General disposed of the questions as follows: “It will be seen that the company’s taxes for 1918 have been assessed upon the basis of its return made as of September 30, 1918, the close of its fiscal year. In other words, its taxes have been assessed on the basis of its financial condition on that date as compared with its financial condition 12 months previously. The result reached was based — in part, of course — upon an inventory of all its property owned at that date. It then had out- standing contracts for the purchase and delivery of X material to be used in its manufacturing operations during succeeding months. The amounts which would be payable under these contracts upon delivery of the X material were not listed as liabilities, nor was the X material which was to be there- after delivered included in the inventory of property owned by the company* At that time the war was in progress. The company was not using X mate- rial in carrying out contracts with the Government. It was, however, using it in the manufacture of articles which were sold to and used by others who had war contracts with the Government. The Immediate demand for and value of the products in which X material was used depended very largely upon the continuance of the war. When the armistice was signed in Novem- ber this demand ceased and the value of the X material which the company had contracted to buy immediately dropped, making it inevitable that when the X material should be delivered and paid for a heavy loss would imme- diately ensue. 2794 It is clear that the assessment was made upon a return which clearly reflected the income and profits of the company on September 30, 1918. The theory of the income tax laws is that income and profits are to be determined and taxed annually. Ordinarily, therefore, when he pays taxes for a given year upon the net income shown by a proper accounting a,t the end of that year he is not entitled to relief even though it happens that he suffers a net loss during the succeeding year in excess of the net income for the first year. 2795 The Revenue Act of 1918 was not, in fact, passed until February, 1919. During the time that it was under consideration by Congress the armistice had been signed. There were many individuals and corpora- tions in the country conducting business requiring large capital and de- pendent in large measure upon the continuation of the war. It was therefore obvious when the Act was passed that much property — such as plants, build- ings, machinery, and equipment valuable for war work — had been at once 526 TAX INC. 7 - 15 - 20 . greatly reduced in value by the signing of the armistice. It was also evident that business profitable because of the war would, in many instances, be conducted, if at all, during the following year at a loss. Congress apparently felt that persons and corporations so situated should be given some relief. Accordingly, section 204 (b) is as follows: ‘If,for any taxable year beginning after October 31, 1918, and end- ing prior to January 1, 1920, it appears upon the production of evi- dence satisfactory to the Commissioner that any taxpayer has sustained a net loss, the amount of such net loss shall under regula- tions prescribed by the Commissioner with the approval of the Secretary be deducted from the net income of the taxpayer for the preceding taxable year; and the taxes imposed by this title and by Title III for such preceding taxable year shall be redetermined accordingly.’ Net loss as used in this provision is defined in Section 204(a) to be only ‘net losses resulting from either (1) the operation of any business regularly carried on by the taxpayer, or (2) the bona fide sale by the taxpayer of plant, buildings, machinery, equipment or other facilities, constructed, installed or acquired by the taxpayer on or after April 6, 1917, for the production of articles contributing to the prosecution of the present war.’ It will be seen that this relief was not extended to all corporations which had been assessed for taxes during the year 1918, but is limited to those whose fiscal or tax year began after October 31, 1918. Apparently, so far as this provision was con- cerned, Congress decided to leave without relief those individuals and cor- porations whose taxes for 1918 had been assessed upon the basis of a tax year ending prior to the date mentioned — that is, prior to the month in which the armistice was signed. The fiscal or tax year of the A company ended September 30, 1918. It clearly, therefore, did not come within the terms of section 204, and the question is whether it can now be permitted to bring itself within the terms of that section by changing its accounting period or tax year. 2796 Section 212 of the Act of 1918, applying to individuals, but made applicable to corporations by section 232, provides; “(b) The net income shall be computed upon the basis of the taxpayer’s annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; but if no such micthod of accounting has been so employed, or if the method employed does not clearly reflect the income, the computa- tion shall be made upon such basis and in such manner as in the opinion of the Commissioner does clearly reflect the income. If the taxpayer’s annual accounting period is other than a fiscal year as defined in section 200 or if the taxpayer has no annual accounting period or does not keep books, the net income shall be computed on the basis of the calendar year. If a taxpayer changes his accounting period from fiscal year to calendar year, from calendar year to fiscal year, or from one fiscal year to another, the net income shall, with the approval of the Commissioner, be computed on the basis of such new account- ing period, subject to the provisions of section 226.’ 2797 This clearly expresses the purpose that if there is in the conduct of a business a regular accounting period the tax shall be computed for that period and in accordance with the method of accounting regularly employed in keeping the books of the taxpayer, provided that method of bookkeeping clearly reflects the income. If the income is not thus clearly 527 TAX INC. reflected, the Commissioner is given authority to compute the tax in such manner as will clearly reflect the income. I am of opinion, however, that whether the regular method of keeping the books or some other method of computation is made the basis it is compulsory that the taxes be computed for the taxpayer’s regular accounting period. 2798 The A company’s regular accounting period ended September 30, 1918. The assessment against it was made for a period of 12 months ending on that date, and was presumably based upon the method of account- ing regularly employed by the company in keeping its books. The Act of 1918 was not passed until some months after this date. The accounting period for which the tax liability had accrued and the method of accounting during that period were accomplished facts which, in the very nature of things, could not thereafter be changed. Congress, of course, might have authorized a change and directed a recomputation of the taxes, but it did not do so. On the contrary, I think it clear that by limiting the relief granted by section 204 to taxpayers whose tax year should begin after October 31, 1918, it unequivocally expressed the intent that no taxpayer whose tax year for 1919 began prior to that date should take any benefit under section 204. To permit now, therefore, a change in the accounting period for 1918 of this company would be to bring it within the terms of section 204 in the face of the expressed intent of Congress that that section should not apply to it. I am of the opinion that the Commissioner is without power to permit the change of the accounting period as requesting by the company. ^ 2799 Section 204, however, does not contain all the relief which Congress thought should be given on account of losses resulting from the armistice. Section 234 (14) is as follows: ‘(a) At the time of filing return for the taxable year 1918 a taxpayer may file a claim in abatement based on the fact that he has sustained a substantial loss (whether or not actually realized by sale or other disposition) resulting from any material reduction (^^^^ due to temporary fluctuation) of the value of the inventory for such taxable year, or from the actual payment after the close of such taxable year of rebates in pursuance of contracts entered into dur- ing such year upon sales made during such year, * * * (b) If no such claim is filed, but it is shown to the satisfaction of the Com- missioner that during the taxable year 1919 the taxpayer has sus- tained a substantial loss of the character above described then the amount of such loss shall be deducted from the net income for the taxable year 1918 and the taxes imposed by this title and by Title III for such year shall be redetermined accordingly.’ This section, unlike section 204, applies to all corporations paymg taxes lor the year 1918. In the scope of the relief granted, however, it is narrower than that section. It permits a deduction from the net income shown tor the year 1918 not of all losses sustained during the year 1919 but only such as result either from (1) a material reduction of the value of the inventory for the tax year 1918 or (2) from the actual payment after the close ot the tax year 1918 of rebates in pursuance of contracts entered into during that year upon sales made during that year. On September 30, 1918,^ the X material on account of which losses were subsequently sustained had been delivered to the company, and hence none was included in the inven- tory on which the assessment for 1918 was made. The company did not at that time own this X material, and presumably much of it had not even been produced. The company did not own it but only had a contract lor its purchase. It could not, therefore, have properly been included in an in- ventory of the company’s property as of that date. It is not, as I under- stand, insisted that if subsection 14(a) stood alone the loss on this X mate- 528 TAX INC. 7 - 28 - 20 . rial could not be allowed as a reduction of the value of the inventory for 1918, but it is insisted that subsection 14(b) is broader in its scope, and that the A expression therein ‘loss of the character above described includes such a ^ loss as that sustained on this X material. I am unable to agree with this insistence. Subsection 14(a) specifically describes the losses for which de- ductions may be ma.de; and when (b) of the same subsection speaks of a ‘loss of the character above described’ I do not think the language can be construed to include anything which is not included in (a). This view seems to me unavoidable when it is remembered that (a) provides for a claim in abatement to be made at the time of the filing of a return for 1918, that the ^ Act was not passed until February, 1919, after the time of many taxpayers for filing a return for 1918 had expired and after it was impossible for taxpayers to file a claim in abatemient at the time of filing their return. The provision in (b) was obviously for the benefit of taxpayers who had filed their returns before the Act was passed or who thereafter for any reason failed to file a claim in abatement at the time of filing returns. The two provisions manifestly apply to exactly the same losses, and these are specifically de- t scribed in (a). The loss for which a deduction is now claimed does not con- sist of a reduction in the value of the inventory upon which the taxes for 1918 were assessed, and I am constrained to the opinion that it does not come within the terms of section 234 (14). _ ^ 2800 Answering the questions submitted specifically, I advise; 2801 1st. The statute does not authorize the Commissioner to appro vm a change by this company at this time in its accounting records for the fiscal year ending September 30, 1918, so that its accounting period for 1918 will be changed to a calendar-year basis. _ _ , • i 2802 2d. The answer to question 1 is conclusive of this company s right to now change its accounting period for 1918, and a specific answer t to question 2, which would involve a more extended examination of the regulations referred to, would therefore seem to be unnecessary. ^ 2803 3d. The statute does not authorize a deduction by this company under section 234, subdivision 14, -by treating the loss on the X material contracts as a loss which is of the character of an inventory loss. (T. D. 3044, signed by Acting Commissioner Paul F. Myers, and dated July 9, 1920.) 2804 Basis in determining profit (or loss, if properly deductible) on Uis- j 1058 position of homestead by original entryman. Receipt is acknowl- ^ 1310 edged of your letter of Alarcli 22, 1920, and your letter of March 24. 1920, relative to the basis for determining gain or loss from the sale of a homestead acquired from the government. You refer to Office Decision 386, page 8, Bureau Bulletin No. 7-20, and ask whether the ruling there given means that if a homestead is acquired from the government in 1918 at, say, $1.00 an acre, and is sold in 1919 for $100.00 an acre, the gam or loss will be figured upon the fair market value of the land acquired at the date of ^ acquisition irrespective of cost. 2805 In reply, you are advised that profit made on the sale of property is income subject to tax, and under the provisions of the Federal income tax acts in effect since March 1, 1913, this office has consistently held that, in the case of the sale of property, the basis for computing gam or loss is tne cost of the property if acquired* subsequent to March 1, 1913, or its fair market value as of March 1, 1913, if acquired prior to that date. t 2806 In the case of property acquired by gift, bequest, devise, or descent, the basis is the fair market price or value of the property at the time INC. 529 TAX of acquisition or as of March 1, 1913, if acquired prior to that date. A “public grant’' is in the nature of a gift from the government, and on the sale of a homestead acquired by “public grant” the basis for determining gain or loss is the fair market price or value of the homestead at the date ot acquisition or as of March 1, 1913, if acquired prior to that date Ihe date of acquisition of a homestead acquired by public grant is the date o the entry upon the land, as the patent, which is evidence of legal title to the land relates back to the tim.e when entry was made. The above relates only to the basis of determining gain or loss from the sale of a homestead by the original entryman and has no application to the case of those acquiring government lands in any other way than under the homestead laws. to The Corporation Trust Company, signed by Acting Commission Faul t. Myers, and dated July 8, 1920.) 2807 Deductibility of losses sustained in connection with wagering on 1310 horse races: Winnings to be included in gross income. Reference 2507 is made to vour letter dated March 1, 1920, with which was enclosed a copy of a ktter dated March 1, 1920, from the Collector of Internal Revenue at New York, N. Y., addressed to the Maryland State k air, 50 Fairview Avenue, Orange, N.^ J. In the Collector’s letter it is stated that the following is a recent decision of this office: v i • u “Total losses from race track gambling may be credited against the total winnings, and the net gain should be reported as income. it, however, the losses exceed the winnings, the net losses cannot be de- ducted from the gross income from other sources in computing the net income subject to tax.” r mio 2808 You are advised that Section 213 (a) of the Revenue Act of 1918 ^ provides that gross income includes “* * * gains or profits and income derived from any source whatever.” . i • j 2809 Under the provisions of Section 214 (a) 5 of the Act, losses incurred in any transaction entered into for profit, though not connected vath the trade or business of the taxpayer, constitute allowable deductions, but losses in illegal transactions are not deductible (Regulations 45, Article 141). Whether betting or gambling is an illegal transaction depends upon the law of the state in which the wagering contract is made. If the laws jke state in which the wagering contract is made prohibit betting or gambling, such transactions are illegal, but if, under the laws of the state, betting or gambling is not prohibited, such transactions are legal. r • • r ^ 2810 It is accordingly held that: (1) The entire amount of winnings from 806 all wagering contracts should be returned in gross income under Section 213 (a) of the Revenue Act of 1918, irrespective of the nature of the transaction, whether legal or illegal and notwithstanding the laws of the state in which such contracts are made. [Read ^1215.] 281 1 (2) If, under the laws of the state in which the wagering contract is made betting or gambling is prohibited, such transactions are illegal and no deduction may be claimed under Section 214 (a) 5 of the statute for losses sustained in such illegal transactions, but if the laws of the state in which the wagering contract is made do not prohibit betting or gambling, such transactions are lawful and the entire amount of the losses sustained m the transactions may be deducted from gross income under Section 214 (a) 5. 2812 Copies of this letter are being furnished the Maryland State Fair and the Collector of Internal Revenue for the Second District of New ^ York for their information. (Letter to The Corporation Trust Company, | signed by Acting Commissioner Paul F. Myers, and dated July 12, 1920.) INC. 530 tax 7-28r20. 2813 Salaries of United States Judges appointed subsequent to February 803 24, 1919. — [Comment: The (acting) Attorney-General in an 2713 opinion rendered on June 21, 1920, states, in part: “I am unable to see, therefore, that there is anything in the recent opinion of the Supreme Court which relieves a judge appointed since the enactment of the income tax law from paying the tax imposed by that law.” — The Corporation Trust Company.] 2814 Returns by the Alien Property Custodian : Satisfaction of tax liability 1854 on income on account of property taken over by him.— [Comment: 2497 The (acting) Attorney-General, on June 21, 1920, rendered an opinion 2503 to the effect that the Alien Property Custodian is not liable, as a trustee or otherwise, to make income tax returns in connection with any income arising on account of any property taken over by him; that the vesting in him of the powers of a common-law trustee constitutes him a trustee for the United States rather than for any person who may ultimately become entitled to or have an interest in the property; and that in any event such trustee powers are limited strictly to property other than money, all actual money received by the Alien Property Custodian from any source on account of property taken over by him being immediately covered into the United States Treasury. The income resulting from the investment of such money does not come into the custodian’s hands and of it, including its amount, he has no knowledge. “Whatever net income the custodian receives from property under his control comes to him, of course, as money. To say that out of such money he must pay income taxes would be to require him to make a disposition of funds coming to his hands different from that expressly re- quired by the Act of Congress.” The concluding paragraph of the opinion reads as follows: “This does not mean that if property or income shall be returned to the former owners, and the amounts received by them include any income that may have accrued during the time the property was held b ythe custodian, such former owners are not liable for income taxes. Undoubtedly, before paying out any funds which represent such income the Treasury Department may ascertain the taxes due thereon and require them to be paid. I merely mean to say that, in my opinion, the law does not require the cus- todian to make such returns or pay such taxes.” — The Corporation Trust Company.] (T. D. 3046.) 2815 Reprint of opinion in The Penn Mutual Life Insurance Company 2673 case. — [This Treasury Decision, released July 21, 1920, merely in- corporated the decision of the Supreme Court of the United States in the case of the Penn Mutual Life Insurance Company v. Ephraim Lederer, Collector of Internal Revenue, and is published not as a ruling of the Treasury Department, but for the information of Internal Revenue officers and others concerned. — The Corporation Trust Company.] 2816 Substitution by collecting agent of proper certificate for improper 2764 form accompanying item presented for collection. — Banks may adopt in similar cases procedure outlined in office letter [1[2764] quoted in your letter July 9, in regard execution ownership certificates where wrong certificate attached to interest coupons. (Telegram to The National City Bank of New York, New York, N. Y., signed by Deputy Commissioner G. V. Newton, and dated July 14, 1920.) INC. 531 TAX 2817 Interest on tax-free covenant bonds sold between interest dates: 869 Ownership certificates; withholding; credit for tax withheld; account- 903 ing for interest income. — Reference is made to your letters of Feb- 1722 ruary 5 and March 12, 1920, in which you state that numerous subscribers of your service have made inquiries regarding the interest on tax-free covenant bonds sold between interest dates. You direct atten- tion to the established ruling of the Department that when a tax-free cove- nant bond is sold between dates, the purchaser pays as a part of the pur- chase price the amount of interest accrued since the last interest date, and such interest is income to the seller. When the purchaser collects his in- terest the ruling has been that only so much of that interest as has accrued since the date of the purchase is income to him. The question presented is how the interest accruing to the vendor and purchaser, respectively, m such case, should be treated for income tax purposes. . . 2818 In this connection, you are advised that this office has consistently held that where bonds are purchased between interest dates, the interest accrued to the time of purchase (advanced by purchaser) is not to be accounted for as income by the purchaser and that only the amount o interest assignable to the portion of the interest period subsequent to the purchase has the status of income for the purpose of return and tax by the purchaser. The amount of accrued interest so advanced by the purchaser is taxable income to be accounted for in the return of the vendor. j i ^ 2819 The foregoing ruling is embodied in paragraphs 15 [11903] and 16 [1[904] of Article 4, Regulations 33 (Revised) issued under the Rev- enue Act of 1916, as amended by the Revenue Act of 1917, and is also applica- ble under the provisions of the Revenue Act of 1918. ^ ^ ^ 2820 In accordance with Article 364 [1[1659] of Regulations 45, it is neces- sary when interest coupons are presented for payment of interest on bonds or other obligations, whether or not containing tax-free covenaiU, issued by domestic or resident foreign corporations, that such coupons be accompanied by ownership certificates. . 2821 Therefore, where interest coupons are presented for payment oi in- terest on bonds which have been sold between interest dates, the coupons should be accompanied by the separate ownership certificates of both the vendor and the purchaser. The certificate of the vendor^ should cover the interest accrued upon the bond to the date of sale and the interest accrued from the date of sale to the maturity of the coupon should be covered by the certificate of the purchaser. The certificates should be on Form 1000 (Revised), or Form 1001 (Revised), dependent upon whether or not exeinption is claimed from having the tax paid at the source. The ownership certificate of the vendor should be obtained by the purchaser at the time of the sale ot the bond and presented, together with the purchaser’s certificate, when the coupon is cashed. Unless the separate certificates of the vendor and pur- chaser, showing the amount of interest accrued to each, respectively, accom- pany the coupon when it is presented for payment,^ the entire amount ot interest represented by the coupon will be treated as interest accrued to me purchaser. In that event, however, the vendor will not be relieved of his liability for return and payment of the tax upon the portion of the interest accrued to him. (Letter to The Corporation Trust Company, signed b\ Commissioner Wm. M. Williams, and dated July 21, 1920.) 8 - 2 - 20 . 2822 Sale of personal property on installment plan; Procedure on chang- 914 ing method of reporting profit to an apportioning basis. — Reference 915 is made to office letter to yon dated June 28, 1919, in regard to the steps which should be taken by a taxpayer engaged in merchandis- ing upon the installment plan, who has made returns upon the basis of treat- ing the profit upon installment sales as realized as at the date of sale and now desires to change to the basis of reporting the profit as being realized as at the date of collection of the outstanding accounts. 2823 The procedure outlined therein has been reconsidered and as a result of such reconsideration the following has been adopted where a tax- payer engaged in merchandising upon the installment plan who has here- tofore made returns upon the basis of treating the profit upon installment sales as realized as at the date of sale and now wishes to change to the basis of reporting the profit as being realized as at the date of collection of the outstanding accounts. 2 824 1 . In accordance with the provision of Article 42 [11914] (as amended [sic]) of Regulations 45, the balance sheet as at the beginning of the taxable year, which shall be filed as a part of the return, shall carry the in- stallment sales contracts unliquidated and remaining in force as at the date that this system of accounting is adopted and made effective by the tax- payer, as accounts receivable, such unliquidated installment sales contracts having been inventoried and determined as at that date. Cash collections on account of such contracts will be credited directly to such accounts re- ceivable and no part of such collections will be included in computing real- ized profits for the taxable year. 2825 2. As from the beginning of the taxable year, the following accounts should be set up: 2826 (a) Goods purchased, which will be charged with the amount of inventory of the goods on hand at the beginning of the taxable year and with the expenditures for goods purchased during the year. 2 827 (b) Goods sold (cost value), which will be credited with the cost value of all goods sold during the year. 2828 (c) Installment sales contracts — (year date), which will be charged only with the amount of installment sales contracts made during the year specified. This account for each year will be credited with all cash collected during that year, or in subsequent years, upon installment sales contracts for that year only^ and wdth the unpaid installments of defaulted or canceled contracts for that year. 2829 (d) Unrealized gross profits on installment sales contracts — (year date), which will be credited only with the amount of unrealized gross profits upon installment sales contracts made during the year speci- fied. 'riiis amount will be the total of the installment sales contracts for that year reduced by the cost or inventory value (as carried in account (a) GOODS PURCHASED), of the actual goods sold and covered by the con- tracts; the balance remaining being the amount of the unrealized gross profits. The proforma monthly (or annual) journal entry would be: Dr. Cr. Installment sales contract (year date) $ To goods sold (cost value) $ Unrealized gross profits on installment sales con- tracts (year date) 2830 (e) Realized profits on installment sales contracts, which will be credited from month to month (or at the end of the Year), with the profits realized by cash collections upon all installment sales contracts of any year. Such profits should be computed by taking the same percentage of INC. 533 TAX cash collections made during the taxable year on account of installment sales contracts of either that or prior years, as the total unrealized profits on installment sales contracts for the year against ivhich the collection ap- plies, bear to the total installment sales made during that respective year. Corresponding debits should be made to UNREALIZED GROSS PROFIT^. ON INSTALLMENT SALES CONTRACTS for the year affected by such collections. If adjustments to any or all of these various accounts become necessary in order that it or they may accurately reflect the facts, such ad- justment may be made either monthly or as at the end of the taxable year. 2831 It is believed that sufficient has been said above to indicate the use that is to be made of these special accounts, and it is not necessary to discuss any of the other accounts which would normally be maintained. 2832 It will be noted that the foregoing plan which will be permitted upon an explicit statement of facts made to the Commissioner of Internal Revenue by a taxpayer engaged in merchandising upon the installment plan is not a change from an accrual basis to a cash received and paid basis. In the opinion of this office, the income of a merchandising concern can not be correctly reflected upon the latter basis, as the use of inventories is abs(> lutely essential. The plan herein outlined is, therefore, merely such a modi- fication or adaptation of the ordinary accrual method of accounting as in the opinion of this office will enable the accounts of the taxpayer clearly to reflect his net income. Where in the past another method has been used that has failed to reflect the taxpayer’s net income an amended return or returns for such year may be made. ^ ^ 2833 In cases where the taxpayer has in the past exercised the option of reporting the profit as realized as at the date of sale and now wishes to change to a basis of reporting the profit as realized as at the date of col- lection of the outstanding installments, either of which method is allowable under Article 42 of Regulations 45, amended returns for years prior to the date that the above outlined system of accounting is adopted and made effective by the taxpayer, will not be required or allowed unless in the opin- ion of the Commissioner such former method has failed to reflect the net income. (Letter to Greenbaum, Wolff and Ernst, New York, N. Y., signed by Acting Commissioner Paul F. Myers, and dated July 17, 1920.) (T. D. 3047.) ^ [Matter in italics is new; that in hold face brackets [ ] ts old matter cut otiti\ 2834 Inventories at market. — Article 1584, Regulations 45 is hereby 1094 amended to read as follows: Art. 1584. Inventories at market. — Market means the current bid price prevailing at the date of the inventory for the particular merchandise, _ and is applicable to goods purchased and on hand ^ and to basic W materials in goods in process of manufacture and in finished goods on hand, exclusive, however, of goods on hand or in process of manu- facture for delivery upon firm sales contracts at fixed prices entered into before the date of the inventory, which goods must he inventoried at cost. Where no open market quotations are available the taxpayer must use such evidence of a fair market price at the date or dates nearest the inventory as may be available to him, such as specific transactions in reasonable volume entered ^ into in good faith, or compensation paid for cancellation of contracts for purchase commitments. The burden of proof will rest upon the taxpayer INC. 534 TAX in each ease to satisfy the Commissioner of the correctness of the prices adopted It IS recognized that in the latter part of 1918, by reason among •thtr things of governmental control not having been relinquished, con- ditions were abnormal and in many commodities there was no such scale of trading as to establish a free market. In such a case, when a market has been established during the succeeding year, a claim may be filed for any loss accordance with the provisions of section 214 (a) (12) or section 334 (a) (14) of the statute. See articles 261-268 [for losses in 1918 inventories and from rebates, ^1477]. (T. D. 3047, signed by Commissioner Wm. M. VVilliams, and dated July 24, 1920.) (T. D. 3049.) 2836 803 2713 3813 Compensation of Federal Judges. Opinion of the Attorney-General. ^ Evans v. Gore, T. D. 3037, the Supreme Court held that salaries of Federal|Judges, appointed before the incidence or the Revenue Act of 1918, arc not subject to payment of income f u The Attorney General in response to a request from the Secretary of the Treasury has advised that the salary of a Federal judge may be subjected to a Federal income tax where the Act imposing such tax ^ passed prior to the time the judge in question took office. A copy of the Upinion of the Acting Attorney General is published herewith [112837 bclowj for your information. 2836 This office will be governed by the Opinion of the Acting Attorney General. (T. D. 3049, signed by Commissioner Wm. M. Williams, and dated July 27, 1920.) (Opinion rffgrred to in T, D, 3049, 1f2835.) Department of Justice, w Pk -j p Tj Washington, June 21, 1920. Hon. David h . Houston, Secretary of the Treasury, Washington, D. C. Dear Mr. Secretary; 2837 I have the honor to acknowledge receipt of your request to be advised whether in view of the Supreme Court’s decision in the case of V, Gore [1[2713], to refrain fromfthe collection of income taxes under he Revenue Act of 1918 from judges and the President taking office after e passage of the Act as well as from those in office when the law was passed. 838 In the opinion of the Solicitor accompanying your request certain quotations are made from the opinion of the court in the case above referred to as indicating that the court intended to hold that the salary of no federal Judge could constitutionally be included in his taxable income regardless of whether he became a judge before or after the passage of the Act. 1 do not thmk, however, that anything that was said in that opinion can fairly bear this construction. That question was not before the court. e judge then contesting the constitutionality of the law was appointed many years ago, and the rights of one appointed subsequent to the enactment of the law were in no wise involved. The only question was whether the re- (juirement that a judge’s salary should be included in his taxable income was, of the Constitution, a diminution of his compensation as It had been fixed by Act of Congress prior to the enactment of this tax INC. 535 TAX law. Congress has the same power to fix the compensation of judges ^at It. has to levy taxes,, except; that it has no. power; during the term of omce of a judge to. fix his compensation at a sum less than it was when he became a judge. The effect of the recent decision is .to hold that the levying of a tax upon the compensation thus fixed is a diminution of that compensation in the constitutional sense. In fixing the compensation, however, which judges hereafter appointed shall receive there is no limration upon the power [oi Congress. It may fix the compensation of such judges at a fipre less ,phan that now received by judges of the same rank, and whicii the lattei will -be entitled to receivg during the remainder of their service. In fixing such compensation, I see no reason why Congress may not say that ^ the compensation shall be a certain amount less a fixed percentage thereof which shall be paid or retained as an income tax. When, therefore, after the salary of the judges has been fixed by law and another Act has been passed making those salaries subject to a fixed and definite income tax, a judge who is appoifited takes his office with his actual compensation fixed at the amount of the salary less the am.ount of income tax. Upon assuming the duties' of the office he is entitled to receive no more than this; and when he pays the tax previously fixed by law there has been no diminution of the compensa- tion to which he was entitled at the beginning of his term of service. 1 am unable to see, therefore, that there rs anything in the recent opinion of the Supreme Court which relieves a judge appointed since the enactment of the ■income tax law from paying the tax imposed by that law. ’ Respectfully, Wm. L. Frierson, Acting Attorney General. (T. D. 3050.) 2839 Decision of Court^ — Deductibility of New York inheritance tax in 1264 computing income of legatee. — The tax imposed by the State of 1265 New York on the transfer of decedent’s estate is a tax on the right of disposition of the property, and is not a tax on the privilege of the legatee to receive it. Therefore in computing the net income of the legatee subject to the income tax, the New York inheritance tax is not a proper deduction from gross income under the provisions of Section 2, Paragraph B, of the Act of October 3, 1913. _ 2840 T. D. 3050, approved July 27, 1920, of which the above, ■j.28u9, isUhe caption, merely incorporates a decision of the United States Circuit Court of Appeals for the Second Circuit, in the case of Elizabeth S.‘ Prentiss v. \Iark Eisner,, Collector, Third District of New A ork, affirming the judgment of the lower court (260 Fed. 589, T. D. 2933 [^[1265]) is pubp fished not as a ruling of the Treasury Department, but for the informatipa of Internal Revenue officers. and others concerned. (Caption of T. D. 3050, dated July 27, 1920.) 4 4 4 INC. 53i TAX 8 - 18 ^ 0 . (T. D. 3052.) 2841 Stock dividends: Some applications Of the decision of the Supreme 2575 Court of the United States in the case of Eisner v. Macomber, rendered Mar. 8, 1920, in the determination of the taxability of dividends. — The following applications of the decision of the Supreme Court of the United States in the case of Eisner v. Macomber in the determination of the taxability of dividends declared by corporations are published for the information and guidance of internal revenue officers and others concerned: 2842 1 . Where a corporation, being authorized so to do by the laws of 2644 the state in which it is incorporated, transfers a portion of its surplus 2653 to capital account, issues new stock representing the amount of the surplus so transferred, and distributes the stock so issued to its stockholders, such stock is not income to the stockholders and the stock- holders incur no liability for income tax by reason of its receipt. 2843 2. Where a corporation, being thereunto lawfully authorized, increases its capital stock, and simultaneously declares a cash divi- dend equal in amount to the increase in its capital stock, and gives to its stockholders a real option either to keep the money for their own or to reinvest it in the new shares, such dividend is a cash dividend and is income to the stockholders whether they reinvest it in the new shares or not. 2844 3. Where a corporation, which is not permitted under the laws of the state in which it is incorporated to issue a stock dividend, increases its capital stock and at the same time declares a cash dividend under an agreement with the stockholders to reinvest the money so received in the new issue of capital stock, such dividend is subject to tax as income to the stock- holder. 2846 4. Where a corporation, having a surplus accumulated in part prior to March 1, 1913, and being thereunto lawfully authorized, trans- fers to its capital account a portion of its surplus, issues new stock representing the amount so transferred to the capital account and then declares a dividend payable in part in cash and in part in shares of the new issue of stock, that portion of the dividend paid in cash will, to the amount of the surplus accumu- lated since March 1, 1913, be deemed to have been paid out of such surplus, and be subject to tax, but the portion of the dividend paid in stock will not be subject to tax as income. 2846 5. A dividend, paid in stock of another corporation held as a part 2378 of the assets of the corporation paying the dividend,^ is income to the stockholder at the time the same is made available for distri- bution to the full amount of the then market value of such stock (Peabody V. Eisner, 247 U. S. 347 [1[2378]); and if such stock be subsequently sold by the stockholder, the difference between its market value at date of receipt and the price for which it is sold is additional income or loss to him, as the case may be. 2847 6. The profit derived by a stockholder upon the sale of stock re- 865 ceived as a dividend is income to the stockholder and taxable as 2655 such even though the stock itself was not income at the time of its [receipt by the stockholder. For the purpose of determining the amount of gain or loss derived from the sale of stock received as a dividend or of the stock with respect to which such dividend was paid, the cost of each share of stock (provided both the dividend stock and the stock with respect to which it is issued have the same rights and preferences) is the quotient of the cost of the old stock (or its fair market value as of March 1, 1913, if acquired prior to that date) divided by the total number of shares of the old and new stock. (T. D. 3052, signed by Commissioner Wm. M. Williams, and dated August 4, 1920.) INC. 537 TAX (T. D. 3050.) 2848 Decision of court. — Deductibility of New York Inheritance Tax in 1264 computing income of legatee.— The tax imposed by the State of 1265 New York on the transfer of decedent’s estate is a tax on the right 2839 of disposition of the property, and is not a tax on the privilege of the legatee to receive it. Therefore in computing the net income of the legatee subject to the income tax the New York inheritance tax Is not a proper deduction from gross Income under the provisions of section 2, para- graph B, act of October 3, 1913. The appended decision [beginning at 112849] of the United States Circuit Court of Appeals for the Second Circuit in the case of Elizabeth S. Prentiss v. Mark Eisner, collector, third district of New York, affirming the judgment of the lower court (260 Fed. 589, T. D. 2933 [111265]), Is published for the Information of Internal-revenue pfficers and others concerned. (T. D. 3050, signed by Commissioner Wm. M. W illiams, and dated July 27, 1920.) {The opinion referred to in T. D. 3050,1(2839 and 1[2848 , /o/Zom^j.) United States Circuit Court of Appeals for the Second Circuit. Elizabeth S. Prentiss^ plaintiff in error {plaintiff below), v. Mark Eisner, collector of internal revenue, third district of Nezu York, defendant in error {defendant below). (June 16, 1920.) Before Rogers, Hough, and Manton, Circuit Judges. This cause comes here on writ of error to the United States District Court for the Southern District of New York. The facts are stated in the opinion. Rogers, Circuit Judge: 2849 This is an action to recover from the defendant the sum of $7,432.88 with interest, which amount the plaintiff alleges she was wrongfully compelled to pay to the defendant as collector of internal revenue. 2850 It appears that the plaintiff and the then husband, since deceased, filed with the defendant a joint return of their net Income for the year 1913, pursuant to the act of Congress approved October 3, 1913 (U. S. Stat. L., vol. 38, pt. 1, ch. 16, Sec. II, p. 166). 2851 The aforesaid act of Congress, In paragraph B, page 167, provided as follows: That, subject only to such exemptions and deductions as herein- after allowed, the net Income of a taxable person shall include gains, profits, and income, Including * * * but not the value of property acquired by gift, bequest, devise, or descent * * * ^ That in computing the net income for the purpose of the normal taxes there shall be allowed as payment; * * * third, all national. State, county, school, and municipal taxes paid within the year, not including those assessed against local benefits. 2852 And in paragraph D, page 168, It provided as follows: The said tax shall be computed upon the remainder of said net income of each person subject thereto accruing during each preceding calendar year ending December thirty-first: Provided, however. That for the year ending December thirty-first, nineteen hundred and thir- teen, said tax shall be computed on the net income accruing from March first to December thirty-first, nineteen hundred and thirteen, both dates # INC. 538 tax 8 - 13 - 20 . inclusive, after deducting five-sixths only of the specific exemptions and deductions herein provided for. 2853 It appears, too, that in the year 1913 the plaintiff inherited a portion of her father’s estate and that on the inheritance thus received by her the State of New York assessed against her an inheritance tax of $259,- 805.71, which amount she paid on December 11, 1913. 2854 The plaintiff in making her income return under the act of Congress included therein as a deduction five-sixths of the inheritance tax which she had paid to the State of New York, which amounted to $216,504.75. This deduction was not allowed by the Commissioner of Internal Revenue and he levied and assessed against her an additional tax of $7,432.88. There- upon she instituted this action to recover back the amount so paid. 2855 The complaint was demurred to upon the ground that it did not state facts sufficient to constitute a cause of action. The court below sustained the demurrer and dismissed the complaint. 2856 The question of law thus presented is whether the payment by the plaintiff of the inheritance tax to the State of New \ ork was a proper deduction from her income tax return for the year 1913. That is the sole question herein involved. The plaintiff’s contention is that the inheritance tax which she paid to the State of New York was a tax paid to a State, and therefore under the act of Congress the plaintiff was entitled to make the deduction of five-sixths of the amount so paid in making her income return. 2857 The Commissioner of Internal Revenue in making the ruling to which reference has been made stated that — ■ A collateral inheritance tax levied under the laws of the State of New York being, as it is, a charge against the corpus of the estate, does not constitute such an item as can be allowed as a deduction in computing income tax liability to either the estate or beneficiary thereof. 2858 The district judge in sustaining the demurrer states that he did not regard the New York transfer tax ‘‘as imposing a tax upon the plaintiff’s right of succession which is deductible in her income tax returns.” 2859 Material provisions of the New York transfer tax act may be found in the margin. 2860 The New York act reads as follows in section 220 of Article X: A tax shall be and is hereby imposed upon the transfer of * * * property * * * to persons or corporations in the following cases * * * : (1) When the transfer is by will or by the interstate laws of this State * * * when the transfer is by deed * * * in- tended to take effect in possession or enjoyment at or after such death. * * * The tax imposed hereby shall be upon the clear market value of such property at the rates hereinafter prescribed. 2861 Section 224 reads as follows: Lien of tax and collection by executors^ administrators ^ and trustees . — ■ Kver>' such tax shall be and remain a lien upon the property transferred until paid and the person to whom the property is so transferred, and the executors, admiinistrators, and trustees of every estate so transferred shall be personally liable for such tax until its payment. Every executor, administrator, or trustee shall have full power to sell so much of the property of the decedent as will enable him to pay such tax in the same manner as he might be entitled by law to do for the payment of the debts of the testator or intestate. Any such executor, administrator, or trustee having in charge or in trust any legacy or property for distribution subject to such tax shall deduct the tax therefrom and shall pay over the same to the State comptroller or county treasurer, as herein provided. If such legacy or property be not in money, he shall collect the tax thereon 539 TAX INC. upon the appraised value thereof from the person entitled thereto. He shall not deliver or be compelled to deliver any specific legacy or property subject to tax under this article to any person until he shall have collected W the tax thereon. If any such legacy shall be charged upon or payable out of real property, the heir or devisee shall deduct such tax therefrom and pay it to the executor, administrator, or trustee, and the tax shall rem.ain a lien or charge on such real property until paid; and the payment thereof shall be enforced by the executor, administrator, or trustee, in the same manner that payment of the legacy might be enforced, or by the district attorney under section two hundred arid thirty-five of this chapter. If any such legacv shall be given in money to any such person for a limited period, the executor, administrator, or trustee shall retain the tax upon the whole amount, but if it be not in money, he shall make application to the court having jurisdiction of an accounting by hirn, to make an apportionment, if the case require it, ot the sum to be paid into his hands by such legatee, and for such further order relative thereto as the case may require. ^ ^ % 2862 The right to dispose of property by will is statutory. The matter has always been recognized as within the legislative control. In the reign of Henry II (1154-1189) a man’s personal property was, at his death, divided into three equal parts, if he died leaving a wife and children: ^ne part went to his wife, another to his children, and only the remaining could be disposed of by his will. And, at least after the establishment of the feudal system and prior to the enactment of the statute of wills (32 Henry VIIIX the right to make a will of real estate was not known to the English law. 2863 There has been and still is a difference of opinion among the courts as to the exact nature of an inheritance tax. It is generally agreed that such a tax is not upon the property or money bequeathed. The dispute is over the question whether the tax is laid on the privilege of receiving the property so transmitted. The right to transmit and the right to receive are distinct, and each is alike under the legislative control. The distinction between the right to transmit and the right to receive is important and upon the distinction depends the right to deduct or not to deduct the amount of the tax in the income return submitted to the Federal Government. 2864 The Circuit Court of Appeals in the Third Circuit has recently de- cided Lederer v. Northern Trust Co. (262 Fed. 52). In that case the question arose as to the right to deduct a tax paid under the collateral inheri- tance tax act of the State of Pennsylvania. The answer to be given to that question depended upon whether the Pennsylvania tax was an estate^ tax, the burden of which was imposed upon the estate of a decedent as claimed by the executors, or was a legacy tax, the burden of which was imposed upon the legatee or beneficiary. It happened that the supreme court of Pennsylvania in Jackson v. Myers (257 Pa., 104) had squarely decided that the collateral inheritance tax of that State was not levied upon an inheri- tance or legacy, but upon the estate of the decedent, and had held^that what ^ passed to the legatee was simply the portion of the estate remammg after the State had been satisfied by receiving the tax. The Circuit Court of Appeals held that the decision of the supreme court of Pennsylvania constru- ing the inheritance tax law of that State was binding on the Federal courts, and that inasmuch as the tax was held by that court as a tax on the estate and not a tax on the inheritance the amount of the tax so paid was properly deductible in computing the net estate under the act of Congress of Septernber ^ 8, 1916. Under a like state of facts we should have no difficulty in reaching a like conclusion. But the case with which we are dealing presents a dif- INC. 540 TAX 8 - 18 - 20 . ferent question, involving as it does the tax law not of Pennsylvania but of New York. 2866 In 1900 the Supreme Court in Knowlton v. Moore (178 U. S., 41) had under consideration a tax imposed under the war revenue act of June 13, 1898 (20 Stat., 448). The opinion in that case is exhaustive and occupies about 70 pages. It deals with the subject of death duties and sus- tains the constitutional right of Congress to impose death duties.’ In the course of the opinion, which was written by Justice (now Chief Justice) White, it was said: Thus, looking over the whole field, and considering death duties in the order in which we have reviewed them — that is, in the Roman and ancient law; in that of modern France, Germany, and other continental countries; in England and those of her colonies where such laws have been enacted, in the legislation of the United States and the several States of the Union — the following appears: although different modes of assessing such duties prevail, and although they have different accidental names, such as probate duties, stamp duties, taxes on the transaction, or the act of passing of an estate or a succession, legacy taxes, estate taxes, or privilege taxes, nevertheless tax laws of this nature in all countries rest in their essence upon the principle that death is the generating source from which the particular taxing power takes its being and that it is the power to transmit, or the transmission from the dead to the living, on which such taxes are more immediately rested. 2866 It thus appears, as the opinion of the court, that in general death duties are imposed on the power to transmit. However, the immed- iate question with which we are now concerned is whether the so-called tax which the New York law has imposed, and which is herein involved, is a tax upon the power to transmit or is laid on the power to receive. In 1889 a testator within the State of New York died and devised and bequested all his estate, both real and personal, to the Government of the United States. The surrogate’s court imposed an inheritance tax upon the personal property. The case was taken on appeal to the general term of the supreme court of New York and later to the New York Court of Appeals, by each of which it was affirmed. It was then taken to the Supreme Court of the United States, by which it was in like manner affirmed. The question was whether the personal property bequeathed to the United States was subject to an inheritance tax under the laws of New York. The Supreme Court held the property to be subject to the tax. (United States v. Perkins, 163 U. S., 625.) In the course of its opinion the court said: ‘‘In this view the so-called inheritance tax of the State of New York is in reality a limitation upon the power of a testator to bequeath his property to whom he pleased; a declaration that, in the exercise of that power, he shall contribute a certain percentage to the public use; in other words, that the right to dispose of his property by will shall remain, but subject to a condition that the State has a right to impose. Certainly, if it be true that the right of testamentary disposition is purely statutory, the State has a right to require a contribution to the public treasury before the bequest shall take effect. Thus the tax is not upon property, in the ordinary sense of the term, but upon the right to dispose of it, and it is not until it has yielded its contribution to the State that it becomes the property of the legatee.” And the court went on to say: “That the tax is not a tax upon the property itself, but upon its trans- mission by will or by descent, is also held both in New York and in several other States.” We find no case in the subsequent decisions of the New York Court of Appeals in which that court disclaims the construction placed 541 TAX INC. by the Supreme Court of the United States on the New York decisions, or in any way qualifies or overrules the proposition that the “tax” under the New York law is not one upon the property, but is one upon the right to dispose of it by will or by descent. In the absence of such a decision it seems to be our duty to follow the law as it is laid down in the Perkins case unless there can be found in the New York statute in force, when the present tax was laid, some substantial difference from the statute in force when that case was decided in the particular now being considered. If such a difference exists we have failed to detect it, and learned counsel have failed to point out in what it consists. 2867 The New York Court of Appeals in 1919 in matter of Watson, 226 N. Y., 384, 399, the court, in discussing a provision in the New York inheri- tance tax law imposing tax upon the transfer of property at the time of death which had not theretofore paid any tax, local or State, said; “The beneficiary has no claim to the property of an ancestor except as given by law, and, if the State has a right to impose a tax at all upon the passing of property, the transferee takes only what is left after the tax is paid.” The opinion quotes at page 396 from the opinion of the Supreme Court of the United States in the matter of Penfield, 216 N. Y., 163, 167, (1915), that under the New York law the inheritance tax is not upon the property but upon the right to dispose of it. There is not one word of criticism, not one word of dissent, and not the slightest suggestion of disapproval of that proposition anywhere in the opinion. 2868 In matter of Penfield, supra, the New York court declares what it had several times before stated that “the transfer tax is not a tax upon property, but upon the right of succession to property.” The language of the statute is that the tax is “due and payable at the time of the transfer;” that is, at the death of the decedent. It accrues at that time. 2869 Now a succession tax is a tax upon a transfer of property in general and as such is distinguishable from a legacy duty, which is a tax upon a specific bequest. Under the New York law the succession tax creates a lien upon the estate of the decedent at the moment of his death. The right of the State to the amount of this lien attaches at that time and it must be paid before the transferee, legatee, or devisee ever gets anything, and the executor or administrator is personally liable for the tax until it has been paid. Under such a law we do not see that the transferee pays the tax. In stating this conclusion we have not overlooked what was said in the matter of Gihon, 169 N. Y., 443, 447, where it is said that “though the administrator or executor is required to pay the tax, he pays it out of the legacy for the legatee, not on account of the estate. The requirement of the statute that the executor or administrator shall make the payment is prescribed to secure such payment, because the Government is unwilling to trust solely to the legatee.” The fact, however, remains that if a legacy left by a will is $10,000 and the executor has paid to the State on its account a tax of $500 and then has turned over to the legatee $9,500, the legatee has received not $10,000 but $9,500, and the legatee has been enriched only to the extent of the amount which he has himself received, and he has not paid the tax nor has it been paid by his authority, nor by anyone representing him. The payment has been made by the personal representative of the deceased, and in making it he has acted under authority of the statute. 2870 As was said by Judge Gray in matter of Swift, 137 N. \ ., 77, “What has the State done, in effect, by the enactment of this tax law.^ It reaches out and appropriates for its use a portion of the property at the moment of its owner’s decease; allowing only the balance to pass in the way directed by llie testator, or permitted by its intestate law.” INC. 542 TAX ( % % 8 - 16 > 20 . 2871 We admit that the New York cases on the subject of taxable transfers are confused and not always clear and consistent. But until the New York Court of Appeals authoritatively states that the law of New York is not what the Supreme Court of the United States said it was in the Perkins case, this court has no alternative but to hold that the New York transfer act does not impose a tax on a legatee’s right of succession which is deductible in her income tax return. The legacy which the plaintiff herein received under the will of her father did not become her property until after it had suffered a diminution to the amount of the tax, and the tax that was paid thereon was not a tax paid out of the plaintiff’s individual estate but was a payment out of the estate of her deceased father of that part of his estate which the State of New York had appropriated to itself which payment was the condition precedent to the allowance by the State of the vesting of the remainder in the legatee. Judgment affirmed. 2872 Taxability of discount on non-interest-bearing obligations of a state ■ 1130 or municipality. — Reference is made to your letters of July 8 and July ^1135 27, 1920, and to a recent conference between your representative, Mr. Robert R. Reed, and officials of the Bureau, relative to the taxability of discount on non-interest-bearing obligations of a municipality, ^You are advised that profit derived from state and municipal securities purchased at a discount and held until maturity is not taxable where it clearly appears that the return from the investment in the hands of the taxpayer is, due solely to the compensation received from the state or muni- cipality in lieu of interest for the use of the taxpayer’s money. In no case may such ex^ption exceed the total discount at which the securities were originally sold by the state or municipality. (Letter to Messrs. Reed, Dougherty and Hoyt, New York, N. Y., signed by Acting Commissioner Paul H. Myers, and dated August 9, 1920.) (T. D. 3053.) [Note: To indicate the change which are in subdivision {b) only, would prove more confusing than helpful.] 2873 Gross income of life insurance companies: Article"" 549 of Regu- 987 lations 45 amended. — Article 549 of Regulations 45 is hereby amended to read as follows: Art. 549. Gross income’^ of life-insurance^ companies. — A life insurance company shall not include in gross income such portion of any actual premium received from any individual policyholder as is paid back or credited to or treated as an abatement of premium of such policyholder within the taxable year. (a) “Paid back” means paid in cash, (b) “Credited to” means applied by way of credit to the payment of the premium for the taxable year. It does not include dividends applied to purchase additional paid-up insurance or annuities, or to shorten the endowment or premium paying period, or in any way that does not actually reduce the premium-receipts of the company for the taxable year, (c) “Treated as an abatement of premium” means of the premium for the taxable year. Where the dividend paid back is in excess of the premium received from the policyholder within the taxable year there may be excluded from gross income only the amount of such 543 TAX INC. premium received, and where no premium is received from the policy- holder within the taxable year the company is not entitled to exclude from its premiums received from other policy-holders any amount in respect of such dividend payment. (T. D. 3053, signed by Acting Commissioner Paul F. Myers, and dated August 10, 1920.) [Note: To indicate changes herein would prove more confusing than helpful.] (T. D. 3055.) 2874 Computation of depletion allowance for combined holdings of oil 1420 and gas wells: Article 214, Regulations 45, amended. — Article 1421 214 of Regulations 45 is hereby amended to read as follows: Art. 214. Computation of depletion allowance for combined holdings of oil and gas wells —{\) The recoverable oil belonging to the taxpayer shall be estimated for each property separately. The capital account for each property shall include the cost or value, as the case may be, of the oil or gas lease or rights plus all incidental costs of development not charged as expense nor returnable through depreciation. The unit value of the recoverable oil or gas for each property is the quotient obtained by dividing the capital account recoverable through depletion for each property by the estimated number of units of recoverable oil or gas on that property. This unit for each separate property multiplied by the number of units of oil or gas produced within the year by the taxpayer upon such property will determine the amount which may be deducted for depletion from the gross income of that year for that property. The total allowance for depletion of all the oil or gas properties of the taxpayer will be the sum of the amounts computed for each property separately: Provided, 2875 (2) That in the case of gas properties the depletion allowance for 1421 each pool may be computed by using the combined capital account returnable through depletion of all the tracts of gas land owned by the taxpayer in the pool and the average decline in rock pressures of all the taxpayer’s wells in such pool in the formula given in Article 211 [Tfl417]. The total allowance for depletion in the gas properties of the taxpayer will be the sum of the amounts computed for each pool. (T. D. 3055, signed by Acting Commissioner Paul F. Myers, and dated August 12, 1920.) INC, 544 TAX 8 - 19 - 20 . (T. D. 3056.) 2876 Coiicemmg the creation of a sinking tund by a corporation in order 636 to secure the payment of its bonds or other indebtedness. — The final 809 edition of P^egulations 45 is amended by inserting immediately 1697 after Article 541 a paragraph, to be .known as Article 541 (a), as follows: Art. 541 (a). Creation of sinking fund. — If a corporation, in order solely to secure the payment of its bonds or other indebtedness, places property in trust, or sets aside certain amounts in a sinking fund under the control of a trustee, who may be authorized to invest and reinvest such surns from time to time, the property or fund thus set aside by the corporation and held by the trustee is an asset of the corporation, and any gain arising there- from is income of the corporation and shall be included as such in its annual return. The trustee, however, is not taxable as such on account of the property or fund so held. See Section 219 and Articles 341 to 347 [as to estates and trusts, beginning at ^[636]. If such fund is invested by the trustee in whole or in part in bonds, the trustee when presenting coupons from the bonds for payment shall file ownership certificates, Form 1001, revised, whether or not the bonds contain a tax free covenant clause. See Article 366 [for form of certificate where no withholding required, ^1697]. (T. D. 3056, signed by Acting Commissioner Paul F. Myers, and dated August 14, 1920.) (T. D. 3058.) 2877 Section 203, Revenue Act of 1918: Inventories of retail dry goods 1090 dealers. — Regulations 45 are hereby amended by inserting Article 1092 1588, reading as follows: 2878 Art. 1588. Inventories of retail dry goods dealers.— (1) Retail dry goods dealers who emiploy the “retail method,” which is essen- tially a “cost” method of valuing inventories, will be permitted to make their returns upon that basis, provided (a) that the use of such method is designated upon the return, (b) that accurate accounts are kept, and (c) that such m.ethod be adhered to in subsequent years, unless a change is authorized by the Commissioner. The “retail method” consists in computing the cost of goods on hand from the “percentage of purchase mark-up” and the “retail value” of goods on hand. 2879 (2) A taxpayer employing the “retail method” of valuing inventories shall maintain and preserve in permanent form, for the inspection (■)f iniernal revenue officers, the accounts and records of each year, together with a schedule of all mark-downs in each department, and such mark-downs shall not be included in the computation of the retail value of goods on hand unless the goods so marked down have been actually sold. 2880 (3) The follov/ing general plan of taking an inventory by the “retail method” will, it is believed, be found readily adaptable to the require- ments of most retail dry goods dealers: 2881 (A) 4'he percentage of purchase mark-up is computed as follows: 4 'he value of all merchandise, as received, is recorded by departments at two prices, (a) invoice cost plus transportation, and (b) original retail sale })rice, 4'hese cost and retail values are accumulated as recorded during the year. I’he total retail value minus tlie total cost value equals the total purchase mark-up, which divided by the total retail \alu(‘ gives the percentage of purchase mark-up. 2882 (B) 'The reta I value of goods on hand is computed as follows; A recc)rd is kejat of (a) the amounts of all sah's at retail, (b) any variations trom 545 TAX INC. the inventory prices of the preceding year of goods carried over from that year, and (c) any variations from the original sale prices, such as subsequent mark-ups or mark-downs (note paragraph 2). The retail value of the opening inventories plus the retail value of the purchases (plus or minus the algebraic sum of all subsequent mark-ups, and mark-downs in the case of goods actually sold) minus the retail value of the sales equals the retail value of the book inventory of goods on hand. 'Physical inventories by departments are taken of goods on hand at retail at the close of the taxable year, and the retail value (')f the book inventory of goods on hand is adjusted accordingly. 2883 (C) The cost of goods on hand is computed by subtracting from one hundred per cent the percentage of purchase mark-up, which gives th.e percentage of cost, and multiplying the retail value of goods on hand by such percentage of cost. (T. D. 3058 signed by Acting Commissioner Paul F. Myers, and dated August 16, 1920.) (T. D. 3059.) 2884 Stock dividends: Article 1545, Article 1546, and Article 1642 of 849 Regulations 45 revoked, and Article 1547 amended. — In accord- 859 dance with the recent decision of the Supreme Court of the United 860 States in the case of Eisner v. Macomber (T. D. 3010) [^[2575], 865 holding that a stock dividend is not taxable income to the stock- 2575 holder. Article 1545 [11849], Article 1546 [1[859], and Article 1642 2841 [11860] of Regulations 45 are hereby revoked, and Article 1547 [1[865] is amended to read as follows: 2885 Art. 1547. Sale of stock received as dividend. — Stock received as a 865 dividend does not constitute taxable income to the stockholder, 2653 but any profit derived by the stockholder from the sale of such stock is taxable income to him. For the purpose of ascertaining the gain or loss derived from the sale of such stock, or from the sale of the stock with respect to which it is issued, the cost (used to include also, where required, the fair market value as of March 1, 1913) of both the old and new shares is to be determined in accordance with the following rules: 2886 (1) Where the stock issued as a dividend is all of substantially the same character or preference as the stock upon which the stock dividend is paid, the cost of each share of both the old and new stock v/ill be the quotient of the cost, or fair market value as of March 1, 1913, if acquired prior to that date, of the old shares of stock divided by the total number of the old and new shares. 2887 (2) Where the stock issued as a dividend is in whole or in part of a character or preference materially different from the stock upon which the stock dividend is paid, the cost, or fair m.arket value as of March 1, 1913, if acquired prior to that date, of the old shares of stock shall be divided between such old stock and the new stock, or classes of new stock, in pro- portion, as nearly as may be, to the respective values of each class of stock, old and new, at the time the new shares of stock are issued, and the cost of each share of stock will be the quotient of the cost of the class to which such share belongs divided by the number of shares in that class. 2888 (3) Where the stock with respect to which a stock dividend is issued was purchased at different times and at different prices and the identity of the lots cannot be determined, any sale of the original stock will be charged to the earliest purchases of such stock (See Art. 39 [1[911, for sale of stock and rights.]), and any sale of dividend stock issued with respect to such stock will be presumed to have been made from the stock issued with respect to the earliest purchased stock, to the amount of the dividend chargeable to such stock. (T. D. 3059, signed by Acting Com- missioner Paul F. Myers, and dated August 16, 1920.) 546 TAX INC. 8 - 30 - 20 . 2889 Interest on bonds sold between interest dates. — Ownership cer- 2817 tificates.— Ruling of July 21, 1920 [112821] held [in abeyance.— Refer- ence is made to the letter from this office addressed to you under date of July 21, 1920, relative to the filing of ownership certificates where interest coupons are presented for payment of interest on bonds which have been sold between interest dates. 2890 In the letter of July 21, the following ruling was given: — ‘‘Where inter- 2821 est coupons are presented for payment of interest on bonds which have been sold between interest dates, the coupons should be accompanied by the separate ownership certificates of both the vendor and the purchaser. The certificate of the vendor should cover the interest accrued upon the bond to the^ date of sale and the interest accrued from the date of sale to the maturity of the coupon should be covered by the certificate of the purchaser. The certificates should be on Form 1000 (Revised), or Form 1001 (Revised), dependent upon whether or not exemption is claimed from having the tax paid^ at the source. The ownership certificate of the vendor should be obtained by the purchaser at the time of the sale of the bond and presented, together with the purchaser’s certificate, when the coupon is cashed. Unless the separate ownership certificates of the vendor and purchaser showing the amount of interest accrued to each, respectively, accompany the coupon when it is presented for payment, the entire amount of interest represented by the coupon will be treated as interest accrued to the purchaser. In that event, however, the vendor will not be relieved of his liability for return and payment of the tax upon the portion of the interest accrued to him.” 2891 You are advised that the subject of the letter of July 21 is being reconsidered by this office and the enforcement of the above ruling will be held in abeyance pending final determination of the matter. (Letter to The Corporation Trust Company, signed by Acting Commissioner Paul F. Myers, and dated August 17, 1920.) (T. D. 3060.) [Mattgr in italics is new; that in bold face brackets [ ] is old matter cut out.] 2892 Concerning countries which do or do not satisfy the similar credit' 1286 requirement of Section 222 (a) (3) of the Revenue Act of 1918.— 2711 The final edition of Regulations 45 is amended by inserting imme- diately after Article 384, a paragraph to be known as Article 385, as follows: Art. 385. Countries which do or do not satisfy the similar credit re- quirement. (a) The following is an incomplete list of the countries which satisfy the s’iniilar credit requirement of Section 222 (a) (3) of the Revenue Act of 1918, either by allowing to citizens of the United States residing in such countries a credit for the amount of income, war profits or excess profts taxes paid to the United States upon incomes derived from sources therein, or in imposing such taxes, by exempting from taxation the incomes received from sources within the United States by citizens of the United States residing in such countries: Bulgaria, Canada, Italy, Newfoundland, Salvador, (b) The following is^ an incomplete list of the countries which do not satisfy the similar credit requirement of Section 222 (a) (3), of the Revenue Act of 1918, either by allowing no credit to citizens of the United States residing in such countries, for the amount of income, war profits or excess profits taxes paid to the United States upon incomes derived from sources therein, or because such IMC. 547 TAX coufitfics do Tvot ifnposc ciuy incoftiSy wdt pTofits ov excess peofits taxes'. Argentina., Bahama, Belgium, Bermuda, Bolivia, Bosnia, Brazil, Chile, China, Costa Rica, Equador, Egypt, Finland, France, Great Britain and Ireland, Guate- mala’, Herzegovina, India, Jamaica, Japan, Montenegro, Morocco, New Zealand, Nicaragua, Panama, Paraguay, Persia, Peru, Portugal, Roumania, Santo Domingo, Serbia, Siam, Sweden, Switzerland, Venezuela. The former names of certain of these territories are here used for convenience in spite of the actual or possible change in the name or sovereignty. A resident of the United States who is a citizen or subject of any country in the first list is entitled, for the purpose of the total tax due the United States, for 1918 and subsequent years, to a credit for the amount of any income, war profits and excess profits taxes paid or accrued during the taxable year to such countrv upon income from sources therein. If he is a citizen or subject of any country in the second list, he is not entitled to such credit. If he is a citizen or subject of a country which is in neither list, then to secure the desired credit, he must prove to the satisfaction of the Commissioner that his country satisfies the similar credit requirement of the statute [the country of which he is a citizen or subject either imposes no income, war profits or excess profits taxes, or in imposing such taxes allows to citizens of the United States residing in such country a credit for the amount of income, war profits or excess profits taxes paid to the United States on incomes derived from sources therein]. . , , » • 2093 T. D. 3028 11[271ll is hereby revoked. (T. D. 3060, signed by Acting Commissioner Paul F. Myers, and dated August 25, 1920.) (T. D. 3061.) [Matter in italics is new; that in bold face brackets [ ] is old matter cut out.] 2894 Deductions allowed: Depreciation. Article 166, Regulations 45, |l359 Amended. — Article 166 of Regulations 45 is hereby amended to read ^ as follows: . Art. 166. Modification of method of computing depreciation. — If it develops that the useful life of the property has been underestimated, the plan of computing depreciation should be modified and the balance of the cost of the property, or its fair market value as of March 1, 1913, not already provided for through a depreciation reserve or deducted from book value, should be spread over the estimated remaining life of the property. Inasmuch as under the provisions of the hicome tax Acts in effect prior to Revenue Act of 1918 deductions for obsolescefice of property were not allowed except as a loss for the year in which the property was sold or permanently abandoned^ a tax- payer [A taxpayer who in computing depreciation allowances in returns^ for years prior to 1918 has not taken ordinary obsolescence into consideration] may for [the year] 1918 and subsequent years revise the estimate of the use- ful life of any property so as to allow for such future obsolescence as may be expected from experience to result from the normal progress of the art. No modification of the method should be made on account of changes in the market value of the property from time to time, such as, on the one hand, loss in rental value of the buildings due to deterioration of the neighborhood, or, on the other, appreciation due to increased demand. The conditions affecting such market values should be taken into consideration only so far as they affect the estimated [of the] useful life of the property. (T. D. 3061, signed by Commissioner Wm. M. Williams, and dated August 27, 1920.) 9 - 3 - 20 . 2896 Suggested method of identifying dividend checks of resident foreign 1517 corporations as domestic items. — Reference is made to your letter 1744 dated July 22, 1920, stating that the , a Canadian corporation 2482 doing business in the United States and paying an income tax to the United States Government, on practically all of its earnings, pays its dividends with checks drawn on its New York banking institution. Understanding that it is necessary for checks representing dividends of a foreign corporation to be accompanied by ownership certificates, you inquire whether this corporation may obviate the necessity of having its dividend checks accompanied by such certificates by the attachment of the following notice: “This Company carries on its manufacturing operations within the United States, and under the U. S. Income Tax law, it is termed a Resident Foreign Corporation. This dividend check, therefore, is not a foreign item, and need not be accompanied by a United States ownership certificate.” 2896 You are advised, that as the is required to pay the normal tax on its net earnings, the dividends derived therefrom are only subject to surtaxes in the hands of the stockholders. As such dividends are regarded as domestic dividends for income tax purposes, ownership certi- ficates are not required to accompany the dividend checks for collection. 2897 The proposed notation submitted by you has the approval of this Bureau and will undoubtedly have the effect of identifying the dividend checks as domestic items. (Letter to A. H. Whan & Company, New York, N. Y., signed by Deputy Commissioner G. V. Newton, by H. A. Haywood, Acting Head of Division, and dated August 23, 1920.) (T. D. 3062.) [Comment; Differences between old and new Arts. 48 and 109, being many, are not shown; in Art. 164 the only change is the addition of the new matter shown in italics.] 2898 Income to lessors of improvements made upon real estate by lessees — Articles 48, 109 and 164 of Regulations 45 amended. — Articles 48, 109 and 164 of Regulations 45 are hereby amended to read as follows: 2899 Art. 48. Rents and royalties. — When buildings are erected or im- 939 provements are made by a lessee in pursuance of an agreement with 2695 the lessor, and such buildings or improvements are not subject to removal by the lessee, the lessor receives income at the time when such build- ings or improvements are completed, to the extent of the fair market price or value of such buildings or improvements subject to the lease. This amount would ordinarily be the difference between the value of the land free from the lease without such improvements and the value of the land subject to the lease with such improvements. If, for any other reason than a bona fide purchase from the lessee by the lessor, the lease is terminated, so that the lessor comes into possession and control of the property prior to the time originally fixed for the termination of the lease, the lessor receives additional income for the year in which the lease is so terminated to the extent that the value of such buildings or improvements when he became entitled to such possession exceeds the fair market price or value thereof to him as determ ned when the same completed became part of the realty. No appreciatio in value due to causes other than the premature termination of the lease shall be included. Conversely, if the buildings or improvements are dest oyed 549 TAX INC. prior to the termination of the lease the lessor is entitled to deduct as a loss of^the year when such destruction takes place the fair market price or value of^such buildings or improvements subject to the lease as determined when the same completed became a part of the realty, or the value thereof subject to the lease on March 1, 1913, less any salvage value subject to the lease, to the extent that such loss was not compensated by insurance. (See Articles 109 [1(2900], 164 [1(2901].) 2900 Art. 109. Rentals. — Where a leasehold is acquired for business pur- 1231 poses for a specified sum, the purchaser may take as a deduction in his return an aliquot part of such sum each year, based on the num- ber of years the lease has to run. Taxes paid by a tenant to or for a landlord for business property are additional rent and constitute a deductible item to the tenant and taxable income to the landlord, the amount of the tax being deductible by the latter. The cost borne by a lessee in erecting build- ings or making permanent improvements on ground of which he is lessee is held to be a capital investment and not deductible as a business expense. In order to return to such taxpayer his investment of capital, an annual deduc- tion may be made from gross income of an amount equal to the total cost of such improvements divided by the number of years remaining of the term of lease, and such deduction shall be in lieu of a deduction for depreciation. If the remainder of the term of lease is greater than the probable life of the buildings erected, or of the improvements made, this deduction shall take the form of an allowance for depreciation. (See Article 48 [1(2899].) 2901 Art. 164. Capital sum recoverable through depreciation allowances. 1348 The capital sum to be replaced by depreciation allowances is the cost of the property in respect of which the allowance is made, except that in the case of property acquired by the taxpayer prior to March 1, 1913, the capital sum to be replaced is the fair market value of the property as of that date. In the absence of proof to the contrary, it will be assumed that such value as of March 1, 1913, is the cost of the property less depreciation up to that date. To this sum should be added from time to time the cost of improvements, additions and betterments, the cost of which is not deducted as an expense in the taxpayer’s return, and from it should be deducted from time to time the amount of any definite loss or damage sustained by the property through casualty, as distinguished from the gradual exhaustion of its utility which is the basis of the depreciation allowance. In the case of the acquisition after March 1, 1913, of a combination of depreciable and non- depreciable property for a lump price, as, for example, land and buildings, the capital sum to be replaced is limited to that part of the lump price which represents the value of the depreciable property at the time of such acquisi- tion. Where the lessee of real property erects buildings, or makes permanent improvements which become part of the realty and income or loss has been returned by the lessor as a result thereof, as provided in Article 48 [K 2899], the capital sum to be replaced by depreciation allowances is held to be the same as though no such buildings had been erected, or such improvements made. (T. D. 3062, signed by Commissioner Wm. M. Williams, and dated Sept. 1, 1920.) INC. 550 TAX 9 - 23 - 20 . (T. D. 3064.) [Matter in itaHcs is new; that in hold face brackets [ ] is old matter cut out.] 2902 Computation of allowance for depletion of gas wells. — Article 211, 1417 Regulations 45, is hereby amended to read as follows: Art. 211. Computation of allowance for depletion of gas wells. — On account of the peculiar conditions surrounding the production of natural gas it will be necessary to compute the depletion allowance [s] for gas prop- erties by methods suitable to the particular cases in question and acceptable to the Commissioner. Usually, the depletion of natural gas properties should be computed on the basis of decline in closed or rock pressure, taking into account the effects of water encroachment and any other modifying factors. The gas producer will be expected to compute the depletion as accurately as possible and submit with his return a description of the method by which the computation was made. sThe following formula, in which the units of gas are pounds per square inch of closed pressure, [may be used and] is recom- mended: the quotient of the capital account recoverable through depletion allowances to the end of the taxable year, divided by the sum of the pressures at the beginning of the year plus the sum of initial pressures of new wells and less the sum of the pressures at the time of expected abandonment (which quotient is the unit cost) multiplied by the sum of the pressures at the begin- ning of the taxable year plus the sum of the initial pressures of new wells and less the sum of the pressures at the end of the tax year, equals the depletion allowance. (T. D. 3064, signed by Acting Commissioner Paul F. Myers, and dated September 4, 1920.) (T. D. 3071.) 2903 Husband and Wife — Community Property — Opinion of Attorney 1770 General. (1) The earnings of husband and wife domiciled in Texas are community income, and such husband and wife in rendering separate income tax returns may each report as gross income one-half the total earnings of the husband and wife. 2904 (2) The income from separate property, except the increase, rents and revenues from lands, is community income, and therefore hus- band and wife domiciled in Texas, in rendering separate income tax returns, may each report as gross income one-half the total income from separate property, except the increase, rents and revenues from land held separately. 2905 (3) The income from community property as defined in Article 4622, Vernon’s Sayles’ Statutes, is community income, and therefore husband and wife domiciled in Texas, in rendering separate income tax re- turns, may each report as gross income one-half the total income from such community property. 2906 There is given below [beginning at ^[2907] in full for your information and guidance an opinion rendered by the Attorney General under date of August 24, 1920, dealing with the right of husband and wife domiciled in certain States having so-called “Community Property” laws to divide certain of their income for the purpose of the income tax. (T. D. 3071, signed by Commissioner Wm. M. Williams, and dated September 18, 1920.) INC. 551 TAX (Attorney-Generar s Opinion referred to above, in Tf2906.) Department of Justice, Washington, August 24, 1920. . Hon. David F. Houston, Secretary of the Treasury, Washington, D. C. . . / Dear Mr. Secretary: 2907 Further acknowledging receipt of your favor of August 12th, request- ing my opinion on the three questions of law set forth below, to wit: (1) Are the earnings of husband and wife domiciled in Texas community income, and may they therefore in rehdering separate income tax returns, each report as gross income one-half of the total earnings of the husband and wife? (2) Is the income from separate property, as* defined in Article ■ 4621, Vernon’s Sayles’ Statutes, 1918 Edition, community income and may therefore husband and wife domiciled in Texas, in render- ing separate income tax returns, each report as gross income one-half of the total income from all separate property owned by them?_ (3) Is the income from community property as defined in Article 4622, Vernon’s Sayles’ Statutes, 1914 Edition, community income, and may therefore husband and wife domiciled in Texas, in render- ing separate income tax returns, each report as gross income one-half of the total income from community property? I have the honor to advise you as follows: 2908 The Revenue Act of 1918 levies a tax on the net income of every in- dividual (Secs. 210 and 211). Net income is defined as gross income less deductions allowed (Sec. 212). Gross income is defined as follows (Sec. 213): _ , That for the purposes of this title (except as otherwise provided in Section 233) the term “gross inconie” — (a) Includes gains, profits, and income derived from salaries, wages, or compensation for personal service (including in the case of the President of the United States, the judges of the Supreme and ^ inferior courts of the United States, and all other officers and em- ployees, whether elected or apj>ointed, of the United States, Ala^a, Hawaii, or any political subdivision thereof, or the District of Col- umbia, the compensation received as such), of whatever kind and in whatever form paid, or from professions, vocations, trades, busi- nesses, commerce, or sales, or dealings in property, whether real or personal, 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. The amount of all such items shall be included in the gross income for the taxable year in which received by the taxpayer, unless,^ under methods of accounting, permitted under subdivision (b) of Section 212, ^ any such amounts are to be properly accounted for as of a different period. 2909 The State Constitution of Texas provides: Art. VII, Sec. 19, Constitution 1845: All property, both real and personal, of the wife, owned or claimed by her before marriage. 552 TAX INC. 9-23-20. -and that acquired afterward [s] by gift, devise or descent, shall be xher separate property; and laws shall be passed more clearly de- fining the rights of the wife, in relation as well [as] to her separate property as that held in common with her husband. Laws shall also be passed providing for the registration of the wife’s separate property. [Art. XVI, Sec. 15, Constitution 1876.] 2910 The Statutes of the State of Texas determining property rights of husband and wife are as follows. Article 4622, Vernon’s Sayles’ Statutes, 1914 Edition: All property acquired by either the husband or wife during mar- riage, except that which is the separate property of either one or the other, shall be deemed the common property of the husband and wife, and during coverture may be disposed of by the husband only, provided, however, the personal earnings of the wife, the rents from the wife’s real estate, the interest on bonds and notes belonging to her, and dividends on stocks owned by her shall be under the control, management and disposition of the wife alone, subject to the provisions of Article 4621, as hereinabove written; and further provided that any funds on deposit in any bank or banking institution, whether in the name of the husband or the wife, shall be presumed to be the separate property of the party in whose name they stand, regardless of who made the deposit, and unless said bank or banking institution is notified to the contrary, it shall be governed accordingly in honoring checks and orders against such account. 2911 Article 4621, Vernon’s Sayles’ Statutes, 1918 Edition. All property, both real and personal, of the husband owned or claimed by him before marriage, and that acquired afterwards by gift, devise or descent, as also the increase of all lands thus acquired, and the rents and revenues derived therefrom, shall be his separate property. The separate property of the husband shall not be sub- ject to the debts contracted by the wife, either before or after mar- riage, except for necessaries furnished herself and children, after her marriage with him. All property of the wife, both real and personal, owned or claimed by her before marriage, and that acquired afterwards by gift, devise or descent, as also the increase of all lands thus acquired, and the rents and revenues derived there- from, shall be the separate property of the wife. During marriage the husband shall have the sole management, control and disposi- tion of his separate property, both real and personal, and the wife shall have the sole management, control and disposition of her separate property, both real and personal; provided, however, the joinder of the husband in the manner now provided by law for con- • veyance of the separate real estate of the wife shall be necessary to an encumbrance or conveyance by the wife of her lands, and the joint signature of the husband and wife shall be necessary to a transfer of stocks and bonds belonging to her, or of which she may be given control by this Act; provided, also, that if the husband shall have permanently abandoned his wife, be insane, or shall re- fuse to join in such encumbrance, conveyance or transfer of such property, the wife may apply to the District Court of the county of her residence, and it shall be the duty of the court, in term time or vacation, upon satisfactory proof that such encumbrance, con- veyance or transfer would be advantageous to the interest of the INC. 553 TAX wife, to make an order granting permission to make such encum- brance, conveyance or transfer without the joinder of her husband, in which event she may encumber, convey or transfer said property without such joinder. Neither the separate property of the wife, nor the rents from the wife’s separate real estate, nor the interest on bonds and notes belonging to her, nor dividends on stocks owned by her, nor her personal earnings, shall be subject to the payment of debts contracted by the husband. The homestead, whether the separate property of the husband or wife, or the community prop- erty of both, shall not be disposed of except by the joint convey- ance of both the husband and the wife, except where the husband has permanently abandoned the wife, or is insane, in which instance the wife may sell and make title to any such homestead, if her separate property, in the manner herein provided for conveying or making title to her other separate estate. The community property of the husband and wife shall not be liable for debts or damages resulting from contracts of the wife, except for necessaries furnished herself and children, unless the husband joins in the execution of the contract. Provided that her rights with reference to the community property on permanent abandonment by the husband shall not be affected by the preceding sentence. 2912 Article 2469, Vernon’s Sayles’ Statutes. Upon the dissolution of the marriage relation by death all prop- erty belonging to the community estate of the husband and wife shall go to the survivor, if there be no child or children of the de- ceased or their descendants; but if there be a child or children of the deceased, or descendant of such child or children, then the sur- vivor shall be entitled to one-half of said property, and the other half shall pass to such child or children, or their descendants. But such descendants shall inherit only such portion of said property as the parent through whom they inherit would be entitled to if alive. 2913 The community property system prevails in Texas, Arizona, Cali- fornia, Washington, Louisiana and New Mexico. It seems to have had its origin in France and Spain and to have been brought thence into our judicial system. 2914 Community property laws provide generally that all property acquired during marriage, by the industry and labor of either husband or wife or both, together with the produce and increase thereof, belongs to both in equal shares, during the continuance of the marital relation. It has^ its foundation in the fact of the legal presumption that all property acquired during marriage, otherwise than by gift, devise or descent, is acquired by the joint efforts of husband and wife (Nickerson v. Nickerson, 65 Tex. 281, 284). Their relation partakes of the nature of a partnership in which each partner may have separate estates, or property, as well as common stock of acquisi- tions and gains. The business of the firm generally is transacted in the name of the husband and he prosecutes and defends its suits with the same effect as if his partner were named in the case (Simpson v. Brotherton, 62 Tex. 170); and although community property has not all the incidents of part- nership property, it has many of them, and is commonly spoken of as part- nership property (De Blanc v. Lynch & Co., 23 Tex. 25; Wilkinson v. Wil- kinson, 20 Tex. 237). In the conventional partnerships the gains of ^ the partners are in proportion to their respective shares of stock and services, but in the conjugal partnerships the division is equal, though one may Fave brought in the greater part, if not all of the property from which the profits 554 TAX INC. 9 - 23 - 20 . are derived, or may have contributed all his skill and services unaided by the other (Wheat v. Owens, 15 Tex. 241; Routh v. Routh, 57 Tex. 589, 595). The fact that one or the other of the spouses may do all the work does not change the character of community property (Yates v. Houston, 3 Tex. 452, 454). And though the management and disposal of community prop- erty during marriage are usually given to the husband this is said to be for reasons of public policy and social economy and not on the grounds that the husband has any greater interest in it than the wife. Section 4622, Vernon’s Sayles’ Statutes, as amended in 1913, and as set forth above, pro- vides that the personal earnings of the wife, the rents from her estate, the interest on bonds and notes belonging to her, and dividends owned on stocks owned by her, shall be under the control, management and disposition of the wife alone; but the Supreme Court of Texas held in Tannehill v. Tanne- hill, 171 S. W. 1050, that such amendment did not change the character of rents from the wife’s separate property so as to make them her separate property, but that they continued to belong to the community estate, and the husband was owner of one-half of same. (This before the amendment of Section 4621 in 1917 made the rents from separate lands the separate property of the owner of the land.) 2915 In Tucker v. Carr, 39 Tex. 98, 102, the Court said: “It is well settled that all property acquired during the marriage whether by the labor of the husband or the wife, or the joint labor of both, whether the title be made to the husband or to the wife or to both jointly, is community property.” 2916 Also see Cooke v. Bremond, 27 Tex. 457, 2917 In Holyoke v. Jackson, 3 Pac. 841, the Supreme Court of Washington, in defining community property rights in that State held that the community “is like a partnership, in that some property coming from or through one or other or both of the individuals, forms for both a common stock which bears the losses and receives the profits of its management, and which is liable for individual debts; but it is unlike in that there is no regard paid to proportionate contribution, service, or business fidelity; that each individual once in it is incapable of disposing of his or her^ interest, and that both are powerless to escape from the relationship, to vary its terms or to distribute its assets or its profits . . . In it the proprietary interest of husband and wife are equal, and those interests do not seem to be united merely, but unified.” 2918 There are numerous decisions holding that the proportional interests of husband and wife in community property are equal regardless of their individual contributions. 2919 In Merrill v. Moore, 104 S. W. 514, the Court said: “This community of interest is not made to depend upon the acquisition of the property during the time the parties actually live together, nor upon the fact that there was an equal amount of labor or capital contributed by the husband and wife in its accumulation. It is the property acquired during the marriage (with exceptions stated)that shall be deemed the common property of husband and wife, and the right to an equality of enjoyment and division thereof, regardless of whether the one or the other has contributed little or nothing to its acquisition is well recognized.” 2920 Also see: Edwards v. Brown, 68 Tex. 329; Saunders v. Isbell, 24 S. W. 307; Barr v, Simpson, 117 S. W. 1041; Wright v. Hays’ Admr., 10 Tex, 130; Zimpelman v. Robb, 53 Tex. 274. That one-half of the common estate belongs to each spouse is recognised in Treasury Decision 2450, which determines the method of assessing estate tax upon the estate of a decedent spouse. INC. 555 TAX 2921 The decisions in the various States seem to be unanimous on the proposition that the earnings of both husband and wife during the marriage belong to the community. i u i j 2922 In Fennell v. Drinkhouse, 131 Cal. 447, it was held that money earned by the wife while living with her husband was community prop- erty the Court, saying: “The possession of community property by the wife is the possession of the husband.” And in Martin v. Southern Pacific Com- pany, 130 Cal. 285, holding that moneys received as damages for injury to the wife are community property, it was said: The services of the wife are a part of the earning power of the community, and the earnings received for her services constitute community property as much as do the earnings received for the services of the husband. If the injury had been received by the husband, it would not be contended that he .could not recover for the damage sustained by the loss of his earning capacity. In either case the earnings would be community property, and any act by which either husband or wife is deprived of the capacity to render services diminishes the capacity to accumulate community property. If the services voluntarily rendered by the wife obviate th^e necessity of employing other assistance the amount of the community property is thereby enhanced in the amount that would be required for such assistance. . . . 2923 See also Washburn v. Washburn, 9 Cal. 475. 2924 Under the Louisiana Statutes the profits of the industry of both spouses and the fruits of their separate estates fall into the com- munity. Succession of Webre, 49 La. 1491; 22 So. 390. Knight V. Kaufman, 105 La. 35; 29 So. 711. Manning v. Burke, 107 La. 456; 31 So. 862. The decisions of the Supreme Court of the State of Washington are to the same effect. Abbott V. Weatherby, 6 Wash. 507; 33 Pac. 1070. Yake v. Pugh, 13 Wash. 78; 42 Pac. 528. Sherlock v. Denny, 28 Wash. 170; 68 Pac. 452. i i i- There are numerous decisions by the Supreme Court of Texas holding that in Texas the earnings of the husband and wife are community property. Cline V. Hackbarth, 27 Tex. Civ. App. 391; 65 S. W. 1086. Johnson v. Burford, 39 Tex. 242. Pearce v. Jackson, 61 Tex. 642. Cooke V. Bremond, 27 Tex.^ 457. In the latter case the Court said: Our whole system of marital rights is based upon the fact that acquisitions either of the joint or separate labor or industry of the husband or wife, become common property; and as a general rule deductible from this principal, all property acquired by purchase or apparent onerous title, whether the conveyance be^ in the naine of the husband or of the wife, or in the names of both, is prima facie presumed to belong to the community. Under the laws of the various States wherein the community property system obtains, the earnings of separate property of the spouses with such exceptions as are specifically provided for by Statute, are community property. See Barr v. Simpson, 117 o. W. 1040 (Tex.) and Hayden v. McMillan, 23 S. W. 430 (Tex.) (% % % % A INC. 556 TAX 10 - 8 - 20 . 2926 The latter case was decided when Article 2851 Revised Statutes of Texas provided that all the property owned by the wife before marriage or acquired afterwards by gift, devise or descent, and the “increase of all lands thus acquired” should be the separate property of the wife. And the Court held that rents accruing on the separate lands of the wife were community property and subject to garnishment for community debts. This case also establishes the proposition that such community interest attaches the moment the property comes into existence,, the Court saying: “The moment the rents become due they are disconnected from the land and become personal property, and being acquired by the joint labors of the married couple put forth during the marital relation they must neces- sarily be community.” 2926 From the above authorities I am convinced that under the law of Texas the earnings of the husband and wife belong to them jointly in equal shares; that the community interest attaches as soon as the right to the wages comes into existence; and that the increase and revenues from the separate property of each spouse except the increase, rents and revenues from lands, is also community property in which the interests of husband and wife are equal. 2927 These propositions being established it follows that the earnings of husband and wife and the revenues from their separate personal property are community “income,” under the provisions of the-Act of Febru- ary 24, 1919. Gross income under the terms of the Act includes “gains, profits and income derived from salaries, wages, or compensation for personal services of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real cr personal, growing out of the ownership or use of or interest in such property.” 2928 The law of Texas presumes that the earnings of the husband and wife are the product of their joint labor and rests the ownership of same in the community; they are therefore community “income” to wit, “gains, profits and income” of the community, “derived from salaries, wages, or compensation for personal services, . . . professions, vocations,” as the case may be. 2929 Under the Statutes of Texas heretofore set forth, the separate property of the spouses is defined as that “owned or claimed by him (or her) before marriage, and that acquired afterwards by gift, devise or descent,” and also “the increase of all lands thus acquired, and the rents and revenues derived therefrom.” It is to be noted that the increase of separate personal property and the revenues derived therefrom, are not the separate property of the owner of the personalty, but are community property (Carr v. Tucker, 42 Tex. 330; Epperson v. Jones, 65 Tex. 425; Barr v. Simpson, 117 S. W. 1041). They are therefore “income” to the community, to wit, “gains, profits and income . . . from businesses, commerce, or sales or dealings in property . . . growing out of the ownership or use of or interest in such property.” 2930 Since one-half of all community property vests in each spouse it follows that one-half of the increase and revenues from separate property of the spouses except increase and rents and revenues from lands, is income to each of said spouses. 2931 Community property under the laws of Texas, belongs jointly to husband and wife; it follows that the Income therefrom accrues to husband and wife in equal shares. I therefore conclude: INC. 557 TAX 2832 1. That the earnings of husband and wife domiciled in Texas arc community income, and such husband and wife in rendering separate income tax returns may each report as gross income one-half the total earniilgs, of the husband and wife. 2933 2. That the income from separate property, except the increase,:, rents and revenues from lands, is community^ income, and that therefore husband and wife domiciled in Texas, in rendering separate income tax returns, may each report as gross income one-half the total income from separate property, except the increase, rents and revenues from land held separately. ^ j • a * i 2834 3. That the income from community property as defined in Article 4622, Vernon’s Sayles’ Statutes, quoted above, is community income, and that therefore husband and wife domiciled in Texas, in rendering separate income tax returns, may each report as gross income one-half the total income from such commiunity property. Respectfully, (Signed) A. MITCHELL PALMER, Attorney General. (Attorney-General’s Opinion embodied in T. D. 3071, ^2903.) {Decision.) Liability to Tax of Estates and Trusts as Entities under the Act of 1913. United States Circuit Court of Appeals For the Seventh Circuit. (October Term and Session, 1920.) FIRST TRUST AND SAVINGS BANK, ^ Trustee Under the Last Will and Testa- ment of Otto Young, Deceased, PloAntiff in Err or ^ vs. JULIUS F. SMIETANKA, as Collector of Internal Revenue of the United States of America, for the First District of Illinois. Defendant in Error. Error to the District Court of the United States for the' Northern District of 111- nois, Eastern Division. Before Baker, Alschuler and Evans, Circuit Judges. Baker, Circuit fud^.e, delivered the opinion of the court; 2835 Plaintiff in error, as trustee under the will of Otto 1: oung, filed a 639 declaration to recover income taxes assessed against the estate under 640 the Internal Revenue Act of October^ 3, 1913, and paid under pro- test. A general demurrer was sustained, and judgmient for costs followed. .... 2836 Otto Young’s will, after disposing of portions of the income during the lives of his widow and four daughters and until his youngest sur- viving grandchild should attain the age of twenty-one, provided; “6. When the last survivor of m.y daughters shall have de- ceased and the youngest surviving child of my daughters shall have % INC. 558 tax 10 - 8 - 20 . attained the age of twenty-one years, all of said trust estate then remaining in the hands of said trustee shall be divided in equal shares between my grandchildren, the surviving issue of any deceased grandchild to receive the share which such deceased grandchild would have been entitled to receive if then living. * * * The excess, if any, of the income of said trust estate, over and above the pay- ments hereinbefore provided to be made therefrom, shall be accumu- lated in the hands of said trustee and form a part of said trust estate, subject to the like control and power of disposition on the part of said trustee as the principal of said trust estate.” 2937 If a decedent’s estate produces an increment which is only payable at timies and to persons not now detenninable, is such increment dur- ing a tax year an incomic of that tax year which is assessable und.er the In- ternal Revenue Act of October 3, 1913.^ 2938 Provisions essential to the answer are as follows: “Par. A, subd. 1. There shall be levied and collected an- nually (a tax) upon the entire net income accruing from all sources in the preceding calendar year (1) to every citizen of the United States, whether residing at home or abroad, and (2) to every person residing in the United States, though not a citizen thereof, and (3) a like tax * * * upon the entire net income from all property owned and of every business, trade or profession carried on in the United States’ by persons residing elsewhere.” “Par. A, subd. 2. In addition to the income tax provided under this section (herein referred to as the normal income tax) there shall be levied and collected upon the net income of every individual an additional income tax of * * “Par. B. Subject only to such exemptions and deductions as are hereinafter allowed, the net income of a taxable person shall include * * * income * * * growing out of interest in real or per- sonal property and income derived from any source whatever.” “Par. D. Guardians, trustees, * * * and all persons, corpora- tions or associations acting in any fiduciary capacity, shall make and render a return of the net income of the person for whom they act, subject to this tax, coming into their custody or control and management, and be subject to all the provisions of this section which apply to individuals.” “Par. E. (After providing for withholding the normal tax at the source, and making various requirem.ents concerning returns and assessments, this paragraph continues:) The tax herein im- posed upon annual gains, profits, and incom^e not falling under ^the foregoing and not returned and paid by virtue of the foregoing, shall be assessed by personal return, under rules and regulations to be prescribed by the Com.m.issioner of Internal Revenue and ap- proved by the Secretary of the Treasury.” “Par. G fa). The normal tax hereinbefore imposed upon indi- viduals likewise shall be levied * * * upon the entire net income accruing from all sources during the preceding calendar year to every corporation, joint stock company or association, and every insurance companv, organi'zed in the United States, no matter how created or organized, not including partnerships.” 2939 Inasmuch as all persons and property within the jurisdiction of a sovereignty are subject to taxation, and since the property cannot 559 TAX INC. speak and the persons have no direct voice in wording the tax laws, it is a fundamental duty of the law-givers to make the scope of a tax law definite and its meaning clear; and therefore all doubts respecting scope and mean- ing are to be resolved in favor of the taxpayer. Treat v. White, 181 U. S. 264; Gould Y. Gould, 245 U. S. 151 [1[2306l. 2940 By citing this rule we do not imply that there is in the act of 1913 an ambiguity which must be construed against the government. ^In our judgment nothing could be clearer than the absence of any legislative intent to tax a property increment which during the tax year had no owner in being who received or was entitled to receive any of such increment. Paragraph A lays a tax each year upon the net income accruing in the pre- ceding calendar year. Paragraph B defines net income as that which comes in from any interest in real or personal property and from any other source whatever. Subdivision 1 of Paragraph A and Paragraph G (a) condition the levy upon the fact that the income, either actually or potentially, and with full right of immediate disposition, comes into the hands of either a citizen wherever resident, or a person who is a resident but not a citizen, or a person who is neither a citizen nor a resident but who owns property or carried on business here, or a corporation, joint stock company or asso- ciation, or insurance company, organized in this country. Otto Young’s estate consists, say, of a great commercial building in a great commercial city; the net rentals, after payment of insurance, local taxes, maintenance and operation, exceed the amount required by the trustee to pay the an- nuities to the widow and children; at some remote period the estate as it may then exist is to be turned over to persons now unknown, possibly not now in existence; and in the meantime the estate is growing in value by reason of the rise in real estate and also by the accumulation of rentals. But neither the real estate as valued at Young’s death, nor the increase in value, nor the accumulation of rentals, is a citizen or person or corporation, joint stock company or association, or insurance company, mutual or stock. In no calendar year preceding a levy was there any sort of being to whom the trustee could pay or account for the accumulations of rentals. Paragraph D of course did not lay upon the trustee the duty of returning these accumu- lations as part of its own income. That paragraph required the trustee to report what it received for another who, if acting in his own behali, would be called upon to show what he had received or was entitled to receive, with full power of immediate disposition, during the preceding calendar year. Paragraph E, the only other part of the act referred to by government coun- sel, plainly adds nothing to the ‘Tax imposed,” but is concerned only with methods of administration. 2941 Our reading of the aet accords with the many and uniform rulings of the Treasury Department from the passage of the act down to July 26, 1915. Treas. Dec. No. 1906, issued November 28, 1913; Income Tax Regulations No. 33, Articles 70, 71, 74 and 75, issued January 5,^1914; Treas. Dec. No. 1943, issued February 4, 1914; Treas. Dee. No. 2090, issued Decemiber 14, 1914; Rulings on January 15 and 30, and February 9 and 27, 1915, in Incom.e Tax Service 1915 on pages 379, 396, 426, 438; and the opinion of the Attorney General rendered to the Treasury Department on February 12, 1914, in Ineome Tax Service 1914 at page 260. 3942 In Treas. Dec. No. 2231, issued July 26, 1915, the Department declared that “Any part of the annual income of trust estates not distributed becomes an entity and as such is liable for the normal and addi- tional tax, which must be paid by the fiduciary. When the beneficiary^ is not hi esse and the income of the estate is retained by the fiduciary, such in- come will be taxable to the estate as for an Individual and the fiduciary will pay the tax both normal and additional.” This ruling was the cause of the 560 TAX INC. 10 - 8 - 20 . present and other similar suits. It illustrates the not unnatural tendency of tax officers to increase the revenues by implications and strained construc- tions. The Department’s first rulings were in harmony with the natural import of the language used by Congress; its later ruling does more than violate the canon that doubts and ambiguities are to go against the gov^n- ment, for it is based, not upon any uncertainty in the terms of the act, but upon a metamorphosis of a body of property into a person, and upon exac- tions contrary to the exemptions in the Act of 1913. If the unascertained residuary legatees were now at hand to receive from the trustee the accumu- lations of the preceding calendar year, they might be such in number as that nothing but the normal tax on the share of each in excess of ^ his personal exemption could be assessed; but the Department, by converting an estate into a personal entity, cuts off all personal exemptions and by adding me shares together subjects each share to the rates of surtaxes that are calculable on the sum total. If the residuary legatee were a charitable or educational institution, the Department’s method would add to the detriment due to the testator’s postponement of the benefit the taxes and surtaxes throughout the period of postponement. Congress recognized that such alterations and amendments were legislative and passed the Amendatory Act of Sep- tember 8, 1916, levying a tax upon undistributed income added to the prin- cipal of trust estates. 2943 The judgment is reversed and the cause remanded for further pro- ceedings in consonance with this opinion. (T. D. 3076.) 2944 Depletion of timber. — Articles 228, 229, 230, 231, 233, 234 and 235 1438 of Regulations 45 are hereby amended, and Articles 236 and 237 are promulgated, as follows: 2945 Art. 228. Capital recoverable through depletion allowance in the 1439 case of timber. — In general, the capital remaining in any year recoverable through depletion allowances may be determined as indicated in Articles 202 [^1408] and 203 [^1409]. In the case of leases the apportionment of deductions between the lessor and lessee will be made as specified in Article 204. The cost of timber properties^ shall be deter- mined in accordanec with the principles indicated in Article 205 [^[1411]. For method of determining fair market value and quantity of timber, see Articles 234, 235 and 236 [below]. For depletion purposes the cost of the timber shall not include any part of the cost of the land. 2946 Art. 229. Computation of allowance for depletion of timber for given 14t0 year. — The allowance for depletion of timber in any taxable year shall be based upon the number of units of timber felled during the year and the unit value of the timber in the timber account or accounts, pertain- ing to the timber cut. The unit value of the timber for a given timber account in a given year shall be the quotient obtained by dividing (a) the total number of units of timber on hand in the given account at the beginning of the year plus the number of units acquired during the year plus (or minus) the number of units required to be added (or deducted) by way of correcting the estimate of the number of units remaining available in the account into (b) the total fair market value as of March 1, 1913, (and/or cost) of the timber on hand at the beginning of the year, plus the cost of the number of units acquired during the year, plus proper additions to capital (See Art. 231). ’The amount of the deduction for depletion in any taxable year with respect to a given INC. 561 TAX timber account shall. be the product of (a) .the number of units of timber cut from the given account during the year multiplied by (b) the unit value of the timber for the given account for the year. Those taxpayers, who keep their accounts on a monthly basis, ^may, at their option, keep their depletion accounts on a monthly basis, in which case the amount deductible on account of depletion for a given month will be determined in the manner outlined above for a given year. The total amount of the deduction for depletion in any taxable year shall be the sum of the amounts deductible for the several timber accounts. For description of timber accounts, see Articles 235 and 236 [below]. . • r n j 2947 The depletion of timber takes place at the time the timber is felled. Since, however, it is not ordinarily practicable to determine the quantity of timber immediately after felling, depletion for purposes of ac- counting, will be treated as taking place at the time, when, in the process of exploitation, the quantity of timber is first definitely determined. 2948 Art. 230. Revaluation of timber not allowed.— In the case of timber 1441 acquired prior to March 1, 1913, the fair market value as of that date shall, when determined and approved by the commissioner, be the basis for determining the depletion deduction for each year during the con- tinuance of the ownership under which the fair market value of the timber was fixed, and during such ownership there shall be no redetermination of the fair market value of the timber for such purpose. However, the unit market (or cost) value of the timber will subsequently be changed if from any cause such unit market (or cost) value, if continued as a basis of deple- tion, shall upon evidence satisfactory to the Commissioner be found inade- quate or excessive for the extinguishment of the cost, or fair market value as of March 1, 1913, of the timber. 2949 Art. 231. Charges to capital and to expenses in the case of timber. 1442 In the case of a timber property held for future operation by an owner having no substantial income from the property or from other sources, all expenditures for administration, protection and other carrying charges prior to production on a normal basis shall be charged to capital account, after such a property is on a normal production basis such expenditures shall be treated as current operating expenses. In case a taxpayer, who has a substantial income from other sources, owns a timber property which is not yet on a normal production basis, he may, at his option, charge such expenditure with respect to such timber property to capital, or treat them as current operating expenses, but whichever system is adopted must be followed until permission to change to the other system is secured from the Commissioner. In the case of timber operations all expenditures prior to production for plants, improvements, and equipment,^ and thereafter all major items of plant and equipment, shall be charged to capital account for purposes of depreciation. After a timber operation has been developed and equipped and has reached its normal output capacity, the cost of additional minor items of equipment and the cost of replacement of minor items of worn-out and discarded plant and equipment may be charged to current operating expenses, unless the taxpayer elects to write off such expenditures through charges for depreciation; however, the method adopted must be followed consistently from year to year. 2950 Art. 232. Not changed. 1413 (% !% INC. 562 TAX 10 - 8 - 20 . 2951 Art. 233. Information to be furnished by taxpayer claiming depie- 1444 tion of timber. — To the income tax return of the taxpayer claiming a deduction for depletion or depreciation or both there shall be attached a map and statement (Form T (Timber)) for the taxable year covered by the income tax return. Form T (Timber) requires the following: (a) map showing timber and land acquired, timber cut, and timber and land sold; (b) description of, cost of, and terms of purchase or lease of, timber and land acquired; (c) proof of profit or loss from sale of capital assets; (d) description of timber with respect to which claim for loss, if any, is made; (e) record of timber cut; (f) changes in each timber account as the result of purchase, sale, cutting, re-estimate, or loss; (g) changes in physical property accounts as the result of additions to or deductions from capital and depreciation; (h) operation data with respect to raw and finished materials handled and inventories; (i) unit production costs; and (j) any other data which will be helpful in determining the reasonableness of the depletion and/or depreciation deductions claimed in the return. Similar information is required for certain years prior to the 1919 taxable year from those taxpayers who have not already furnished it. The specific nature of the information required for the earlier years is given in detail in “Form T — General Forest Industries Questionnaire for the years prior to 1919.” 2952 Art. 234. Determination of fair market value of timber. — VlTere the 1445 fair market value of the property at a specified date, in lieu of the cost thereof, is the basis for depletion and depreciation deductions, such value shall be determined, subject to approval or revision by the Commis- sioner upon audit, by the owner of the property in the light of the most reliable and accurate information available with reference to the condition of the property as it existed at that date, regardless of all subsequent changes, such as changes in surrounding circumstances, in methods of exploitation, in degree of utilization, etc. The value sought will be the selling price assum- ing a transfer between a willing seller and a willing buyer as of the particular date. Such factors as the following will be given due consideration: (a) character and quality of the timber as determined by species, age, size, condition, etc.; (b) the quantity of timber per acre, the total quantity under consideration, and the location of the timber in question with reference to other timber; (c) accessibility of the timber (location with reference to distance from a common carrier, the topography and other features of the ground upon which the timber stands and over which it must be trans- ported in process of exploitation, the probable cost of exploitation, and the climate and the state of industrial development of the locality); and (e) the freight rates by common carrier to important markets. The timber in ques- tion will be valued on its own merits, and not on the basis of general averages for regions; however, the value placed upon it, taking into consideration such factors as those mentioned above, will be consistent with that of the other timber in the region. The Commissioner will give due weight and consideration to any and all facts and evidence having a bearing on the market value, such as cost, actual sales and transfers of similar properties, the margin between the cost of production and the price realized for timber products, market value of stock or shares, royalties and rentals, value fixed by the owner for the purpose of the capitaTstock tax, valuation for local or State taxation, partnership accountings, records of litigation in which the value of the property has been involved, the amount at which the property may have been inventoried and/or appraised in probate or similar proceedings, disinterested appraisals by approved methods, and other factors. For deplc- INC. 563 TAX tion. purposes the fair market value at a Specified date shall not include any part of the value of the land. 2953 Art. 235. Determination of ctnantity of timber.— Each taxpayer % 1446 claiming or expecting to claim a deduction for depletion is required to estimate with respect to each separate timber account the total units (feet board measure log scale, cords or other units) of timber reasonably known or on good evidence believed to have existed on the ground on March 1, 1913, or on the date of acquisition of the property, as the case may be* This estimate shall state as nearly as possible the number of units which would have been found present by a careful estimate made on the specified date with % the object of determining 100 per cent of the quantity of timber which the area would have produced on that daet if all of the miCrchantable^ timber- had been cut and utilized in accordance with the standards of utilization prevailing in that region at that time. If, subsequently, during the owner- ship of the taxpayer making the return, as the net result of the growth of the timber, of changes in standards of utilization, of losses not otherwise accounted for, of abandonment of timber, and/or of errors in the original ^ estimates, there are found to remain on the ground, available for utilization, more or less units of timber than remain in the timber account or accounts, a new estimate of the recoverable units of timber (but not of the cost or the fair market value at a specified date) shall be made, and, when made, shall thereafter constitute a basis for depletion. 2954 Art. 235. Aggregating timber and land for purposes of valuation 1446 and accounting. — With a view to logical and reasonable valuation of timber, the taxpayer shall include his timber in one or more accounts. In general, each such account shall include all of the taxpayer’s timber which is located in one ‘'block, ” a “block” being an operation unit which includes ^ all of the taxpayer’s timber v/hich would logically go to a single given point of manufacture. In those cases m which the point of manufacture is at a considerable distance, or in which the logs or other products will probably be sold in a log or other market, the “block” m.ay be a logging unit which includes all of the taxpayer’s timber which would logically be removed by a single logging development. In exceptional cases, provided there are good and substantial reasons, and subject to approval or revision by the Com- missioner on audit, the taxpayer may divide the timber in a given “block into two or more accounts, e. g., tim.ber owned on February 28, 1913, and that purchased subsequently, may be kept in separate accounts, or timber owned on February 28, 1913, and the timber purchased since that date in % several distinct transactions may be kept in several distinct accounts, or individual tree species or groups of tree species may be carried in distinct accounts, or special timber products may be carried in distinct accounts, or ‘Tlocks” may be divided into two or more accounts based on the character of the timber and/or its accessibility, or scattered tracts may be included in separate accounts. When such a division is made a proper portion of the total value or cost, as the case may be, shall be allocated to each account. .. 2955 The timber accounts mentioned in the preceding paragraph shall not include any part of the value or cost, as the case may be, of the land. In a manner similar to that prescribed in the foregoing part of this article the land in a given “block” may be carried in a single land account or may be divided into two or more accounts on the basis of its character and/or accessibility. When such a division is miade, a proper portion of the total value or cost, as the case may be, will be allocated to each account. t ^ INC. 564 TAX 10-2I-20. 2956 Tlie total value or total cost, as the case may be, of land and timber shall be equitably allocated to the timber and land accounts re- spectively. 2957 Each of the several land and timber accounts carried on the books of the taxpayer shall be definitely described as to their location on the ground either by maps or by legal descriptions. 2958 For good and substantial reasons, to be approved by the Commis- sioner, or as required by the Commissioner, the timber of the land accounts may be readjusted by dividing individual accounts, by combining two or more accounts, or by dividing and recombining accounts. 2959 Art. 237. Timber depletion and depreciation accounts on books. — 1446 Every taxpayer claiming or expecting to claim a deduction for depletion and/or depreciation of timber property (including plants, improve- ments and equipment used in connection therewith) shall keep accurate ledger accounts in which shall be charged the fair market value as of March 1, 1913, or the cost, as the case may be, of (a) the property, and (b) the plants, improvements and equipment, together with such amounts subse- quently expended for the administration, protection and other carrying charges, or development of the property or additions to plant and equip- ment as are not chargeable to current operating expenses. (See Articles 231 and 236.) In such accounts there shall be set up separately the quantity of timber, the quantity of land, and the quantity of other resources, if any, and a proper part of the total value or cost shall be allocated to each. (See Article 236.) These accounts shall be credited with the amount of the depreciation and depletion deductions claimed and allowed each year, or the amount of the depreciation and depletion shall be credited to depletion and deprecia- tion reserve accounts, to the end that when the sum of the credits for deple- tion and depreciation equals the value or cost of the property, plus the amount added thereto for administration, protection, and other carrying charges, or development or for additional plant and equipment, less salvage value of the physical property, no further deduction for depletion and depreciation will be allowed. (T. D. 3076, signed by Commissioner Wm, M. Williams, and dated October 5, 1920.) (T. D. 3078.) 2960 A society organized to insure its members against fire (and other 767 casualty) is liable to tax on its statutory net income as a “fire insur- ance company” imder the 1909 and 1913 Acts.— The appended decision [captions only, 1[2961 to 1[2964], dated July 19, 1920, of the United States District Court for the Southern District of New York in the cases of Jewelers Safety Fund Society v. Lowe, collector, and Jewelers Safety Fund Society v. Anderson, collector, is published for the information of internal revenue officers and others concerned. (T. D. 3078, signed by Commissioner Wm. M. Williams, and dated October 13, 1920.) [Captions referred to in ^[2960 above.] 2961 1. Gross Income of Insurance Companies — Premium Receipts. The premium receipts of “every insurance company’’ by whatever name they are called are, unless specifically exempted by the terms of the taxing statutes in question, a part of such company’s gross income. 2962 2. Same — Premium Deposits. Premium deposits made in advance by members of a mutual insurance company to cover estimated losses and expenses are, so long INC. 565 TAX as the payment thereof constitutes the consideration for contract of insurance, insurance premiums constituting gross income of the company. 2963 3. Same — Interest on Bank Balances and Profits from Investment of Premium Deposits. Moneys received, by way of interest upon bank balances and from investment of such portion of premium deposits as are not currently required for the payment of losses and expenses are profits earned by an insurance company subject to tax. 2964 4. Mutual Fire Insurance Companies — Corporation Coming Within Meaning of. A corporation, organized to insure its members, limited to jewelers and dealers in goods ordinarily carried in the jewelry trade, against loss or damage by fire, theft, barratry, embezzlement and transporta- tion, which requires each member to deposit in advance a definite sum sufficient to cover estimated losses and expenses for the ensuing year, the balance of such deposits being returned to members, is a mutual fire insurance company and subject to the taxes imposed by the Acts of August 5, 1909, and October 3, 1913. (Captions of decision appended to T. D. 3078 [112960].) (T. D. 3082.) [Matter in italics is new; that in bold face brackets [ ] is old matter cut out.] 2965 Gross income defined — Inclusions — Article 42, Regulations No. 45, 914 amended. — Article 42 of Regulations No. 45 is hereby amended to 2672 read as follows: 2822 Art. 42. Sale of personal property on installment plan. — Dealers in personal property ordinarily sell either for cash, or on the personal credit of the buyer, or on the installment plan. Occasionally a fourth type of sale is met with, in which the buyer makes an initial payment of such a substantial nature (for example, a payment of more than 25 per cent) that the sale, though involving deferred payments, is not one on the install- ment plan. In sales on personal credit, and in the substantial payment type just mentioned, obligations of purchasers are to be regarded as the equivalent of cash, but a different rule applies to sales on the installment plan. Dealers in personal property who sell on the installment plan usually adopt one of four ways of protecting themselves in case of default: (a) through an agree- ment that title is to remain in the seller until the buyer has completely per- formed his part of the transaction; (b) by a form of contract in which title is conveyed to the purchaser immediately, but subject to a lien for the unpaid portion of the purchase price; (c) by a present transfer of title to the pur- chaser, who at the same time executes a reconveyance in the form of a chattel mortgage to the seller; or (d) by conveyance to a trustee pending performance of the contract and subject to its provisions. The general purpose and effect being the same in all of these plans, it is desirable that a uniformly applicable rule be established. The rule prescribed is that in the sale or contract for sale of personal property on the installment plan, whether or not title remains in the vendor until the property is fully paid for, the income to be returned by the vendor will be that proportion of each installment payment which the gross profit to be realized when the property is paid for bears to the gross contract price. Such income may be ascertained by taking as profit that proportion of the total cash collections [payments] received in the taxable year from installment sales, {such collections being atlocated to the year against the sales of zuhich they apply [always including payments received in the INC. 566 TAX ^ 11 - 30 - 20 . has not been '‘received,” but remains in the hands of the trustee. But, apart Jrom the fact that the corpus of the residuary estate has in fact already been ‘‘received” by the hospital in the shape of a mortgage, and the hospital Itself is pro forma paying to its own trustee the money which, pro forma, constitutes the income here taxed, the construction thus urged and the effect given to the word “received” does not commend itself to our judg- ment. The sections in question in the acts of 1913 and 1916 are to be con- sidered and construed jointly. They concern the same subject-matter, and that of 1916 was evidently meant to continue the broad and absolute purpose and provisions of the act of 1913 “that nothing in this section shall apply * * * to any corporation * * * operated exclusively for * * charitable * * * purposes.” Such being the case, the residu- ary estate which produced this income being the property solely of the hospital, no^ one but the hospital owning the income thereof, and the tem- porary holding of the income being by a trustee, who was the agent and rep- resentative solely of the hospital, it is clear that when substance and spirit, and not mere form and words, are the interpreters of the statute, the receipt of this income by the hospital’s agent and representative was in truth and reality a receiving by the hospital, for he who acts by the hand of another himself -acts. If this income was received from a third person by the trustee and afterwards lost, surely the hospital could never have collected it again from such third person on the theory the hospital had never received it. Moreover, it will also appear that, if the trustee had, without protest, used the money of the hospital to pay this income tax, such trustee could not, on settlement of his trusteeship, have justified such payment under section 2 of the act of 1913, for that section only warrants such deduction and with- holding where the income is the “income of another person subject to tax,” and elsewhere, as we have seen, the same section provided “that nothing in this section shall apply * * * to any corporation * * * operated exclusively for * * * charitable * * * purposes.” 2991 From the above, it is clear to us, first, that the United States, the taxing power and real defendant in this case, speaking by its legis- lative branch in plain language enacted its purpose and will to exempt from taxation the income of “any corporation or association organized and operated exclusively for religious, charitable, scientific, or educational purposes, no part of the net income of which enures to the benefit of any private stockholder or individual;” second, that the action of the United States by its executive officer, in this case the collector of internal revenue, in assessing and collecting this income tax from the hospital, was not warranted by the taxing statutes; and, third, that it is the duty of the United States, acting by its third agency, the federal courts, to prevent its executive branch from illegally defeating its expressed will in the law enacted by its legislative branch. 2992 It follows, therefore, that the judgment entered by the court below in favor of the hospital and against the collector should be and is affirmed. (266 Fed. 676.) INC. 573 TAX 2993 National banks may ret lawfully doclare stock dividends. — 815 [CoiKmcnt: In an rpirlon given to the Secretsrv of the Treasury 849 on October 26, 1920. /ciirg Attorney-General \Vm. L. Frierson 2575 so holds. — The Corporation Trust Company.) {Attorney-Generar s Opinion.) Whether certain foreign corporations and partnerships derive income from sources within the Urdted States. Department of Justice, November 3, 1920. 2994 Sir: I have the honor to acknowledge receipt of your letter of 1010 August 12, 1920, requesting an opinion as to v/hether, under the 1018 Revenue Act of February 24, 1919, in the five following cases, the 1027 foreign corporation or partnership derives income from sources 1545 within the United States, and, if so, what is the measure for deter- 1553 mining the amount of incomie derived from such sources. 2995 (1) R. Burleigh & Sons, a corporation organized under the laws of Scotland, owns and operates two sawmills in the United States, one at Dermiott, Ark., and the other at Dawson Springs, Ky. The m.ills saw logs into plank squares called “handle blanks” and also roughly turn hammier handles. These products are all exported to Glasgow, where they are finished at the homie mill. In addition the manager of the Amierican plant buys logs in the United States and exports them as such to Great Britain. No part of the products of the mills located in this country or of the logs purchased here is sold in the United States, but the entire output is sold in Great Britain. The plants and operations of the manager in the United States are conducted solely from funds sent to this country from the home office in Glasgow, Scotland, and no funds are sent to the home office from the Am.erican plants. 2996 Section 213 (a) of the Act of February 24, 1919 (40 Stat. 1065), defines gross incomie as follows: “Sec. 213. That for the purposes of this title (except as otherwise provided in sec. 233) the term ‘gross incom.e’ — “(< 2 ) Includes gains, profits, and incom^e derived from salaries, w^ages, or com>pensation for personal service (including in the case of the President of the United States, the judges of the Supremie and inferior courts of the United States, and all other officers and employees, whether elected or appointed, of the United States, Alaska, Hawaii, or any political subdivision thereof, or the District of Columbia, the compensation received as such), of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commjerce, or sales, or dealings in property, whether real or personal, 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 Incom.e derived from any source whatever. The amiount of all such items shall be included in the gross income for the taxable year in which received by the taxpayer, unless, under methods of accounting permitted under subdivision (b) of section 212. any such amounts are to be properly accounted for as of a dif- ferent period. * * 2997 Fection 233 (b) (40 Stat. 1077) provides: “In ihc case of a foreign corporation, gross income includes only the gross income from sources witln'n the United States, including the interest on bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise, dividends from resident corporations, and including all amounts 574 INC. TAN 11 ^ 0 - 20 . received (although paid under a contract for the sale of goods or otherwise) representing profits on the manufacture and disposition of goods within the United States.” j u r 2998 No incom.e is derived from the mere manufacture of goods; before there can be income there must be sale; and there is no income from sources within the United States from goods m.anufactured here unless there is, in the language of section 233 (b), both “m.anufacture and disposition of goods within the United States.” The obvious purpose of this section is to tax only incomie that accrues within the United States. ^ Congress does not attempt to tax profits arising from goods m.anufactured in this country but sold after being shipped abroad and without being disposed of by the owner in this country. I conclude, therefore, that when Burleigh & Sons manu- facture or partially manufacture articles in this country but do not sell or dispose of them until they are taken to Scotland, there is no gross income from sources within the United States v/ithin the mieaning of the Act. 2999 As to the purchase and exportation of logs, since profits that may accrue from such transactions are not specifically provided for in section 233 (b), if any gains or profits are gross incomie from sources within the United States, they miust be so because they represent compensation from trades, businesses, commierce, etc., as enumerated in section 213 (a), which are carried on within the United States. 3000 In Sulley v. Attorney General, 5 H. & N. 711 (2 B. T. C. 149), under a statute taxing the income of nonresidents “from any property whatever in the United Kingdom, or profession, trade, employm_ent, or vocation exercised within the United Kingdom,” the facts are simiilar to those above stated. Sulley was a partner in a firm of general merchants and drapers carrying on business in both the United States and England. Sulley resided in England and the other petitioners in the United States. Sulley transacted the business of the firm in England, which consisted of purchasing goods in England and shipping themi to the United States. No money was received in England except what was sent from the LTnited States, and the profits of the business v^ere miade by the resale of goods at an increased price in the United States. The court held that the liability to income tax attached only to such profits as came home to England as the share of Sulley, the partner resident there. The Lord Chief Justice said: “The question is, whether there is a carrying on or exercise of the trade in this country. I think there is not, looking at the sense- in which the term is used and having regard to the subject-matter of the statute. Wherever a merchant is established, in the course of his operations his dealings must extend over various places; he buys in one place and sells in another. ^ But he has one principal place in which he may be said to trade, viz., where his profits come homie to him. That is where he exercises his trade. It would be very inconvenient if this were otherwise. If a man were liable to income tax in every country in which his agents are established, it would lead to great injustice. The argument for the Crown must be carried to this extent, that mierely buying goods in this country is a trade exercised here so as to subject the purchaser of the goods to incom.e tax. In the present case the defendant is a partner; but if the argument is well founded, this American firm might be taxed in the same way if he had been merely an agent. It would be most impolitic thus to tax those who come here as customers. The subject of a foreign State, not resident here, can not be made amenable to our laws. How then are their profits to be made amenable to the fiscal law.^ Simply by the provision that whosoever carries on the business and receives the profits here shall be assessed. But in the present case no profits are received by the firm, or exist in this country. * * * The profits of the firm in America INC. 575 TAX do not accrue in respect of any trade carried on in this country, but in respect of the trade carried on in New York, where the main business is conducted. 3C01 In State ex Tel. Manitowoc Gas Co. v. Wisconsin^ Tax Commission^ 161 Wis. Ill, the Supreme Court of Wisconsin said: “If an income be taxed, the recipient thereof must have a domicile within the State, or the property or business out of which the income issues must be situate within the State so that the income may be said to have a situs therein. 3002 By a parity of reasoning I conclude that income which may accrue to Burleigh & Sons in England by sale of logs purchased in the United States is not income from sources within the United States. 3003 (2) The Moorbrook Mills Co. is a corporation organized under the laws of England, and the Sea Island Mills (Inc.) is a corporation organized under the laws of New York. Under an agreement between them the latter corporation is granted the exclusive right to handle the merchandise of the former in the United States and Canada. Orders for the goods are taken by the New York corporation on net term.s, payment to be made 10 days after delivery. A minimum net price for the sale of the goods by the New York corporation is fixed by the English corporation at an amount rwt to exceed the price obtained for similar goods in England. The New York corporation assumes credit risks and advances 50 per cent of the minimum net price against the bills of lading or packers’ receipts. The^ amount so advanced is deducted by it, together with freight charges, commissions, when remitting to the English corporation the amounts collected frorn the customers. The New York corporation receives a 5 per cent commission on the sale of the goods and any excess over the minimum net price, after deducting such commission, and charges for freight, duties, insuranc^ etc., are shared equally between the two corporations. No price that is insufficient to cover the minimum net price, plus freight,^ duty, and other ^arges, is accepted without the approval of the English corporation. The accepts all merchandise risks. If goods are refused or returned to the New York corporation by its customiers, it is required to make every effort to di^ose of them. Unless goods are sold at a profit above all expenses the New corporation receives no commission thereon. The goods are covered by insurance for the joint account of both corporations and are invoiced to the customier by the New York corporation. ^ r i r 3004 The case of the Moorbrook Mills Co. is the converse of that oi Burleigh & Sons. They purchase goods in England and sell them within the United States, and profits accruing from such transactions are plainly profits derived from business carried on vrithin the United States. 3005 See: Werle & Co. v. Colquhoun, 2 B. T. C. 402; Turner v. Rickman, 4 B. T. C. 25; MaePherson & Co. v. Moore, 6 B. T. C. 107. 3006 The gross income from such business is income from sources within the United States, and is to be estimated in the same way that such income is estimated where both manufacture and sale are had within the United States. ^ i j 3007 (3) Baton, MacLaran & Co. is a partnership organized in England, consisting of two members who are citizens and residents of that country. The principal office of the firm is at Liverpool, England, t)ut it maintains an office at Dallas, Tex., which is operated under the name of A. A. Baton & Co. The Dallas office is in charge of John S. Ownby, who receives a fixed salary and a stipulated commission based upon the net earnings of the firm in accordance with a contract of employment made by him with the members of the firm. It is claimed by the firm that A. A. Baton & Co. is merely a buying agency for the home office, and that such name has been given to the branch for book record purposes and to distinguish the firm s trans- actions in Liverpool from those of its agency in the United States. The 576 TAX INC. 11 - 30 - 20 . business of Paton, MacLaren & Co. is that of cotton merchants and importers. A. A. Paton & Co., the branch office, is engaged in buying cotton in the United States in behalf of Paton, MacLaran & Co. and in shipping it to the parent office in England for disposition. It is the custom of the branch office to draw on the parent office for amounts sufficient to make such pur- chases, together with a liberal margin to cover estimated charges and expenses, so that at the end of the season the branch office may show a balance to its credit. It is claimed that this balance represents merely the difference be- tween the total amount at which the cotton shipm^ents for the season are invoiced to Liverpool and the total purchase price plus ordinary and necessary costs of handling the cotton and the expenses of the agency. The branch office, however, does not make any sales. 3008 (4) C. M. Lampson & Co. is a partnership organized in England consisting of six members, five of whom are British subjects residing in London and the other a citizen of the United States residing in New York City. The hom.e office of the hrm is in London, but it maintains a branch office in New York City in charge of and conducted under the name of the partner resident in that city. The business of the firm is that of commission merchant in raw furs. The furs are consigned to it from various parts of the world, including the United States, the sales being made almost entirely in London at auction by auctioneers employed by the firm or at private sale. The firm does not at any time take title to the goods, but title remains in the consignor until the sale, when it passes to the purchaser. The principal func- tion of the New York office is to solicit consignments of raw furs to the firm at London, which requires the resident partner to travel to various points in the United States and Canada. The majority of goods consigned from Canada are sent to New York for shipment to London. The New York office also acts as disbursing agent for the firm in paying to consignors in the United States and Canada the proceeds of sales of their goods in London, attends to the shipment of the goods to London and their storage and insur- ance in New York while w^aiting for steamers, and further makes advances to consignors on the security of bills of lading or express receipts. The money required to maintain the New York office is obtained by selling drafts on London, and a balance of about $20,000 is usually carried by it with a New York bank. The income of the partnership is derived from a commission of about 6 per cent on the proceeds from sales of furs consigned to it. It collects the proceeds of the sales and deducts its commission, the expenses, if any, incurred by it for freight, insurance, or storage, and also the amount of any advances made to the consignors. The balance of the proceeds is remitted to the consignors. No profit is made on the freight or other charges. 3009 These cases are disposed of by the reasoning of the first case, from which it is concluded that in the former case the partnership of Paton, MacLaran & Co. is not deriving income from sources within the United States, and that in the latter case only the income of the partner resident within the United States is taxable. 3010 (5) The Manchester Liners (Ltd.) is a corporation organized under the laws of Great Britain, with its home ofhce at Manchester, England, operating a line of freight steamships between Philadelphia, Pa., and foreign ports. The corporation has no office in the United States, but consigns its steamships to hurness. Withy & Co. (Ltd.), at Philadelphia, who handles them as agents and brokers, together with steamships consigned to them by other owners. The agents see to the entry and clearance of each steamer and the discharge and loading of the cargo and supplies, collect such part of the freight as is prepayable in this country for the ocean carriage, deduct the amount of the agents’ disbursements and charges for their services, and remit 577 TAX INC. the balance to the steamship corporation at Manchester upon the departure of the vessel. Frequently a large part of the freight is not prepayable, but is payable upon delivery of the goods at Manchester. 3011 In an opinion rendered March 9, 1910, 28 Op. 211, Atty.-Gen. Wicker- sham decided that foreign steamship companies engaged in the business of transporting passengers, goods, and merchandise between ports in the United States and foreign ports, and maintaining passenger and freight agencies in this country, are subject to the special excise tax provided in section 38 of the Act of August 5, 1909, saying: * * Their business consists entirely in transporting passengers and goods and merchandise between ports in this country and those of foreign countries, and receiving and discharging the same. Through agents located here all contracts and arrangements incident to such a business at this end of their lines are made, and all exports are delivered to their warehouses and loaded upon their vessels, and the passengers embark, while they are within the limits of the United States; and likewise while here their imports are unloaded and passengers from foreign ports disembark. If these companies do not transact business in the United States they transact no business in any foreign port, and their entire business is carried on upon the high seas. To such a conclusion I am unable to give assent.” 3012 A similar conclusion was arrived at in Erichsen v. Last, 8 Q. B. D. 414 (4 B. T. C. 422), which held that a cable corporation established at Copenhagen, with an agent and an office in London, with cables extending between England and Denmark, was carrying on trade in England from which profit arose on account of contracts entered into with persons in England to send messages from England to other countries. Brett, L. J., said: * * That which earns the profit, as I said at first, or that out of which they get the profit is the better phrase, is the money to be paid to them out of the contract, which contract is made in England, and such contracts being habitually made by them in England, it seems to me, they carry on in England the trade or business of making such contracts. Therefore, it seems to me, that these people are properly said to be persons from whom this duty must be collected.” 3013 I am of the opinion that the Manchester Liners (Ltd.) derives income from sources within the United States to the extent that it derives income from freight and passenger traffic originating within the United States. Respectfully, WM. L. FRIERSON, Acting Attorney General. To the Secretary of the Treasury. (% (% INC. 578 TAX 11 - 30 - 20 . {Decision.) Claim for refund essential to suit for recovery of taxes even though claim for abatement has been filed and adversely acted on. SUPREME COURT OF THE UNITED STATES. No. 82. — October Term, 1920. Rock Island, Arkansas and Louisiana Railroad ] Company, Appellant, I Appeal from the Court of vs. Claims. The United States. [November 22, 1920.] Mr. Justice Holmes delivered the opinion of the Court. 3014 This is a claim for a sum paid as an internal revenue tax under the 2177 Act of August 5, 1909, c. 6, §38, 36 Stat. 11, 112. It is alleged 2189 that the claimant was not engaged in or doing business in the year 2982 for which the tax was collected and that therefore it was not due. The Court of Claims dismissed the petition on the ground that the claimant had not complied with the conditions imposed by statute and the claimant appealed to this Court. 3015 The facts are sim.ple. After the tax was assessed a claim for an abate- m.ent was sent to the Commissioner of Internal Revenue in July, 1913. On Decem-ber 18 of the same year the Commissioner rejected the application, whereupon on December 26 the claimant paid the tax with interest and a penalty. So far as appears there was no protest at the time of paymient and is is found that after it nothing was done to secure repayment of the tax. By Rev. Sts. §3226, amended by Act of February 27, 1877, c. 69, §1, 19 Stat. 248, no suit shall be maintained in any Court for the recovery of any tax alleged to have been illegally assessed “until appeal shall have been duly made to the Commissioner of Internal Revenue according to the provisions of law in that regard, and the regulations of the Secretary of the Treasury established in pursuance thereof, and a decision of the Commissioner has been had thereon, provided,” etc. Regulations of the Secretary established a pro- cedure and a form to be used in applications for abatement and distinct ones for claims for refunding them. The claimant took the first step but not the last. 3016 By Rev. Sts. §3220 the Commissioner of Internal Revenue is author- ized ‘on appeal to him made, to remit, refund, and pay back’ taxes illegally assessed. It is urged that the ‘appeal’ to him to remit made a second appeal to him to refund an idle act and satisfied the requirement of §3226. Decisions to that effect in suits against a collector are cited, the latest being Loomis V. Wattles., 266 Fed. Rep. 876. — But the words ‘on appeal to him made’ mean, of course, on appeal in respect of the relief sought on appeal — to refund if refunding is what he is asked to do. The words of §3226 also must be taken to mean an appeal after payment, especially in view of §3228 requiring claims of this sort to be presented to the Commissioner within two years after the cause of action accrued. So that the question is of reading an implied exception into the rule as expressed, when substantially the same objection to the assessment has been urged at an earlier stage. 3017 Men must turn square corners when they deal with the Govern- ment. If it attaches even purely formal conditions to its consent to be sued those conditions must be complied with. Lex non praecipit inutilia INC. 579 TAX (Co. Lit. 127^) expresses rather an ideal than an accomplished fac^ But in this case we cannot pronounce the second appeal a mere form. On appea a iudee sometimes concurs in a reversal of his decision below. It is possible as suggested by the Court of Claims that the second appeal may be heard by a different person. At all events the words are there in the statute and the regulations, and the Court is of opinion that they mark the conditions ot the claimant’s right. See Kings County Savings Inshtution Blair, lib U. S. 200. It is unnecessary to consider other objections that the claiman would have to meet before it could recover upon this claim. (% -INC. 580 TAX 12 - 18 - 20 . « (THE CORPORATION TRUST COMPANY’S INCOME TAX SERVICE. > INSERT T^S PAGE TO FACE PAGE 580*. THE INDEX on the blue sheets at the back of the book indexes the Law and all regulations, etc., relating thereto, to and * including page 580 opposite. Page 581 and the pages following that page, are unindexed. THE RUNNING TABLE OF CONTENTS, on Supplementary Page 115, at the back of the book, should be consulted for matter unindexed. This table consists of a list of all current Treasury Decisions, etc., printed in the Service, showing in a general way, the subject covered by each regulation, ruling or other matter. Remove the pink sheet facing page 520. (THE CORPORATION TRUST COMPANY’S INCOME TAX SERVICE^)' THE INDEX on the blue sheets at the back of the book indexes the Law and all regulations, etc., relating thereto, to and including page 580. Page 581, opposite, and the pages , . ; , . following, are unindexed. THE RUNNING TABLE! OF CONTENTS on Supplementary Page 115, at the back of the book, should be consulted for matter unindexed. This table consists of a Ust of all current Treasury Decisions, etc., printed in the Service, showing the general subject covered by each regulation, ruling or " other matter. 12 ^- 20 . 3018 Collection by distraint, of tax assessed by collector ex parte against 2071 a long since dissolved corporation, the business being continued by 2164 ) the former stockholders as a partnership (Pennsylvania), and the property against which the collector is proceeding being that of the partnership, may not be enjoined by the^ members of the partnership, they being taxable persons and the property itself being such as to be liable to distraint for any tax assessed against them. (Substance of decision of U. S. District Court, M. D. Pennsylvania, September 27, 1920, in Markle et al. vs. Kirkendall, Collector (267 Fed. 498).) (T. D. 3101.) 3019 Traveling expenses.— Article 292 of Regulations 45 (revised) is [1187 hereby amended to read as follows, effective on and after January 1, 1921: ^ “Art. 292. Traveling expenses. — Traveling expenses, as ordinarily understood, include railroad fares and meals and lodging. If the trip is undertaken for other than business purposes, such railroad fares are personal expenses and such meals and lodging are living expenses. If the trip is on business, the reasonable and necessary traveling expenses, including rail- road fares, and meals and lodging in an amount in excess of any expenditures ordinarily required for such purposes when at home, become business instead of personal expenses, (a) If, then, an individual whose business requires him to travel receives a salary as full compensation for his services, without reimbursement for traveling expenses, or is employed on a commission basis with no expense allowance, his expenses for railroad fares, and expenses for meals and lodging in an amount in excess of any expenditures ordinarily required for such purposes when at home, are deductible from gross income, (b) If an individual receives a salary and is also repaid his actual traveling expenses, he shall include in gross income an amount thereof equal to the ordinary expenditures required for meals and lodging when at home, as such amount is held to be additional compenaation to the taxpayer, (c) If an individual receives a salary and also an allowance for meals and lodging, as, for example, a per diem allowance in lieu of subsistence, any excess of the cost of such meals and lodging over the allowance plus the ordinary expendi- tures required for such purposes when at home, is deductible, but any excess of the aljowance over such expenses plus such ordinary expenditures is tax- able income. Congressmen and others who receive a mileage allowance for railroad fares should return as income any excess of such allowance over their actual expenses for such fares. A payment for the use of a sample room at a hotel for the display of goods is a business expense. This contemplates that only such expenses as are reasonable and necessary in the conduct of the business and directly attributable to it may be deducted. A taxpayer claiming the benefit of the deductions referred to herein must attach to his return a statement showing (1) the nature of the business in which engaged; (2) number of days away from home during the calendar year on account of business; (3) number of members in taxpayer’s family dependent upon him for support; (4) average monthly expense incident to meals and lodg- ing for entire family, including taxpayer himself when at home; (5) average monthly expense incident to meals and lodging when at home if taxpayer has no family; (6) total amount of expenses incident to meals and lodging while absent from home on business during taxable year; (7) total amount of excess expenditures incident to meals and lodging while traveling on busi- ness and claimed as a deduction; (8) total amount of other expenses incident to travel and claimed as a deduction. 581 INC. TAX 3020 Claim for the deductions referred to herein must be substantiated when required by the Commissioner, bj,records showing in detail the amount and nature of the expenses incurred. (T. D. 3101, signed by Commissioner Wm. M. Williams, and dated December 16, 1920.) {Decision) Revenue Act of 1916 Increase in value of capital assets when realized by sale or di^ position, by one not a trader or dealer therein, is not income, and hence is not taxable as such. DISTRICT COURT OF THE UNITED STATES District of Connecticut Frederick F. Brewster vs. James J. Walsh Collector of Internal Revenue, No. 2133 'At Law 804 1055 1310 1916. Henry F. Parmelee, Esq., New Haven, Conn. Georee D. Watrous, Esq., New Haven, Conn. for Plaintiff. Edward L. Smith, Esq., United States Attorney Allan K. Smith, Esq., Ass’t United States Attorney. for Defendant. THOMAS, DISTRICT JUDGE; ™ 3021 This action arises under the Income Tax Law of 1916. Plaintitt seeks to recover of the defendant, who is Collector of Internal Revenue for the District of Connecticut, $17,689.13, which amount the plaintiff paid to the Government under protest, as an additional income tax assessed against him for the year ending December , lyio. The plaintiff further claims that there is also due him the additional sum of $67.66 which the Government concedes was an overpayment ot normal tax and is rightly due the plaintiff, so that the total amount chimed by the plaintiff is $17,756.79. Trial by jury was waived and the case was tried to the Court. , i • ‘o: * ‘ 3022 The facts were stipulated. It appears that plaintiff is not now nor was he during the times mentioned herein, a member ot any stock exchange, or of any similar organization or association engaged in the business of trading in, buying or selling securities. Neither ^as he in any way engaged in the business of buying or selling stocks and bonds otherwise than occasionally making purchases of stocks and bonds tor m- vestment purposes, and occasionally making sales of such stocks and bonds for the purpose of changing the character of his investments. It fn^ej appears that there are three transactions involved in the mam points raised 3023 ^ The first transaction concerns the bonds of the International Navigation Company. In 1899 the P'a>ntiff acquired certa n interest-bearing bonds of that Company of the face value of $191,000 in exchange for other securities of the same corpmation, and during the year 1916 he sold the same bonds for .$191^00. On March 1, I^I^’ bonds were quoted in the market at 7934% r v so mht to that day the market value of the bonds was $151,845. The tax soiightto 582 TAX INC. 12 £ 20 > 20 . be collected by the Government on this transaction is based Upon the difference between the sale price and the market price of the bonds on March 1, 1913, to wit: $39,155, which amount the Commissioner taxed as income for the year 1916, and is part of the tax paid under protest which plaintiff seeks to recover in this suit. 3024 The second transaction concerns certain bonds of the International Mercantile Marine Company. In 1903, plaintiff, as a member of an underwriting syndicate, was granted an allotment of mortgage bonds of the face value of $257,000, in return for which he paid the Company at that time $231,300 in cash, but the bonds thus allotted were not de- livered to the plaintiff until April, 1906 when he received them with nothing by way of interest on the amount of cash he had turned over to the Com- pany in 1903. The plaintiff claims that interest at 6% for three years on $231,300 is properly an element of cost and attributable thereto. 3025 It becomes necessary at this point to digress from a statement of the facts and first dispose of plaintiff’s claim for interest on this transaction, in order to determine what the bonds actually cost the plaintiff, as the actual cost must be determined before consideration can be given to the plaintiff’s claims respecting the tax the Commissioner assessed and which plaintiff paid under protest, pursuant to such assessment. Plaintiff’s claim that interest computed from date of payment in 1903 to date of receipt of bonds in 1906, and added to the cash paid for the bonds repre- sents the real cost of the bonds to the plaintiff is untenable. 3026 In Hays v. Gauley Mountain Coal Co., 247 U. S. 189, one of the questions there presented was whether the respondent should be allowed to add interest to the amount of cash it had paid in 1902 for certain shares of the capital stock of another mining company which shares it sold in 1911, but the Supreme Court held that there was “no merit in the contention that interest should be added to the purchase price in order to ascertain its cost,” so that I find that the actual cost of these bonds to the plaintiff was $231,300. 3027 From the stipulation it further appears that the plaintiff sold the bonds in 1916 for $276,150, part of them having been sold at 107^ and part at 1073^. But on March 1, 1913, the market quotation and market value of these bonds was 64 bid and 643/^ asked and at such quo- tation had an actual market value of $164,480. On this transaction the plaintiff failed to make an income tax return as to any profit or gain by him obtained on the sale of these bonds and was later assessed an additional tax of $111,670 on the ground that this was the representative gain shown by the difference between $164,480, the value of said bonds as indicated by the market quotation of March 1, 1913, and $276,150, the price which plaintiff received from the sale of the bonds in 1916. The tax which was assessed on this transaction by the Commissioner, and paid under protest, and which is part of the tax here sought to be recovered was levied upon the sum of $111,670, which amount the Government claims represents the income received from the sale of these bonds and which amount, as stated above, was the difference between the market value of the bonds on March 1, 1913, and the sum received for them when sold in 1916. 3028 The third transaction relates to a stock dividend declared by the Standard Oil Company of California, in which Company the plaintiff owned 1330 shares of its capital stock. In 1916 the plaintiff received 665 shares of stock of said Company as a stock dividend declared against a surplus, — 18.0754% of which had been earned after March 1, 1913. The Government claims that the plaintiff derived $12,019.41 taxable income therefrom, but this claim has been decided adversely to the Government INC. 583 TAX in Eisner v. Macomher, 252 U. S. 189 [^ 2575], where the identical stock dividend was under consideration, so that the plaintlfF, upon that authority, is entitled to recover for the tax assessed and collected in connection with this transaction. 3029 The discussion is therefore narrowed to two transactions, those pertaining to (a) The International Navigation Company bonds, (b) The International Mercantile Marine Company bonds, both of which the plaintiff owned on and before March 1, 1913, and which he sold in 1916, in accordance with the conditions above set forth. So that the sole inquiry here is — whether the difference in the amounts between the value of investment securities on March 1, 1913, and the amounts received for such securities when sold in 1916 is taxable income within the Income Tax Law of 1916? (39 Stat. c. 463, pp. 756, 757.) 3030 The discussion of this proposition revolves around the Sixteenth Amendment of the Constitution and the legislation passed by the Congress after the ratification of the Amendment. 3031 The Sixteenth Amendment to the Constitution provides: “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.’’ 3032 The pertinent sections of the statute passed by the Congress to carry the Amendment into effect provide: “Sec. 1. (a) That there shall be levied, assessed, collected, and paid annually upon the entire net income received in the preceding calendar year from all sources by every individual, a citizen or resident of the United States, a tax of two per centum upon such income.” “Sec. 2. (b) That, subject only to such exemptions and de- ductions as are hereinafter allowed, the net income of a taxable person shall include gains, profits, and income derived from salaries, wages, or compensation for personal service of whatever kind and in whatever form paid, or from professions, vocations, businesses, trade, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in real or personal property, also from interest, rent, dividends, securities, or the transactions of any business carried on for gain or profit, or gains or profits and income derived from any source whatever: Provided, that the term ‘dividends’ as used in this title shall be held to mean any distribution made or ordered to^ be made by a corporation, joint-stock company, association, or insurance com- pany, out of its earnings or profits accrued since March first, nineteen hundred and thirteen, and payable to its shareholders, whether in cash or in stock of the corporation, joint-stock com- pany, association, or insurance company, which stock dividend shall be considered income, to the amount of its cash value.” 3033 It is thus apparent that the statute specifically imposes^ a tax upon net income which “shall include gains, profits, and income derived from . . . sales or dealings in property,”^ and then provides: “(c) For the purpose of ascertaining the gain derived frorn the sale or other disposition of property, real, personal, or mixed, acquired before March first, nineteen hundred and thirteen, the fair market price or value of such property, as of March first nineteen hundred and thirteen, shall be the basis for detemrining the amount of such gain derived.” 584 TAX INC. 12 . 20 - 20 . 3034 It is the contention of the plaintiff that the statute is unconsti- tutional in so far as it taxes as income the increased value of invest- ments when realized by pie, and that such a tax is a direct tax upon capital or property not authorized by the Sixteenth Amendment and not a tax upon^ income. In other words, that such gains do not come within the definition of income as the word is used in the Sixteenth Amendment. 3035 On the other hand, it is the contention of the Government that such gains do constitute income properly taxable under the Income Tax Law of 1916. 3036 We are therefore brought to a consideration of the scope of the Sixteenth Amendment, because there is no question but that prior to the adoption of this Amendment the Congress had no power whatever to tax as income gains arising from the sale of property where the owner thereof was not a dealer or trader in such property so as to justify an excise tax upon his business. 3037 In support of this, reference is made to the decision of the Supreme Court in Pollock v. Farmer s Loan ^ Trust Co.y 158 U. S. 601. The conclusion stated by Chief Justice Fuller, on page 637, is as follows: “Taxes on personal property, or on the income of personal property, are likewise direct taxes,’’ and that “The tax imposed by Sections twenty-seven to thirty-seven, inclusive, of the Act of 1894, so far as it falls on the income of real estate and of personal property, being a direct tax within the meaning of the Constitu- tion, and, therefore, unconstitutional and void because not appor- tioned according to representation, all those sections . . . are necessarily invalid.” 3038 In Eisner v. Macomber, supra — Mr. Justice Pitney, speaking of the Pollock case, said on page 205: “It was held that taxes upon rents and profits of real estate and upon returns from investments of personal property were in effect direct taxes upon the property from which such income arose, imposed by reason of ownership; and that Congress could not impose such taxes without apportioning them among the States according to population, as required by Article I, section 2, clause 3, and section 9, clause 4, of the original Constitution.” 3039 The Sixteenth Amendment does not extend the taxing power to new subjects. InEvans v.Gore, 253 U. S. 245, at page 261 [1[2738], Mr. Justice Van Devanter in delivering the opinion of the Supreme Court said: — Thus the genesis and wordsofthe Amendment unite in showing that it does not extend the taxing power to new or excepted sub- jects, but merely removes all occasion otherwise existing for an apportionment among the States of taxes laid on income, whether derived from one source or another.” 3040 And again in Eisner v. Macomber, supra, at page 206, Mr. Justice Pitney, in discussing the scope of the Amendment, said: As repeatedly held, this did not extend the taxing power to new subjects, but merely removed the necessity which otherwise might exist for an apportionment among the States of taxes laid on income. Brushaber v. Union Pacific R. R. Co., 240 U. S. 1, 17-19; Stanton v. Baltic Mining Co., 240 U. S. 103, 112 et seq.; Peck y Co. V. Lowe, 247 _U. S. 165, 172-173. A proper regard for its genesis, as well as its very clear language, requires also that this amendment shall not be extended by loose construction, so as to repeal or modify, except as applied INC. 585 TAX to income, those provisions of the Constitution that require an apportionment according to population for direct taxes upon property, real and personal.^ This lirnitation still has an appro- priate, and important function, and is not to be overridden by Congress or disregarded by the courts. a • i t r In order, therefore, that the clauses cited from Article 1 ot the Constitution may have proper force and effect, save only as modified by the amendment, and that the latter also may have proper effect, it becomes essential to distinguish between what is and what is not ‘income,’ as the term is there used; and ro apply the distinction, as cases arise, according to truth and substance, without regard to form. Congress can not by any definition it may adopt conclude the matter, since it cannot by legislation alter the Constitution, from which alone it derives its power to legislate, and within whose limitations alone that power can be lawfully Gxcrcis0(l • • 3041 In the case at bar it therefore “becomes essential to ditinguish between what is and what is not ‘income as the term is used in t e Sixteenth Amendment . . . and to apply the distinction according to truth and substance without regard to form,” in order that Article l o the original Constitution, section 2, clause 3, and section 9, clause 4, may have proper force and effect save only as modifiea by the bixteent Amendment. . , , . t • • i r 3042 The question therefore is simply this. Is a gam in value realiz from the sale of property income? 3043 Insisting with great earnestness, with persuasive argument and tne citation of cases alleged to be in support of its a^ument, the Government contends that the answer is— Yes. The plaintiff, with equal forcefulness, contends that the answer is No. 3044 But the cases relied upon by the Government arose under the Corporation Tax Act of 1909 and not under an Income l ax Law. The Corporation Tax Act of 1909, as held by the Supreme Court in Stratton s Indepenhnce v. Howbert, 231 U. S. 399, 414, 416, was not an income tax law, and since gains bv sales were specifically included as taxable, jhe cases decided under that act do not determine the definition of the word income within the Sixteenth Amendment and so are not apposite to the instant 3^045 Mr. Justice Pitney, in the Strattons Independence case, supra, page 414, said: — , , , t a 4 - “As has been repeatedly remarked, the Corporation lax Act of 1909 was not intended to be and is not in any proper sense an income tax law. This court had decided in the Pollock case that the income tax law of 1894 amounted in effect to a direct tax upon property, and was invalid because not apportion^ according to population as prescribed by the Consitution. 1 he Act oi 1909 avoided this difficulty by imposing not an income tax, but an excise tax upon the conduct of business in a corporate capacity, measuring, however, the amount of tax by the income ot the corporation, with certain qualifications prescribed by the Act it^ t. Flint V. Stone-Tracy Co., 220 U. S. 107; McCoachv. MinMl Co., 228 U. S. 295; United States v. Whitridge (decided at this term, ante, p. 144).” And again on page 416 he said: , • i • i ^ “As to what should be deemed ‘income’ within the meaning of Sec. 38, it of course need not be such an income as would have been taxable as such, for at that time (the Sixteenth Amendment on 586 TAX INC. 12 - 20 - 20 . not having been as yet ratified), income was not taxable as such by Congress without apportionment according to population, and this tax was not so apportioned. Evidently Congress adopted the income as the measure of the tax to be imposed with respect to the doing of business in corporate form because it desired that the excise should be imposed, approximately at least, with regard to the amount of benefit presumably derived by such corporation from the current operations of the Government. In Flint y. Stone-Tracy Co.,^ 220 U. S. 107, 165, it was held that Congress in exercising the right to tax a legitimate subject of taxation as a franchise or privilege, was not debarred by the Constitution from measuring the taxation by the total income, although derived in part from property, which, considered by itself, was not taxable. It was reasonable that Congress should fix upon gross income, without distinction as to source, as a convenient and sufficiently accurate index of the importance of the business transacted.” See also Anderson v. Forty-Two Broadway^ 239 U. S. 69, 72; Stanton v. Baltic Mining Co., 240 U. S. 103, 114; Von Baumhach v. Sargent Land Co., 242 U. S. 503, 522; Doyle v. Mitchell Bros . Co., 247 U. S. 179, 183. 3046 The question before us was passed upon by the Supreme Court under the Income Tax Law of 1867 inGray v. Darlington, 15 Wallace 63, and this precise question has not been before the Supreme Court since that decision. There it was decided that under the Law of 1867 a gradual increase in value extending over a period of years could not be taxed as income for the year in which it was realized by sale. Speaking for the Court, Mr. Justice Field on page 65 said: — “The question presented is whether the advance in the value of the bonds, during this period of four years, over their cost, re- alized by their sale, \vas subject to taxation as gains, profits, or income of the plaintiff for the year in which the bonds were sold. The answer which should be given to this question does not, in our judgment, admit of any doubt. The advance in the value of property during a series of years can, in no just sense, be considered the gains, profits, or income of any one particular year of the series, although the entire amount oif the advance be at one time turned into money by a sale of the property. The statute looks, with some exceptions, for subjects of taxation only to annual gains, profits, and income.” And further on page 66: “The mere fact that property has advanced in value between the date of its acquisition and sale does not authorize the imposi- tion of the tax on the amount of the advance. Mere advance in value in no sense constitutes the gains, profits, or income specified by the statute. It constitutes and can be treated merely as increase of capital.” 3047 Respecting this decision, the Supreme Court inLynch v. Turrish, 247 U. S. 221 [1f2351], speaking by Mr. Justice McKenna, said on page 230, after discussing v. Darlington'. “This case has not been since questioned or modified,” and meets the Government’s attempt to distinguish Gray v. Darlington, on page 230, in the following manner: — “The Government, however, makes it view depend upon dis- putable differences between certain words of the two acts. It urges that the Act of 1913 makes the income taxed one ‘arising or accru- ing’ in the preceding calendar year, while the Act of 1867 makes INC. 587 TAX the income one ^derived.* Granting that there is a ^ade of difference between the words, it cannot be granted that Congress made that shade a criterion of intention and committed the con- struction of its legislation to the disputes of purists.^ Besides, the contention of the Government does not reach the principle oi Gray V. Darlington^ which is that the gradual advance in the value of property during a series of years in no just sense can be^ ascribed to a particular year, not therefore as ‘arising or accruing, to meet the challenge of the words, in the last one of the years, as the Gov- ernment contends, and taxable as income for that year or when turned into cash. Indeed, the case decides that such advance in value is not income at all, but merely increase of capital and not subject to a tax as income.” i a j 3048 The meaning of the word “incomes” in the Sixteenth Amendment is no broader than its meaning in the Act of 1867. It was adopted in its present form, using only the words “incomes from whatever source derived” with the presumptive knowledge on the part of Congress and the several State legislatures, of the meaning attributed thereto by the deci- sions of the various courts, both State and Federal. ^ u i 3049 It has been held repeatedly that gains realized from the sale of capital assets held in trust are not income, but are principal, exactly as the securities were before they were sold, and that where a tenant for life is entitled to the entire net income of a fund, and the trustee realizes an advance in value by the sale of an investment, the life tenant is not en- titled to the gain which is uniformly treated by the Courts as an increment to principal and a part of the corpus of the trust. ^ ^ , j 3050 The following are a few of the leading cases sustaining the doctrine that the growth or increase of value when realized on the sale ot an investment is accretion to capital and not income as between life tenant and remainderman. Boardman v. Mansfield^ 79 Conn. 634; Carpenter v. Perkins, 83 Conn. 11, 20; Parker v. Johnson, 37 N. J. Eq. 366, 368; Out- cault V. Appleby, 36 N. J. Eq. 74, 78; Matter of Gerry, 103 N. Y. 445; Thayer v.Burr, 201 N. Y. 155, 157, 158; Graham s Estate, 198 Pa. St. 216, Neel’s Estate (No. 2) 207 Pa. St. 446; Lauman v. Foster, 157 Iowa 275; Slocum V. Ames, 19 R. I. 401; Jordan v. Jordan, 192 Mass. 337; Mercer v. Buchanan, 132 Fed. 501, 508. ^ , t • r i c* u 3051 These decisions had at the time of the adoption or the bpteentn Amendment, established a definite meaning of the word ^ i^JF^me for the purpose of statutory and Constitutional construction. It is dimcult to see how the word “income” can have any different meaning when applied to the proceeds of an investment when held by a trustee, than when held by an individual, as the Income Tax Law specifically refers to funds held in trust. (Sec. 2 (b).) ^ i i i • -ii 3052 In order to show the conclusions reached by the^ Courts it will suffice to quote from only one of the cases to which reference is made supra. In Parker v. fohmson, 37 N. J. Eq. 366, the Court said: “The profit is not income. It was made by the trustee in the process of converting the investment, and, like a premium realized on the sale of Governm.ent bonds in which the funds might be in- vested, it belongs to the fund. The trustee in this case is to keep the fund invested, and the tenant for life is entitled to the interest. It is clearly the duty of the trustee to apply the profits on one in- vestment to making up the losses on others. ^ ^ 3053 So it seems that income from investments consists, in ^e case of bonds, of interest; in the case of stocks, of dividends. There is no income from the sale of investments. 588 TAX INC. 12 - 20 - 20 . 3054 The conclusion seems imperative that the word ‘‘income” has a well-defined meaning, not only in common speech but also under judicial construction and this meaning does not include the increase m value of capital assets when realized upon a sale. 3055 The following extract from the opinion of Mr. Justice Pitney in the Macomber case, supra, at page 206, is instructive: ^ “For the present purpose we require only a clear definition of the term ‘income’ as used in common speech, in order to determine its meaning in the amendment.” 3056 It seems to me apparent that the Supreme Court, in Tozvne v. Eisner^ 245 U. S. 418, 426, [1f2313], and in Eisner v. Macombety supra, followed the doctrine enunciated in Gibbons v. Mahon, 136 U. S. 549, where it was held that a stock dividend is an accretion to capital and not income as between a life tenant and the remainderman and therefore held in the Towne case that a stock dividend was not income within the meaning of the Income Tax Law of 1913 and in the Macomber case that a stock dividend was not income within the meaning of the Sixteenth Amendment. As already stated, it is difficult to see why any different rule should be applied to the proceeds of an investment — purely a capital investment — when held by a trustee than when held by an individual. 3057 Two pertinent points have been definitely established by the Su- preme Court in Eisner v. Macomber, supra, page 214: ^ First: — “Enrichment through increase in value of capital in- vestment is not income in any proper meaning of the term. and Second: — If it requires conversion of capital in order to pay the tax, it must follow that the tax is on capital increase and not on income, for on page 213, the Court said: — “Yet without selling, the shareholder, unless possessed of other resources, has not the wherewithal to pay an income tax upon the dividend stock. Nothing could more clearly show that to tax a stock dividend is to tax a capital increase, and not income, than this demonstration that in the nature of things it requires conversion of capital in order to pay the tax.” 3058 Had the plaintiff possessed no resources other than the bonds which he sold, — prior to the sale his capital would have been their then entire value. The increase since March 1, 1913, was capital increase. To collect the tax on this increase in value because the capital was converted into cash must of necessity diminish his capital to that extent. Before the sale all the plaintiff possessed was capital without any part of it constituting income. The sale of capital results only in changing its form and like the mere issue of a stock dividend, makes the recipient no richer than before. Gibbons v. Mahon, supra; Towne v. Eisner, s\\pv 2 i', Eisner v. Macomber , supra. 3059 The exact question presented in this case has not been before the Supreme Court since its decision in Gray v. Darlington, supra, nor did it arise in Eisner v. Macomber, supra. Notwithstanding certain passages in the opinion of the Court in the Macomber case stating that when dividend stock is sold at a profit, the profit is taxable like other income, — which I consider, in view of all that has been written by the Supreme Court in a long line of income tax decisions, must mean that the profit derived from such transactions, if it is income, applies in the case of a trader and not in the case of an individual who merely changes his investments. 3060 Therefore, under the authoruty of Gray v. Darlington, which is approved in Lynch v. Turrish, supra, I feel constrained to hold that the appreciation in value of the plaintiff’s bonds, even though realized INC. 589 TAX by sale, is not income taxable as such, and in reaching this conclusion I find support for it in the Macomber case where Mr. Justice Pitney says: “Enrichment through increase in value of capital investment is not income in any proper meaning of the terrn.’’ 3061 It follows that the Income Tax Law of 1916, in so far as it attempts to tax such increase, is in conflict with the apportionment require- ments of the First Article of the Constitution, being a direct tax and not apportioned among the several States according to population. 3062 Counsel for plaintiff contended that the Act should be so construed as to limit the tax to the actual increase from the dates of acquisi- tion, although the value of such bonds was less on March 1, 1913, than when acquired prior thereto, in the event that the gain in value of the bonds v hen sold was taxable at all. In view of the decision that such increases are not income it becomes unnecessary to discuss the point. 3063 The conclusion herein expressed has been reached only after a very r careful consideration of all the respective claims presented by able counsel in exhaustive and persuasive briefs and with full appreciatiori of the admonition given by the Supreme Court in Nicol v. Ames^ 173 U. S. 509, at page 514. This Court fully appreciates that “It is always an exceedingly grave and delicate duty to decide upon the constitutionality of an act of the Congress of the United States,’’ and that ... , “the duty imposed demands in its discharge the utmost delibera- tion and care and invokes the deepest sense of responsibility ^ as was said by Chief Justice Fuller in the opening paragraph of the opinion in Pollock V. Farmers^ Loan lA Trust Co., 158 U. S. 601, at page^617. In the discharge of that duty, as I see it, it follows that the word “incomes in the Sixteenth Amendment should not and cannot be so construed as to include property other than income even if such property is described as income by an Act of Congress, as such a construction permits the Congress to nullify the provisions of the second Section of Article I of the Constitu- tion, that direct taxes shall be apportioned.^ 3064 Let judgment be entered for the plaintiff to recover of the defendant $17,756.79, together with interest on the same from July 19, 1918, together with costs of suit. Ordered Accordingly. (Signed) THOMAS, D.J. December 16, 1920. f INC. 590 TAX 12 - 81 - 20 ; (T. D. 3101. — Corrected.) 3065 Art. 292. Traveling expenses. — [Comment: T. D. 3101 [^3019], 3019 as issued by the Bureau in mimeograph form, was incorrect in that the word “plus,’’ the sixth word from the end of the sentence beginning “(c) If an individual receives a salary and also an allowance for meals and lodging,” should be “minus.” As corrected by the Government the clause at the end of the sentence should read “but any excess of the allowance over such expenses minus such ordinary expenditures is taxable income.” — The ' Corporation Trust Company.! (T. D. 3102.) 3066 Liability to tax of U. S, citizens resident in Philippines. — The ap- f48hJ pended decision [summary only, 1(3067] of the District Court of the [United States for the Northern District of California, Southern Division, in the case of W. H. Lawrence v. Julius S. Wardell, collector, rendered November 16, 1920, is published for the information of internal revenue officers and others concerned. 3067 Summary of decision referred to in 1(3066. — A citizen of the United States who resided in the Philippine Islands during the entire year 1918 is subject to the tax imposed by the Revenue Act of 1918. (T. D. 3102, signed by Paul F. Myers, Acting Commissioner of Internal Revenue, and dated December 24, 1920.) (T. D. 3104) 3068 Inventories of livestock raisers and other farmers. — Regulations 45 2692 are hereby amended by inserting after Article 1585 a new Article to be known as Article 1585(a) which shall supersede Treasury Decision 3011 [K2692] and shall read as follows: Article 1585(a). Inventories of livestock raisers and other farmers. — (1) Farmers may change the basis of their returns from that of receipts and disbursements to that of an inventory basis, which necessitates the use of opening and closing inventories for the year in which the change is made. There should be included in the opening inventory all farm products (including livestock) purchased or raised which were on hand at the date of the inven- tory, and there must be submitted with the return for the current taxable year an adjustment sheet for 1917 and each year thereafter (prior to the year in which the change is made) based on the inventory method; upon the amount of which adjustments the tax shall be assessed and paid (if any be due) at the rate of tax in effect for each respective year. Where it is impos- sible to render complete inventories from, the beginning of the taxable year 1917, the Department will accept estimates which in its opinion substantially reflect the income, on the inventory basis, for the year 1917 and thereafter; but inventories must not include real estate, buildings, permanent improve- ments or any other assets subject to depreciation. (2) Because of the difficulty of ascertaining actual cost of livestock and other farm products, farmers who render their returns upon an inventory basis may at their option value their inventories for the current taxable year according to the “farm price method” of determining costs, which provides for a valuation of inventories a1 market price less cost of marketing. If the use of the “farm price method” of valuing inventories for any taxable year INC. 591 TAX involves a change in method of pricing inventories from prior years, the opening inventory for the taxable year in is made should be brought in at the same value as the closing for the preceding taxable year (this being the same in effect as ing inventory on the new basis and crediting iricorne wi r +t, + -caKle don brought in). If such valuation of the opening inventory for the taxable year in which the change is made, results in an abnormally that year, there may be submitted with tne return for such taxable year fn adjustment shee/for 1917 and each year thereafter (pn- to the year m which the change is made), based on the farm price method of valuing inventories; upon the amount of which adjustments the tax shall be assessed and paid as provided in paragraph (1) hereof. has (3) Where returns have been made in which the taxable net income ha been computed upon incompUte inventories, the abnorma ity must be c - rected by submitting with the return for pe current taxable year “ adjust- ment sheet for 1917 and each year thereafter (prior to the year in which the change is made), upon which such adjustments shall be made as are neces sary to bring the closing inventory for the preceding year with the opening complete inventory for the current taxable Y ■> P , Tmlnt of which adjustments the tax shall be assessed paid as provided in paragraph (1) hereof. (T. D. 3104 , signed by Paul F Myers, Acting Commissioner of Internal Revenue, and dated December 27, 19 .) (T. D. 3105.) 3060 Contributions by corporations to Red Cross and 1181 war organizations deducted m returns lor the year 1918. °™er 1460 to obviate the necessity of filing amended returns for bhejear 1 by corporations which filed their completed returns publicatiL of^the opinion of the Attorney General and claimed deductions ^r“t of contributions to the Red Cross and o^her recoded wa organizations, corporations which filed their deductions nrior to the issuance of Treasury Decision 2847 nl4601, sfioulQ file immediately with the Collector of Internal Revenue a the amount of such deductions claimed, the amount of net income as reported and as corrected, and the amount of additional tax due by «a^ ot the erroneous claiming of the deductiom The total j tax shown to be due by such statement should be paid at once, together witn interest on each installment from the original due date. 3070 In cases where this procedure is followed amen _ office required and the statements referred to when received by this office through the collector’s office, will be filed with the original returns in lieu of amended returnSo statement and make payment of the additional tax by a corporation will subject it to the 5% penalty with mterest for when it, T t*g tributions is disallowed. (1. U. signea oy ^ . Commissioner of Internal Revenue, and dated December 27, 19 .} INC. 592 TAX 12-31-20. (T. D. 3108.) v. - 3072 Valuation of Inventories. — Article 1582, Regulations 45, is hereby .; 1092 amended to read as follows: ^ ' Art. 1582. Valuation of inventories. — Inventories must be valued at (a) cost i or (b) cost or market, as defined in Article 1584 as amended, whichever is ' lower. (See Article 1585 for inventories by dealers in securities). Whichever basis is adopted must be applied consistently to the entire inventory. A tax- . payer may, regardless of his past practice, adopt the basis of “cost or market whichever is lower” for his 1920 inventory, provided a disclosure of the fact and that it represents a change are made in the return. Thereafter changes can be made only after permission is secured from the Commissioner. Inven- tories should be recorded in a legible manner, properly computed and sum- marized, and should be preserved as a part of the accounting records of the taxpayer. Goods taken in the inventory which have been so intermingled that they can not be identified with specific invoices will be deemed to be the goods most recently purchased. (T. D. 3108, signed by Paul F. Myers, Acting Commissioner of Internal Revenue, and dated December 30, 1920.) (T. D. 3109.) 3073 Inventories at market. — Article 1584, Regulations 45, as amended 1094 by T. D. 3047 [1[2834], is hereby amended to read as follows: 2834 Art. 1584. Inventories at market. — Under ordinary circumstances, “market” means the current bid price prevailing at the date of the inventory for the particular merchandise in the volume in which ordinarily purchased by the taxpayer. This method of valuation is applicable in the cases (a) of goods purchased and on hand, (b) of basic elements of cost (materials, labor and burden) in goods in process of manufacture, and (c) of finished goods on hand; exclusive, however, of goods on hand or in process of manufacture for delivery upon firm sales contracts at fixed prices entered into before the date of the inventory, which goods must be inventoried at cost. Where no open market quotations are available, the taxpayer must use such evidence of a fair market price at the date or dates nearest the inventory as rnay be available, such as specific transactions in reasonable volume entered into in good faith, or compensation paid for cancellation of contracts for purchase commitments. Where, owing to abnormal conditions, the taxpayer has regularly sold such merchandise at prices lower than the current bid price as above defined, the inventory may be valued at such prices, and the cor- rectness of such prices will be determined by reference to the actual sales of the taxpayer for a reasonable period before and after the date of the inventory. Prices which vary materially from the actual prices so ascertained will not be accepted as reflecting the market and the penalties prescribed for filing false and fraudulent returns may be asserted. Goods in process of manufacture may be valued for purposes of the inventory on the lowest of the following bases: (1) the replacement or reproduction cost prevailing at the date of the inventory; or (2) the proper proportionate part of the actual finished cost; or, under abnormal conditions, (3) the proper propor- tionate part of the sales price of the finished product, account being taken in all cases of the proportionate part of the total cost of basic elements (materials, labor and burden) represented in such goods in process of manu- facture at the stages at which they are found on the date of the inventory. The inventories of taxpayers on whatever basis taken will be subject to in- INC. 593 TAX vestigation by the Commissioner and the taxpayer missioner of the correctness of P . article included in the to show both the cost and of 1918 , by reason among Xf?hfngs ofgX^nmLtal control Snr:: tt::ubllr^ f^enjln established during the succeeding y ’ r gpotion 214 (a) 12 or Section sustained in accordance with the pro\ losses in 1918 inventories 23,(.) ,4 of .he ““ “Sty S ? Ac.i.g Com- and from rebates]. (1. 19. j r.L-pmber 80 1920.) missioner of Internal Revenue, and dated December PU, ly ; END OF 1920 SERVICE. 'f f f INC. 594 TAX MEMORANDA 3aOIVH3« ZAT Y^TATOOp TSUZT ’/[OITAHO^LSOO SHT MEMORANDA THE CORPORATION TRUST COMPANY TAX SERVICES 1 i 4-27-20. TABLE OF FOBMS. . . Reproduced « Ckj.. for 47 Claim for abatement 47 A Claim for credit— Taxes paid in excess.'. .*.*.'. 1000 Ownership Certificate— Tax to be paid at source.*.* ! " * 1001 Ownership Certificate— Tax not to be paid at source— Domestic securities jq lOOlA Ownership Certifipte— Tax not to be paid at source^ Foreign securities U lOOlB Statement of income received by nonresident alien* from sources within the United States— Personal ex- emption claimed 12 1012 Monthly return of tax withheld at source— Bond interest*. 68 1013 Annual return of tax withheld at source— Bond interest 13 1040 Individual income tax return— Net income exceeding $5,000. 1040A Individual income tax return for net income of not more than $5 ,000 49 1040F Schedule of farm income and expenses !.*.*.*.*.* 75 1041 Annual return of income by fiduciaries * 59 1042 Annual return of tax withheld at source— Salaries* rent etc ’ ; 1058 Substitute certificate — Tax not to be paid at source 15 1059 Substitute certificate— Tax to be paid at source. ....'.** 16 1065 Annual return of partnerships and personal service cor- porations 1078 Certificate of alien claiming residence in the United States 21 inni Ownership certificate Disclosing actual owner of stock 22 1096 Annual information return summary— Salaries, wages interest, rent, etc ’ 23 1096A Monthly information return— Bond interest and foreieii dividends 25 1096B Annual information return— Bond interest and foreien dividends 26 1098 Annual information return — miscellaneous income pay- ments (and tax withheld) to nonresident aliens'^and foreign corporations 43 1099 Annual information return— Salaries, wages* interest* rent, etc ’ 27 1114 Application for permission to establish repiacement fund. (See 1[942.) 1115 Claim by_ nonresident alien for benefit of personal ex- emption 28 111^ credit for foreign taxes paid — Individuals. ... 30 1117 Bond — In connection with claim on Form 1116 34 11 in credit for foreign taxes paid — Corporations.. . 35 1119 Bond — In connection with claim on Form 1118 79 Corporation income and profits tax return 51 1120A Corporation income and excess profits tax return for fiscal years ended 1919 39 Concluded on Supplementary Page 2 , Income Tax Supplementary Paj?e 1. tC VO On Form No. 1122 1124 1125 1126 TABLE OF FORMS— -Concluded. (See Supplementary Page 1.) Reproduced Designation ^ P^g® Information return of subsidiary or affiliated corpora- tion in connection with consolidated return 67 Bond— In connection with claim for abatement on ac- count of inventory losses or rebate payments 47 Schedule of taxable interest on Liberty Bonds oU Certificate of inventory ^ To be added to as fast as the revised forms, or new forms, are issued. See ‘‘Forms and Their Uses” Index Page 16. Income Tax Supplementary Page 2. 3-1-20. TREASORV DEPARTMENT, BuBEfi.n Internal Revenue. Form 46— Revised Jan., Ed. 200,000. State of. County of CLAIM FOR REFUND. TAXES ERRONEOUSLY OR ILLEGALLY COLLECTED. ALSO AMOUNTS PAID FOR STAMPS USED IN ERROR OR EXCESS. IMPORTANT. This claim should be forwarded to the Cidiector of Internal Revenue to wlMxn the Tax was paid and nuist be accompanied b; Collector’s Receipt therefor. Date of filing to be plainly stamped here . (Name of claimant.) (Address of claimant; give street and number as well as city or town, and State.) This deponent being duly 'sworn according to law denoses and says that this claim is made on behalf of the imant named above, and tnat the facts stated below ^vitn reference to the claim are true and complete: claimant 1 . Business engaged in by claimant 2. Character of assessment or tax ... (State for or upon what tho tax was assessed or the stamps afdxed.) 3. Amount of assessment or stamps.. - 3— . 4. Amount now asked to be refunded (or such greater amoimt as is legally refundable) 3 5. Date of payment of assessment or purchase of stamps Deponent verily believes that the amount stated in Item 4 should be refunded and claimant now asks and demanfW refund of said amount for the following reasons: And this deponent further alleges that the said claimant is not indebted to the United States in any amount whatever, and that no claim has heretofore been presented, except as stated herein, for the rofimding of the whole or any part of the amount stated in Item 3. Svxtm to and fhibaanJbed hrfore me this day of , 19 Signed: WritaNuiM • it UD b* •iDy r«*d. (N»m*.) (Title.) (Thia affidavit may be Hwom to before a Deputy Collector of Internal Revenue without charge.) Income Tax Supplementary Page 3. CERTiFiCATES. CoXUaor Schedule Number Allowed or Rejected Number. Clfumant District (Nature ot tai.) Address Claim examined bj— Claim approved by— CUtf of DIriilon. Examined and submitted for action-.— 19.... COMMITTEE ON CLAIMS. Amount claimed — $ Amoimt allowed — $ Amount rejected' — $.. — — r — ' [Page 2 of Form 45.] Income Tax Supplementary Page 4. tBBASOIlT MPARTUtKT, O. 8. iMnlKAL Reventx. Ponn i«l& CLAIM FOR ABATEMENT TAXES ERRONEOUSLY OR ILLEGALLY ASSESSED DAtE OF FOING TO Bf State (f County of. ' IMPORTANT Thu claim ahould be forwarded to the Coneetor of Internal Rerenue from whom notice of aMe<»» ment wee roeelved* PUIKIY STAMPED HERE CNdino ^ clfthoaote) Ht«E Write Nerae SO it csn be cosily rood. (Name of claimant.) (Address of claimant; give street and number as well as city or town, and State.) . - This deponent being duly sworn according to law, deposes and says that this claim is made on behalf of the claimant named above, and that the facts stated below with reference to said claim are true and complete. 1. Business engaged in by claimant - 2; Character of assessment or tax 3. Amount of tax paid. $ Taxable year. 4. Portion of No. 3 claimed as a credit S 5. Unpaid assessment against which credit is asked $...i Taxable year Deponent verily believes that the amoimt stated in item 4 should be credited, and claimant now asks and demands credit of said amount for the following reasons: (State facts regarding alleged overpayment.) Sworn to and subscribed before me this day of — , 19. (fltte.) (This affidavit may be sworn to before a Deputy Collector of Internal Revenue without charge.) t-nn Income Tax Supplementary Page 7, CERTIFICATES * I certify that an examination of the records of tho Commissioner’s Office shows the following facts as to iJlO ' assessment and payment of the tax: ASSESSMENT OVERPAID NAME OE TAXPAYER. Chabacter of Assessment and Peeiod Covebed. List. Year. Month. Pag,e. Line. Amount. Datb Paid. Aueument Clerk, Internal Revenue Bureau. Collector of Internai Revenue. o ( # ASSESSMENT TO BE CREDITED NAME AND ADDRESS. Character of Assessment or Article Taxed. Period Covered by Assessment. L.sr. Year. Month. Page. Line. Amodot. Aitetsmenl CUA, internalRevenue Bureau. Collector of Internal Revenue. Form 47 A District eibatem€nt;Order M'o. (Nature of tax.) Clairrumt Address . CUim approTcd bj— Examined and submitted for action 19 ... COMMITTEE ON CLAIMS: .Amount claimed, $. Amouni allowed, S. Amount rejected, f. f^m ' 4 i t Income Tax Supplementary Page 8. j Income Tax Supplementary Page 9, ii UB« f-U SS 1§ Z Z o E go Oh «:4lz !5g qS <1 § a (dp CQ c/3 03 lr*Q fe® §1 XP si WH .•§ ^ 3 CJ .ii .'-' •• 3 - 0 ^ !=>flo — xJ.« -a ^ CCl ^ •d ■ 3 © 5s ?a © o /“fa ® , ■‘^ 1 w;h •T’O-” ®«t4p. - o o ifa d *-* - sis 1.S 06’Ort '2'2 S>g CT3 “ 'O'*? tc a tJ .-■J-H s- o .2-^ ci >33 9 s 2 ® fa •■- S' <2 •pfl •*+» ! ^ 1 ^ ii 1 Q ’• 1 5 ! ? 1 M ■\ '• ii I 1 1 • . 1 , 1 II ll is-? 8 0“^ n d si |s I- 11 jll o.a3 d» •2J wa| ¥h gill ■s;:sg 9i3.^5 ?’23i •il^i r-s| g.2sl “till S 4> w.« Z>qI o ^1111 bC I' z d 2 •S CQ Income Tax Supplementary Page 10. 4 - 14 ^. # f f ♦ # a id i| “■a u 0. “ 2 E- bJ S H S5 «5 iS £i3 § g ^ § I.-I g »-« Q « a C3 P] > o CQ N o o ta PI o m « o o « Jz; o 8 S H I? I tt o ca 0 aJ' e a ol tnj < a gits o 1 » ok ^5 • c • irj I Q rf, z 1 X « i Si o O S3 si ft •u ^ JSsn f4-4 o p':o o WTJ o to cO S I’p® ,cl r; © 4^/q P.© ^p-SS » <* VJ ?| ‘S5' o ■S^rs-S Si.? On V ©PI p O' '^■3 2 1 . .. ^ni-i S.||2 I o rt Oi S 11 ‘ri O :< <^c ! Pi Income Tax Sui/pleincDt«ry Page 11. This form will not be accepted unless all information called for is furnished. TREASURY DEPARTMEKT U. 8. iNTtRNAi Revenue Form 1001 B— December, 1919 STATElilENT OF INCOME RECEIVED BY NONRESIDENT AUEN FROM SOURCES WITHIN UNITED STATES PERSONAL EXEMPTION CLAIMED. To ha with withholdlne aeent by nonresident alien individual owning bonds of a domestic coporatlon which contain a tax-free covenant cUuse. The execu- tloa of oertiflcate does not relieve the bond owner from filing ownership certificates required by the regulations. NAMES MUST BE PRINTED OR WRITTEN PLAINLY. DEBTOR ORGANIZ.A.TION. OWNER OF BONDS. Street — Str66t - City — State City otatc Subject of — This is to certify that the owner of the above-described bonds is a nonresident alien as to the United States and is asubject of the country as stated above, and is entitled to personal exemption and credit for dependents in accordance with paragraphs (c) and Section 216 of the Revenue Act of 1918, and Article 307, Regulations 45. SlOSATUBS or OwNXB OB AQBNT. Bond interest received during calendar year with respect to tax-free covenant bonds issued by above-named corporation — $ All other income from sources in United States... $ Total § Personal exemption — $ Address I olAfect. 1 [ Credit for denendents $ - Total S Citliens or subjects of tho countries enumerated in Class (a) of Article 307, Regulations G, as amended, will bo allowed for the purpose of the normal tax the foUowIng ' In the case of a sinele nerson. a rersona! exemption of $1,000, or in the case of the head of a family or a married pemon living with husband or wife, a persjml exemption of $2 000 A husbanif and wife living together shall receive but one personal exemption of $2,000 agamst their aggregate net Income, and in case they make separate rkums, the personal exemption of $2,000 may be taken by either or divided between them; S200 for each person (other than husband or wife) dependent upon and receiving his chief support from the ta.xpayer, if such dependent person Is under eighteen yearn of age oris incapable of self-support because mentally or physicaUy defective. Cttizdis or subjects of the countries enumerated in Class (b) of Article 307 will be allowed the benefit of the personal exemption but no cremt for dependents. ClUtms or subjwtTof the countries enumerate in Class (c) of Article 307 will not bo permitted to claim the benefit of personal exemption or credit for dependents and should thmforo not use this form. TO BE FILLED IN BY WITHHOLDING AGENT. District in which return Form 1013 is Sled — Amount of tax required to be withheld at source as shotyn by Form 1013, for 1910, $ To be reduced on account of personal exemption claimed as indicated by this certificate, the items appearing on the followr..ig monthly returns. Form 1012: Month . Page Amount of tax. $ — ^ Month. Page Amount of tax. — Month—. Page Amount of tax — Month - Page...... Amount of tax Name of withholding ^gent - — Income Tax Supplementary Page 12. THIS RETURN MUST BE MADE IN DUPUCATE TO THE COUEC- TOR OF INTERNAL REVENUE FOR THE DISTRICT IN WHICH THE WITHHOLDING AGENT IS LOCATED, ON OR BEFORE MARCH I, 1920, AND THE TAX MUST BE PAID ON OR BEFORE HINE IS, 1920. Form 1013— Revised January, 1920. UNITED STATES INTERNAL REVElJUE SERVICE ANNUAL RETURN OF NOR MAL INCOME lAX JO BE PAID AT SOURCE INTEREST ON BONDS AND OTHER SIMILAR OBLIGATIONS OF DOMESTIC AND RESIDENT CORPORATIONS AND FOREIGN COR- PORATIONS HAVING A, PAYING AGENT IN THE UNITED STATES' For the Calendar Year 1919 (Name of debtor organization)’ (Address in lull) ’ (Name oi withholding agent) (^Address in iull) Do not write in thia apatw PAYMENT (Cashier** Stamp) CASH CHECK M.O. Enmioed bj. INSTRUCTIONS If debtor organization makes its own return, no entries need be made on lines provided for name and' address of withholding agent.' This return must be made by debtor organizations, or their duly authorized withholding agents, and'must show, by months in which the mcome was paid and reported on Form 1012, the total amount of tax to be paid at source on each of the following classes ot payments: withheld and paid at source in such cases. ‘ " ^ 2. Interest on bonds without tax-free-covenant clauses: (а) If paid to a nonresident alien individual, a normal tax of 8 per centum is required to be withheld and paid at source (б) If P^d to a foreign corporation having no office or place of business in the United States, a normal tax of 10 per- centum is required to be withheld and paid at source. f ^ MONTH CLASS 1 CLASS 2(a) CLASS 2(b) < TOTA4 JANUARY $ 1 %. J FEBRUARY ' $ MARCH __ —— — APRIL ^ MAY . JUNE... . JULY AUGUST .r .. SEPTEMBER OCTOBER-.. NOVEMBER DECEMBER 1 1 1 TOTALS 1 ........i ' , L.. LJ $- 1 ......:.. Less adjustments on account of Forms lOOlB, attached he Amount of tax to be assessed.. iSmSSL ■ , -r that the above return is a full and complete summarij of the amounts of normal tax {h^etofore p e on monthly returns on Form 1012, which are hereby mode a part of this return) required to be withheld from, payments made by the above or^nization during the year 1919. Sworn to and subscribed before me this - 1920. (Slgnator*) (Slgoaturt) (Capacity in which acting) (Address in lull)' Income Tax Supplementary Page 13 . Form r■ ... 1 — - - - ToTAIoS — 1 lin-- Income Tax Supplementary Page 14. lUviSd SUBSTITUTE CERTIRCATE— TAX ^OT TO BE PAID AJ^SOURCE U. 8. MVaTOB. Qd ^ OTHER SIMOAR OBUGATIOflS OF DOMESTIC AMD R^ENT CORPORATIONS Income Tax Supplementary Page 15. o 0.1 la 3 § I r M w pa a I s o o tu o t/3 z o t^w B ^r, w O > « O «? ._ CJ w ^ A W o B “ S£3 w ^ r? g <* M I a ^ 2 2g i fe ^ LiJ oeS S s W o &; 1^ :::> C/2 . s; ts a H a .§ 3 c3 ^ a a 2 S > " fl a oo §§ o to © g i« « «) H 0 _M «® 2'w © -8 that this return, iu< hiding the eccompaiiyung aehedulos and sLatemonts, has been examined by 1 ana u to itie U«t of ius knowledgo and belief a true and complete return made in good faith pursuant to the Itovenuo Act ot I»18 and the regulations laaaed thereunder. Sworn to and aubscribcJ before mo this day of 19 r sffid.Tlt. Pretidml oj carporatum. Uember of jKtrtnenhip. Trtoturrr 6/ corpontim. [Page 1 of Form 1065.) IiKoinc 'fax Supplementary Page 17. Page a of R^um. SCHEDULE D— RECONCILIATION OF NET PROFIT AS SHOWN BY BOOKS WITH NET INCOME. • 1. Net profit fet year as by boobs, beiore any adjust- ments are m^e tbereis 2. Tjn^owable dednctiona: (a) Donations, gratuities, and contributions.. lb) Income^ war-profits, and excess-profits taxes paid ( accrued to the United States.. (c)l (d) Special improvement taxes (») Furniture and fixtures, additions, or betterments treated as expenses on the books (/) Replacements coveted by depreciation (a) Insnnaceiminlamsuidantlielireofaarpartaer “ fgr tke SeneBt «f the (artaerehlp or corperaUv. ..... (M btereeC on indebtedness inctured or continued to purchase or carry ohUn^oni or securities (other than oblivions or the United States issued after September £1. 1917) the interest Is whoUj exempt from taxation (0 Additions to reserves for bad debts, contingencies. (to be detMled)._ U) — ( 1 ). — tablch <»»)- (ft) Other unallowable deductions (to be detailed)- ■(o)____ (P)- S. Partnership’s dlstrlbnUte share of net Income earned dnrins period br personal serilce corporatuna not receiiedor accrued on beets bf personal Total 9 eairj belongs on line 8).. 6. Income not to be accouaied icT by membera: (o) Interest on obligations of the United States issued beiore Septemoer 1, 1917, and on obligations of (6) Interest on obligations of States, Territories, and political subdivisioiis thereof (d) Dividends on stock of personal service corporations from net income earned during the period between January 1, 1918, and the beginning of present accounting period which were returnable by members for the previous accounting period (c) Other items of nontaxable income (to be detsiled). (/) 7. Charges against reserves for bad debts, contingencies, etc. (to be detailed) 8. Amount necessary to adjust book profit or loss with the amounts reported in Items 23 and 24, Schedule A (un- less entry belongs on line 4) 9. Income to be accounted for by members (Item 26, Schedule A) — SCHEDULE E— BALANCE SHEETS. hereto balance sheets as of the beginning and end of the taxable year (preferably in parallel columns), ahowing as nearly as practicable the details caUed for b^ow; (These ets should be prepared from the books and should be in agreement therewith, or any differencea should be reconciled.) uABn.mEa balance sheets ^ould be prepared from the books ASSETS. CMhJ'-'-' X-.-X , which should be^mly attach^ to this return. OTHER CONCERNS IN SAME BUSINESS. 5. Attach hereto a list of the names and addresses of five representative cocK^ems in your locality or section of the country engaged In the same kmd of business. ORGANIZATION OR INCORPORATION. 6. DatAafftrgMilgfttlQnftriTifforpQrfttiQa — 14. If the answer lo questions 1 (Name of corporation.) (Name of corporation.) "(Addr^.) Shares held. Percentage of stockholdings. Shares held. Percentage of stockholdings. 1 1 1 I 1 1 : full voting privileges during the entire taxable oeriod; (2) whether the voting privUeges were cumalftlive; whether these voting pnviieges were exercised ’during the taxable period; (4) the conditions by which these votlae privUeges mhy be sacrificed or acquired. , a, -j x a a (6^^^tat^''ihe*dKdTod°pr1i^^ oUhTr^p^lIve classes of stock: the rate of t^vidends i>a;djdur:rig t ibie period; the date ana r"- ) Stale lepcrio" . lerred stock participates (c) State if the prefei ({fico on or before the loth day of tho third month foUowing the close of the accounting period unless an extension of time has been granted. ” ‘ SIGNATURES AND VERIFICATION. 18. Returns of partnerships must be sworn to by a mombor of the partnership. Corporation returns must be sworn to bv the president, vice president, or other principal officer and by tho treasurer or assistant troMurer of tlio corporation. If receivers, trustees in bankruptcy, or assignees are operating tho property or business of tho partnership or corjioration, such receivers, trustees, or assignees shall execute tho return under oath. PENALTY FOR FAILURE TO FILE RETURN ON TIME. INSTRUCTIONS FOR FILLING IN SCHEDULE C, PACE I. 10. Tl^ Schedule is to be used for showing tho share of each part or member in the income of the partnership or personal service corporoti whether distnbutcd or not. Where tho ownership of a personal scr\ 19. A penalty of not more than .81,000 attaches for failure to file a return within tlio tune required by law. If the failure is willful or an attempt is made to defeat or evade the tor, the penalty is 810,000 or impn-sonmcut for not more than one year, or botli, together with costa of prosecution. [Page 3 of Form 1065.] Income Tax -Supplementary Page 19, Page 2 of liutnictions SCHEDULES SUPPORTING SCHEDULE A. The schedules called for below should be prepared and firmly attached to this return. Designate each echedde with the number of the item m Schedule A which it e.^plains. Make schedules on paper of uniform size so far as practicable. Attach a list of sAedules accompany^ this return, giving for each a brief title and schedule number. Regulations 45 may be obtained from the CoUector of Litemal Revenue of your distnct. SCHEDULE A2: COST OF GOODS SOLD, EXCLUSIVE OF EXPENSES, REPAIRS, AND OTHER ITEMS CALLED FOR SEPARATELY. (Secure from the Collector and file as a part of this schedule. Certificate of Inventory, Form 1126.) In support ol Item 2. Schedule A, partnerships or corporations en^ed in manufac- t'lrine or tradins operations should submit an analysis, in reenable deUil, of the cost of goods sold. This statement should ordinarily include the following items but should not include any expense items called for separately in Schedule A. 1. Inventories at beginning of period (to be reconciled with balance sheet). 2. Purchases during period. 3. Labor and wages ordinarily charged to manufacturing cost on the jrartnership's or corporation’s books, showing the principal items separately. 4. Other expenses ordinarily charged to manufacturing cost on the partnership’s or corporation’s books. (State separately large or unusual items.) 6. Totai Deduct: 6. Inventories at close of period (to be reconciled with balance sheet). 7. Cost of goods sold (Item 5 less Item 6). Note.— Inventories must be valued at (o) cost or (b) cost or market, whichever is lower, provided that whichever basis is used must be applied to each item in the inyentop- and not to a part only. Inventories at the end of the taxable period must be valued on the same basis as those at the end of the preceding taxable penod. unless permission to make a change has been first obtained from the Commissioner. 1 f claims for losses on inventories or rebates on sales made under Section 214 (of 12 of the Act have been allowed, the ojKmng inventory must be correspondingly adjusted. (See Articles 26G. 15S1 to 1585, ol Regu- lations 45.) SCHEDULE A3: GROSS INCOME FROM SERVICES OR OPERATIONS OTHER THAN TRADING OR MANUFACTURING, LESS ALLOWANCES. Submit a schedule showing the nature and amount of the principal items included in Item 3, Schedule A SCHEDULE A4: INTEREST ON OBLIGATIONS OF UNITED STATES ISSUED SINCE SEPTEMBER 1, 1917. Information regarding the amount of the partnership's or corporatioii’s holt&gs of obligations of the United States issued since September 1, 1917, and the reemved thereon, must be fimuehed in sufficient detail to enable the members of the partnership or personal service corporation to report correctly the amounts on their individual returns. Submit a schedule, showing in separate columns the following information mth respect to each class of obUgations of the United States issued since September 24, 191, ; 1. Description ol obligations. 2. First and last dates of each period during which the holdings of each class of obligations remained unchanged. 3. Amount of obligations of each cla^ held during each such period. 4. Bate of interest. 5. Interest derived from each amoimt ol principal stated in column 3. Enter as Item 4, Schedule A. the total of column 5 for all classes of obligations. Submit also a statement in similar form to the above, with regard to bonds and other obligstions not subject to income tax. (Soe Section 213 (o) (4) of the Act of 1918.) SCHEDULE AS: INTEREST FROM OTHER SOURCES (not including interest referred to in Schedule D, Item 6). Submit a echedule showing the source, nature, and amount of the principal items included herein, the minor items being grouped iu one figure. The total of the schedule should be entered as Item 5, Schedule A. For interest on foreign bonds show (a) name of country; (6) kind of obl^tiora (whether national. State, municipal, or corporate o’chgations) ; (c) amount of prmcipal; and (d) amount of interest. SCHEDULE A9: DIVIDENDS. CASH OR STOCK, FROM EARNINGS OF COR- PORATIONS TAXABLE BY THE UNITED STATES UPON ANY PORTION OF THEIR NET INCOMES (including dividends on stock of personal serv-. ice corporations declared out of profits earned prior to January 1, 1918). Submit a schedule showing (a) name of corporation; (6) State in which organized; (c) total par value of stock held; and (d) amount oi dudden^. With respect to foreign corporations taxable by the United Sta^ upon any jw^on ol their net uicom^ (a) name of corporation* (6) country in which organized; (c) total par value of stock held; and (d) amount of dividends. SCHEDULE AlO: DIVIDENDS ON STOCK OF FOREIGN CORPORATIONS NOT TAXABLE BY THE UNITED STATES UPON ANY PORTION OF THEIR NET INCOMES. Submit a schedule showing (a) name of corporation; (6) country iu which organized; (c) total par value of stock held; and amount of di^iden• OT ^ -I-? J O W 0 3 m -§ a “ 5 !P. O +■3 }~, d • o |g “S 8 | -= f-l -Tj O oS '3 d ^ o c3 -M 52 d 2 'd § ■?o 5 i’i I P. 10 lo i i -OE^ 03 cO d .'h M jj 2 o d a O o d n 3 Income Ttx Supplementary Page 21 s « - 2 g i r? o. j c :: S Eh ® ^ C a S - I? bo © £ ^ g i H g. M CZ} 5 ►H to P'5 o, cd te « g HM O Ih © B ft ** •ST ® ^ § £ 1 62 *3 gt-’inrf M m W W p^ -t-> o •'d' fc o ‘S ft s o B a o o ,i4 o 3 ii fr I o IS. II : 52 (y ® ^ St Vi Z G,^ O 3 s « G p c X rs Is §-a « iH © -r £ c if !3jS«g 02 CC Q ^ _ © O ©3^3"" 3 >% i ft ^ ® »-' i >-i ® ” ® ja © h 5 o -Hi © fS .5 © >> P •6I“TZ ‘-idv **o *^— OOO'OOZ ‘Pa •xvx awooNi-axiMaAaH ivKHaxxi ‘•Lxapixuvdsta innsvanx ( (( i Income Tax Supplementary Page 22, tTfilTEC STATES INTERNAL REVENUE SERVICE Form 1096 (Eevued Jaou^y 1920) ANNUAL INFORMATION RETURN o r PAYMENTS OF INCOME. ETC., REQUIP^D TO BE REPORTED UNDER REVENUE ACT OF FEBRUARY 24, 1919 FOR CALENDAR YEAR 1919 FOR INSTRUCTIONS SEE REVERSE SIDE THIS RETURN, ACCOMPANIED BY EEPOPvTS ON yORM 1C46. MUST BE FORTVABDED SO AS TO REACH THE COMMISSIONER OF INTERNAL REVENUE, j SORTING- SECnONp j W.VSaiEGT03i, D. CL, i OS OR BEFOSa I (Ilams of person or organization by wham pajripents were made.) rstreet atd ntmiber^r rojai route.) (Daia tecafsed) (St^) A B c CHARACTEil OF INCOME PAID. NUMBER OF REPORT FOPJSS. TOT.4L AMOUNT OF PAYMENTS. FORM 1989. — Interest, rent, salaries, wages, premiums, annuities, compensation, remu aeration, emoluments, or other fixed or determinabio gsina, profits, and income of 11,00.") or moro . . . $ (DO NOT WIUTE IN THIS SPACE) ITAPORTANT NOTICE Ketums or inTonnsiiozi are reqiilred to be rcairdered on tZie bs^ of t&e c^eaidaT jear. Retarns for any other period of time will not be accepted. If an adding machine tape waa used in ascertaining the total reported in column 0, it should be submitted with the forms. The name of the individual, corporation, partnership, etc., using Form 1099 may bo printed or stamped on each form, if ee desired, but this return must be made under oath. Returns of indi's'iduals on this form must bo signed and sworn to by the individual or his duly authorized agent. Returns of corporations, partnerships, etc., must bo signed and sworn to by an officer of the corporation or member of firm. I swear (or affirm) that to the best of my knowledge and belief the foregoing return and the accompanying reports constitute'a trus and complete statement of payments of the above-described classes of income made by the person or organization named at the head of this return during the calendar year 1919. Sworn to and subscribed before mo tin's day (Si^iature.) of 19 (State whether Ic^^dnal owner, memter of film, or disbursing officer ol Ck>vem]noQt bureau or office, or If officer of corporation give title.) (Signature.) (Title.) (State ^oiees of person siptUig If diiiuent from that (^ven at LAd of return.) Income Tax Supplementary Page 23 , ilVSTicUCTIONS actiuo’ who made payments of income OS desciibed bclow durfag the calcndw , .o„e.JpSLe„Mp, P.»».«rvic c.n»»a... or ••e<--uired to lecder a return on this form on or betore March 15, 1920. * . rr. , • Of nan ni- in ore —This return must be made by every person, corporauon, FORM 1099-Iiiterest, Ee&t, 3 executors, admi^ partndtsJnp. assomation. or insurance coropanj , inc-udang Ic^ - 0 0 ^ho paid interest, rent, salaries, etc., to another tmtors, receivers, employers and during the ^endar year 1919. A separate report on Form 1099 must be partLl^ip, personal corporatte, o, ddud.ry «, who» .del. .dcop.0 rL., »..de. o«., ^e^^dlos. o, pdd .o dien i.divid«d3, .Wd «o. be Uc.uded id «d, eetue. be. ehould be reported on return Form 1042 and individually on Form 1098. Reports on Form 1099 are not required in the following cases: , - -n- t TTnlt/vl Statos of States Territories, or poUtical subdivisions thereof or of the District ot Co,l“eS:;S:pain~de7Xb.^ Bill, paid ior merctendi». teloipain., telophode. freight, eterage. add elndar charge.. Amounts paid to employees for expenses incurred in business Premiums paid to insurance companies. Annuities representing return of capital Interest accrued on bank deposits if not-crediteda „ . Payarent, dr»ie b, domert.c edabliebment, « foreign branch h.nee. thereof to nonrrrddent alien employee, for eervree. performed entirely in foreign countries Interest on bonds of domestic and foreign corporations. (See Forms 1012 and 1096A.) Salaries, wages, etc., paid to nonresident alien individuals and foreign corporations. (See Form 1042.) ORGANIZATIONS HAVING A iqqqaNO lOOe's^O^NG ALI.^ATMENTs\aDE BT MAIN The name mid addrem of flie Indlvidnal or organi.atio. nraldng reporfo on Bonn 1009 may he printed or mamped en each form,- but the return Form 1096 must be made under catb. ^ -rn nvvrcvn^ OF AN FOEM 1099 IS EEQIJIEED TO BE EXECUTED EEPOETING PAYMENTS OF SALARIES xO OFFICERS^^^ ORGANIZATION. Page 2 — Form 1096. Income Tax Supplementary Page 24. 2-7-20. Form lOOCA-UNITED STATES INTERNAL REVENUE SERVICE MONTHLY INFORMATION RETURN PAYMENTS OF INTEREST ON BONDS OF DOMESTIC AND FOREIGN CORPORATIONS AND COUNTRIES AND DIVIDENDS ON STOCK OF FOREIGN CORPORATIONS FOR MONTH OF 19 THIS RETURN, AC€OMPANiF.O BY CERTinCATES ON FORM ICCI, 100 lA, AND 10i«. MUST B£ MAilED 10 TOE COMftMSSIONER OF l.vrr.PNA?, REVENUE. SUR7ING DlVaON. VASiPNCTON, D.C., ON OR BEFORE THE 2uii DAY OF THE MONTH SUCCC'DING TiAT FOR WHICH MADE (Name of debtor ort;.iaiidUoii) (KuU po-l-oice iiJJresi) (Suma of bani or payias agent) (Full pctol-ollice addfosi) Class or Income A. Interest cu bonds and other eimilar^ obligations of domestic and reddeat (Foau 1001), $...- corporations (pro\'ided tax was not withheld at source}...... B.. Interest on Uontls and ether almilar obligations of dcmestic and resident (FORK 1058) $ * corporationa (proifided tax was not withhc-d at source) — — — C. Interest on bonds of foreign corporations and countries and dividends on stock of foreign corporations. (FORM lOOIA) , ^ i (Oat* rec«lv3 6TATE3 TMTERNAI/ KEV'SNTJE SSKVICE ANNUAL INFORMATION RETURN PAYMENTS 0? INTEREST ON BONDS OF DOMESTIC AND FOREIGN CORPORATIONS AND COUNTRIES AND DIVIDENDS ON STOCK OF FOREIGN CORPORATIONS For Calendar Year 19. THIS RETURN MUST BE FORWARDED SO AS TO REACH THE COMMISSIONER OF INTERNAL REVENUE SORTING DIVISION WASHINGTON, D. C. ON OR BEFORE MARCH 15, OF THE FOLLOWING YEAR (Name ol debtor organization.) (Full post-olBco address.) (Name cl bank or paying agent.) (Full post-oUice address.) (Data racatrsd) mcTnth A. iXTEP.EST OK BONB8 AND OTHER SIMILAR OBLIGATIONS OF IX)MESTIC AND RESIDENT CORPORATIONS B. Interest on bonds op fobe] AND DIVIDENDS ON STOCK IGN CORPOKATIONS AKD COUNTBIES OF FORSION COaPOaATIONS NumlKT of certifioates Amount Number of certificates Amount |u_ January- February- March ‘ April May • June July August September October — IIJ............... Thi? rotum must bo mode bv debtor corporations, paying agents, or. bamrs, and miist show, fey months in which the incirae wm paid and reported on monthly returns, the total number of exemption certiiicatos filed with such returns and the to.al income paid without deduction of tax, as shown by such certificates and returns. . I swear (or affirm) that this return is a full and complete summary of the number of exemption certifica^ and amount of income of the classes shown above (iieretcfore reported on monthly returns, which are hereby made a part of this return), paid durmg the year. Sworn to and subscribed before me this of 19 day (Signature.) ( Capacity in whioli acting.) (Signature.) ■ (A ddresn in luU.) Income Tax Supplementary Page 2 $. IS £3 bJ £22 h 01 S[: S2 So Z Income Tax Supplementary Page 27, The WnHHOLDiNd Agent TREASURY DEPARTMENT Form 1115— (Revised Fob., 1920 )— United States Internal Revenue Service 1 Do Not Wp.ite Here OB Collector Recei-.tng This Claim Shall Enter Date of Receipt in This CLAIM BY NONRESIDENT ALIEN INDIVIDUAL Space. Fob iiENEFiT of Personal Exemption and Credit for Dependents FOR TAXABLE YEAR rNameoY^rttWiordi’ng'ageat?) ^ (SYreet and number.) (CYty or town)' ^ (State.) Claim is hereby made for benefit of the personal exemption and the credit for dependents (if any) provided imder section 216 of the Revenue Act of 1918 by (or for) — Name of claimant - - - Address in thej - - United States.] --.-j - 1. Of what country are you a citizen or subject? - - 2. Are you single 1 3. Are you married and hving with wife or husband? — 4. Are you head of a family ? — 5. If head of a family, give age and relationship of those dependent upon you — — - - 6. If married, has your wife or husband derived income during the taxable year to date from sources in the United States separate from your own ? - — - — — - 7. If so, is such income included in the income stated below? - — 8. Have you filed a return of net income for all or any of the past four years ? 9. If so, state for which years and the Internal Revenue Districts in which filed INCOME OF CLAmAKT. DURING TAXABLE YEAR TO DATE, FROM SOURCES WITHIN THE UNITED STATES. (1) S.^-i-Any OR Wages. Name of Emploter. Address. j Period. Amount. 1 1 $ t':::::::::::;::::] 1 1 j' 1 1 1 1 $ (2) Other Income. Name of^ource. Address. Period or Date. Amount. |. . $. 1 1 1 i Total income of claimant, during taxable year to date, from sources within the United States (X) $ - STATEMENT OF CREDITS CLAIMED. Amount of credits claimed : Personal exemption, $ — Credit for dependents, $ — Total (Y) $ Total income of claimant, during taxable year to date, from sources within the United States (item X from above) Balance of credit (item Y minus item X),... I swear (or afi&rm) that the above is, to the best of my knowledge and belief, a true and complete state- ment of facts in connection with the claim for credits above made. (If claim is made by agent the reason therefor must be stated on this iine.) Sworn to (or afiirmed) and subscribed before me this dav of — 19 (Signature of iudividual or agent.) cs— S77S (Oflieial capacity.) (OVER.) (.\ddress of individual or agent.) Income Tax Supplementary Page 28 [Page 1 of I'orm 1115.] PROVISIONS OF REGULATIONS 45 APPLICABLE TO TIIH USE OF THIS FORM. APPLICABILITY OP CREDITS, UNDER SECTION 216 OF REVENUE ACT OF 1918, TO NONRESIDENT iULIEN EHIPLOYEE. Art. 316 (of Regulations 45). Allo-wnnce of. pcrsoiial ex- emption to nonresident nlien employee. — A nonresident alien employee, provided he Is entitled under section 216 of the statute (sec the articles below, particularly the lists of countries In Article 307) to credit for a personal exemption or for dependents, or both, may 'claim the benefit of such credit by filing with his em- ployer this form, duly filled out and executed under oath. On the filing of such a claim the employer shall examine it. If on such examination it appears that the claim is in due form, 'that it con- tains no statement which to the knowledge of the employer is un- true; that such employee on the face of the claim 1? entitled to credit, and that such credit has not yet been exhausted, •such em- ployer need not until such credit be in fact exhausted withhold any tax from payments of salary or wages made to such employee. Every employer with whom aflBdavits of claim on this form are filed by employees shall preserve such affidavits until the following calendar year, and shall then filethem, attached to his annual with- holding return on Form 1042 (revised), with the Collector on or before March 1. In case, however, when the following calendar year arrives such employer has no withholding to return, he shall forward all such affidavits of claim directly to "the Commissioner (Sorting Division), with a letter of transmittal, on 'or before March 15. "Where any tax is withheld the employer in every Instance shall show on the pay envelope or shall furnish some other memorandum showing the name of the employee, the date" and the'amount with- held. This article applies only to payments of compensatioi) by an employer to an employee. Ap.t. 306 (of Regulations 45). Credits 4o non-resident alien individnal. — A nonresident alien individual, similarly to a citizen or resident, is entitled for the purpose of the normal tax to credit • • • a personal exemption, and $200 fdr each dependent, except that If he is a citizen or subject of a country which imposes an income tax a personal exemption or credit for dependents Is allowed him “ only if such country allows a similar credit to citizens of the United States not residing in such country.” “ If such country allows a similar credit ” means if such country in imposing its In- come tax allows a personal exemption or a credit for dependents, as the case may be, and allows it without discrimination to citizens of the United States not residing in such country. * * * AST. 307. "When nonresident alien individnal entitled to personal exemption. — (c) The following is an incomplete list of countries which either Impose no income tax or in imposing an income tax allow both a personal exemption and a credit for (Jependents which satisfy the similar credit requirement of thq.' statute : Argentina, Celgium, Bohemia, Bolivia, Bosnia, Brazil, Bukowina, Canada, Carinthia, Carniola, China,, Chile, Cuba, Dal- matia, Denmark, Ecuador, Egypt, France, Galicia, Goritz, Gradlsca, Greece, Guatemala, Herzegovina, Istria, Lower Austria, Luxemburg, Mexico, Montenegro, Moravia, Morocco, Nev/foundland, Nicaragua, Norway, Panama, Paraguay, Persia, Peru, Portugal, Roumania, Russia (including Poles owing allegiance to' Russia), Salzburg, Santo Domingo, Serbia, Siam, Silesia, Slovakia, Styria, Spain, Switzerland, Trieste, Tyrol, Upper Austria, Union of South Africa, Venezuela, (6) The following is an incomplete list of countries which in im- posing an income tax allow a personal exemption which satisfy the similar credit requirement of the statute, but do not allow a- credit for dependents ; Bachka, Banat of Temesvar, Croatia, Finland, India, Italy, Salvador, Slavonia, Transylvania, (c) The following Is an incomplete list of countries which in imposing an income tax do not allow to citizens of the United States not residing in such country either a personal exemption or a credit for dependents and, there- fore, fail entirely to satisfy the similar credit requirement of the statute : Australia, Costa Rica, Great Britain and Ireland, Japan, The Netherlands, New Zealand, Sweden. The former names of cer- tain of these territories are here used for convenience, in spite of an actual or possible change in name or sovereignty. A nonresi- dent alien individual who is a citizen or subject of any country in the first list is entitled for the purpose of the normal tax to such credit for a personal exemption and for dependents as his family status may v/arrant. If he is a citizen or subject of any country in the second list, he is entitled to a credit for personal exemption, but to none for dependents. If he is a citizen or subject of any country in the third list, he is not entitled to credit for either a personal exemption or for dependents. If he is a citizen or subject of a country which is in none of the lists, then to secure credit for' either a personal exemption or for dependents he must prove to the satisfaction of the Commissioner that his country does not impose an income tax or that in imposing an income tax it grants the simi- lar credit required by the statute. CREDITS UNDER SECTION 216 (c) and (d) OF REVENUE ACT OF 1918. PEKSONAL EXEMPTIOlf. Status of taxpayer. Amount of credit. Married, and living with husband or wife (see Article 303, below) $2,000 Head of a family (see Article 302, below)........,. ;. 2,000 Married, and not living with husband or wife and. not head of a family (see Articles 302-303, below) 1, 000 Single, and not head of a family (see Article 302, below)..- 1, 000 CBEDIT FOB DEPENDENTS. Status of. dependent. Amount of credit. Eor each person (other than husband or wife) v,’ho is (1) (a) under 18 or (b) Incapable of self-support because defective, and (2) is dependent upon, and receiving the chief support from, the taxpayer (see Article 304, below) $200 Art. 302 (of Regulations 45). Personal exemption of head of family. — A head of a family is a person who actually supports and maintains In one household one or more Individuals who arc closely connected with him by blood relationship, relationship by marriage, or by adoption, and whose right to e.xci’cise family con- trol and provide for these dependent individuals Ls based upon some moral or legal obligation. In the a"bscncc of continuous actual resi- dence together, whether or not a person with dependent relatives is a head of a family within the moaning of the statute must depend on the character of the separation. If a father Is absent on busi- ness or at war, or a child or other dependent Is away at school or oa a visit, the common home being still malntalm.'d, the additional ex- emption applies. . If, moreover, through force of circumstances a parent is obliged to maintain his dependent children with relatives or in a boarding house while he lives elsewhere, the additional exemp- tion may still apply. If, however, without necessity, the dependent continuously makes his home elsewhere, his benefactor is not the head of a family, irrespective of the question of support. A resident alien with children abroad is not the head of a family. Art. 303" (of Regulations 45). Personal exemption of married person. — In the" case of a married man or married woman the joint exemption replaces the individual exemption only if the man lives with his wife or the woman lives with her husband. In the absence of continuous actual residence together, whether or not a .man or woman has a wife or husband living with him or her within the meaning of the statute must depend on the character of the separation. If merely occasionally and temporarily a wife is away on a visit or a husband is away oa business, the joint home being maintained, the additional exemption applies. The unavoid- able absence of a wife or husband at a sanatorium or asylum on ac- count of illness does not- preclude claiming the exemption. If, how- ever, the husband voluntarily and continuously makes his home at one place and the wife hers at another, they arc not living together for the purpose of the statute, irrespective of their personal rela-; tions. A resident alien with a wife residing abroad is not entitled to the joint exemption. Art. 304 (of Regulations 45>.. Credit for dependents. — A tax- payer receives a credit of $200 for each person (other than husband or wife), whether related to him or not and whether living with him or not, dependent upon and receiving his chief support from the ta ;payer, provided the dependent is cither (a) under eighteen or (b) Incapable of self-support because defective. The credit is based upon actual financial dependency and not more legal dependency. It may accrue to a taxpayer who is not the head of a family. But a father whose chfldrcn receive half or more of thoit support from a trust fund or other separate source Is not entitled to the credit. 02—8773 Page 2 — Formal 115. Income Tax Supplementary Page 29, tREASURY BtmEATJ OF INTERNAL RKVEN^. Form me.— Revised Jan., 1920. CLAIM FOR CREDIT ON INDIVIDUAL INCOME TAX RETURN FOR TAXES PAID OR ACCRUED TO FOREIGN COUNTRIES OR TO POSSESSIONS OF THE UNITED STATES Name of aaimant Address. (Street and number or rural route.) (City orto-BH.) On behalf of the above-named claimant, who is a citizen or subject of — ,and is a resident credit is hereby claimed, on his attached income-tax return, which is based on income for taxes paid or accrued * as follows: (Reoelved oraccrued.) (Name ol country.) during the taxable year (If calendar year give year— if flscal year give months.) SCHEDULE Al. »Tax Paid or Accrued* to a Possession of the United States on Behalf of Claimant Individually. Name of possession of U. S — Statute imposing tax Date of accjf ual — Character of tax (Income, war-profits, or excess-profits.) (To be named luily and ciearly so as to be easily identified#) rate of . (To be given even if claim is based on payment.) y attached receipt or return) .. *) equals in dollars Date of payment (if paid) (To be given even if claim is based on accrual,) 1. Amount of tax^ (evidenced hy attached receipt or return) which (converted at an exchange SCHEDULE A2. ' Tax Paid or Accrued* to a Possession of the United Stales on Behalf of Claimant Individually. Name of possession of U. S Character of tax. „. Statute imposing tax Date of accrual ... (Income, ■war-profits, or excess-profits.) named fully and clearly so as to be easily identified.) Date of payment (if paid) Tf o be gYv^ii eTenVf cia.’mYs'to'ed on payment.) (To be given even if claim is based on accrual.) 1. Amount of tax^ (evidenced by attached receipt or return) which (converted at an exchange rate of ®) equals in dollars , ^ : SCHEDULE Bl. * Tax Paid or Accrued * to a Foreign Country on Behalf of Claimant Individually. Name of foreign country Character of tax... (Income, war-profits, or excess-profits.) Statute imposing tax. '(To be named fully and clearly so as to be easily identified.) Date of accrual yf "^"j^Vn evVn'u Yi^'iY'b^'d oY'paY^^^^^^ payment (if pa^d) j,,,ruai.) 1. Total net income on which this tax was based — 2 That amount of such total net income which was derived from eourcos in that foreign country^ ... - ■* s! Ratio of total net income derived from sources in that foreign country to total net income on which this tax was based (item 2 divided by item 1) ^ — 4. Total amount of this tax ^ payment or accrual to that foreign country (evidenced by attached receipt or retum) * 5, That amount of this tax which was based on income derived from sources in that foreign country (item 3 multi- plied hy item 4) *7 which (converted at an exchange rate of ®) equals in dollars.. $ (in foreign money ) — SCHEDULE B2. «Tax Paid or Accrued * to a Foreign Country on Behalf of Claimant Individually. Name of foreign country Statute imposing tax Date of accrual .. Character of tax. (Income, war-profits, or exce^proflts.) Date of payment (if paid) (To be given even if claim is based on accrual.) '(’i’obe named fully and clearly so as to be easily identified.) (To bo given even if claim is based on payment.) 1. Total net income on which this tax was based 2'. That amount of such total net income which wca derived from sources in that foreign country . 3. Ratio of total net income derived from sources in that foreign country to total net income on whicn this tax was based (item 2 divided by item 1) 4 Total amount of this tax^ payment or accrual to that foreign country (evidenced by attached receipt or return) . — 5'. That amount of this tax which was based on income derived from sources in that foreign coimtry (item 3 multi- ') equals in dollars— plied hy item 4) which (converted at an exchange rate of.. (In foreign money.) I See note 1, page 3. >'s^7Y^;Y2.pag6 3. 3 see note 3, page 3. < See note 4, page 3. » See note 6, page 3. »Scenoio6,paC6 3. ’ See noie 7, page 3. Pa^e i of I'orm 1116 . Income I’ax Supplementary Page 30. SCEEDtrtS Cl. •Tk WXbhM ai Source bjre Cotpofafiofl trader & Foreign XaGoiae Tax law, oa Behalf of cimaxnnt Individually. Name of foreign country Character of tax (Income, war-profits, or excess-profits.) Statute imposing tax _ (To be named fully and clearly so as to bo e^y identSed.) Date of Accrual Date of payment, if paid (To be ^ven even U claim is based on payment.) (To be givMlvm ifcWm isTased on accn^^^^^^^ 1. Name of -vidthholding corporation 1(a). Number of held during the year 2. Number of shares acquired dunng the year. 2 (a) . Date of such acquisition 3. NumbCT of shares sold during the year 3 (a). Date or such ale 4. Total num^ of shares outstanding on which dividend was declared (regardless of whether the dividend was paid to citizens of the United States or other governments) 5. Total dividends paid or accrued exchange rate of such shares during the year .„.®, equals in dollars which convertel at an 6. Amount of tax (evidenced by attached receipts, or return) paid en bloc to foreign government . which converted at an exchange rate of J equals in dollars. 7. Portion of tax paid for claiimnt individually (total tax withheld, item 6, divided by total number of $ corporation stock outstanding, item 4, and tnis result multiplied by number of shai'es held during the year item 1 (a) $_ Less amount of taxes properly allocated to the -iriden^ declai^ (hiring the year prior to acquisition or aftCT the disposition of stock not held during the entire year Balance of tax paid for claimant individually by withholding corporation (item 7 minus item 8) •$. SCHEDULE C2. ®Tax Withheld at Source by a Corporation Under a Foreign Income Tax Law, on Behalf of Cfeimant Individually. Name of foreign country Character of tax (Incxmie, war-profits, or excess-profits. ) Statute imposing tax Date of Accrual (To bo named ftdly and clearly so as to be easily Wentifled.) Date of payment, if paid (To be given even if claim is based on payment.) (To be given evai if claim 1. Name of withholding corporation 1 (a). Number of shares held during the year 2. Number of shares acquired during the year 2 (a) . Date of such acquirition onaccroal) 3. Number of shares sold during the year. i. 3 (a). Date (jf such sale 4. Total number of shares outstandmg on which dividend was declared (regardless of whetJw, the 'dit^end w paid to citizens of the United States or other govemnsents) ■* which converted at an $. 5. Total dividends paid or accrued on such shares during the year . exchange rate of equals in dollars 6. Amount of tax (evidenced by attached receipts, or return) paid en bloc to foreign government which converted at an exchange rate of ® equals in dollars . $ 7. Portion of tax paid for claimant individually (total tax withheH item 6, divided by total’ numberof sharca’erf COTporation stock outstanding, item 4, and this result multi^plied by number of shares held during the year, 8. Less amount of taxes properly allocate(l to the ^vidends declar^ during the year prior to acquisition or after the (iispoeition of stock not held during the entire year $ 9. Balance of tax paid for claimant incKvidually by withholding corporation (item 7 minus item 8)_ $- SCHEDULE D. i'Tax Paid or Accrued ‘ to a Possession of the United States on Behalf of a Partnership, Estate, or Trust, in Which Claimant Has an Interest. Partnership, estate, or trust (Nam(^5) ^ " ■ (Addrea.) Fiduciary (if estate or trust) __ . . .. (Name.) * ’(Ad‘dr'^)“ Character and extent of claimant’s interest in partnership, estate, or trust Name of possession of U. S Character of tax.. Statute imposing tax (Income, war-profits, or excess-profits.) (To be named fully and clearly so as to be easily identified.) Date of accrual — Date of payment (if paid) (To be given even iX c laim is based on paynwait.) (To bo given even il claim is based on acxirucl.) 1 . Total not income on which this tax was based 2. That amount of such total net income to which claimant would Jmve been entitled as partner or b^eficiary hiLi no such tax of the partnership, estate, or trust accrued or been paid to that possession (claimant’s share of 3. Ratio of that amount of total net mcome to which claimant WDuld’have b©^ entitl^, to total net i which this tax was based (item 2 divided by item 1) ax® payment or accrual to that jxiesei ax which was based on claimant’s shi which, (converted at an exchange rate of ®) equals in dollars 4. Total amount of this tax® payment or accrual to that jxiesession (evidenced by attached receipt or return) 5. That amount of this tax which was based on claimant’s share of tho income taxed (item 3 multiplied by item 4) (In foreign money.) > See note 1, page 3. CJ— 880» • Seo note 2, page 3. ' Soe note 3, page 3. ‘Seenerte 4, pages. ® See nolo 5, page 3 Page 7 . of I'orni 1116. Income Tax Supplementary Page 31 (Kamo.) “Tax Paid or Accrued ’ to a Foreii Partnership, estate, or trust Fiduciary (if estate or trust) "(Kime’) Character and extent of claimant’s interest in partnership, estate, or trust . SCHEDULE E. louuhT on Uehalf of a Partnerslrip, Estate, or Trust in Which Claimant Has an Interest. (Address.) (Address.) Name of foreign countrj'. Statute imposing tax — Date of accrual. Character of tax (Income, -war-proats, or excess-profits.) (To be named luUy and clearly so as to be easUy identified.) Date of payment (if paid) . (To be given even If claim is based on accrual.) (To be given even if claim is based on payment.) 1 . Total net income on which tfiis tax was based 2. That amount of such total net income which was derived from so^c^ in that 3. Ratio of total net income from sources in that foreign country to total net income on which this .ax was b^sed (item 2 divided by item 1) 4. Total amount of this tax* payment or accrual to that foreign c^ntry (emdenced That amount of this tax which was based on income derived from sources in that foiugn emmay {Aeok o meJU 6. 'rfat^nmunt^S t^taTnerincoiM'deriVe from sources in, that iorei^ coun-fry to have .been entitled as partner or beneficiary had no such tax accrued or been paid to aiat loreign cou^itry 7. Eitio'Sthat amount S-ch totei'nSin'^^mrdeiiv^'fr^^^^ in that foreign j to w^ch cJai^t would have been entitled, to such total net income derived from sources in teat foreign coimtxy (item 6 8. That amount of^hie tax which was based on claimant’s share of income derii^ from sources in tiit foreign country (item 5 mnltipUed by item 7) - -----S ^ch (converted at an ex Ji.nge rate cf ^ (In foreiga numey.) J) equals in doillars $--- Nora.-If more space is required tor any of the preceding schedules use a separate sheet of paper giving information as iadiexted on this ftn m. SUMMARY OF CREDITS CLAIMED For Taxes Paid or Accrued* oa Behalf of Ckimant Individually. To possessions of the U. S. : Item 1 of Schedule Al, $ ; Item 1 of Schedule A2, — ; Total, $ To foreign countries : Item 5 of Schedule Rl, $ ; Item 5 of Schedule B2, $ ; Total, S - To foreign countries: Item 9 of Schedule Cl, $ i.Item 9 of Schedule C2, $. ; ToUl, $ For Taxes Paid or Accrued* on Behalf of Partnership, Estate, or Trust in Which Cmimant Has an Interest. To toeign countries: Item 5 of Schedule D, $ — ; Item 8 of Schedule E, $ iota., Total credit claimed (to be inserted in the attached income-tax return on Form ICHO as item 41) I swear (or afErm) that the above is to the best of my knowledge and belief a trae and complete statement of facts in connection with the credit for income, war-profits, and excess-profite taxes aboi-e claimed. (licteim is made by agent, the reason therefor must be stated co this iine.) Sworn to (or afl&rmed) and subscribed before me this day of (Signature of indiviiAual & agent.) (Address of individual or agent.) (Official capacity.) 1 If attached incom^tax return is based on income “received," then “paid or accrued " wherever it appeamin this form means ‘'paid." if based on income “accrued/' then or accrued** means '*actTued.'' (See Section 200 of the Revsnue Act oi ISIS.) r. « To secure^^^for taxes paid or accrued to possessions of the Vnited States, claimant must be a citizen or resident of the United Sta.es. (See Section 222 (a) an ‘ State this item in terms of the currency used in making the return on which this tax was based (e. g., pconds, Iraaos, marks). , . , ,,, 6 Claimant must here state the rate of exchange used and must also attach a statement describing in reascnable detail why and how he determined upoai this ^ » The person^iMking this^im must attach to it a statement describing in reasonable detail the method by which he determined the amount of Uem 2 (“That locmt of^ch total net income which was derived from sources in that foreign country ). (OVEE) Page 3 of Form 1116. Income [Tax Supplementary Page 32. PROVISIONS OF STATUTE AND REGUUTIONS GOVERNING USE OF THIS FORM SECTION 222 OF KEVENUE ACT OF 1918. Sec. 222. (o) That the tax computed tmder Part II of this title shall be credited with: (1) In the case of a citizen of the United States, the amount of any income, war-profits, and excess-profits taxes paid during the taxable year to any foreign country, upon income derived from sources therein, or to any possession of the United States; and (2) In the case of a resident of the United States, the amount of any Budh taxes paid during the taxable year to any possession of the United States; and (3) In the case of an alien resident of the United States who is a citizen or subject of a foreign coimtry, the amount of any such taxes paid during the taxable year to such country, upon income derived from sources therein, if such country, in imposing such taxes, allows a similar credit to citizens of the United States residing in such coimtry; and (4) In the case of any such individual who is a member of a partnership or a beneficiary of an estate or trust, his proportionate share of such taxes of the partnership or the estate or trust paid during the ta'xable year to a foreign country or to any possession of the United States, as the case may be. (6) 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 redetennination, if any, shall be paid by the taxpayer upon notice and demand by the coUector, or the amoimt 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 condition precedent to the allowance of this credit may require the taxpayer to give a bond with sureties satisfactory to end to he approved by the Co mmis 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 redetermination; and- the bond herein prescribed shall contain such further conditions as the Commissioner may require. (c) These credits shall be allowed, only if the taxpayer furnishes evidence satisfactory to the Commis- sioner showing the amount of income derived from sources within such foreign country or such possession of the United States, and all other information necessary for the computation of such credits. AETICLES 882 AND 383 OF REGITIATIONS 45. Akt. 382. Meaning of terms. — “Amount of * * * taxes paid during the taxable year” means taxes proper (no credit being given for amounts representing interest or penalties) paid or accrued during tho taxable year on behalf of the individual 1919* Signed, sealed, and delivered in ike ‘presence of—^ 8-1 Principal. -[L. B.] Surety. -[l. 8.1 Bond approved this day of - 1919. Commissioner of Internal Revenue. Income Tax Supplementary Page 34. Form 1118 — United States Inteskal tlrrEmrE Sebttce. CLAIM FOR CREDIT ON INCOME AND PROFITS TAX RETURN OF DOMESTIC CORPORATION FOR TAX-ES PAID OR ACCRUED TO FOREIGN COUNTRIES OR TO POSSESSIONS OF THE UNITED STATES Name of coi-poration Address. (Clty or town.) (Street and number.) (State.) Oa liehalf of tho abovo-aamed domestic corporation, credit ia hereby claimed, on the attached corporation income and profits tax return, which is based on income (Ilecelved or accrued.) for the taxable year 'ir calendar year, give year; if fiscal year, give months.) ot the above-named corporation, for taxes as follows: (Paid or accruett.) Taxes Paid or Accrued' During the Taxable Year to Possessions of the United States on Behalf of the Corporatioiu Schedule A1. Name of p»)6seseion imposing ta.t Character of tax (Income, war profits, or excess profits.) Date of accrual Date of payment (if paid) i Statute imposing ta.x (To be named fully and clearly so as to be easily Identifirt.) 1 . Amount of tax payment (evidenced by attached receipt or return) J which (converted (In foreign money.) at an exchange rate of ®) equals in dollars $ j., Taxes Paid of Accrued' During the Taxable Year to Possessions of the United States on Behalf of the Corporation. Schedule A2. Name of poaecsBion imposing tax Character of tax Date of accrual Date of payment (if paid) Statute imposing tax , ncome, war profits, or excess profits.) (To be named fully and clearly so .as to be easily identified.) 1 . Amount of txr payment (evidenced by attached receipt or return) 2 -which (converted (In foreign money.) at an exchange rate of ^) equals in dollars. Taxes Paid or Accrued' During the Taxable Year to a Foreign Country on Behalf of the Corporation, Schedule Bl. Name of foreign country im posing tax Character of tax Date of accrual •Statute imposing tax 1. Total net income on which tax was based 2. That amount of such total net income which was derived from sources in that foreign country ‘ (Income, war profits, or excess profits.) Date of payment (if paid) (To be oamod fully and clearly so as to bo easily identifle'inent (if paid) income, war profits, or excess profits.) Name of foreign country imposing tax Date of accrual Statute imposing tax easUy ideaUfied.) 1, Total net income on which tax was based ^ 2, That amount of such total net income which was derived from sources in that ^ 3, Ratiooftotalnetincomederivedfromsourbesinthatforeign country to total net income on w^chtoxw^^ ^ (item 2 divided by item 4 Total amount of this tax paymout or accrual to that forcigu couutry (evidcuced thatS™ '■ •s! tL amount of thi. tax paymeut or accrual which waa baaed op income derived rrom eources in that foreign 1 - 4 V * which (converted at an exchange rate country (item 3 multiphed by item^) 5 of equals in dollarB Taxes Paid® during the Taxable Year to a Foreign Country or Schedule C a Possession of the United States by a ControUed Foreign Corporation. (Nora.— No credit can be claimed for taxes paid on behalf of a the act.) foreign corporation the dlvldends-from which are deductible from gross income under section 234 ol 'Name Foreign , Corporation Address (Street and number.) (Caty or town.) Incorporated under the laws of — Number of shares outstanding Number of shares owned by above-named domestic corporation Has preferred stock voting rights? . — N ame of foreign country or possession of United States imposing tax (Country.) Preferred Common. Total Capital stock .... Character of tax (Income, war profits, or excess profits.) Statute imposing tax ---^"j^g—g^YiiuyMTclwiyioas'to Date of pajTnent of tax. Was any part of the net income on which this tax ' based, derived from sources within the United States? .... (Yes or no.) I Period of accrual of this tax payment « 2. Amount of this tax payment (evidenced by attached receipt)’ Total . Total 3. Net income on which this t^x was based ® - 4. Amount received during the taxable year by the above-named domestic corporation foreign corporation 6 Ratio of the amount of such dividends to total net income on which this tax was based (item 4 divided by (total items 2 multipliedf by item 5. unless this product is in excess items 2 must be entered here instead of such product) vfn (orei^'monefd* ’ exchange rate of .v .^) equals in dollars - " — See notes on page a [Page 2 of Form 1118.] Income Tax Supplementary Page 36. SUMMARY® OF CREDITS CLAIMED FOR TAXES PAID OR ACCRUED OW BEHALF OF CORPORATION. To a possession of the United States (item 1 of Schedule Al) To a possession of the United States (item 1 of Schedule A2) To a foreign country (item 5 of Schedule Bl) To a foreign country (item 5 of Schedule B,2) of th^United States ^nbeMfTfr'cTnlrolWfor;^^^ — $... Sworn to and subscribed before me this day of President. (Officii capacity.) « S .ate this Item m terms o! the currency used in making the return on which this tax was based (e. g pounds francs marks) Claimant must here state rate of exchange used and must also attach a statement, describing In reasonable detil why 'and how ho determined upon this particular ^ Xll6 DCPSrtTi rn!\lrint> tlii e r»lni rr* mi^o* a i*... -a. . o — ..iijf «x»v* uww uv uci-crimucu upon ems pi 1918) \V^cre beginning and ending pSen^a^ed columns 1 I f* 0' ‘Ws tax payment which uccnicd in such period additional schedules should bo attached, and the credit claimed on each such schiKlulokouKvi^itten InloTwsTuE^^^ “ cpntroUod forci^orpomtion. [Page 3 of Form 1118.] Income Tax Supplementary Page 37. iMSTRUCTiONS REGARDING USE OF FORM 1118 CREDIT FOR TAXES Provisions of Revenue Act of 191.8 Seo. 238. (a) That in the case of a domestic corporation Ihe total taxes imposed for the taxable year by this title and by Title III shall be credited with the amount of any income, war-profits and exceas-profits taxes paid during the taxable year to any foreign country, upon income derived from sources therein, or to any possession of the United States. 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 Commissioner who shall redeter- mine the amount of the taxes due under this title and under Title III 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 ta.xes overpaid, if any, shall be credited or refunded to the.co^ora- tion in accordance with the provisions of section 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 corporation to give a bond with sureties satisfactory to and to bo approved by him in such penal sum as he‘may require, conditioned for the pajment by the taxpayer of any amount of taxes found due upon any such redetermihation ; and. the bond herein prescribed shall contain such further conditions as the Commi^ioher may require. (b) This credit shall be allowed only if the taxpayer furnishes evidence satisfactory to the Commissioner showing the amount of income derived from sources 'within such foreign country or such possession of the United States, as the case may be, and all other information necessary for the computation of such credit. (c) If a domestic corporation makes a return for a fiscal year' beginning in 1917 and ending in 1918, only that proportion of this credit shall be allowed which the part of such period within the calendar year 1918 bears to the entire period. Sec. 240. (c) For the purposes of section 238 a domestic corporation which owns a majority of the voting stock of a foreign corporation shall be deemed to have paid the same proportion of any faicome, war-profits and excess-profits taxes paid (but not including taxes accrued) by such foreign corporation dming the taxable year to any foreign country or to any possession of the United States upon income derived from sources without the United States, which the amount of any dividends (not deductible under section 234) received by such domestic corporation from such foreign corporation during the taxable year bears to the total taxable income of such foreign corporation upon or with respect to which such taxes were paid: Provided^ That in no such case shall the amoimt of the credit for such taxes exceed the amount of such dividends (not deductible under section 234) received by such domestic corporation during the taxable year. Conditions of Allowance of Credit. — (a) When credit k sought for income, war-profits or excess- profits taxes paid other than to the United States, the income and profits tax return of the corporation must be accompanied by this form, carefully filled out with all the information called for and with the calculations of credits indicated, and duly signed and sworn to. When credit is sought for taxes already paid the form must have attached to it the receipt for each such tax payment. When credit is sought for taxes accrued the form must have attached to it tho return on which each such accrued tax was based. This receipt or return so attached must be either the original, a duplicate original, a duly certified or authenticated copy, or a sworn copy. In case only a sworn copy of a receipt or return is attached, there must be kept readily available for comparison on request the original, a duplicate original, or a duly .certified- or authenticated copy, (b) In the case of a credit sought for a tax accrued but not paid, the Commissioner may require as a condition precedent to the allowance of credit a bond from the taxpayer in addition to this form. If such a bond is required. Form 1119 shall be msed for it. It shah' be in such penal sum as the Com mis sioner may ])rescribe, and shall be conditioned for the payment by the taxpayer of any amount of tax foimd due upon, any redeterraination of the tax made necessary by such credit proving incorrect, ■with such further conditions as the Commissioner may require. This- bond shall be executed by the taxpayer, its agent or representative, as principal, and by sureties satisfactory to and approved by the Commis.sioner. See also section 1320 of the Revenue Act of 1918. Articles 611 and 383, Regulations 45. [Page 4 of Form 1118.] Income Tax Supplementary Page 38, .DELIVER OR SEND THIS RETURN SO AS TO REACH COLLEaOR OF INTERNAL REVENUE ON OR BEFORE THE ISTh DAY OF THE THIRD MONTH AFTER THE CLOSE OF THE PERIOD IF EXTENSION OF TIME FOR FIUNG RETURN HAS BEEN GRANTED THE AUTHORIZATION MUST BE ATTACHED TO THIS return . Page 1 — Simmiary Form 1120-A— tTNITED STATES INTERNAL REVENUE SERVICE CORPORATION INCOME AND PROFITS TAX RETURN FOR Fiscal Peri od begun , and ended—; , 1919 (Print plainly corporation’a name and principal place of butinets) Auditad by ^OT WUTE IN TKS STACt) PAYMENT (Caahier’a Stamp) • bCHLDULL 1 — NET INCOME. iTClf. 1 1 wa 2913 i 191S 1« Net Incoue for Each Prewar Year (an finallv determined on inrome retIlpn^ 1 1 1 2. Plus amount of corooration excise or income tax paid in each vear Tl 1” 3. Totals for 1911, 1912, and 1913 (If in any of these years there was a loss, 'enter zero I for that vear l . 9i i 1 4. Less dividends received in 191.3. 8. Net Total FOR 1913 I $ 6. Average Net Income for Prewar Period (sum of items on line 3 for 1911 and 1912 and Item 5 for 1913^ivided by nunlbi 7. Net Income por Taxarle Year (Item 27, Schedule A. pace 21 ' sr of vearsl 4. Imb adjustmentB by way of deductions (from Schedule G). 5. Remainder 0 . Plus of minus clian^es in invested capital during year (from I Schedules J and II).. ' 7. Total (or Remainder). 8. Less deduction on account of inadmissible assets (from I Schedule L) ' 9. Invested Capital por Each Yea»_ 10. Average Invested Capital for Prewar Period (sum of items on line 9 for 1911, 1912, and 1913, divided by number of years). 11. Increase or Decrease in Invested Capital for Taxable Year as Compared with Average Prewar Invested Capital (indicate decrease hv “D”l 1$ . SCHEDULE III-EXCESS-PROFITS AND WAR-PROFITS CREDITS. (If this return ii made for a period less than a full year; Items 3 and 8 must be reduced as provided in paragraph 1, page 1 of Instructions.) Yicess-propits credit. 1. Eight' per cent of invested capital for taxable year (Item 9. last column. Schedule III WAH-PROFTTS CREDIT. 4. Average net ipcome for prew period (Item 6, Schedule I)... $ 2. EzemptioD. Except for forGign mrpnrAtinnR ^<^'1 5. Plus 10% of increase or minus 10% of decicase shown by Item 11, Schedule II 3. Excess-Propits Credit (Item l.nliw Item 21 t 1 6. (a) TotaIfOp (or Difference Between) Items 4 and 5, or (6) 10® of invested coital for taxable year (Item 9 laBt COiUTTIT) Schedule 11) is laryAr 7. Exemption, except for foreign corporations ($3,000).. 8. War-Profits Credit (Item 6 plus Item 7) $- _. 1 . Bcackets. 2 . Amount op Net Income (Item 7 . Schedule IfTiV'EAcn Bracket. 3 . ExcEss-pRonrs Credit (Item 3 , Scheduij! III). 4 , Remaindee Subject to Tax. 5 . Rate. 1 J )19 RATES. R. AVOTTKT np Tat 7 . TlAtP 1>'.8 RATES. 1. Not over 20® of in- vested capital $ $ $ 20% J. 2. Over 20® oi invested capital 40% o\jyo 65® 0 ). 9 . Totals $ WAR. -PROFtTS AND EXCESS.PROF ITS ta: 1 K (Brack 1 ot thr omputat in Sectio n 301 (a) and (fc Net income for taxable year (Item 7, Schedule I)_ $ 7. Eighty petient of Item 6 8. Less Item 3 column 8 (if smaller than Item 7) 9. Tax in Bracket three (Item 7 minus Item 8— if Item 8 is the larger, make no entry).... Leas amount of war-profits credit (Item 8, Schedule HI) Remaindee _____________________ Total at 1918 Rates por War Profits and Excess Profits as Computed under Section 301 (a) (Item 3, columns, plus Item 9) Total at 1918 Rates for War Profits and Excess Profits, ip Computed under Section 302 (see Instructions, page 1, paragraphs 6 and 7) . Total at 1919 Rates por War Paoms and Excess Profits, if Computed under Sections 301 (c) and 302. 55==?=^====== ............... -WiOr.>ft6PlTS AND EXCfeaa-PhOFlYS tAXr numb^o7 months*i™the*p'^d computed under Section .303, So't, or 337, w’hich the numbcr'of months in 1919 is'ofThe .1 .. I ..I I. I- I Zicmptlon, •xctpt for forr Ipi eorporvllMit |2,0rj0 uxiIcm murti It for lest than a year 22. Income tax. 1919 rates, 10J6, Item 20 : 23. That proportion of Item 21 which the number of months in 1918 IS of the number of months in the period 24. That proportion of Item 22 which the number of months in 1919 is of the number of months in tho period II 25. Total income tax (Item 23 plus Item 24) ^ War and cxceas-profita Ux (Ite.-n 15).. Income tax (Item 25) Total of Iteina 28 and 27 htm allowable credit for iDcome, wor-proBto. iniat **Total credit claimed " item from Form 1118, Total Tax (ToUl of Items 26, 27, 28, and 20) Tax peid: On lubmission of tenUtive return (1031T). * excees-prorits taxes paid or accrued to loreign which must be filled out and attached if auch credit ie nugbt). of tho United States, (llcre ; by remittanroaerompanving this return. 8 Page 1 of Form 1120A Income Tax Supplementary Page 39, Page 2— Incom© Schediiles corporations, banks, insurance companies, and other corporations required to submit statements of ^rnings and expenses to any nationat slate ublic officer mav eubmitinstead of Scheciulo A, a statement of earnings and expenses in the form in wMch submitted to such officer In sue h cases the taxable net earnings will be reconciled - c .. and exncnse statement submitted, and should be entered as Item 7, Pchediile 1. page 1. SCHEDULE A— TAXABLE NET INCOME Note. — Railroad public officer may subu,,v i.—v..™ — — . by means of Schedule B with the net profit shown by the earnings and expense statement ■ ~ CROSS INCOME. 1. Gross sales. Ices returns and allowances — rv i'V 2. cost of g^s sold, exclusive of expenses, repairs, and other items called lor separately below (tom Schedule A2) Gro® income tom operations other than trading or manufacturing, less allowances (tom Schedule A3)... Interest on obligations of the United States or its possessions not exempt (tom Schedule A4) Interest tom other sources (from Schedule A5) 3. 4 . 5. 6. Rentals. 7. Royalties 8 . Share of net income earned during period by personal service corporations (whether received or not) — 9. Dividends on stock of foreign corporations (from Schedule A9), $.— ; dividends on stock of domestic corporations other than personal service corporations, 8 — . J__ elow) Total of Items 1 to 10 .; total.. 10. Oro«‘^income tom all other sources except dividends (not including any amount in respect of sales of capital assets or cellaneous investments— see Item 22, below) (tom Schedule AlO) - 11 . DEDUCTIONS. 12. Ordinary and necessary expenses (except amounts reported in Item 2 above or called for separately below, and not includ- ing cost or value of capibd assets or miscellaneous investments sold during taxable year—see Item 22) (from j-chedule At.). 13 Compensation of officers (including salaries, commissions, and other compensation in whatever form paid) (from bchcduic A13) 14. Repairs (including labor, supplies, overhead, and other items properly chargeable to repairs) (from Schedule A14) ......... la" Interret (except on indebtedness incurred or continued to purchase or carry obligations or securities, other than obligations of the United States issued alter September 24, 1917, the interest on which is wholly exempt from income lax)... I (except Federal income, war-profits, and excess-profits taxes, taxes which are a credit under Section 238, and taxes issed against local benefits of a kind tending to increase the value of the property assessed) 17, Debts ascertained to be worthless and charged off within the taxable year. 18. Exhaustion, wear and tear (including obsolescence) (tom Schedule A18). 19. Depletion. If depletion is claimed bv a mining company, the information called for by Form A (revised), or it by an oil or gas company. Form N (which forms can be obtained from the Callector), must be submitted vnth this return Total of Items 12 to 19 Diffebence Between Items 11 and 20 ... 22. Profit or loss on sales of capital assets and miscellaneous investments (from Schedule A22)..............-..--...--.;.— 23. Loas^sustained during the taxable year, and deducted under Section 234 (a) (4) (from Schedule A23) (extend in last column net total of Items 22 and 23) - 24. Net incxime for taxable year exclusive of deductions for dividends and amortization (total of or difference between Items 21 and 23, the latter ^ extended) 25. Dividends received tom domestic corporations, not personal service corporations 26. Amortization of war facilities (tom Schedule A26) (extend total of Items 25 and 26) 27. Net Income for Taxabl e Yeah (Difference between Items 24 and 26, the latter t 1 extended) (to be entered as Item 7, Schedule I, page 1). SCHEDULE B— RECONCILIATION OF NET PROFIT PER BOOKS WITH TAXABLE NET INCOME. adjustments are j ! ! I' 6. Nontoxabte income^^^ | . ! 1 and contributions > 1..........' •--1 • (6) i 1 (f>) Income, war-proSts, and eiceei-proflts taxeis paid or accroed to llie I'nited Statvt, iU posfiCSbioiti. or a loictgu country 1 ' poiiucai suoaiviMoujs uitriwi (c) Interest on Farm Loan Bonds issued under I- ederal | j 1 (c) Special improvement taxes tending to increase the 1 vcilno rrf tho nmnprtv 1 ...i 1 1 1 1 (d) Furniture and fixtures, additions, or betterments **** pvppnRP.'^ nn flie hooks .. (J) Dividends on stock of domestic corporations—. (f) Dividends on slock of pcr.'onal service corporations declared out of piolitsearucd jirior to taxable period. 1 (r) Replacements covered by depreciation—......—..— (/) Insurance premiums paid on tho life of any ofiicer or employee for the benelilofthecorporalionor business. (y) InUrett on inlebteJuttss incurred or coDtiDUcd to purchase of carry obligaiiuutor sefuriiiet {other thau ohligalions of the baited Siaies issued alter September li:4, 1917j the interest - (/) Other items of uonffi.vablc income (to be detailed)... VJ) npoL which is wholly exempt trom income tat.. (h) Additions to reserves for bad debts, conliugcncies, etc. (to be detailed) (') 7. Charges against reserves for bad debts, contingencies, etc. (j) - - — ( ) . (0 — (m) Other imallowable deductions (to be detailed) (n) a AmoOBl necessary to a.ljust profit or loss with the amonnts reported 'Z. Distributive shareof net income, earned during period by per- sonal service corporations not received or acciuedou books... 4 , Amoant necessary to adjust book profit or lost with the amonnts reported 9. Taxable net income (Item 27, Schedule A) 5. Total 1 1 . SCHEDULE C— BALANCE SHEETS. i r i i Attach hereto balance sheets as of the beginning and end of the taxable year (preferably in Jiarallel columii."\ showing as nearly as practica et e et.u s ca balance sheeta should be prepared from the hooka and should be in agreement therewith, or any differences should be retoncii .d.) ASSETS (Continued). Taed AmcU— Continued. Less reserve for doiircciation. Net Value. 1 hand, certifl* ASSETS. Cosh (Including cash in bank a cates of deposit, etc.). Tra^e icceasU ud Det«» tecchtble (before deducting reserves for lossc.v). Otber Accouats ud ootes re«eiT«bte (to be classified). Raw materials. Work in progress. Finisbed products. Supplies. S. Bonds and obUgatioDs (each issue t ^ stated separately). ASSETS fCDDtloued). lofestmenu— Continued— Bonds- Exempt (municipal, state, etc.)* Other, Lotos tod tdvaecet: To olTicers and employees. To others. Deferred chtrgea U fei Filed tssett: Laud. Buildings. Uachiuery Tools ana minor . Delivery equipment. OfTicc fumiiuJ'e. Other (state character). Total. leafs, good irtll. tod ether latto^blc ttsefs: Paid for in cash or other tangible property. Paid for In stock (other than stock dividends). Created by stock dividend or otherwise, tcenot: On bonds. On slock. Total. LIABILITIES. Notes piyable: To olficers and stockholders. To others (iucludiug bank loahs). Accounts ptyttle: Trade. Other. Accrued erpeoses aod reserret. tho charges erwting which ar* allowable dedueuous from income (to be dvlailcd). Reserve for losses ©a ooics and occooots receirthlo. Rc8cr>es for eooiinienclcs. etc., thc charges croaltng which aro not allowable deuuctious from iocome (tc bouttauwj). Cipiul slock ooist.iHlia* (lobcclasnflcil). Snrplai .al godividcA piokts. Total. A corporation having in parallel columns) as of a net income of $3,000 or more, which was in exUtcnce during at IcMt c the beginning of .its tirst full prewar year and as of December 31, 1913. ! full prewar year, should also attach to this return similar balance sheets (preferably SCHEDULE D-ANALYSIS OF SURPLUS ACCOUNT. iccount, Bhowin 1. Surplus at beginning of year per books. d: 2. Total net profat per books and per ^hedule B (Item 1). L/— 1 •Jiw vt i-iv/k-F w. w . - e r II i Deduct: 5. Dii-idcnds (state date payable and amount of each, and whether in cash or in stock). , 6. Other debits to surplus (to be detailed). 4 Total ol Items 1 2 and 3' I - Surplus at end of year per books. A corporation having a net income of $3,000 or more, which was in existence during at least one full p- war year, should also attach to tins return a simH».anJyrU ol its^lut account for its first full prewar year and for each subsequent year down to the beginning of the taxable year. Add; 2. Total net profit per books ana per tscneai 3. Other credits to surplus (to be detailed). Page 2 of Form 1 120A Income Tax Supplementary Page 40. Page 9— Income Schedules — Ck>nclu^od SCHEDULES SUPPORTING SCHEDULE A The Bchedulcfl called for below should be prepared and firmly stapled to this return. Desimato each schedule with the number of the item in Schedule A which it explains. Make schedules on paper of uniform size so far as practicable. In the space provided for the purpose on page 6 list fJl schedules attached to this return, giving the title and schedule number of each. References to Regulations 45 are to revised edition. SCHEDULE A2: COST OF GOODS SOLD, EXCLUSIVE OF EXPENSES, REPAIRS, AND OTHER ITEMS CALLED FOR SEPARATELY. In support oMtem 2, Schedule A, eorporetione engaged in manulacturing or tnding operations should submit an analysis, in reasonable detail, of the cost of goods sold. This etatement should ordinarily include the following items but should not include any ex- pense items called for separately in Schedule A. 1. Inventories at beginning of period (to be reconciled with balance sheet). 2. Purchases during period. 3. Labor and wages ordinarily charged to manufacturing coat on the corporation’s books, showing the principal items separately. 4. Other expenses ordinarily charged to manufacturing cost on the corporation’s books. (State eepaiately large or unusual items.) 6. Totai,. Deduct: 6. Inventories at close of period (to be reconciled srith balance sheet). 7. Cost of goods sold (Item 6 lese Item 6). Note. — Inventories should be valued at (s) coat or (6) cost or market, whichever is lower, provided that whichever basis is used must be applied to each item in the inventory and not to a port only. Inventories should be recorded in a legible manner, properly computed and summarized, end should be preserved as a part of the accounting records of the taxpayer. (See Articles 1531 to 1685 of Regulations No. 45.) If claims lor losses on inventories or rebates on sales made under Section 214 (a) 12 of the Act have been allowed, the opening inventory must be correspondingly adjusted. (.See Article 266 of Regulations 45.) State here which of the above-mentioned bases for valuing inventories is used in this return SCHEDULE A3: GROSS INCOME FROM OPERATIONS OTHER THAN TRAO< ING OR MANUFACTURING, LESS ALLOWANCES. Submit a schedule showing the nature and amount of the prindpsl items included in Item 3, Schedule A. life insurance companies should enter as Item 3, Schedtile A, the total premiums received from policyholders less such portion thereof as has been paid back or credited to, or treated as an abatement of premiums of, such policyholders within the taxable year. (See Articles 54S and 649 of Regulations 45.) Mutual marine insurante compamea should report as Item 3, Schedule A, the gross premiums collected and received by them less amounts paid for reinsurance. SCHEDULE A4: INTEREST ON OBLIGATIONS OF UNITED STATES OR ITS POSSESSIONS NOT EXEMPT. For exemptions on intcreet on Liberty Bonds or other obligations of the United States, see :Vrticles 77 to 82, Regulations 45. Attach hereto schedule showing in separate columns the following information with respect to obligations of the United States issued since September 24, 1917: (1) Class of obligations (list each issue separately). (2) First and last dates of each period during which the corporation’s holdings of that class of obligations remained unchanged. (3) Amount of obligations of that class held by the corporation during each such period. (4) Amount by which each amount entered in col umn (3) exceeds the maximum exemption lor that class of obligations. (5) Kate of interest. (0) Interest derived from each amount of principal stated in column (4). Enter as Item 4, Schedule A, the toUl of column (6) for all classes of obligations. Submit also a sUtement showing the amount of interest derived from bonds and other obligations of the United Stales and its pcsseaaiona, exclusive of those described in the table above. SCHEDULE A5: INTEREST FROM OTHER SOURCES. Submit a schedule showing tho source, nature, and amount of the piindpel itema included herein, the minor items being grouped in one figure. The total of the schedule riiould be entered as Item 5, Schedule A. lor intcreet on foreign bonds submit a schedule showing (a) name of country; (6) kind of obhgadons ( whether national, state, municipal, or corporate obligationa); .(c) amount of p.-incipal ; and (ln surplus by contribution of stockholders. The changed with reepect to taxes probably will occur in every case, and with respect to dividends m most cases. Should no changes respecting these be not^, the reasons for their omission should be stated. 2. The following instructions should be followed in making the above adjustments. Each item should be designated as an addition or distribution, distributions being desig- nated by red ink or otherwise. (a) U stock li Issued lor cash, the actual cash received (but not the amount of discount) should bo entered In this schedule. Assets (other than cash) paid In lor stock must be valued in accordance with Section SaS (a) (3) of the Be venue Act ol 1818. (6) If capital stock of the corporation Is reacquired but not paid for out of current profits, the oast of such stock should be deducted from investea capital. (e) Report dividends paid out ol profits of prior years but not dividends paid out of profits of the taxable year. Any distribution made during the first 60 days of the taxable year shall be deemodto have been made from eornings or profits accumulated during preceding taxable years; but any distribution made during the remainder of tho taxable year shall do deemed to have been made frem the profits for that year to the oxtont that such profits are sufficient. (See Article 1542.) (roporlioiiatu sbaro of car h stAci.- holdcr or member is computed. (Section 220, Arlielo 351.) — s.so> Page 7 of Form 1120A fncome Tax Supplementary Page 45, Page 2 of instructions GENERAL INSTRUCTIONS 1 . For complete instructions concerning the filling in of the schedules in this return, read the explanato^ notes at the head thereof, and Fart II of Regulations 45, revised, relating to the income tax and war-profits and excess-profits tax on corporations. Copies of the regulations can bo ob- tained from any collector of internal revenue or any bank. RETURNS. UABILITY FOR HUNG. 9. Corporations generally. — Every corporation, joint-stock com- pany, association, and insurance company not specifically exempted by Section 231 of the revenue act of 1918, and having a net income for the taxable year of $3,000 or more, is subject to the war-profits and excess- profits tax and must file a complete return on this form. •3. A corporation, joint-stock company, association, or insurance company (not exempted by Section 231) having a net income less than $3,000 must also file a retxirn on this form, filling that part of Schedule IV under the headings “Income tax” and (if necessary) “Adjustment of tax for fiscal year ended in 1918,” and all the schedules called for on pages 2 and 3; and answering all questions on page 6. 4. Foreign corporations. — ^A foreign corporation subject to the law is required to make return to the collector in whose district is located its principal office or agency through which is transacted the business in the United States. The gross income to be returned includes only the gross income from sources within the United States, including interest on bonds, notes, or other interest-bearing obligations of resiv dents, corporate or otherwise, and all amounts received representing profits on the manufacture and disposition of goods within the United States. (See Articles 91, 92, 550, and 625 of Regulations 45.) 5. A foreign corporation should fill in and submit all the schedules called for on pages 2 and 3 of the return with respect to its incofiie from sources within the United States, and should compute its income tax (Schedule IV), claiming, however, no specific exemption (Item 19). Its war-profits and excess-profits tax should be computed in the first instance, as provided in Article 913. 6. Partnerships and personal service corporations. — Partner- ships and personal service corporations must make a return on Form 1065 A. (See Article 624 of Regulations 45.) CONSOLIDATED RETURlfs. 7. Affiliated corporations, as defined in Section 240 of the Act and Articles 632 and 633 of the Regulations, must file a consolidated return. As provided in Article 632, the parent or principal reporting company must file the consolidated return on this form with the collector of the district in which its principal office is located. All supplementary and supporting schedules should be prepared in colimmar form, one column being provided for each corporation included in the consolidation, so that the composition of consolidated nej income and consolidated invested capital may be readily examined. 8. Subsidiary corporations and other affiliated corporations whose net income and invested capital are included in the return of a parent cor- poration or a principal reporting corporation must fill in and file Form 1122 with the collector in whose district their principal office is located. PERIOD COVERED. 9. The taxable year is the fiscal period ended in the calendar year 1919. 10. A corporation desiring to change the period for which its return is made from a calendar year to a fiscal year or vice versa, or from one fiscal year to another, must give written notice to the collector of such change and the reasons therefor at least SO days beforp the due date of its return on the basis of its existing taxable year and at least 30 days before the due date of the return on the basis of the proposed taxable year. (See Articles 26 and 431 of Regulations 45 and Section 226 of the revenue act of 1918.) TIl^E AND PLACE FOR FILING. 11. Returns for a fiscal period ending in 1919 must be sent to the collector of internal revenue for the district in which the corporation’s principal office is located so as to reach the collector’s office on or before the fifteenth day of the third month following the close of the fiscal period, unless an extension of time has been granted. 12. If the fiscal year ended prior to April 1, 1919, and if it is not possible to file a completed return on this form on or before the date the return would be due, an extension of time may be obtained by filing, on or before such date, a tentative return and estimate of taxes assessable, in duplicate, on Form 1031 T, and remitting with such return at leitst one- fourth of the estimated taxes shown thereon. 13. In case of neglect to file either a completed return or a tentative return within the prescribed time the collector is authorized to grant an extension of not more than 30 days, ^provided such neglect was due to absence, or sickness, find provided an application for such extension is made in writing prior to the expiration of the period for which an exten- sion may be granted. In meritorious. cases the Commissioner is author- ized to grant a further extension; but no such further extension will bo granted (except on account of absence or sickness), unless a tentative return has been ffied on Form 1031 T and at least one-fourth of the esti- mated tax has been paid. (See Articles 442 to 444 of Regulations 45.) SIGNATURES AND VERIFICATION. 14. Returns must be sworn to by the president, vice president, or other principal officer and by the treasurer, assistant treasurer, or other principal fiscal officer. The return of a foreign corporation having an agent in the United States shall be sworn to by such agent. If receivers, trustees in bankruptcy, or assignees are operating the property or business of the corporation, such receivers, trustees, or assignees shall execute the returns for such corporations, under oath. PAYMENT OF TAXES. 15. The tax should be paid by sending or bringing with the return a check or money order drawn to the order of “Collector of Internal Revenue at [insert name of city and State].” 16. Do not send cash through the mail or pay it in person except at the office of the collector or a regularly established internal-revenue stamp office. 17. At least one-fourth of the tax is due at the same time that the return is due. 18. An additional amount sufficient to bring the total payments up to one-half of the tax must be paid on or before the fifteenth day of the third month after the time fixed by law for filing the rettun. 19. An additional amount sui^ient to bring the total payments up to three-fourths of the tax must be paid on or before the fifteenth day of .. the sixth month after the time fixed by law for filing the return. 20. The remainder of the tax must* be paid on 'or before the fifteenth day of the ninth month after the time fixed by law for filing the return. 21. If any payment is not made when due, the impaid balance of the tax- will become, due 10. days after demand therefor by the col- lector. 22. If you pay in cash, do not fail to get a receipt at the time of pay- ment. If you pay by check or money order, your canceled check or your money-order receipt will serve as a receipt. PENALTIES. UNDERSTATEMENT OF TAXES DUE TO NEGLIGENCE OR FRAUD. 23. If taxes are understated through negligence on the part of the taxpayer and without attempt to defraud, there shall be added as part of the tax 5 per cent of the total amount of the deficiency pl\is interest at the rate of 12 per cent per annum on the amount of the deficiency of each installment from the time the installment w’as due. If an understate- ment is false or fraudulent with intent to evade the tax, there shall be added as part of the tax 50 per cent of the amount of the deficiency. FOR FAILING TO PAY TAX WHEN DUE. 24. If any tax remains unpaid after the date when it is due and for 10 days after notice and demand by the collector there shall be added as part of the tax the sum of 5 per cent of the amount due but unpaid, plus interest at the rate of 12 per cent per annum on such amount from the time it became due. FOR FAILING TO MAKE RETURN ON TIME. 25. A penalty of not more than $1,000 attaches for failure to lile a re*-*irn or to pay thd tax within the time required by law. If the fn dure is willful or an attempt is made to defeat or evade the tax, the penalty is $10,000 or imprisonment for not more than one year, or both, together with cost of prosecution. Page 8 of Form 11 20 A Income Tax Supplementary Page 46, 1-14-20. TREASURY DEPARTMENT. Xhteknal Revenue Bureau Form 1124. INCOME AND PROFITS TAXES. Bond under sections 214 (a) (12) and 234 (a) (14) of the Revenue Act of 1918. KNOW ALL MEN BY THESE PRESENTS that as principal, and , as surety, are held and firmly bound unto the United States of America in the sum of — dollars, lawful money of the United States, for the payment whereof we bind ourselves, our heirs, executors, administrators, successors and assigns, jointly and severally, firmly by these presents. Whereas, at the time of filing his return of income for the taxable year 1918 the above-bounden principal has filed or is about to file a claim in abatement based on the fact that he has sustained a substantial loss resulting from a material reduction (not due to temporary fluctuation) o^ the value of his inventory for such taxable year or from the actual payment after the close of such taxable year of rebates in pursuance of contracts entered into during such year upon sales made during such year; and Whereas, sections 214 (a) (12) and 234 (a) (14) of the Revenue Act of 1918 provide that in the case of such a claim payment of the amount of the tax covered thereby shall not be required until the claim is decided, but that the taxpayer shall accompany his claim with a bond in double the amount of the tax covered by the claim, with sureties satisfactory to the Commissioner, conditioned for the payment of any part of such tax foimd to be due, with interest, and it appears that the amount of this bond is double that of the tax covered by such claim in abatement: Now, THEREFORE, the condition of the foregoing obligation is such that if the principal shall on notice and demand by the collector duly pay any part of such tax found by the Commissioner to be due, with interest at the ratO of twelve per cent per annum from the time such tax would have been due had no such claim been filed, and shall otherwise well and truly perform and observe all the pro- visions of law and the regulations, then this obligation is to be void, but otherwise to remain in full force and virtue. Witness our hands and seals this day of , 1919. ... [L. S.l Signed, sealed and delivered in the presence of— Bond approved this .... day of 1919 Commissioner of Internal Revenue. — ..... [l. s.) Pnnmpal. [l. s.] Surety. Income Tax Supplementary Page 47. r-i .•-< > 00 a§» « ^ II 1 1 •d a i! 1 1 .9 II S A •SI :g (■^ Income Tax Supplementary Page 48. no vcrk sheel fini DELIVER OR SEND THIS RETURN WITH PAYMENT TO COLLECTOR OF INTERNAL REVENUE ON OR BEFORE MARCH 15, 1920 PAY TOUR TAX IN FHU WHEN YOU niE TOUR RETURN, THEREBY REDUONG THE COST OF COLLSaiONAND AVOIDING POSSIBLE ANNOYANCE TO YOU Page 1 of Return Form 1040A.— TJNITia) STATES INTERNAL REVENtTE SERVICE INDIVIDUAL INCOME TAX RETURN FOR NET INCOMES OF NOT MORE THAN $5,000 For Calendar Year 1919 PRINT NAME AND ADDRESS PLAINLY BELOW (Name) (Street and number or rural route) (Post offlce and State) Do not wiite in this spaw FIRST PAYMENT Stamp) CASH CHECK M. Examined by 1. Did you make a re- turn for 1918? 3. To what collector’s office was it sent? _ 2. If BO, what address did you give on .. that return? (Give district or city and state.) f. Ifnot, wereyou on that date 6. How many dependent persons under the head of a family as de- 18 (or mentaUy or physically defec- finedininstructLonaunder " ' 4. Were you married and living with wife (or husband) Dec. 31, 1919? “Personal Exemption?’ ^ __ 8. Did you pay dunng the ^endar year to any individual rent, wagcs.'saliiea or other fixed or determinable income amounting to $1,000 or over? ... tivc) were recoivii^ fceir chief sup- port from you on Dec. 31, 1919? 7. Write “R” if this return shows income received, or “A” if it shows income accrued 9. Did your vrife (or husband) or minor child make a separate return? * vAixjD o-AixA Avjo- cLiiu. luv u rtsLura oi xnionnauon. ; ' (If 5e, giy* name and address shown theroon.) 10. Did you, your wife (or husband) or minor children receive any in- tereet on U. S. Liberty Bon^ or any other income not reported ebewhere in this return or in a separate return? . (If so, give sources and amounts. ) , — 11. Enter name and address of each organization to which you made contributions claimed as deduc- tions, and amount paid to each. 10 •. . . oage 2 of return (see instractiona): If property was i aat date was determined. 3, claimsd as deductions in Schedules A, E and I 1013, attach statement explaining how value as 1. Befer terlaj of wlucb constructed.) 8. Date ac- quired. i. Cost or market value March 1, 19)3, if acquired prior thereto. 6. Repairs ordinary and incidental. W ear and tear (depredation) and depletion charged off— 9. Losses not compensated for by insurance. Causoandbow amount was arrived at. 6. Rate. 7. Amount pre- vious years. 8. Amount tills year. $ j $ — Attach a detailed statement of repairs showin g nature and amount of each item of expenditure. Da not write hs.'O M. Nel mccne ihcwa on page 2, Item J $ Oc not write here P» Tsx duo (4 ^ OQ sm^ocl cf Iicm 0^ 1 i N. Lest pevaal cxemptioB (see Inslraclioa VII) O. BcJancs fiacame faiahle at 4 9^ ) Less of 2^ on AsioufiS cf Ii&iq F $ .■ IL Ba?.3BCf! of ^ 1 NOTE.— If tL3 DEiount on Udo 0 exceeds J 1,000, the excess is taxable at Olid your return should be ruade on Form 1040. j 3. Amoiint of iax paid on stbn-Jssion of rctam 1 1 1 swear (or affirm) that tins return, to the be.st of my knowledge and belief, is a true and complete statement of all taxable (rains profits, and incoino loceived by or accrued to mo (or the person for -Khoin this return is made) during the year 1919, and that all deductions ea lured or claiiaod herein ai-o allowable under the law. “ (If return Is luaje by agent, t):o reusou tborefor must Lo stataC onVnia Una.) " Birom to and subscribed before me this Jay cf 1920. oi (oticcr auistobtering oetb.) (T:t!o.) (Siguatiiro of iiiulvliluil or agent. ) (Address of iadividual or uge- 1.) [Page 1 of f'crni 1040A.1 income Ta.x Supplementary Page 49. DETACH RETURN HERE AND SEND IT TO COLLECTOR OF INTERNAL REVENUI P*jl« 2 EeSara INDIVIDUAL RETURN 0? TAXABLE INCOME /^cladiof incstne ot wife (or liasban j) anil JepenJent niiiier\ \ children^ onleas reported in separate r INCOME FROM BUSINESS OR PROFESSION. 1 3 — — — COST OF GOODS SOLD: % OTHER BUSINESS DEDUCTIONS: 12. Salaries and wages not reported as “ Labor” under “Cost of Goods Sold”. 13. Rent on business property la which tB Ypriy**r - t 6 Mc!ctolr3!bonghrfcr'slio"''"" 14. Interest on business Indebtedness to Others-———-- — — . IS. Taxes on business and business property ^ 19. Repairs, wear and tear, and property losses 8. rius inventories at beginning of year. Q Totat. _ _ X 17. Bad debts arising from sales or profes- sional services — — — — — — 10 Less inventories at end of y^ar , 18. Other expenses (attach classified state- ment) 11 Net Cost or OooDS Sold 19. Total (Items 13 to 18 Inclusive) 8 L- 20. Net Cost Plus Total Deductioks (Item 11 phis Item 10). 21. Net Income vrom Business on Protession (Item 3 minus Item 201 B. INCOME FROM SALARIES, WAGES. COMMISSIONS, BONUSES, DIRECTOR’S FEES AND PENSIONS. 1. By whom received. 2. Occupation. 3. Name and address of employer. 4 . Amount received. $ Salary to self and dep! indent minor children In eluded in any deduction In Schedule A ... Total Income eeom Salaetes, etc. C. INCOME FROM PARTNERS'HIPS, PE.RSONAl SERVICE CORPORATIONS. AND FIDUCIARIES REPORTING ON A CALENDAR YEAR BASIS (not including amounts reported under F and K). D. PROFIT FR(}MrSALE OF LAND. B’OlLDlNGS. STOCKS. BONDS AND OTHER PROPERTY, AND FROM LIQUIDATING DIVIDENDS. L Kind oi property. 2. Name of purchaser or broker, j 3. Sale pri c or liquidating dividend 11. 4. Date acquired. 5. Cost or market value Mar. 1, 1913, if acquired prior thereto. 6. Cost of subse- quent iraprovo- ments, if any. 7. Depreciation subsequently sustained. 1 1 Net PnonT (total of cols. 3 and 7 minus total of cols. 5 and 6) *... 1 $— 1 1. Kind of property. 2. Name and address of tenant, lessee, cto. 0 . Ainonut (cash ! or onuivalcTit) , and property losses. 5. Other expenses. Net Tneome ebom Rent.s and Rotat.ttes (total ofcol. 3 minus total of cols. 4 and 5). $ It 1 's. .....I 1 fi F. JNTEsIsT ON CORPORATION BONDS CONTAINING TAX-FP.EE COVENANT, ON WlilCfeA TAX OF 2% WAS PAID BY DEBTOR CORPORATION I I Mni'lniin" su"h interest ref cived firong'n ni'-tnership?. ni-rsnntl se^^^cp. corDorations and fidnoiarie^reportinTon ealRTidar year basis'). 1^- G. OTHElTlNCOME^Tn^ including dividend.-,, which should reported in Item K). Amount received Amount paid for you by debtor corporation on tai-lrce covenant bonds (Item Q, page 1). H, TOTAL NET INCOME FROM ABOVE SOURCES. 1. Interest paid on 3. Losses by Ore, storm, or cas- ualty oot claimed above. i 2. Taxes paid 5. Bad debts and other deductions, llany(attachdetail&dstatemont TOTAt.-- Ji L I rc- J. Total net income on which norma! tax is to ho caSerfated (H raniw 1) (Enter 03 Item M, page 1) — K. Cash or Slock Dividends from corporations which are lasaWe hy Sre L'niled Suies upon any portion of their net incomes (including dividends ceived through partnerehipe, personal service corporations, and fiduciaries reporting on a calendar year basis) . |„ L Total net income (if this amount is over $5,000, mate your return on Form 1040) 1 2—9397 $ [Page 2 of Form 1040A. Income Tax Supplementary Page 50. KEEP THIS WORK SHEET AND INSTRUCTION DETACH THE RETURN (CON- TAINING AFFIDAVIT) AND DELIVER OR SEND IT WITH PAYMENT TO COLLECTOR OF INTERNAL REVENUE ON OR BEFORE MARCH 15. 1920 PAY YOUR TAX IN FULL WHEN YOU FILE YOUR RETURN, THEREBY REDUCING THE COST OF COLLECTION AND AVOIDING POSSIBLE ANNOYANCE TO YOU 1. Did you make a re- turn for 1918? . Pag© 1 of Work Slieet Form l(HOA— UNITED STATES INTERNAL REVENUE SERVICE WORK SHEET FOR INDIVIDUAL INCOME TAX RETURN FOR NET INCOMES OF NOT MORE THAN $5,000 For Calendar Year 1919 .PRINT NAME AND ADDRESS PLAINLY BELOW ^Name) (Street and number or rural route) (Post office and State) IF YOU NEED ASSISTANCE GO TO A DEPITTY COLLECTOR OR TO THE COLLECTOR’S OFFICE BUT FIRST READ INSTRUCTIONS AND HLL OUT THIS SHEET (FACE AND BACK) IN PENCIL AS WELL AS YOU CAN 2. If 80 , what address did you give on _ that return? 8. To what collector’s office was it sent? 4. Were you married and living with wife (or husband) Dec. 31, 1919? (Give district or city and State.) 6. If not, were you on that date 6. How many dependent persons under the head of a family as de- 18 (or mentally or physically defec- fined in instructions under tive) were receiving their chief sup- “Personal Exemption?” port from you on Dec. 31, 1919? 8. Did yoR pay durmg the calendar year to any individual rent, wages, salaries or other fixed or determinable income amounting to $1,000 or over? 7. Write “R” if this return shows income received, or “A” if it shows income accrued 9. Did your wife (or husband) or minor child make a separate return? (II 30, give name and address shown thereon.) 10. Did you, your wife (or husband) or minor children receive any in- terest on U. S. Liberty Bonds or any o&er income not reported elsewhere in this return or in a p^parafA TAfiim? (II so, give sources and amounts. ) 11. Enter name and address of each organization to which you made contributions claimed as deduc- tions, and amount paid to each. 12. Enter in this table details concerning repairs, wear and tear, and property losses, claimed as deductions in Schedules A, E and I on page 2 of return (see instructions): If property was acquired prior to Slarch 1, 1913, attach statement explaining how value as 1. Beler to “A,” “E” or “L” 2. Kind ol property. (It buildings, state also ma- terial ol which constructed.) 3. Date ac- quired. 4. Cost or market value March 1, 19)3. if acquired prior thereto. 5. Repairs ordinary and Incidental. W ear and tear (depreciation) and depletion charged off— 9. Losses not compensated for by insurance. Causeandhow amount was arrived at. 6. Rate. 7. Amount pre- vious years. 8. Amount this year. $ ) 1 $ 1 — Attach a detailed statement of repairs showing nature and amount of each item of expenditure. CALCULATION OF TAX M. Ncl IDCOIDC sfcowi OD p2££ 2t IlOO J . j .. 1 !. P. Tax dsc (4^ on aaonnt of Item 0) .. ... $ ^ T«tt p«r«Ana1 M^mpPirtii Trrttrnrtinn VTT^ 1 1 1 Q. Lesi nonnal lax of 2 on amonni of Hem F R. Balance of tax doe _ .. .. - A Italanr* /'ifirMn* at 1. ..1 |. $ NOTE.— If tUe amount on line 0 exceeds $4,000, the cxcess.ls tai.able k 1 and your return should be made on Form 1040. S. Ambnnl of tax paid on snbmission of rehim 1$ — TAXPAYER’S RECORD OF PAYMENTS PAYMENT. AMOUNT. DA^TE. 1 CHECK OR M. 0. No. BANK OR OFFICE OF ISSUE. First $ 1 RpnnnrT § j Tbird ^ _ i Fourth $. 1 [Page 3 of Form 1040A.1 Income Tax Supplementary Page 51. h*e 2 rf Work Sktti WORK SHEET OF INDIVIDUAL RETURN OF TAXABLE INCOME ( iocludinf meom* of wile (< minor chadfon, onlaM rot>ortod in ooMyoU A. INCOME FROM BUSINESS OR PROFESSION. 1. Kind oftrusiness- 2. Business addrsos.. Xofcd sales and income from business or professional serrices . COST OF GOODS SOLD: j A T.ftVnnr _ „ . 1 OTHER BUSINESS DEDUCTIONS: 12. Salaries and wages not reported as “Labor” under “Cost of Goods Sold”. 13. Rent on business property in which taxpayer has no equity J 1 i 1 1 H. Interest on business indebtedness to 1 1 15. Taxes on business and business property 16. Repairs, wear and tear, and property i. Plos Inventories at bcghmlng of year J 1 17. Bad debts arising from sales or protes- Eional services 1 . 1 18. Other expenses (attach classified state- It. Net Cost o» Goods Bold... 1 1 19. Total (Items 12 to 18 inclusive) !$ 1 20. Net Cost Plus Total Deductions (Item 11 plus Item 10). 21. Net Income eeom Business or Peotession (Item 3 minus Item 201 $ B. INCOME FROM SALARIES, WAGES, COMMISSIONS, BONUSES, DIRECT OR’S FEES AND PENSIONS. 1. By whom received. 3. Name and address of employer. Salary to self and dependent minor children included in any deduction in Schedule A . 3. Losses bv fire, storm, or cos- 1 ualty not claimed above-ii- — . 4. Contributions. if any (attach detailed statement)!^ Total — C. INCOME FROM PARTNERSHIPS, PERSONAL SERVICE CORPORATIONS, AND FIDUCIARIES REPORFiNG ON A CALEND.4R YEAR BASIS (not including amounts reported under F and K). • D PROFIT FROM SALE OF LAND. BUILDINGS. STOCKS. BONDS AND OTHER PROPERTY, AND FROM LIQUIDATING DIVIDENDS. 1 TT- A t \ 1 3. Sale price or i „ rroiimy 1 2. Name of purchaser or broker, j | acquired. 5. Co.'ct or market value Mar. 1, 1913. if acquired prior tnorrto. b. t.ost of subse- quent Improvo- ments, ii any. 7. Depreciation subsequently sustained. 1 s - . ...i , 1 , 1 1 1 1 1 i 1 1 1 ..... 1 1 .. 1 Net Profit (total of cols. 3 and 7 minus total | 1 1 1 ...! !v 1 1 8 ......1...-. t E. INCOME FROM RENTS AND ROYALTIES 1. Kind of property. 2. Name and address of tenant, lessee, etc. | 6. Amount (casu or eouivalent) 4. Repairs. wear. t«*r. and property losses. 5. Other expenses. ! J 1 $ - i 1 r”" 1 1 .J ....1 Net Income from Bents A'm noVAi.-nrs (total ofool. 3 minus total ofcols. 4 and 5). 1 <3 I...... F. INTEREST ON CORPORATION BONDS CONTAINING T.AX-FP.EE COVEN, A.NT, ON WHICH A TAX OF 1% WAS PAID BY DEBTOR CORPORATION! 1 G. OTHER INCOME (not including dividends, . which should he reported in , Item K). 1 ,\mountreceived. bonds (Item Q i >ego 1) L 1 AiQOUiiv paia lor you oy ucotoi cui puiuLiuii uu vv«t.uuAA;, 1 1 H. TOTAL NET INCOME FROM ABOVE SOURCES. - — - I. GENERAL DEDUCTIONS NOT INCLUDED ABOVE, J. Total net income on which norma! tax is to bo calculated (H minus 1) i^Enter c.3 Item .1, page 1) — |$ — - K. Cash or Stock Dividends from corporations which are taxable by the United States upon any portion of their net incomes (luciiulit.g divtuouus rc-| ceived through pjirtnership.s, personal service corporations, and liduciarius reporting on a calennar year oasis; - : : I, Totn! net income (if this amount is over ?.5,000, malre ycur retmn on Form 1040) [Page 4 of Form 1040 A.] Income Tax Supplementary Page .52. tig» 1 «riDsInidiiuu GENERAL rNSTRUCTIONS INDIVIDUAL RETURN L PEBSONS REQUIRED TO MAKE A RETURN OF NET INCOME. L lUtora of net Income must 1)0 filed toy every Citizen of the United States, whetber residing at home or 'abroad, and every person residing in the United States, thoogh not a citizen thereol, .whose net income lor the taxable year 1919 (a) *1,000 If single or if married and not living with wife (or husband). (b>. *2,0(» if married and living with wiie (or husband). 2. Under any of these circumstances a return must be made even though the amount of net income is not sutheient to incur tax liability. Note especially ixrsonal credits for exemption and dependents under Instruction VII on this page. 3. II the combined income of husband, wife, and dependent minor children equaled or exceeded $2,000, all such income must be repotted either .ona Joint return or on separate returns of husband and wile. If single and the income, including that of dependent minors, if any, equaled or exceeded 81,009, one return most be filed. However, a minor having a net income of $1,000 or $2,0C0, according to the marital status, most file a return, as such person is not oon< Eidered a dependent. 4. Ihthe case Of husband and wife whose combined net income exceeds $5,000, Form 1040A should not be used but separate returns must be made on Form lOtO, showi^ the respective amounts of inemna. 6. Income of a minor or Incompetent, if derived from a separate estate under control of a guardian, trustee or other fiduciary, must bo reported by his gnai- dlan or othM legal representative. II. WHEN To USE FORM 1040 INSTEAD OF THIS FORM. You must make your return on Form 1040— (a) If yoar net income is over $5,000. (b) It the net income reported in this return exceeds $4,000 and the entire family exemptim has been claimed In a separate return made by wife (or (c) If the combined net income of husband and wife exceeds $5,000. (d) If you are reporting on the basis of a fiscal year ending on the last day of any month Other than December. (o) If this form does not provide for all the facts you have to report (as, for example, if you receive income from a partnership, personal service corpora- tion or fiduciary with a fiscal year falling i>artly in 191S and partly in 1919). III. PERIOD TO BE COVERED BY RETURN. L Yon iuil5t report your net income lor the calendar year 1919, except under the conditions stated in paragraph 2, when Form 1040 must be used. . 2. You were required to file your return for 1918 on the basis of your annual accounting period. Having established an accounting period for 1918 this period must be adhered to In 1919, unless permission was received from tho CommJssiqnM' to make a change. A person ha^'ing no fiscal year must file a retumon the basis ol a calendar year. IV. ACCRUED OR RECEIVED INCOME. 1. If yon-keep books showing Income accrued and expenses incurred during the year, make your return from your books, but do not f^l to Include all your incoma even ii it is not entered in your books. 2. I f you do not keep books showing income accrued and expenses incurred, report income received and expenses paid. 3. If you report Income accrued, you must Include all Income that accrued fn 1919 even though not actually received. 4. If you report income received, you must include all Income constructively n»e»lv«rt, tiirh m lia.nlf intjre^t Credited. tUyOUI aCOlUnt. V. ITEMS EXEMPT FROM TAX. The following Kerns are exempt from Federal income tax: 1. P^y, not exceeding $3,500, lor active services in the military or naval forces ol the United States, received during the taxable year prior to tho termi- nation of the present war as fixed by proclamation of tho President. 2. Gilts (not made as a consideration for service rendered) and money and propertitacquited under-a wiiloc-by inheritance (but tho income derived Irom money dr prd^rty received by gift, will or inheritance is taxable and must be reported). 3. Interest on bonds and other obligations of the United States issued before September 1, 1917, and on such bonds and other obligations issued since that date, *D the extent provided by acts authorizing the Issue thereof. 4. Interest on bonds and other obligations ol United States possessions (Phlh’p- plnes, J’orto Rico, etc.). 6. loiercst on bonds and other obligations of States, territories, political sub- dlvisiCDS thereof (such as cities, counties and townships), and thu District of Columbia. 6. Interest On Federal Farm Loan bonds. 7. Dividenda upon stock of Federal Reserve Banks. However, dividends paid by member banks aro treated as dividends of ordinary corporations. 8. Interest on bonds Issued by tho War Finance Corporation, only if and to the extent provided In the act authorizing the issue thereof. 9. Pltoceeds of life insurance policies paid upon the death of the insured to individaal beneOcIeries or the estate of the Insured. 10. received by the Insured under lUo insurance, endowment, and annuity coDttacts, provided racb payments do not exceed tho premiums paid la. The amount by which the tote! payments that have been received exceed ' tho total premiums paid In is income and must be reported In Schedule, Q.. 11. Amounts received from accident and health insurance and tinder vvork* , men’s compensation acts plus tho amount of any damages received by suit or agreement on account of injuries or sickness. 12. Compensation paid by a State or political subdivision thereof to Its ofiBcsrs , or employees. yi. FARMER’S INCOME SCHEDULE. If you aro a farmer, or a farm owner renting your farm out on shares, obtain from the coUectorand fill out Form 1040F, " Schedule of Farm Inconie and Expenses,’’ and attach,lt to this return. Translerthe net farm Income to lino 21 of Sehcdula A of the return. Report income from salaries, rents, interest, sales of property, etc., in Schedules B to Q of the return. ~ VII. CREDITS FOR PERSONAL EXEMPTION AND DEPENDENTS. 1. If you were married and living with your wife (or husband) or were head of a famil y December 31, 1919, you may subtract from your net inernne, before cal- culating your tax, an exemption of $2,000 plus 1200 for each pemon under 18 (or mentally or physically defective) who was receiving his chief support from you oajhat date. II husband aiwi wife make separate returns, tlfiscxemp- tion may be claimed by either (but not by both) or may ho divided betwem them. 2 . If you were not married or did hot live, with wifo (or husband)’ and were I not head ol a family Dacombor 31, 1019, you aro entitled toa pcrsonalcxemption of $1,000 plus $200 for each dependent person under 18 (or mentally or physifcally defective) who Was receiving his chief support from you oh that date. 3. If, by reason of a change in your accounting period, you mako'a return for a part of a year, your personal exemption Shall be as many twelfths of the amount that would bo allowed for a full year as there are months in the jieriod covered by the return. " ’ , . - . ; - 4. The personal exemption must be reported on line N, page 1, of the re- turn, and must be supported by answers to questions 4, 5 and 6, 6. A “head of family” is a person who Is tho chief support of one or more persons living In his (or her) household., who are closely related to him (or her) by blood, marriage, or adoption. Vm. AFFIDAVIT. 1. Tbo affidavit must be executed by the person whoso Income Is reported unless ho is a mino.r or Incompctcnt.or unless he, is ilj, a,bseot ’ftojn t.he,c.ountry, or otherwise incapacitated,- in which case the legal representativ’e oragentmay .«xocute the affidavit. However, a minor making his own return may execute th6 affidavit. 2. The oath will be administered without charge by any collector,' cfcputy. collector or intemai-revenuo agent, or (if you are in the military or paya^eryica of the United States) by any military or naval officer who-is authorized to ad- minister oaths for purposes of military or naval Justice and administration. If an internal-revenue officer Is not available,- the return should be sworn to before a notary public, justico of tho peace, or other person authorized to administer IX. WHEN AND WHERE THE RETURN MUST BE FILED. Send your return to the collector of internal revenue for the d.igtrict Jn which you live or have your place of business so that it will reach him on or beforo March 15, 1920. If the address of the collector is not printed on the return and you do not Icnow it, ask at the post office or bank. X. WHEN AND TO WHOM THE TAX MUST BE PAID. 1. Thofaxshould be paid, if possible, by sendingor bringing-withtheretura a check or money ortier drawn to the order of “Colloctor of Internal Revenue at [insert name of city and State].’* 2. Do not sendcash through tho mail, nor pay itln person, exfceptat tho office of the collector or a rogulariy established internal-revenue stamp office. 3. At least one-fourlh of the tax is due at the same time this return is duo. 4. An additional amount sufficient to bring tho total payments up to eae. half of the tax is due on or before June 15, 1920. 5. An additional amount sufficient to bring the total .payments up to ihree- fonrths of tho ta.x is due on or before September 15, 1920. 6. The entire remainder of tho tax is duo on or before December 15, 1920. 7. The total tax may be paid at tho timo of filing tho return, or if not so paid, cno installment may bo paid and the balance may bo paid in instailmonls, or in full, oil or prior to any subsequent Installment date referred to above. Failure to pay any installment on the date fixed by law makes the taxpayer llalile for the payment of tho balance of tho ta.x due, upon notice and demand by the cplicctor, . XI. PENALTIES. For Making Falsa or Fraudulent Return. Not exceeding $10,000 or not exceeding one year’s imprisonment, or both, in tho discretion of the court, and. In addition, 60 per cent of tho tax evaded. For Failing to Make Return on Time. Not more than $1,000, and, in addition, 25 per cimt of tho amount of tax due. For Failing to Pay Tax When Due, or Understatement of Tax Through Negligence. Five per cent of the tax due but unpaid, plus intere.st at tno rate oil per cent per mouth during the period in which it ri-maius uup'.iid. [Page 5 of Form 1040A.j Income Tax Supplementary Page 53, P»ie2«fin5trnciicns INSTRUCTIONS FOR FILLING IN INDIVIDUAL INCOME TAX RETURN A. INCOME FROM BUSH Report here Income from— (a) Sale of merchandise, or of products of raanufacturine, construction, mining, and agriciilture. (For farm income see Instruction VI on the reverse side of this sheet.) (b) Business sendee, sneh as transportation, storage, larindering, hotel and restaurant service, livery and garage service, etc., if you own the busi- ness. If you are engaged In the business as an empioyee, report youx salary or wages m Schedule B. (c) A profession, such as medicine, law, or dentistry, if you practice it on your own account. If you are employed on a salary, report your salary In Schedule B. In general, report In Schedule A any Income in the earning of which Incur expenses for labor, rent, etc. Do not report here partnersUp profiU or profits of personal ser^ce corporations, which should be entered under C, or dividends from other corporations, which should be entered imder K. If you are a farmer (or a farm owner renting your farm to another person on shares), enter on line 21 your net income from farming^, as shown by your “Schedule of Farm Income and Expenses,” Form 1040F. If you keep books showing income accrued, report such income Instead of cash received, and report expenses incurred mstcad of expenses paid. Income received from sale of lands, buildings, equipment, stocks, Iwnds, and other property notdealtinasa business, and from Uquidatmg dividends, should bo reports under D. • Kind of business.— Enter “grocery,” "retail clothing,” "drug store," "laundry,” “doctor," “lawyer,” etc. Tota! sales and income from business or ptefession.— Report the tot^ amount derived from sales, less any discounts or allowances from the sale price. •lESS OR PROFESSION. other business deductions Do not include cost of business equipment or furniture, expenditures for replacements, or for permanent improvements to property, or living and family expenses. Selailes.— Enter as item 12,all salaries and wages not reported as‘'LaboT” undjr “Cost of Goods Sold." Salary or wages for your own services or the service* of your dependent minor ctfildrenlf deducted must be reported as income in Schedule B. Rent.— Enter as item 13, rent on business property In which taxpayer has no equity. Do not include rent for dwelling you occupy for residential purposes. Interest.— Enter as Item 14, Interest on business Indebtedness to othera. Do not include interest on ycur capital investment in or advances to the business. Taxes.- Enter as item 1,5, taxes on business property or for carrying on business. Do not include taxes ussessed egalnst local benefits of a kind tending to increase the value of the property assessed, as fcr paving, sewers, etc., nor Federal income taxes. Repairs, wear end tear, and property losses.— Enter as item 16, (a) ordinary repairs required to keep property in usable condition, (b) reasonable ^low- ance for exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance lor obsolescence, and (c) losses of business property by fire, storm, theft, etc., not compensated for by msurance or otherwise, and for which no claim for insurance is pending. Explam these deductions in table, page 1 of the return. Item 12. Bad debts.— Enter as Item 17, only debts arising from sales or professional services that have been reported as Income, which have been definitely ascertained to be worthless and have been charged off within the year. Net loss.— If the net cost of goods sold plus other business deductions is in excess of the total amount of sales and Income from business or profe sicnal services, report the difference as a loss by using red ink or a mmus sign. B. INCOME FROM SALARIES, WAGES, COMMISSIO If salary, wages, or other compensation received from outside sources by you, your wife (or husband), or dependent minor child was at the rate of tl,0(X) or more per annum, report on separate lines, together with the occu- pation or position and employer’s name and address. 'The total of all other NS, BONUSES, DIRECTOR’S FEES, AND PENSIONS. income from salaries, wages, commissions, etc., should be reported on » ^*?)o not report pay, not exceeding $3,500, for active service in the miUttuT ornavalforces of the United States received during thetaxable year prior tothe termination of the present war as fixed by proclamation of the President. C. INCOME FROM PARTNERSHIPS, PERSONAL If the partnership, personal service corporation cr fiduciary from which you received Income, keeps its books on a fiscal year basLS, make your return on Form 1040 instead of this form. . xv. £•*. » *1. Report here your share (whether received or not) in the prciits or the partnership or personal service corporation or in the income of ^tate or trust. Do not include the part of such share that consisted of dividends on stock of corporations (to be included in Item K), interest on ohUgations of the United States (see question 10), or interest on corporation bonds containing SERVICE CORPORATIONS, AND FIDUCIARIES. a tax-free covenant, upon wtiich a tax of 2 per cent was paid (or ^11 be paid) by the debtor corporation (to be included in liom F). No withhold- ing of income tax at the source with respect to interest upon tax-free covenant bonds owned by partnerships and personal service corporations was required prior to February 25, 1919. ^ Report in Schedule B salary received from partnership or personal service corporation. D. PROFIT FROM SALE OF LAND, BUILDINGS, STOCKS, BONDS, Kind of property.— Describe the property as definitely a? you can in a word or as *‘»rm/^ *^house/' *^lot/* ‘‘stocks/* “bonds. Sale price or liquidating dividends,— State the actual consideration or price, or. In case of an exchange, the fair market value of the property received. . . , , , Cost.— Enter the original oost Of the property or, if it was acquired before March 1 , 1013, its lair market Value on that date. Attach statement explain- AND OTHER PROPERTY, AND FROM LIQUIDATING DIVIDENDS. ing how value of March 1, 1913, was determined. Expenses incidental to the purchase may be included m the cost if never claimed in Income tax returns as deductions from income. Enter in column 7 the amount of wear and tear (denreciatio^) or depletion sustained since March 1, 1913 (or smee date of acquisition if subsequent to March 1, 1913). Losses.— If the total of columns 5 and 6 is in excess of the total of columns 3 and 7, report the difference as a loss by using red ink or a minus sign. E. INCOME FROM REl Kind of property.— Describe briefly, os In D. Rent.— If a tenant rented your property on a crop share basts, report the amount of the rent as income for the year in which you disposed of such crops (unless your return shows Income accrued). In case of rent paid m other property, the fair market value thereof as of date of leceipt should be reported as income ol the year of receipt. NTS AND ROYALTIES. Wear, tear, repairs, end property losses. — See Instructions for Schedule A, above. Explain in Item 12, page 1 of the return. Other expenses.— Report taxes on rented or leased property and interest on indebtedness incurred or continued to purchase or car^ it. Do not include taxes assessed against local benefits of a kind tending to Increase the value of the property assessed. F. INTEREST ON CORPORATION BONDS CONTAIIONG TAX-FREE COVE Thlsitem should include all Interestf received directly or through partner- ships personal service corporations, and flduciares on bonds of corporations organ! or doing business in the United States, contaimug a ela^e by which the debtor corporation agrees to pay the interest without any deduction for taxes, provided exemption from withholding was not claimed by the oymer ofthe bonds. If exemption was claimed (by filing ccrtiucate Form 1001) the NANT, ON WHICH TAX OF 2/.WAS PAID BY DEBTOR CORPORATION. interest received must be reported in O. The amount of tax paid by the debtor corporation is trcatecl as a credit against the tax due (s^ Item CL na^e 1 of the return), but such amount paid at thesource should be reported as income in Schedule 0. If the nartnershlp, personal service corporation or fiduciary from which you received income, keeps its books on a fiscal year basis, make your return on F orm 1340 instead o f this form. G. OTHER INCOME (NOT Report In this schedule Interqpt^rooeived on bank: deposits, notes, mort- gages, etc., the amount paid for you by debtor corporation on tax-free covenant bonds (Item Q, page 1), and aU other income not reported In Schedules A to F, except— INCLUDING DIVIDENDS). (a) Dividends received from corporations which M taxable by the United States on any portion of their net incomes (see Item K). (b) Income exempt from Federal income Ux, as stotad m Instruction V on the reverse side of this sheet. State separately income from each source. 1. GENERAL Interest.- Report here interest paid on personal indebtedness as di^ tlneuiihed from business indebtedness (which should be reported under A or E above). Do nqt include interest on indebtedness incupcd for the norchase ol bonds end other obligations, the interest on which is exempt from tax, except interest on indebtedness incurred to purchase obligauons ofthe UnltW States Issued after September 24, 1917. T,«fe Xtiea.~Report here personal taxes paid and ell taxes on property not med In business or profession, not Including those assessed against local benefits of a kind tending to Increase the value of the property assessed. Do not include Federal income taxes, nor estate or mheriCe^^ taxee. LoMea.— Report here losaie of property not connooted with your trade, buainess. or profession, sustatnea during the year from fire, storm, ship- other casualty, or from th^t, ^ich were not compen^ted for by tomJice or otherwise, and for which no claim for insurance Is pending. DEDUCTIONS. Do not Include losses from transactions not entered Into for iiroflt. Losses claimed should be explained In Item 12, page 1 of the return. Contributions.— Reoort hers only contributions mado witbin the yearu> corporations organist and operated exclusively for religious, charluW^ scientific, or educational purposes, or for the prev^tton of ^eUy to clul^n or animals, or to the ipklsd fund tor vocattonal rehabilitation The t^ amount of contributions to bo entered hero must not oxoeed 15 per coat of the net income computed without the benefit of this deduction. Bad debts and other dedocaocs.— Bad debts arising out of loans should bo reported here, and other proper dodoctlons not cUira^ elsewhei^ Attach a detailed statamoDt of all such deductions. Deduo^M by traveling salesmen to cover expenditures for meals and lodging should be fully explained in an attached statement setting forth the condiUons of employment. 2— [Page 6 of Form 1040A.] Income Tax Supplementary Page 54. IF RETURN IS FOR calendar YEAR 1919 RLE IT WITH THE COLLECTOR OF INTERNAL \ REV’ENUE FOR YOUR DISTRICT ON OR BEFORE MARCH 15, 1920 IF FOR A PERIOD OTHER THAN A CALENDAR YEAR THE RETURN SHOULD BE FILED ON OR BEFORE THE 15TH DAY OF THE THIRD MONTH FOLLOWING THE CLOSE OF SUCH PERIOD Page 1 of Return Form 1040— TTNITED STATES INTERNAL REVENUE SERVICE INDIVIDUAL INCOME TAX RETURN FOR NET INCOMES OF MORE THAN $5,000, OR FOR SEPARATE RETURNS OF HUSBAND AND WIFE LN CASE THEIR COMBINED NET INCOME EXCEEDS $5, COO, FOR CALENDAR YEAR 1919 Or for period begun 19. amid ended , 19. If tk retsn is Bidt fof a pciiod atW lhaa a cal- cadas year, the dales af the b«- fiioBj and ead- iif af Itie period cavered usl be plaia.'j stated in Ibe space pia- sided abase. PRINT NAME AND ADDRESS PLAINLY BELOV' (Street and number or ramt route) (Post office and State) (blSH CHECK M.O. CERT, of IND. ' (DO NOT WRITE IN THIS SPACZ) Exanslnd by Audiled by Fi^T payment' Cashier’s Stamp 1 Did you make a 2. If so, what address did 3. To what (Collector’s office was it sent? ’ return for 1918? you give on that return? (Give district or city and State.) 4 Did you receive any adjustments during the taxable period on account of Gov- 5. Were you married and living with wife (or husband) emment contracts through the operations of a clauns board or otherwise? on the last day of your taxable year? 6 If not, were you on that date head of a family as defined 7. How many dependent persons under 18 (or mentally or physically defective) ' in instructions under “Personal Exemption”? were receiving their chief support from you on the last day of your taxable year? 8. Write “R” if this return shows income 9. Did your wife (or husband) or (If so, give name fcnd address received or ” if it shows income accrued minor child make a separate return? entered at head of that return.) 10. Did you pay during the year to any individual rent, wages, salaries, or other fixed or determinable income amounting to $1,000 or over?.,.. Class or ezccxmia. PRINCTFAI,. Interest. j Class o? Secututies. | 1 Prc-cipax. Interest. Salaby, etc. (cm 30 UBCE). .Amount. Liberty Lo*a S>/i% Bsii4o omainieitod. . Other obllntions of tix U. 8. before Sept. 1, 1917, &&J obLi^U#&3 of U. &• poaMtaiona .. Oblivions of Stages and Territories. c&l enbdjTisioDg thereof, and tbe District I ofColombia 1 Vlctorr Liberty Loea So(eo Federal Farm Loan Bonds | 12. Stock dividends received during the taxable period which were declared and paid Iwtween January 1 and November 1, 1918, both dates inclusive, or authorized or , rinoan 4i% Notes (g) War Finance Corporation Bonds IKMVIDOAL HOLDINOS. Share of Holwhos of Partnerships, Personal Sesvke CoEFoaiTioNs, AND FIDDCUBIES. None. 5,000. fSee Note C.) Not* ; of Um Fourth Ltbertv 1 Nos* B,— Tills otFicrtlon (msxfuium *20,000) is' limited to three limas the amoniit o( i _ _yWor)r Llbertv Loan 3iCi and 41% oriFlnaily subscribed for RDd still held Not* C.— Thill eiempiion b saparate t-oro the t5,000 exemption allowed on other obligations, and can o^y bo cla imed' aga^t War Finmice Corporation Bonds. 14. Enter in the table below (whether received or not) income from partncFships, per^mal service corporation, and fiduciarie*, except .took dividend* entered in Item 12; 2. Pebiod (Enter ims OR Date on Which Fiscal Yeah Enoed). (a) Totals taxable at 1919 rates (see instructions, page 2, under C) (b) Totals taxable at 1918 rates fseo instructions, page 2, under C) (c) Bate Mneimt ef int.reet pieelTed hy [lartnenibipa or personal serrles torporatkmi no tai-f X X X X X 5. Interest on Tax.Feee Bonps (BT FIODCIAEIXS Only). ft- Inteee.st on Libertt Bonps, e: Issued Sinc* 7. Other Incomi, Inclddino Interest on Tax-Free Bonds BT PAETNEESHIPe AND Personal Service COEPOEATIONS. eorenEEt bonds upon whUb normal tax has been or wtU I SUMMARY OF NET INCOME AND COMPUTATION OF TAX. » Included In Item 14, colama T. $,. Income Subject to Surtax. 15. Item L, page 2 (1918-19 rates) $ 16. Item 12(f), column 3 (1917 rates) 17 Total (Items 15 and 10) £ 18. Item 12(c), column 4(1916 rates)- 19. Total (Items 17 and IS) * 20. Item 12(c), fclumn .5(1913-15 rates)... 21. Total Net Incoue (Items 19 and 20) $ Nor*.— If the retirni is r.nder-vl for a Tscal y*«r enter •tjuEl teas .-nanT twenty Piurthi otioial ol Items 32 and wir. months of the Bjcal Item 3San amount s 32 and 33 u there the calendar year ISIS. Did you employ anyone especially to prepare this return? _.If lo, give name and address 1 Income Subject to Norm&l Tax. AT 191» RATES. 22. Net incomo shown on page 2, Item J. 23. Less txtrsonal exemption $.— 24 Baxajjce 25. Amount subject to tax at 4% (not over $4,000) 26. Balance eubiect to tax at . $ AT ISIS RATTS. 27. Amount of 14(5), column 7 $ 28. Balance of personal exemption not used above (Item 23 minim Item 22). 29. Balance 30. Amount subject to tax at 6% (if Item 24 is less than $4,000, enter difference hcroL. . 31. Balance subjert to tax at 12% f Computation of Tax. 32. Normal fax at 4% on amount of Item 25 33. Normal tax at S% on amount of Item 26 34. Normal tax at on amount of Item 30 35. Normal tax at 12% on amount of Item 31 30. Normal tax (additional for fiscal-year return) see note under Item 21 37. Surtax at 1919 rates (see surtax table on page I cif instructions) 38. Surtax at prior-year rates (see surtax table, page 1 of instructions) 39. Total Tax 40. Tax paid at source (2% of sum of Item F, page 2, and Item 14(f)).... 41. Income, wnr-proflts. and rxccss-pronis lilies nmd duriOE taxablo period to forelpi coiin- tns. or pQ3.se3sioas of the Uailed Btau-s.. 42. Balance OF Tax Due (Iti>m39 minus Items 40 ami 41) 43. Amount of tax paid on submission of return amount 1 Date. Chec* o* M. 0. No. Bane o* Office or liiur. Fu»t Second Third 1 1. Fourth Income Tax Supplementary Page 57. [Page 3 of Form 1040.] Page 2 of Work Sheet WORK SHEET OF INDIVIDUAL RETURN OF TAXABLE INCOME A. INCOME FROM BUSINESS OR PROFESSION. 1. Kiacl of business -• lousiness address 3. Total sales and inrome from business or professional sera-icc-s - COST OF GOODS SOLD: 4. Labor — ? - o. Material and supplies - n. Merrhandise bought for sale 7. Other tests /submit schedule of principal it£ at foot of page or on separate sheet)... . '.. 8. Plus inventories at beginning of >ear (see instruc- tious, Schedule A, page 2) 9. Tot.cl * ' 10. Less intenloiies at end of year 11. Net Cost or Goons Solo !? Did you claim an inventory loss for 191S? Is obsolescence claimed in deduction in Item 1C? OTHER BUSINESS DEDUCTIONS: I 12. Salaries and wages not reported as “Labor” under “Cost of goods sold” - 3- 13. Rent on business property in which ta.xpayer has i. no equity - 14. Interest on business indebtedness to others. 15. Taxes on business and business property IG. Repairs, wearandte.tr, obsolescence, depletion, and property losses (explain in table below) 17 Amortization ol war facilities IS. Pad debts ari.'ing from sales or professional se.’-yices-.l 19. Other expenses (submitsi nodule of principal items I at foot of page or on separate sheet).. 1 . 20. Total (Items 12 to 19, inclusive) |S- 21. Net Cost, plus Total Deductions (Item 11 plus Item 20).. 99 Kvt Tvcomp rnn\f T!iTsis-Eas OR Proees.sion' (I tem 3 minus Item 21'. B INCOME FROM SALARIES, WAGES, COMMISSIONS, BONUSES, DIRECTOR’S FEES AND PENSIONS. 1. By Vvijou PvECErNED. 1 2. Occupation. (Give Dime ) 1 3. Name and Addiiess or Emploteb Keceive’d. 1 1 J, • - OUJI. 1 Salary lo soil ana aepenaeni nimor cniiuren lucmucu iu au/ ucuuvi,a« Total 1\comr from Salaries, etc • n PROFIT FROM SALE OF LAND. BUILDINGS. STOCKS. BONDS AND OTHER PROPERTY, AND FROM UQUIDATING DWIDENDS. 1. IClND OF PnOrEIlTY. 2. Name a.sd .\ddses3 op Puechaseb ob BEOKEa 3. Salk Price ob ' Liquidatino DrviDEKtia. 4. Date ^ Acquired. 5. Cost ob Maaxbt Mabcb 1. 1013. a ACQOIBSO 6. Cost or Subse- i QUENT Improve* MENTS, EP ANY. 7. Depreciatio.n Subsequently SUST-UNED. $ 4 t - $ 1 J 1 ....... i $ . . 1 i i 1... ‘ F. INCOME FROM RENTS AND ROYALTIES. 1 Ul.'.D OF PEOPESTT. 2. NiME A.VD ADDEE33 OP TENA-NT, LESSCE, etc. 8. Amoitnt. ( Cash or eqoiToLent . ) CBNBB. DUT.BTIO.'t 5. Interest. 6. TAXEa Expenses (Explain Belo^) « f 1 J Net 1 NCOME fi rolmnn** 4. ROM Re.vts and Royalties (total of column 3 minus total of 5, fi and 7) ( — i - 5. ? ? $ ,r>r>AD A Til r\M O. OTHER INCOME (not includinsr dividends, or interest oti obligatiorxs of the United States). 1 Received. 1 s ^ ^ ^ 1. Interest on bonds, mnrt^a^es, and other obligations of domestic and resident corporations except a.s reported in Item F — - — ".V" Vt ^rVi . 2. Interest on bonds of foreign countries and corporations, and dividends onstock ol foreigncorporationawhichare not taxable by the United | 1 I.:::: upon any portion of their net incomes — ■■ , i..... . .. — — — — • j 1 1 3. Interest on bank deposits, mortgages, etc. . — ~ — , 1 4. Amount paid for you by debtor corporation on tax-free covenant bonds — — — — — - i.... H. TOTAL NET INCOME FROM ABOVE SOURCES. $ 3. Losses bv fire, storm, etc. (explain iu table below) J 2. Taxes paid. 1 4. Contributions (list names, and amounts below) 5. Bad debts and other deductions, -- 6. Amounta paid to benoficianeB. etc.'.. $ J. Total net income on which normal tax is to be calculated at 1919 rales (H minus I) enter aa 22, page 1 (unices minus quantity)........ K (a). Dividends, cash or slock, from earnings of corporations taxable by the United Slates upon any portion of their net incomes inclua mg dmdends on stock of personal service corporations decl^d out of profits earned prior to January 1, 1918): 1. Received directly, incliiding 2 . Received through partnerships, personal service corporations, and Item 12 (a), column 2j. $ fiduciaries. (Item 12 (b), column 2, plus Item 14 (a) columns 3 and 4).... Total- K(b). Taxable interest on bondi and odier t-bligations of the United States issued after September 1, 1917, and War Fmance Co.rporation Bonds: Received directly, ; received through partnerships, personal service corporations and fiduciaries $ Total. K(c). Other income from partnerships, personal service corporations and fiduciaries. (Item 14 (b), column 7) L Total net income subject to surtax at 1918-19 rates. (If Item J shows a minus quantity, deduct amount from total of K (a), K (b) and K (c) before entering j on this line. (It this/amount ehowa a minue quantity, see instructions L, page 2). - - - ENTER IN THIS TABLE DETAILS CONCERNING REPAIRS, WEAR AND TEAR, PROPERTY LOSSES, ETC, CLAIMED AS DEPyCTlO.NS IN SCHEDULES A. E AND 1 ABOVE 4. Cost ob Uajibzt Valus Kaech 1, 1913, OrrsxT BT FOB WKAR AKD Tia&ahd Los&u). 9, Lo.isrs NOT Coi!pr>s.\T£i> i 1N9XTIANCE OE OtnERWlSl a-vd How amoc.m ’ AGLBIVEJD AT. EXPLANATION OF DEDUCTIONS claimed in Schedule A. linc-i 7 and 19; Schedule E, column 7; and Schedule I. Items 4, 5 and G. (AtUch separate sheet, if nece9airy)_ Income Tax Supplementary Page 58. [Page 4 of Form 1040,1 PafeltflitirKiNM I. PERSONS REQUIRED TO MAKE A RETURN OF INCOME. 1. Return of net income must be filed by every citizen of the United States whether tending at home or abroad^ and every person residing in the United States, though not a dtixen thereof, whose net income for the taxable year 1919 amounted to- tal $1,000 if single or if married and not Ui-ing with wife (or husband). (4) $2,000 if married and living with wife (or husband). 2. Under any of these circumstances a return must be made even though the amount of net income is not sufficient to incur tax liability. Note especially credits for personal exemption and dependents under Instruction VI on this page. 3. If the combined income of husband, wife and dependent min or children equaled or exceeded $2,000, all such income must be reported either on a joint return or on separate returns of husband and wife. If single and the income, including that of dependent minors, if any, equaled or exceeded $1,000, one return must be filed. However a min or having a net income of $1,000 or $2,000, according to the marital status, must file a re- turn. as such person is not considered a dependent. t. In the case of husband and wife whose cqmbined net income exceeds $5,000, separate returns must be mode on Form 1040, showing the respective amounts of income.' 6. Income of a minor or incompetent, if derived from a separate estate under controi of a guardian, trustee or other fiduciary, must bo reported by his guardian or other legal representative. If. PERIOD TO BE COVERED BY RETURN. 1. You were required to file your return for 1918 on the basis of your annual accounting period. Having established an accounting period for 1918 this period must bo adhered to in 1919, unless permission was received from the Commissioner to mako a change. A person having no fiscal year must file a return on the basis of a calendar year. 2. The dates on which the period covered by the return begins and ends, if other than a calendar year, must be plainly stated at the head of the return, and answers to questions 5, 6 and 7 must be given accordingly. III. ACCRUED OR RECEIVED INCOME. 1. If you keep books showing income accrued and expenses incurred during the year, make your return from your books, but do not fail to include all your income, even if it is not entered in your books. 2. If you do not keep books showing income accrued and expenses incurred, report income received and expenses paid. 3. If you report income accrued, you must include all income that accrued in the taxable year even though not actually received. 4. If you report income received, you must include all income constructively received inch as bank interest credited to your account. IV. ITEMS EXEMPT FROM TAX. The following items are exempt from Federal income tax. However, nontaxable income of the classes deecribed in paragraphs 1, 3, 4 , 5 and 6 below should be reported in Item 11, page 1 of the return. 1. Pay not exceeding $3,500, for active services in the military or naval forcea of the United States received during the taxable year prior to the termination of the present war as fixed by proclamation of the Preaident. 2. Gifts (not made as a consideration for service rendered) and money and property acquired under a will or by inheritance (but the income derived from money or property received by gift, will or inheritance is taxable, and must be reported). 3. Interest on bonds and other obhgations of the United States issued before Septem- ber 1, 1917, and on such bonds and other obligations issued since that date, to the extent provided by the acta authorizing the issue thereof. See Item 13, page 1 of return, and instructions, page 2, under K(b). t. Interest on bonds and other obligations of United States possessions (Philippines, Porto Rico, etc.). v . 6. Interest on bonds and other obligations of States, Territories, political subdiiisiono thereof (such as cities, counties and townships), and the District of doiumbia. 6. Interest on Federal Farm Loan bonds. 7. Dividends upon stock of Federal Reserve Banks. However, dividends paid by member banks are treated as dividends of ordinary corporations. 8. Interest on bonds issued by the War Finance Corporation, only if and to the extent provided in the acts authorizing tne issue thereof. 9. Proceeds of life insurance policies paid upon the death of the insured to individual beneficiariee or the estate of the insured. * 10. Amounts received by the inmircd under life insurance, endowment, and annuity Contn<$8, provided such payments do not exceed the premiums paid in. Tho amount by which tne total payments that have been received exceed tho total premiums paid in is income, and must reportodm Schedule G. 11. Amounts received from accident and health insurance and under workmen's com- pensation acts plus the amount of any damages received by suit or agreement on account of injuries or sickness. 12. Compensation paid by a State or political subdivision thereof to its officers or employees. GENERAL INSTRUCTIONS-INDIVIDUAL RETURN V. FARMER’S INCOME SCHEDULE If you aro a farmer or a farm owner rcuting your farm out on shares, obtain from tho collector and fill out Form 1040F “Schedule of Farm Income and Expenses,” and attach it to tliis return. Transfer the net farm income to lino 22 of Schedule A of tlio return Report income from eafariea, rents, interest, sales of property, etc., in Schedules D to'ti of the return. VI. CREDITS FOR PERSONAL EXEMPTION .\ND DEPENDENTS. 1. If you were married and living ivith your wife (or husband) or were t.ead of .a family on the last day of your taxable penod, voii may sul>lract from your net income before calcubtiag yournormal tax, an exemption of $2,000 plue$200for each portion under 18 for mentally or physically defective) who was receiving his chief euppert from you on that date. If husband and wife make separalo r.etums, this exemption may 'oe cKimcd by either (but not by both) or may bo divided between them. ^ 2. If you were not married or did not live with wife (rr husband) and ware not head of a family on tho last day of your taxable period, you are entitled to a personal oxemptioii of $1,000 plus $200 for each dependent person under IS (or lUenUlly or ph vsically'defeciiv e) who was receKing his chief support from you on that date. 3. If by reason of a change in your accounting i>eri.\'l you main; a return f:;r a.’part of a vear, your personal exemption shall be asmanv twelfths of the amount that Would be allowed for a full year as tncre are months in the period covered bv the return. 4. The personal exemption must bo reported on line 23, page 1 of the rctuni, and muat be supported by answers to questions 5, G and 7. 5. A “head of family" ts a peison who is the chief support of one or more persons living in his (or her) boueeboid, who arc closely related to hun (or her) bwblood, nStrnage or adoption. (As to credit for taxes claimed in Item 41, see Articles 381-334 Resolutions 45.) ’ Vn. AFFIDAVIT. 1. The affidavit must bo executed by tho person whoso income is renortod unless he is a minor or incompetent, or unless ho is ill, alsenl from the couutrv, or otherwise inca- pacitated, in which case the legal representative or agent may execute the affidavit. However, a minor making his own return may execute the alt-davit. _ 2. The oath will be administered without ebaree by any collector, deputy collector or intenial-revenue agent, or (if j ou are iu tho niiiitan,- or t.-ival sm-v-ice of the United States) by any military Dr naval officer who is authorized to mii-ituUler eatha for purposes of military or naval justice and administration. If an in tcrnal-rr venue o'.bccr is not avail- able tho return should be sworn to befote a notary public, justice oi the neace, cr other peiBoa authorized to administer oaths. vni. WHEN AND WHERE THE RETURN MUST BE FILEt^ 1. If tho return is for the calendar year 19 19, file it with the collector c'fLuterr. i! rsvep'te for tho district in which you live or have your prieripa! place of btt.fino.ts, on m l i ii,-re March 15, 1920. If lor a period other than a calendar yc.tr, the return e'noulj i e hi -d on or before the loth d.vy of the third month following the cl ,o of f. -'n '> ■rif.-l. 2. In case the taxpayer has no legal retidonce or place of Ini'n'ntss in Ih-i In.tcd States the return should be forwarded to the Collector of rntenaal Rev, i.ue, Bal'iTn-..-o, bid. ’ 3. If the address of the collector is not printed on the retuiu and -v-oti do net kni ■ it ask at the poet office cr bank. “ ’’ • IX. WHEN AND TO WHOM THE TAX MUST FF. PMD. 1. The tax should bo paid, if poasibb’, by sending or l-ringing -it'u L’m return a cr-.c t or money order dratyn to the order of “Coliectc.r of Intcr.-.ari!, venue ai luAcrt i.tD.'o of city and State].” 2. Do not send cash through the mail, nor p.ay it in person, e.%' oi-t at Uic office cf the collector or a regularly establishf-d intem.a! revenue stamp offiicc. 3. Tho tax may be p.tid in four equal instaUments as foKo-.vs: The first installment shall bo paid at the time fixed by law for Plti-q the return and the second installment sball be paid on tho 15th d.iy of the tiiiid m .•.iih, the thi.-d instalUneut on the 15th day cf the ai.xta menth, and the fciirth ir.stnnn.cntun the ifuh day of the ninth month, after the- time fixed by Law for filing the ictam. 4. The tots! tax nmy bo paid at the time of nling the r .-turDvOr if iiot so •n: 1, one installment may be p-aid a.nd the balance may be .paid in innal!,nents, et in .iu'! oi- -ir prior to any subsequent iDsU.llmcnt date loferred to above- !•' ..laro to >. .y -.oy ■.j.- .ii. ment on the date fixed by Ln- makes the taxoiver liable for Uie payti.c-nt ci ihe 'n.il - .-.ce of tax due upon notice and dem md by Ihe Hector. X. PEHALFiES. For Ivinking raise or Fiaudciicnt Retu'w.. Not exceeding $i0,jUe or not exceetitug one yc..r's imprta,'ii.-noi>t, or both, iu tho discretion of the couit, Cund, in adJitiou, 50 per cent ui tlio ta.-. evadod. For Failing to Make Return on Time. Not more than IIJXX), and, in addition, 25 per cent of tho amount of t;'T‘d-uo. For Failing to ?ny Tax wHe-n Due, or Under-trte.-r.cnt of Tn- Thrn-n-K "tejligon.-e. Kve per cent of the tax due 'cut unpaid, plus intercut, i.t th- ; •■"o' 1 '*pc-i-"c"ct per month during the peii-od in which it romvins unpaid. Net Losses.— If for any taxable year bemnnlng after October 31, 1918, and ending prior to January 1, 1920, it appea.-s cjron the prod-jcti. n Commiaioner that any taxpayer has sustained a net lose, the amount of such net loss shall under regulations p-cscribed b-' the C-r- -n'mioi r iwth be deducted from the net income of tho taxpayer for the preceding taxable year; and the taxes imooeed by tliio title and by 'litlo 111 I r ■•■ich *'i redetermined accordingly. Any amount found to be due to the taxpayer upon the basis of such redetermination el.ail be crcrlitcd or rc-f -.iuicd u- f li- the provisions of section 252. If such net loss is in excess of the net income for rach preceding taxable yeai. tho 8 ''i 0 urit < f eucn excem ffi li' u" the Commiasioner with the approval of tho Secretary be allowed as a deduction in computing the net income for ito succeeding taxable yc.ir. (See Artie TABLES AND INSTRUCTIONS FOR CALCUL.ATMN SURTAX SURTAX RATES FOR 1S18-19. e.ooo 8,000 10,000 84!ooo v.,ieo ts.om surtax rates for imt. ToUl surtax amouot. Total surtax amouiit. 14,81(1 21,910 22.510 23,610 W.610 77.510 137, MO 2C.T, MO &f£,6i0 SURTAX RATES FOR Anioiinl of oicii r4U>. CALCULVITOM OF b-i ..'AX AT 19iS-!-3 RjtTES. To corajHitc ths amoiint of surtax on any auiouiti of aoi fneote*: Iti csccj- of J5.00(V- Pii jI; Kuici In coIanAa A thu largest sum wnlcl* Is less tliiiu lUe un-oiAut cf tbo tolal net Income sutjcct to 2, or Item II, jj-igo l of the return). tind In eolumn C the coiTCsoondipR amo-mt Cf total hutat. Thmi; T / (he amount of surtax founu asahoro tsdd tr A and multiply tho remainder by the role ahuwn on the t rates (Iter:. . .^<3 iric*i tX 00 190. 00 2. Total Gurtax thorcoa aliown in column C 3 . Kemaiuder of net income after siihtnii-tir.e Item l, nb.-iv.v i, 800. 00 $ 4. 8artM^^thl3 rtnutalerat rite Bhowa laMlomn S tu Use tiil.s 15*; frc-in ^hlcliitsn 1 90.00 5. Total nurl-xx duo (sum of Tfomo 2 end 41 1 250. OO $ 1 Item 5, column 3, abould ho entered la Item 37, CALCULATION OVRTAX AV PRIOR-YL.ill R/.TKS. To catcidato surtax ol IM? ralea — 1 Ixdt 1 Knicr on ih«’ fit.n Uno ofccJc mn 1, lie'o-!?, the amount of Item I.t, ■' ’ of fh'’ ri turn. lumn 2 cUJ. r (u) the next la/gcir ajaount aliowi* lit < ... -Ai* A ..f tLi- i;i7 RUJtnr tal ’e 4Tanti lino of coin (6) the un.ta- ttji' iffrrTu.l 1 i Igbth: I.nU.i In Cultiain 3 lljD dlllerem. 1 t.ivir’8/(h- T'hU .' li. Column 5 Iho ritfv'sLi c.Juni’^Li 1 ■ . ' 3 , column 5, Lhr ; T" ! .i.:i I Tho l/ial of otumn S ihonid I Korr rr T- 'i It Tt'.x k u&Ut4{ Ihu apofopi uUo vu/likx W’ =- • oterod M iiem ?.■. s of UcuLi 17 and IW f ) inaan''r UtscrlW for 1917 rutos, [Page 5 of Form 1040.] Income Tax Supplementary Page 59. p.je 2 of Inrtructions INSTRUCTIONS FOR FILLING IN INDIVIDUAL INCOME TAX RETURN K spKe fnM Ihii r«rH li M ttUdmd ftf iR eitilo. l iU O- jitwul enlne* tt t unnlt ik«! of M?*' *• •**« »«(«■ ^ A. INCOME FROM BUSH Report here income from— (o) Salo of merchandise, or of products of manufacturing, construction, mining, and agriculture. (For farm income see Instruction V on the reverse side of tlua sheet.) (b) Businoes service, euch as transportation, storage, laundering, hotel and res- taurant service, livery and garage service, etc., if you owned the business. If you were engaged in tho business as an employee, report your salary or w.ages in Schedule B. (c) A profeaeion, such as medicine, law, or dentistry, if you practiced it on your own e^count. If you were employed on a salary, report your salary in Schedule B. In general, report in Schedule A any income in the earning of which you incurred erpenscB for labor, rent, etc. Do not report here partnership profits or profits of per- sonal service corporations, which should oe entered under C, or dividends from other corporations, which should be entered under K(a). If you are a farmer (or a farm owner renting your farm to another ^raon on shares), enter on line 22 your net income from farming, as shown by your “Schedule of Farm Income and Expenses,” Form 1040 F. . . t i. If you keep books showing income accrued, report such income instead of cash received, and report expenses incurred instead of expenses paid. Income received from sale of lands, buildings, equipment, stocks, bonds and other projierty not dealt in as a businees, and from liquidating dividends, should be reported Tf you have a complete profit and loss statement, showing all the information called for under “Cost of goons sola ” and “Other business deductions,” attach it to the return and enter the amount of net income on line 22, Schedule A. Kind of business.— State kind of goods dealt in or kind of services rendered, and whether manufacturer, jobber, wholesaler, retailer, importer, broker, etc. Total sales and income from business or profession. — Report tho total amount derived from sales or from services, less any discounts or allowances from the sale price *^{nTSto^eT^Write “C” or “C or M” on lines 8 and 10 immediately before the amount column, to indicate that inventories are valued ateilher co6t,or costor market, whichever is lower. ’ . , , . t > ■ Inventories at the end of the taxable period must be valued on tho same basis as those at the end of the preceding taxable period, unless permission to make a change has been first obtained from the Commissioner. If claims for losses on inventories or rebates on sales made under Section 214 (a) 12 of the Act have been allowed, the openinginventory mustbe correspondingly adjusted. (See Articles 266, and 1581-1685, ^MtfulatioDs 45). other busineso deductloas, — Do not include coat of business equipment or furni- ture, expenditures for replacements or for permanent improvements to property, or living and family expenses. . t j Salaries.— Enter as Item 12 all salaries and wages not reported as Labor under “Cost of goods sold.” Salary or wa^ lor your own services or the services of your dependent minor children if deducted must bo reported as income in Schedule ”U”. Rent.— Enter as Item 13 rent on businees property in which you have no equity. Do not include rent for dwelling you occupy for residential purposes. Interest. — Enter as Item 14 interest on business indebtedness to others. Do not include interest on your capital investment in or advances to tho business. MESS OR PROFESSION. Taxes. — Enter as Item 15 only taxes on buainesa property, or for carrying on business. Do not include taxes assessed against local benefits of a kind tending to increase the value of the property assessed, as for paving, sewers, etc., nor Federal income taxes. Repairs, wear and tear, obsolescence, and property losses. — Enter as Item 16, (a) ordinary repairs required to keep projicrty in useible condition, (6) reasonable allowanco for exhaustion, wear and tear of property used in the trade or buieneos, jncludmg a reasonable allowance for obsoleacence, and (c) losses of business property by fire, storm, or other ca.sualty, or theft, not compensated for by insurance or otherwise and not made good by repairs claimed as deductions. Explain these deductions in table at foot of page 2 of return. . . j Losses duo to causes enumerated under (c) with respect to projterty not urea in your business, euch as your dwelling or personal property, should bo reportoa in Schedule 1. l i « The amount claimed for wear and tear (depreciation), including obroleacence, should not exceed tho original cost of the property (or its value March 1, 1013, if acquired before Ih.at date) divided by its estimated life in years. If obsolescence is claimed, state in table at toot of page 2 why useful life is less than actual life. vtTicu the amount of depreciation and obsuiesoence allowed equals the coet of tho property (or its value March 1, 1913), no further claim should be made. Do not claim any deduction for depreciation in the value of a building oecupiod by you aa a dwelling, or of other property held for personal use. Do not claim any deduction for depreciation of real estate (exclusive of improvementa thereon), nor for depreciation of stocks, bonds, and other securities. ^ Depreciation of patents, copyrights, etc., and depletion of mines, etc. If you claim a deduction on account of depreciation in ^e value of patents, copyright^ franchises and other legal privileges, or on account of depletion of mines or oil and gas wells, see Regulations 45. . , / ..... . i • ..j .v. Amortization of war facilities.- If amortization of war facilities is claimed, the taxpayer is required to submit with this return tho information and schedules called for in Articles 181 to 18S of Regulations 45. , Bad debts.— Enter aa Item 18 only debtsarising from sales or prqfeasional services which you have ascertained to be worthless and have charged off during the year. A bad debt offsetting income accrued since March 1, 1913, will not be allowed as a deduction unless the antount was reflected in the income reported for the year iri which the debt was created. In the case of debte existing prior to March 1, 1913, only their value on that date may be deducted upon subsequently ascertaining them to be worthlew. State under “Explanation of deductions.” at the loot of the p^e, how the debts wero ascertained to be worthless. Insolvency of the debtor, inability to collect by legal proceedings, or imability of debtor to pay as ascertained by a mercantile agency, would be a sufficient indication of worthlessness. A debt previously charged oS as bad must be returned aa income for the year m Bad debts arising out of personal loans should bo reported in Schedule I. Net loss.— If the net cost of goods sold plus other business deductions is In excess of the total amount of sales and income from businoes or professional services, report the difference as a loss by using red ink or a minus sign. B. INCOME FROM SALARIES, COMMISSIONS, 1 If salary, wages, or other compensation received by yourself or dependent minor children frem outside sourcea was at the rate of *1,000 or more per annum, report on separate linee, together with the occupe.tion or position and emplqyer’s name and sddr^. The total of alFother income trom salaries, .wages, commissions, etc., should BONUSES, DIRECTOR'S FEES AND PENSIONS. Do not report here pay, not exceeding *3,500, for active service in the military or naval forces of the United States received during the taxable year prior to tho termination of the present war as fixed by proclamation of the President. C, INCOME FROM PARTNERSHIPS, PERSONAL Report your share (whether received or not) in the profits of the partnerehip or personal service corporation or in the income of the estate or trust. Do not include the part of euch share that consisted of dividends on stock of corporations (to be in- cluded in Item K(a)), interest on ebUgations of the United States (ece table 13, page 1 of the return and instrucrione under K(b), below), or interest on corporation bonds containing a Ux-free covenant received through fiduciaries, upou which a tex of 2 per cent was paid (or will be paid) by the debtor corporation (to be included in Item h) No witholding of income tax at the eource with respect to interest upon tax-free covenant bonds owned by partnerships and personal service corporations was required prior to February 25, 1819. . Reportin Schedule B salary received from partnershipor^rsonal service corporation. AcTOrtionment of peutaership incomo between years.— If you derived income from a partn^hip or personal service corporation whose fiscal year diSered from the calendar SERVICE CORPORATIONS, AND FIDUCIARIES. . .. . . , year assign to 1918 aa many twelfths of your share of such income (except dividends ind Liberty Bond interest received through the partnership or personal service cor^ra- tion) ns the number of months of the fiscal year that fell in the calendar year 1918. Aseien to 1919 the remainder of your ehare of euch income, except stock dividends and Liberty Bond interest, which should bo apportioned as provided in instrucUona under of income to be distributed to the beneficiaries periodically, wheAer or not at regular intervals, each beneficiary must include in his return his distributive ehare of the net income, even though not yet paid him. If tho taxable year on t^ basis of which he makes his return fails to coincide with the annual accounting period of the estate or trust, then he should include in his return hisdialnburiye share for such accounting period ending within his taxable year, which income will be taxable at D.T'ROFIT FROM THE SALE CF LAND, BUlLJ>iNGS, STOCKS, BONI If the profita or losses on tsaloe made through any one broker aggregated J 1,000 or more report the transactiona on a separate line with the name and addrciis of the br^er. Kind of property.— Describe the property aa definitely ao you can m a word or two. as “farm,” “house,” “lot,” “ctockfi,” “bonds.” ..... Sale price or Uqaidatin| diridends.— State the actual consideration or pnee, or, m case of an exchange, the fair market value of the property received. F.ntftr the orlinnal coet of the property, or, if it was acquired before March )S AND OTHER PROPERTY, AND FROM LIQUIDATING DIVIDENDS. ^ 1, 1913, its fair market value on that date. Attach statement explaining how va ue of March 1 1913, was determined. Expenses incidental to the purely niay be included in the cost if never claimed in income tax returns as deductions frpm inconie. Enter in column 7 the amount of wear and tear, obsolescence, or depletion susteined since . March 1. 1913 (or since date of acquisition, if subsequent to ““oh 1, 19131. Losses. If the total of columns 5 and 6 is in eicete of the total of columns 3 and E. INCOME FROM RE Kind of property.— Describe briefly, as in D. Rent.- If you recefved property or crops in lieu of cash rent, report the income as though the rent had been paid in cash. CTOps received as rent on a crop share basis should be reported as income far year ia which disposed of (unless your return MIS ^ obsolescence, depletion, and prop^ losses.— See instruc- tions for Schedule A, above. Explain in table at foot of page 2 of the return. Other expenses.— Report taxes on rented or leased property and interest on indebt- edness incurred or continued to purchase or carry it. Do not include taxes assessed . F. ’interest on CORPORATION BONDS CONTAINING TAX-FREE COVI This item should include all interert received directly or through - ^ , . fiduciaries on bonds of corporations organized or doing business in the United States, containing a clause by which the debtor corporation asrreee to pay the interest without any deduction for taxce, provided exemption trom not rlalmpd hv the owneT of tho bonds. If exemption was claimed, ENANT, ON WHICH TAX OF 2% WAS PAID BY DEBTOR CORPOWTION. (by filing a yeUow certificate, Form 1001), the interest received must be reported in O. The amount of Ui pmd by the debtor corporation is treated as a credit against the tax due. (See Item 40, page 1 of the return), but such amount paid at the source should bo r OTHFR INCOME fNOT INCLUDING DIVIDENDS, OR INTEREST ON OBLIGATIONS OF THE UNITt-D STATES). fhia’SufafnteKi de'io^U: ttes,‘3gages, et'e, and all other taxable income for which no place is provided elsewhere on thi^return. 1. GENERAL Interest.- Report hero interest paid on personal indebtedness as distingniBhed from business indebtedness (which should bo reported under A or E above). Do not include interest on indebtedness incurred for the purchase of bonds and other obli- gations, the interest on which is exempt from tax, except interest on indebtedness incurred to purchase or carry obligations of the United States issued after September Taxes. — Report here personal taxes paid, and all taxes on property not i^ed in busineas or profession, not including those assessed against local benefits of a kind tend- ing to increase the value of the property. Do not include Federal income tuxes, nor estate or inheritance taxes. ... . j u • ' Losses.— Report here lo8.«es of property not connected with your trade, business, or profession, sustained during the year from fire, storm, shipwreck, or other casualty, or from theft, which were not compensated for by insurance or otherwire. Do not include losses from transactions not entered into for profit. Losses clanned should be explained in table at foot of page 2. < Contributions.— Report here only contributions made withm the year to coipora- and oTv.mfi>d excliisivelv for religious, charitable, scientific or educa.- DEDUCTIONS. ' tional purposes, or for the prevention of cruelty to children or animals, and contributioi^ to the snec^und for vocational rehabilitation. Tho total amount of coutributioiie to be entereif here mustnotexceed 15 per cent of the net income computed withoutthc benefit of this deduction. Therefore, iUtem 4, Schedule I, exceeds 15 per cent of the sum of It^m 21, page 1, plus Item 4 , then Item 4 must be reduced to 15 per cent of such sum and vour total net income must be recalculated accordingly. _ *1.,^ Lntcr under “Explanation of deductions,” at the foot of page 2 of the returo, the name and address of each corporation to which you made contributions claimed as deductions, and the amount paid to each. , . . , , i i j v. Bad debts end other Eductions.— Bad debts arising out of loans d he reported here, and other proper deductions not claimed elsewhere. Attach detailed statement of aU such deductions. Deductions claimed by traveling salesmen to cover meals and lodging should be fully explained in an attached statenient setting forth conditions of emmoyment. . Amounts paid to beneflciaries.— If this return is filed for an estate in the process of administration, there may be deducted tho amount of any income properly paid or Enter as Item K(a) all cash or stock dividends received during the Tgl''L rni dividanda n.dd hv ^^rsonal servicc coroomtions out of earnings accumulated sut- | year which are included m Item 12, columns 3, 4 , and 5, pagej. K (b). INTEREST ON OBLIGATIONS OF THE UF Interestupon First Liberty Loan, 3)^ petcentbondsand Victory Liberty LoanSj.^ per ccntconvertible gold notes iscxempt from normal income taxes and graduated additional income taxes, commonly known as eurt^es. Interoet upon all other issues of Fjhcr / Loan Bonds as well as interest upon certificates of indebtedness and War Savinirs CcrtUi cates ts exempt from normal income tax regardless of the amount of the principal and ia fmm {rnAxxAtf^d additional income taxes, rommonlv known as surtaxes, on.y MITED STATES ISSUED SINCE SEPTEMBER 1, 1917. to the extent provided for in the act authorizing the i^ue and holdings exce^ the exempoons epecifiod in Item 13 page 1, secure Form 1125 from Collector and compute taxable interest. Interest on War Finance ho'ids is exempt trom all normal income tax and is exempt from eurtox only wuh tes^yt a princimt not exceeding *5,000. This exemption is in addition to the exemptions Kfc) OTHER INCOME FROM PARTNERSHIPS, PERSONAL SERVICE CORPpRATIONS, AND FIDUCIARI^. Report hero all other income received from partnerphips, personal service corpor- | partnerships and scrvico corporations on y. w ic e o L. PARTS OF INCOME SUB.JECT TO RATES FOR DIFFERENT YEARS. In determining the income, any deductions, exemptions, or credits of a kind not 1 calendar year; but any balance thereof shall be applied against e income eu jec piaiEilvand properly chargeable against the income Uxable at tho rates for a preceding | rates of tho next preceding year or years until fully allowed. [P ige[6 of Form 1040.1 Income Tax Supplementary Page 60, IF RETURN IS FOR CALENDAR YEAR 1919 FILE IT WITH THE COLLECTOR OF INTERNAL REVENUE FOR YOUR DISTRICT ON OR BEFORE MARCH 15, 1920 IF FOR A PERIOD OTHER THAN A CALENDAR YEAR THE RETURN SHOLTD BE FILED ON OR BEFORE THE 15TH DAY OF THE THIRD MONTH FOLLOV/ING THE CLOSE OF SUCH PERIOD Pago 1 Form 1120— UNITED STATES INTERNAL REVENUE SERVICE CORPORATION INCOME AND PROFITS TAX RETURN - . . f OR CALENDAR YEAR 1919 Or for period begun » 19 » and ended , 19.. cure from the Collector ol Internal Rev- enue for your dUtrict Form nZOS, eEecute end file the eeme as a pert of this return. (Print plainly corporation’s name and principal place of business) (Sirset and number or rural route) (Post office and State) CASH CHECK M.O. CERT, of IND. (DO HOT WRITR in TinS SPACE) Eiaaiaed by Audiisd by FIRST PAYMENT Cashier’s Stamp KIND OF BUSINESS - THIS A CONSOLIDATED RETURN? SCHEDULE A— TAXABLE NET INCOME. GROSS INCOME. 1. Gross sales, less returns and allowances - — vr v'i VT” 2. Less cost of goods sold, exclusive of expenses, repairs, and othor items caUed for separately below (from Schedule A2V 3 Gross income from operations other than trading or manufacturing, 1^ allo-^ances.............. — 4. Interest on obligaUons of the United States oriU possessions and War Finance Corporation Bonds not exempt (from Schedule 5. Interest from other sources (from Schedule A5) 6. Rentals (see Schedule AC) 7. Royalties - — — 8 Share of net income earned (during taxable period) by personal service corporations (whether received or not)— ... .... 9. Dividends on stock of foreign corporations (from Schedule A9), $ ; dividends on stock of domwtic corporations other than personal service corporations, $ — : - , AOtai 10. Gross income from all other sources except dividends (not including any amount in respect to sales of capital asseis or miscellaneous investments, see Item 22, below) (from Schedule AlO) Total op Items 1 to 10.. DEDUCTIONS. 12. O.-dinarv and necessary expenses (except amounts reported in Item 2 above or called for separately below, and not in. cludin® cost or value of capita] assets or miscellaneous investments e-old during taxable period, see Item (Irom SchedSoA12). Labor, » , Other expenses, $ tdtal 13. Ompensation of officers (including salaries^ commissions, and other compensation in vyhatever form paid) (from Schedule AI3). 14. Repairs (including lalwr, supplies, etc.) (from Schedule AM); Labor, $ ... Other expenses, $ — ' — 15 Interest (except on indebtedness incurred or continued to purchase or carry obligations or purities, other than obliga- tions of the United States issued after September 24, 1917, the interest on which is wholly exempt from taxation (soo paragraph 9, page 2, General Instructions) . - ,, , „ 16. Taxes (except Federal income, war.proBts and excess-profits taxes, taxes which are a credit under Section 238, and taxes 1 against local benefits of a kind tending to increase the value of the property assessed)... 17. Debts ascertained to be worthless and charged off within the taxable period (from Schedule A17)— 18. Exhaustion, wear and tear (including obsolescence) (from Schedule — -c;-,— :: T'i'V 19. Depletion; if claimed secure from the Collector Form D (minerals), Form E (coal), Form F (miscellaneous non-metals). Form O (oil and gas), or Form T (limber), fill in and file with return Total op Items 12 to 19 Ditferel'CE Betwee.v Items 11 ahd 1 22. Profit or lo-ss on sales of capitol assets and miscellaneous investments, including liquidating dividends (from SchediJo A22)— 23. Losses sustained during the taxable period and not compensated for by insuraace or otherwise. (Extend m fast column adjustment of Items 22 and 23.) (From Schedule A23) 24. Net income for taxable period exclusive of deductions for dividends and amortiiiation (total of or d ifference between Items 21 ai 25. Dividends received from domestic corporations not personal service corporations, and dividends upon stock ot loreigu corporations taxable by the United Slates upon any portion of their net incomes • facilities (from Schedule A2C) (extend total of Items 25 and 26).. Amortization^ . $ . $ Net Income for Taxable Period (difference between Items 24 and 2S, the latter as extended— to be entered as Item 5, Schedule D) - ITEM. Akount. 1. Capital, Burplua, and undi>'ided profits at bej^daning o( tax; 2. PluA adjustments by way of additions (from Schedule F, Li • dacch3T-nb’bco’-s(fr'>mS-hH' l»T' llnoil » 9) ? .... able period as s own y c , , , pagb 3, Totax*-.-.. — 4. T adjustments by way of deductions (from Schedule Gi ~7 ~ 6. Remainder...— 6. Plus or minus changes in invested capital during taxable ^ _ _ 8. Lees deduction on account of inadmisBible assets (from Sc a. TnvPfitM cauital for taxable Deriod . (If return is for a pc bed 1 J) riod less than a full year, sec paragraph 11, p.age 2 of Instructions) SCHEDULE C -EXCESS-PROFITS CREDIT. 1. Eight per cent of invested capital for taxable period (Iten 2. Exemption (83,006) (except for foreign corporations) HfAm 1 Tiliifl Ttftm 2^. (If return is 1 L j .1 ! 1.^ p.- j 1' . J ^ 1 _ for a Tv.rin.1 loAs than a full year, see paragraph 11, page 2 of Instpictional b ! 1 ..1 1 SCHEDULE D— COMPUTATiiON OF TAXES. 1. Bucxztx. ties 3- ^^“srSi^cr 1 AaiOUHT ' OT TaJT. 1.... Li I 1 I, . 1 i j i _.l { 20 /. ji- 1. Not over 20^ of invoeted capitaL i 1 1 1 1 1 1 1 L 1 1 3. Totals computed uudor Sp.ctlon 3Ql(b) S 1 1 1 -1$ 1 1 1 1 1 1 1 i 4. Excen-Profita Tax, if compxited under Sections 302, 303, : 304(c) or 337 of Revenue Act of 1918 - If t: 1 ,1 Lens; Interest oil obligations of United States and War Fi- nance Corporation Bonds, not exempt (Item 4, Schwliilo A) - Excess profits tax (Item 3 or 4 column 0, .Schedule D) or taxes (Item 1C, Form income from < iovemment con- tracts) — ..... Exemption, except for foreign corporations, $2,(X)0 unlcus re- turn is for less than a year (see paragraph 11, page 2 of In- structioDs) BaJancesnbject to income tax (Item 5, and^ f I Items 6, 7 (or 8), If. iCOME TAX. === 1 1 1 1 Tit of 1ft 'ti on in ^ .... • ?. ... 1 1 i-y Tftf.al ia-r fltrktn 4 nr 8 nhi3 !t;em ll’l $ — ^ 1 1 13. Lesa; Income, wiir-profite, and exccna-profits taxiie paid or j acefued to foreign countries or to pa'uessioiifl of tho U . B. sections 238 and 240(c) of Revenue Act of 1918)..——— 14. Income tax withhold at source in ca.'M? of a foreign corporation not engaged in a trade or businoos within tho U. b., and not having any olDco or place of busiiieia therein ! * Balanro of tax (Item 12 niinos Items 13 and 14) $ — [Page 1 of Form 1 120.] Income 'I’ax Supplementary Page 61. Page 2. SCBEKWX E.-CAmAL. SURPLUS, A-W BY »««»“ SCWEOULt 6. ^ JUXIUSTMENTS ARE MADE THERESN. «, tto extent ttot It 13 peid up. ir stock ^ ^ preceitu* UAtblo period. toouH reOect the amounts on tto a, end o! the pmccdini; tarable period. It any anuountclalmcd should be entered under Item '• ““ thmugh demotions mad. aotr.es should beldentifled and llnecosssry treasury stork, copies ottho E.O. If the corporation had on handat any ^\tq^ent a, Item. Amount. Capital slock paid upend actually ootstsndtnsattncclosc cl the preceding year s- Surplus and undivided profits: A Paid-In surplus ^ RJ3?v'l^^§I^.^oL^Twrac hi,? nm de■durt^b^J W (to berecoaiciled with balance-sbevi item'*) 9 Otb«r Items (to be detailed) - V. TOTAU Of iTZWa 4, 5, 6, 7, XKD \\ CaDital and surplus at begloolng of taxable peri.'hl as shown by books SCHEDULE F.— ADJUSTMENTS BY WAY OF ADDITIONS. FI Item addition to invested capital is cUlme) in Item 1, Schedule F, Kibrnlt a .talem.nl ehov^ ,.,.h^ltmd “r^rVly. (M.h. year In «h,ch ,t ™a, paid m. sblp to the corporation. Id) the octual cash value ot such property at the dale aben (»id In. ( ) ^ ,«k or shares Sued therelor and the amount at which such prop^ y was enti^d m upon which the actual cash value ol the property was determined imd ibe date nmde.andtplthe amount oldepreciaiion sustained on such propertylromihe date olacants of kind?. , (5) dcprecialion.' (c) obsolesa numral dvposits. limber supplies, and ibe like? If odequaio thjrgc Las not Ixvn mode for dopreciulion. dipk't value ol the propirty b.ii not been miiniauad by r,-pla«rai-nis i ujulvd for ull ycirs in wbKl 1 compAOy . obsolcseeDC-o, and other losses. additional chart s thon'Ior □ total amount (.fsucbcUargv i5. Schedule G. iloation of patents, copvrights. secret process* uodcuivka, trade brands, (riincbuies, or ovlior alaation oltangible property paid in lot stock.. Juation ofo-vsets acxi aired In reoripaniiations.. . Appreciation . Depreciation, depict Ion, and other losses- ToT^L DeoncTtONs. SCHEDULE H.-CHANCES IN INY ESTEO CATITAL DURING TAXABLE PERIOD 1. Changeo In Invested capital during Ibe uxahla period otdutar.ly ansa In one ot more ot tbo lollowme ways: *'*tar^sale ol capital stock lor trash or by Iho Issue ol capital stock lor tangible or olher lo) By payment ol assessments by stockholders or by creation ol paid ia surplus by conulbotlon oi slockboWcrs. ^““("“By iTquidatloool part ol the tnplua by rellremeol ol stock or by purchase ol treasury stock not out of current earmngs. fdl By papcncnl of cash dividends out of earnings of prior years. (r) By payment of Federal Income and profits taxes for the pry loos years. The cL^cr«.tb respect to taxes will occur in nearly every * . k. .mn„nt olsuchassctshcld at Ibe beginning ol the taxable period and the amount held at the end ol the UxaUe ™riTtos?crra«the.moMloIadSle assets may bestbedetcrtmncdIrom(Ulhcbalan« oUhe wriSodZ” Wit^pect to lhaltems to Schedules F and C and (2) the ba^cesb^asal J^o°«.d«Uhop.riodco,respoadin6lyadlusUd. hastaken place to the amount ol such assets, the average amount must be dctenmnctl as provioea in atoci. m ol Regulations 4S. In such case show in detail— (M The compatatlco of such amount; (f) Amount ol inadmissible assets bcU at beginning of the Uxabic period; ('. 7<»ol$ au f minor equipment. Pvli\ery eqo\ e Torru ropip- of thpir balance ^lK•cl.■« prps(ril>ed by sanJ o ASSETS-Contlnued. Filed a8se*t— continued. Leas reserveo for deprectatloo (-ihow separately amount appUcablo to each Qxed aoset).* Net Via.irF.. Dlacount: On tofid*. On rt« k. Notes payable: To otflcers end stockbolders. To others (Includini: bank loons). AccounU payable: Trade. Other. Accrued erpenacs and reserves. Ihecharges creating vFhlch are allowable deductions from Income (to ‘ > delalJed). Reteives, ibo charges creatmp which i a>)lo deductions from Inooiue: JUservfts for lo&ui on notes and accounts rucclvttble. Other rtsenes (to l^e detailed). Capital atock outsUndtoa (i.> bo classffled). Suiplut and uodtslde^roftU* TotaI. f ItrmU' d OD the Ibbllity ride of Ibu talonoo theet. I.tlf ;iiid (N* ami niiiiiicipal auihoriti("v. : iv iiaTjonal. St tto, municip.:!, vr f ti n pubbe n» bfigwuiing and «nd o( ihr (uxaMo period •h h‘^rp'o an arnly 1 I'-nrplu Mil 2. iM i nrni, n. fflluT i if«fn f lo .•urpli -I. T. l^l nf III nil I, 'j, ai.d :i. i- i- a f iiifcoli']al**'l fp^urn, ai»j!\ SCHEDULE L.— ANALYSIS OF SURPLUS ACCOUNT. (he rr,rp'irjt ion's .>:ilrjilus arrouhl, bliowirig Ibo dotaili ol all wJja'tmcnU of surplus for Iho tavat-lo pvrio-l, as nearly a“ pructicaM in the f..llowingform: ginniii;' of trixrcbie pei hown by tiool.s Gtcm 1 . ll < -liould shown by bfsiks. h>- l,.-rd.bil- b. /. 'I'otal of Heins ' 8. .‘'iirplns ;it ci. 1 f I nslrni ti-.ns. b!j nvii by books. [Page 3 of Form 1120.] Income 'I’ax Supplementary I’agc 63, Pago 4 SCHEDULE M.-RECONCILIATION OF NET PROFIT AS SHOWN BY BOOKS WITH TAXABLE NET INgOM^i 1. Net profit for taxable period aeBbown by books, . before ony | adjiiatmentfl are made therein * 2. Unallowable deductions: (a) Donations, gratuities, and contributions . laromo. war-profl'a, anl on whicli is wholly cioicpl. from tatalion - (h) Additions to reserves for bad >d 'States ijcuedslnceSeptemberl, 1917 (par value), beld St which Interest was derive during tho taxable period. ) time, and War Finanoo Corporaiioo Bonds from 1. Class of Obligation- fa) Hrst Mberty Eoan converted Into Second lx>an and Second Uberty Loan unconverted— (t>) First and Second Uberty LoM^n- ' verted into Third Loan and Third Uberty Loan r. -r- (c) First l>ii*erty Loan converted Into Fourth * (d) Fourth Libertv Txan..— — — (r) Other United States obligations, ex- c»»pt class (/). issued abac© Septem- ve.Sftciue P'ona bonds Ls exempt from „ _ _ _ exceeding $5, Of" This exemption is in Edition to the c SCHEDULE A5: INTEREST FROM OTHER SOURCES. , , 3.. . Submit a schedule showing the soiirce, nature, and amount JUim Sg grmi^ in ono ng^ra. The total ofth© schedule should bo entered as Item 5. Schedule A. (1) Have you Included to this item w toterest on preleried stock? - K so, how much? *■'72) 'HaiVyou tociiidcd'ijrt^^ item any Federal tooome tax paid at source to pursuance o( tax-free covenant ’"“FmtolwlS»' amount oi interest. wmtDULS AS- HfCOME FROM RENTALS. be reported as income will iDctado all amuabi as rent on buildtags or other property owned or controlled by the corporation making the return. (Schedule A, Item 6.) RCHEDULK AS- DIVIDENDS ON STOCK OF FOREIGN CORPORATIONS, net income. (1) Original cost of assets — (a) of acqiiisitic thereto Cost of suVoquent iraprovemcr^lfa^- (o) Shown by books (h) Aocrued but not on books - Net cost (Item 1 or Item 2, plus Item 8, minus Item 4). - (o) M^wtdebisets weresild ot amount of liqmdatmg dtsadends roccivod — (7) rro9toTlo(B 7--- (o) If loss, report amenmt of salvage, Lnsiiranu«,ofOlhcrrecovcry,uiiny $ - (5) Date loss chareed otT.. State''ilso"how'liid by-whom lafr mai ket iirice or value as o( March 1, Swbafamo'rt!li-aiy;o(^-he%:riuVal^^^^^ ' basis used by you to arriving a Report In ca.se of cxrhnngo ol ir cosh value of properly rcccr "Tberint\^i=|odXnr™ "D"o';^sSii‘‘24^ra— lations 45. (rjamount rcalited; tft premium to the return period must bo reported either as Item 0 '",’'-“«le a” amru^i^ been reported as income or ailo. ed Is S dVducUoS to prio'; yenra (See Article oh. Rejuiations 43.) OUUUUfc »a» UUUliao X portion Of Its net incoma. («) name of c held, and (d) amount of dividends; (2) s United states upon any portion of thee — ^ ] , . ti.F gii.ixF .irr.'km Mcb for liitQseli dcpoBC6 and ea^/8 that this return, We, the undermgncd, pr^«nt and treasuror of ^>>0 and belief, a trio and complete return made in good faith pureuant including tho accompanying echedules and etatements has been examined by hmi aua is, to cue ur- to the Revenue Act of 1918 and the RcgulaUons issued thereunder. _ Sworn to and-Bubscribod before me this ... . day of . [Page 4 of Form 1120.] Income Tax Supplementary Page 64. pace I of Iiutnictioiu GENERAL INSTRUCTIONS. CORPORATION RETURN. RETURNS. - LIABILITY FOR FILING. 1 Corporations generally.— Every corporation, joint-stock company, Association; and insurance company not specificaUy c.xcrapted by Section '231 of the Revenue Act of lb IS, and having a net income for the taxable period of S3,000 or more, is subject to the excess-profits tax and must me a complete return on this form. 2 A corporation, joint-stock companv, association, or insurance company (not exempted by Section 231). whether or not haying income must file a return on this form, filling in that part of Schedule L> under the headings “Income tax" and all the schedules called for on pages 1 and 4, and answering all questions on page 3. 3. Government Contracts.— In addition thereto, if net income in excess of SIO.OOO was derived during the taxable period from a Govern- ment contract, Fonn 1 120 S should be secured from CoUcctor of Internal Revenue for your district and filed ps a part of this return. • 4. Foreign Corporations.- .\ foreign corporation subject to the law is required to make return to the collector in whoso district is located its principal office or agency through which is transacted the business m tho United States. If it has no office or agency in the United States, the re- turn should be filed with tho Collector of Internal Revenue, Baltimore, Md. The gross income to be returned includes only the gross income from sources withm the United States, including interest on bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise, and all amounts received representing profits on the manufacture and disposition of goods within the United States. (See Articles 91, 93, 5-30, and 025 of Regulations 45.) For deductions from gross income see Article 573. 5. A foreign corporation should fill in and submit all the schedules called for on pages I and 4 of the return with respect to its income from sources within the United States, and should compute its income t.ax (Schedule D), claiming, however, no specific exemption (Item 9). Inas- much 03 the profits tax in the case of a foreign corporation is not based on invtsted capital, the schedules pertaining thereto should not bo filled in. (See Article 871, Regulations 45.) 6. Partnerships and Personal Service Corporations.— Partncr-diips and personal service corporations must make a return on Form 1005. (^0 Article 624, Regulations 45.) CONSOLIDATED RETURNS. 7. The parent or principal reporting company of affiliated corpora- tions ns defined in Section 240 of tho Act and Articles 631 to 638 of the Regulations, must file a consolidated return on this form with the col- lector of the district in which its principal office is located and attach thereto a schedule showing the names and addresses of all allUiated cor-, porations in the group, together with the amount of tax allocated to each corporation. (But sec paragraph 9). Each of tho other affiliated corporations shall file in the office of tho collector of its district Form 1122. Consolidated invested capital must bo computed as at tho beginning of tho taxable period of the parent or principal reporting company and consolidated income must be computed on the basis of its taxable period. All supplementary and supporting schedules should bo prepared in columnar form, one column being provided for each corporation included in tho consolidation, one column tor a total of like items before adjust- ments are made, one column for intercompany eliminations and adjustments, and one column for a total of like items after giving cfTcct to the eliminations and adjustments. Tho items included in tho column for eliminations and adjustments should bo symbolized so as to readily identify contra items aflectcd and if necessary, in order to give a correct understanding of these entries, suitable explanations should oc appended. 8. If one domestic corporation owms 95 per cent or more of the out- standing voting stock of another, or if 95 per cent or more of the out- standing voting stock of two or more domestic corporations is owned by tho same individual or individuals, partnership or partnerships in sub- stantially tho same proportion, a consolidated return must bo filed by such corporations except that tho limitations as to consolidation pro- vided by Article 635 must bo observed. If the ownership is less than 95 per cent of the outstanding votm" stock, but exceeds 50 per cent, tho parent or principal corporation of any ^oup of affiliated corporations must furnish the information called for in questions 11 to 14, page 3. 9. In case of all consolidated returns the Department pref; rs that the total tax assessed against the affiliated companies bo allocated to tho parent or principal reporting company and paid by it to tho Collector of Internal Revenue with whom the return is filed, instead of tho tax being apportioned among tho affiliated companies. PERIOD COVERED. 10. The taxable period is the calendar year 1919 or tho fiscal period ended in tho calendar year 1920, and tho net income shall be computed upon tho bn.si3 of tho corporation's annual accounting period (calendar year or fiscal period) in accordance with tho method of .keenin.g the- books. The accounting jicriod cslablished for 191S must bo afllKicd to in 1019, unless permis uoti was received from tho Commissioner to make a change. . A corporation having no fiscal year must file its rcluni on tho basis of a calendar year. 11. If a corporation changes its accounting period, ami not merely its ta.\«Lble year, to conform with its existing accounting [icriod, it shall as soon as possible give to the collector for transmission t ) the Commis- sioner written police of such cliango and of its reasons thciefor. The Commissioner Will not approve a change of the basis of coiuputiiig net income unless such notice is given at'.T, time which is both. (a) at least thirty da\-s before the due date of the corporation’s return on the basis of its existing taxable year and (6) at least thirty daj's before the due date of its return on the basis of the proposed taxable year. (See Arti- cle 431 of Regulations 45 and Section 226 of the Revenue Act of 1918.) 4 TIME AND PLACE FOR FILING. 12 Tlio Return must be sent to the Collector of Internal Revenue for. tho district in which the corporation’s principal office is located, so as to reach the collector's office on or before the fifteenth day of the third month following tho close of the ta.xablc period, unless an extension of time has been granted. 13. In case of neglect to file return within the prescribed time tho collector is authorized to grant an extension of not more than thirty days, ■provided such neglect V'as due to absence or sickness, and provided an application for such extension is made in writing prior to the expiration ot the period for which an extension may be granted. In mentonous cases tho (ilcmmissioaer is authorized to grant a further extension. SIGNATURES AND VERIFICATION. 14. Tho return shall bo sworn to by the president, vice president, or other principal officer and by the treasurer or assistant treasurer. The return of a foreign corporation having an agent in tho United States shall be sworn toby such agent. If receivers, trustees in bankruptcy, or assignees are operating the property or business of the corporation, such receivers, trustees, or assignees shall e.xeciite the return for such corpora- tion, under oath. PAYMENT OF TAXES. 15. The tax should be paid by sending or bringlng'with Uie return a check or money order drawn to the order of “Collector of Internal Revenue at (insert name of city and State).’’ 16. Do not send cash through the mail or pay it in person e.xcept at the office of the collector or a regularly established intcrnal-revenuo stamp office. 17. The total tax may be paid at the time of filing tho return or in four equal installments, as follows: The first installment shall be paid at the time fixed by law for filing the return, and the second installment sh.all be paid on the fifteenth day of tho third month, the third installment on tho fifteenth day of the sixth month, and tho fourth installment on the fifteenth day of the ninth month after tho. time fixed by law for filing the return, ^ ' * ■ PENALTIES. FOR MAKING FALSE OR FRAUDULENT RETURN! Not exceeding 810,000 or not exceeding one year’s imprisonment, or both, in the discretion of the court, and, in addition, 50 per cent of tha tax evaded. FOR FAILING TO MAKE RETURN ON TIME. Not more than 81,000, and, in addition, 25 per cent of tho amount of tax due. FOR FAILING TO PAY TAX WHEN DUE OR UNDERSTATEMENT OF TAX, THROUGH NEGLIGENCE. Five per cent of the tax duo but unpaid plus interest at the rate of 1% per month during the period in whicn it remains unpaid. WORKING papers; Every corporation should preserve, available for inspection by a revenue officer, working papers showing — 1. Tho balance in each account on tho corporation’s boolcs that was used in preparing Schedule A. 2. Tho amount deducted from each such balance on account of each class of nontaxable income, unallowable deductions, and other adjustments indicated in ^hedulo M, with a reference to the number of the item in Schcdul,e M in which each amount so deducted was included. 3. Tho rcmnindei- of each such balance, analyzed to show the amount included in eacli item of Schedule A, with a reference to tho number of the item in Schedule A in which each such amount was included. NET LOSSES If for any taxable period beginning after October 31, 1918, and ending' prior to January 1, 1920, it appears upon the production of evidence satisfactory to the Commis-sioner that any taxpayer has sustained a net loss, tho amount of such net loss shall under regulations prescribed by tho Commissioner with tho approval of the Secretary bo deducted from tlio net income of tho taxpayer for tho precedmg taxable period ; and tho taxes imposed by Titles II and HI, Revenue Act of 1918, for such pre- ceding taxable period shall be redetermined accordinglj'. Any amount • fouiKi to be duo to (ho taxpayer upon the basis of sudi redetormination shall 1)0 credited or refunded to tho taxpayer in accordance with tho provisions of section 252, Revciiuo Act of 1918. If such net loss is in excess of tho net income for such preceding taxable period, tho amount of such c.xcess shall imdci’ regulations prescribed by the Commissioner with the approval of tho Secretary be allowed as a deduction in computing tho net income for the succeeding taxable period. (See Ai liolcs 1601-1603, Regulations 45.) REGULATIONS 45 Copies of Regulations 45 may be obtained from the Collector ot Internal Revenue for your district. Income Tax Supplementary Page 65. [Page 5 of Form 1120.] Page 2 of Instructions. INSTRUCtlONS RfcCARDlNG DETERMINATION OF CREDITS, CoMFUTATION OF TAX. ETC. RECtXATIONS COVERING CROSS INCOME AND DEDUCTIONS. 1 RaUroad corponuious. banka, insurance companies, and other corporations to submit eiatemenTof income and expenses to any national, State, mumcapal p other public officer may submit instead of Schedule A a statement of meeme and expenses m fhe form in wWch submitted to such officer. In such cases the taxable net mcome be reconciled by means of Schedule M with the net pror.t e- pense stalcmont submitted, and should be entered as Item 27, Schedule A pa^e 1. 2. Life insurance companies should enter as Item 3, Schedule A the total rcceix ed from policyholders loss such portion thereof as has been paid nark or credited to, or treated as an abltomcnt of premiums of, such policyholders within the taxable year. (Sec Articles 548 and &'I9 of Regulations 45.) 3 Mutual marine insurance comrianios should report as Item 3, Schedu-o A, the gross premiums collected and received by them less amounU paid fr^ rerneimance. 4 Insurance companies should state separately in Schedule A12, (a) the net addition required by law to be made within the taxable year to rcse.-x-e funds (iucludmg in the ct^e of assessment insurance companies the actual deposit of sums ^th ^1?*" cers pursuant to law as additions to guarantee or reserae funds, ana (5) the total of sums otlicr than d.i-idends paid within the year on policy and annuity conlracU. 5 Corporations issuing pt-licics covering life, health, and accident insur^ce combim^ in one policy issued on the weekly premium payment plan continuing lor Me and notsuh- iect to Lcedlation should report in Schedule A12 such part of the net addition (not r^uired by law) made within the taxable year to reserve funds as the Commissioner finds to he required for the protection of the holders of such policies. C. Mutual marine insurance companies should report in Schedule A12 amounts r 'paid to policyholders on account of premiums prewiously paid by them and interest paid upon such amounts between the ascertainment and the payment thereof. _ 7. Mutual insurance companies (other than mutual life and mutual maruie insurance companies) that require their members to make premium deposits to provide lor losses and expenses, should report in Schedule A12 the amount of premium deposits returned to their poUoyholders and the amount of premium deposits retained for the payment of losses, expenses, and reinsurance reserves (unless deducted elsewhere in Schedule A). 8. IncidenUl repairs, which do not add to the value or appreciably prolong the Me of property, are deductible as expenses. Expenditures for new buildings, raachmery, equipment, or for permanent improvement or bcltermciits which incrc.ase the vMue of the property are chargeable to capital account. Expenditures for restoring or replacing property arc not deductible under this or any other item cl the return. Such cxpendi- lurcs arc chargeable to capital account or to depreciation reserve, depending on the treah menl of depreciation on the books of the taxpayer. (Schedule A, Item 14.) 9 The amount of interest deductible under item 15, Schedule A, is the amount of interest paid or accrued within the taxable year on its indebtedness, except on indebted- ness incurred or continued to purchase or carry obligations or securities (other than obli- gations of the United States issued after September 24, 1017), the interest upon which is wholly exempt from Uxation under the Act as income to the taxpayer, or. lu the case of a foreign corporation, the proportion of such interest which the amount of its gross income from sources within the United Slates bears to the amount of its gross income from all sources xvithin and without the United Stales. (Schedule .L, Item 15.) 10 Ejffiaustion, wear and tear (including obsolescence).— The amoimt deductible on account of depreciation is an amount charged off which fairly measures the lo^ during the year in the value of physical property by reason of exhaustion, wear, tear, and obsolescence. Such an amount should be determined upon basis of the cost or fair market value as of March i 1913 if acquired prior thereto, of the property and the probable number of yer^ constituting its life. The capital sum to be replaced should bo charged off over the probable life of the property cither in equal annual installments or in accordance with any other recognized trade practice, such as an apportionment of tee capital sum over units of production Whatever plan or method of apportionment is adopted must be reasonable and should be described in the return. Slocks, bonds, and like securities are not subject to exhaustion, wear and tear, within the meaning of the law. PROVISIONS AFFECTING INVESTED CAPITAL AND CREDITS. RETURNS FOR PART OF A YEAR. 11 It this return is for a period Mss than a full year, Item 3. Schedule C; Items 1 and 2 column 2, Schedule D; and Item 9, Schedule D, shall be reduced to as many twelfths of the fi-ure’s for a full year as there are months in Iho period for winch the return is made. If the period for which the first or fnal return is made includes fractions of months, •here slmll bo added to the number of complete months as many thirtieths of a month 08 there are days in the fractional parts of months. CREDIT FOR INCOME, WAR-PROFITS. AND EXCESS-PROFITS TAXES PAID ’'or AtXRUED DURING TAXABLE PERIOD TO FOREIGN COUNTRIES OR POSSESSIONS OF THE UNITED STATES. 12. If a credit is claimed in Item 13, Schedule D, a copy of Form 1118, completely filled out and sworn tc or affirmed, must be eubraitted with this rcl urn. 11 credit is sought for taxes already paid, the form must have attached to it the receipt lor <-a. b such tax pay- ment. If c.’xidit is sought for taxes accrued, the form roust have allarhed to it the return on which each such accrued tax was based. (See Artie le Oil ol Regulations 45.) 13. UTiea a, credit is claimed for accrued ta-xes, the CommiKiioncr may, as a concution precedent to the allowance of this credit, require the corporation to give a bond (Fora 1119' with eurctifs satisfiactory to and to bo approved by him in such pen.al euro as he may irquiro, conditioned for the payment by the taxpayer of any amount of taxes found due if iho taxee when paid differ from the amount claimed in respect thereof. /PROVISIONS AFFECTING COMPUTATION OF EXCESS-PROFITS TAX. 1 1. Item 3. Schedule D, is the excess-profits tax unless the taxpayer is subiect to coo or more of the following provisions: , , „ • (a' Limitations on total fax.— The maximum cxcofe.pn.fiu tax impcwd shall in no case be more than 20 jior cent ol the net incemo in excess of $.3,000 and not in ext* as ol $20,000 plus 40 per cent of the net income in excess ol $20,000 (Section 302), unless net income amounting to more than $10,000 was derived from a Government contract, when the tax on such income shall be assessed under Section 301(c), in which case the maximum e.xcess and war-profits tax imposed upon this proportion ol the net incomeshall notbemore than 30 iier cent ol the amount ol net income in excess of $3,000 and not in ^ess of $20,000 plus SO per cent of the amount of net income in excess of $20,000. (See Section 302.) (5) Tax on profits from sale of mineral deposits. — In the case of a bona fide sale of mines, oil or gas wells, or any interest therein, whore the principal value of the property has been demonstrated by prospecting or exploration and discovery work done by the taxpiayer, the portion of the excess-profits lax attributable to such sale shall not exceed 20 per cent of the selling price of such property or interest. (See .‘Jticloe 971 and 972 of Regulations 45, and Section 337 of the Act.) Thejirat step is to find the excess-profiu tax computed without regard to this provi- sion ; the second is to find of the tax thus computed such portion as the net income from the the L o beam to the total net income. 1 f this portion equals or does not exceed 20 per cent of th . celling prica, then no adjustment is permitted. Should such portion exceed 20 per cent of the selling price, then, first, find such portion ol the excess-profits tax as the net income not attributable to the sale beam to the total net income; and aocondly, add to this 20 per cent ol the selling price ol the mineral deposits. (c) Tax on corporation engaged in mining of gold.— If a corporation was engaged in the mining of gold, its e,xcess-pvofita tax shall be that proportion of Item 3, Schedule D. which iho net income not derived Irom the mining of gedd bears to the totol net income. (Articles 752 and 753, Regulations 45, Section 304(c) oi the Act.) (d) Tax of corporation whose income is derived in part horn “Personal Service.”— If part of the net income (notless tlian 30 per cent) is derived from a separate tradaor husinoee of the character of “personal service, “ the tax sliall he computed in accordance with the proiTsions of Articles 741 to 743, Regulations 45, Section 303 oi the Act. 15. Statement of basis of claims.— If tho corporation claims tho benefit oi one or more of those provisions, it should attach to tho return a complete stotoment of the basis for such claim aud a computation of tho tax payable in the event that such claim is allowed. Tho amount of tax so computed should be eulcred in Schtdule D, but, except in cteea lalling under (a) atiovc, the taxpayer must nevertheless fill out all the ectedulsB of this form. SPECIAL CASES. 16. Definition of special cases.-Seci ion 327 of the Act provides that in the following cases the tax shall be determined as provided in Section 328: , ■ (a) Where tho Commissioner is unable to determine the invested capital as provided in Section 326. (i) In tho case of a loreign corporation. (c) Where a niLued aggregate of tongible property and inUngihlo property has been paid in lot stock or ior stock and bonds and the Commissioner is unable satisfactorily to determine the respective values of the sevoral classes of property at tho time of payment, or to distinguish the classes of property paid in for stock and for bonds, respectively. (d) Where, upon application by the corporation, the Comn^ioncr finds and dodaros of record that the Ux if detomiiued without benefit of this section would, owing to abnor- mal conditions affecting tho capital or income ol the corporation, work upon tho corpora- tion an exceptional hardship evidenced by gross disproportion between the tax computed without benefit of this section and, tho tax computed by reference to the representetivo corporations specified in Section 328. This subdivision shall not apply to any caw: (1) in which the tax (computed without benefit of this section) is high merely bscauso the corp^ ration earned within the taxable year a high rate of profits upon a normal invert^ capitel, nor (2) in which 50 per centum or more oi tho gross income of tho corporation for the Uxablo year (computed under Section 233 of Title II) consists of gains, profits, commissions, or other ineome derived on a cost-plus basis from a Government contract rt contracts made between April 6, 1917, and November 11, 1918, both dates inclusive. 17. Treatment of special cases.— In tho cases specified in Section 327 tho tax will he BDOcially determined under tho provisions of Section 328. A corporation which comes vSrin the provisions of subdivision (• [Page 6 of Form 1120.] Income Tax Supplementary Page 66, 4-27-20, Form li22 — Revised UNITED STATES INTERNAL REVENUE SERVICE INFORMATION RETURN OF SUBSIDIARY OR AFFILIATED CORPORATION -i 03) WHOSE NET INCOME AND INVESTED CAPITAL ARE INCLUDED IN RETURN OF A PARENT OR PRINCIPAL REPORTING CORPORATION FOR PURPOSES OF INCOME AND PROFITS TAXES FOR CALENDAR YEAR 1919 This Return must be filed on or before Marc!i IS, 1920, with tlie Collector of Internal Revenue for the district in which the Subsidiary or Afnliatcd Corporation has its princi- pal office, if for a cafen- dar year; and on or bcfoic the 15th day of the third month after the efese of the fiscal p-riod, if fur a fiscal period. Fiscal period begun . Nome Buciness address tLuy or lowu) OR (Date Received) .and ended < 1920 (street and number) (State) 1 . Date meorporateci Under laws of what State*?. 2. Kind of bu3iue.ss 3. - Par value of capital stock outstanding at beginning of taxable year: (a) common, $ {b) preferred, $ 4. Name of parent corporation 1 5. Address of parent corporation - 6. Internal revenue district in wbicb consolidated return has been filed - (Give district, or city and State) 7. In case of all consobdated returns, the department prefers that the total tax assessed against the affiliated group be paid by the parent or principal reporting company, instead of being apportioned among the affiliated companies. If apportionment is made state the amount of income and profits tax for the taxable year to be assessed against the subsidiary or affiliated company making this return. Wo, the undersigned, president and treasurer of the above-named subsidiary or affiliated corporation, being severally duly sworn, each for himself deposes and says that the foregoing return, including the accompanying list, (if any), has been examined by him and is to the best of his laiowlcdgc and belief a true and complete return of information made in good faith pursuant to the Revenue Act of 1918 and the regulations thereunder. SwoEN to and subscribed before mo this .day of 19 PresuierU. (Namo ot officer) »— ecir (Title) Treasurer. Income Tax Supplementary Page 67. Form 1012.-nEmF.o Jaitwaht, 1920.-UNITED STATES INTERNAL REVENUE SERVICE MONTHLY RETURN OF NORMAL INCOME TAX TO BE PAID AT SOURCE and INTEREST ON BONDS AND OTHER SIMILAR OBLIGATIONS OF DOMESTIC RESIDENT CORPORATIONS AND FOREIGN CORPOI^TIONS HAVING A PAYING AGENT IN THE UNITED STATES (To be used by payias agent of foreign oorporatlon only In case the bonds conUln a lax-free^ovenant clause.) FOR MONTH OF " (Name of debtor otgaaiaation-. ) ( Full" posbofflce address. ) (Name of withholding agent.) (Full post-office address.) Date received THIS RETURN, IN DUPLI- CATE. ACCOMPANIED BY CERTinCATES ON FORM IMO AND FORM 1059 MUST BE FILED WITH THE COL- LECTOR OF INTERNAL REV- ENUE FOR THE DISTRICT IN WHICH THE WITHHOLDING AGENT IS LOCATED ON OR BEFORE THE 20 th DAY OF THE MONTH SUCCEEDING THAT FOR WHICH MADE It debtor organization makes its own withholding return, nTeS^s'iSd be made on lines provided above for name and address of withholding return on this form must be made to cover f { the United States (individuals and fiduciaries) not claiminc 1. Interest on bonds with tax-free-covmant clauses to ci toons and re^d^ tne individuals or fiduciaries, to foreign partnerships, and ' per centum is required to be withheld and paid at source xu such cases. 2. Znfer^f on or in case owner is unknown, a normal Uk of 8 per centum is required to be withheld (b) ufa^forei^^corporation having no office or place of business m required to be withheld and paid at source. * . j v, « the debtor corporation shall prepare of thfunited States (individuals and fiducianos) and .. u,* „n.i dud.b»gi™. •®‘‘‘'^\?,”ffrSSd'”SSo,p.yee,(b,b.»b»d.dd,«^^^^^ from whom the coupons were r^exved, (e) amount “oavee ” entering the amount of interest, due date, and A ,b. ““ Tba iffiHflvit. should accomnanv the ownership certificate to the Collector of Internal Key enue the United States, a normal tax of 10 per centum is If bonds'are o^ed ioinlly, seFarat^^^^^^^^ should^be made by or for each joint owner . Fid, •■owner AnTs’-Ze naCKaL. trust, or beneficiary on behalf of-whom the exemption is claimed Fiduciaries must enter on the certificates under and inclosed herewith: Class. iKTEKEST PMD. Tax Withubld. (Siguatuie.) 1 2(a) 2(b) q (Capacity in wilicb acting.) s $ (Address in full.) — Name of Patee. 1 Street and Number, Post Office and State. Amount Paid. j Tax 1 triTHlIEU B. 1 ? 1 1 1 J 1 1 1 i 1 1 1 1 1 1 1 1 1 1 1 CONTINUE ON FORM 1012A Income Tax Supplementary Page 68, IF RETURN IS FOR CALENDAR YEAR 1913 file it with the COLLECTOR OF INTERNAL REVENUE , FOR YOUR DISTRICT i ON OR BEFORE MA RCH 15, 1 520 1 IF FOR A PERIOD I OTHER THAN A CALENDAR YEAR, THE ' RETURN SHOULD BE FILED ON OR BEFORE THE 15TH DAY OF THE THIRD MONTH FOLLOWING THE CLOSE OF SUCH PERIOD lH5i irreiH IS IWt m MSB » tSSlSSSLlV xxn is not thee BSED foe estates W PEOCESS or AOMWlSrEATlON Page 1 of Retxirn Form IWl.-UNITED STATES IKTERKAL REVENITE SERVICE FIDUCIARY RETURN OF INCOME FOR CALENDAR YEAR 1919 Or for period begun If thm return U for « pwrtod ether then _ — — - - . . - . cooredipurt be plainly etetedm the , 19 and ended .lender y«»r, th« d*tM of *"** " ... 19 PRINT NAMES AND ADDRESSES PLAINLY Name and 1 addreaa of< fiduciary | (D» Nd Write in thu S|>acc) (D«k« received.) Was a rit'orn of income tor 1918 filed on behalf of the eatate or trust named above? If eo to vrhat collector's office was it sent Cgive district or city and State)? Ectp’r holow all nontaxable income received by tor accrued tol the estate or tnist duringthcEg^ vcTed bv tbia return from the following sourcea: . Class of SzcLTimEs. Class or Bectoittes. r L«u: Srtf* of Oolambie... Fed^rwl FArm Ia&p Bonds . ifir I- cUvi * 'u ’a rofcivi-tl i!urAr.?tho nrcour.tins poriod tthichwere declared and Mid lx 1 ween January 1 and Kovembxr ) , 1918 hoih dates inclusive, cr or define 1, nnd encored on the books of the corporation within ihcec datwnnH rpreivod during such accounting period, and before Mar- h i?, shall be allocated ns follows: Accumulated in— (а) Received directly ... (б) Eeccived indirectly I tahio IkIow interest t rnd-rJ (!>',): 1. ClJUiS OF Obuoatk ns. noLDCtcs or Tins Fidvciaxt. 1 FiDUCIARY’sFlL^REOrnOLDlSOSO.Fl’Ar.T- 1 VEBSaiPS. rr.RJ^ONAL SERNTCF. COBPORA* 1 Tioss, Aa*.o Other I-TpuclvRieS, } COLLU-SS i ANd'S. 2. Amount of inlcrfst. 3. Maximum amount 1 of obiigationi. { 4, Amount of 5. Maximum OTnouat of obUcTtioas. j (n) I'ir-l I.u Arty ec-tivcrt.^d iuXo a'^cccaa liberty J.oan ana ::?ecoiia isirwrty i-odu u (b) Fir^ttRod Second Liberty I/iaas converted intoTOrd Liberty Loan, and Third Liberty] $... ' 1 $ $ - - r 1 i 1 (c) Fir?t Liberty I>oaa coaverteU into jfourin i^incny 1 I 1 f («*} Fourth Liberty Isiaa 1 1 1 r’li... 1 (0 Other oblisations, except cla« (/), issued fince Septem’oer 1, 1917 - — 1 1 1 (f) Victory Liberty Isian A\fn Notes — i i 1 1 iiiiiii::::::::;:; , ih.mhlAVx.Iow twhether received or not) income from partnerships, personal service corporation, and other ftduciariea, eRvept atock dividends c intered in Item 4: 1 . ICame and Addaesscf PiETTcrR^n*-. Ptnw/XAL Fermce CoBrrp.ATK>K ca 2. Period (EvTTtt Wtara PisCAi. YxAa Kkded.) 3. Cum Dnttxm>s 4. Brocs PlTlDENIlS. 5. TKTXRtSf rx Tax-I-bee Bonus (CY Other riDCCUHIES ONLY). e. IVTEREST OX I.iiTERTY Bonds, Etc., 1.WXD Since COF.I'OKATION 7. Otker Income, InCLUDINQ ICTIIR- PM-TVCnSHIRR. AND Personal COBFORATTOKS. I i 1 $ : $ $ i 1 ■ 1 l&clud«tnJ (•I.pMvS. 1 $ Uclaa.loE.pM.a. * $ car (see instruc- tions, Schedule A, page 2) 9 . Totai. 10. Less inventories at end of year.. 11. Net Cost or Goods Sold Did you claim an inventory loss for 1918? Is obsoleecence claimed in deduction in Item 10?_ OTHER BUSINESS DEDUCTIONS: 12. ’ Salaries and wages not repwted as Labor under "Cost of Goods Sold” — — -■■■■r'lZ — 13. Rent on business property tn which the estate or trust has no equity 14. Interest on business indebtedness to others 15 Taxes on business and business property.. ... 16 Repairs, wear and tear, obsolescence, depletion, and property losses (explain in tabl .0 below) 17. Amortization of war facilities - 18. Bad debts arising from Balee-.™..*..-:......— 19. Other eicpenseB (submitechedule of principal items at foot of page or on separate sheet) 20. Total (Items 12 to 19 inclusive) 2L Net Cost Plus Totax Dedoctions (Item 11 plus Hem : 22. Net iNCOME^^ROM^^tJBlNEflS^^^Itc^^^minusJ^ni 21)..-. B. INCOME FROM PARTNERSHIPS, PERSONA L SERVICE CORPORATIONS AND OTHER HDUCIARIES. (From Item 6 (a), column 7. page I.) - — (From Item 6 ( C. PROFIT FROM SALE £T4Nn'Rllll.DlNGS. STOCKS,' BON OTHER PROPERTY. AND FROM LIQUIDATING DIVIDE^ Kind or Propertt. 2. Name and Address or Fttrcdasee or Broker. Nkt Pbotit rnoM Pales (total of columiM 3 and 7 minus n. INCOME FROM RENTS AND ROYALTIES total of columns 5 and 6) $ Cost of Subse* QUENT Improve- , Kind or Propertt. 2. Niue and Address or Tenant, Lessee, Etc. ME FROM Rents AND Rotalties (tctal of column 3 nanus total of 7. Other Expenses (Explain Below), E. INTOREST ON CORPORATION BONDS CONTAINING TAX-FREE COVENANT. ON WHICH A T AX OF 2% WAS Koceived directly. 3 - received .lirough other fiduciaries (Item 6 (al. column 5), $ OTHER income (not including dividends, or interest on obligations of the Umted States). Interest on bonds, mortgages, and oWigitiora of dom®^^^ nn o°Sr^gn““r^orTtm “Jffi^c'not mabl^b^ the United States upon any portion of their net incomca — — — — • - Interest on bank depoeite, mortgages, etc - - Amount paid for you by debtor corporation on tax-free covenant 1 H. DEDUCTIONS NOT INCLUDED ABOVE. . (explain lie below) Contributions and amounts set aside for U. S.. etc, (list below) 5. Bad debts and other deductions.. Total Interest paid $ 2. Taxes pnid - r„.. Item 4 (a) column 2 J (b). ToUl amount of Intereit on bond* and other obligation* of the Umted ' Reoeiveddirectly.l ; re<»ivedth,oughpartnersMpe,personidservieeeorpomtionB,andotherfiducm^^^ $. J (c). Other income from partnership., per«.nJ .ervice corporation*, and other fiduciaries (Item C (5). column 7)..... K. Total net income. (If Item I shows minus quantity, deduct amount from total of T (a). J (b) and .1(0) Sutes issued after September 1, 1917, and Wir Finance Corporation Bonds: Total. enter in THIS TABLE DETAILS CONCERNING REPAIRS. WEAR AND TEAR. PROPERTY LOSSES. ETC- CLAIMED AS DEDUCTIONS IN SCHEDULES A D AND H ABOVE Prior Thereto. 5. REPAraS (NOT Offset by Claims FOR Wear and Tear and Losses). Wear and Tear. Obsolescence, i Depletion Coaroed Off. 8. Amount this Cause and now Amount y EXPLANATION OF DEDUCTIONS claimed in Schedule A. tin , 7 and 19; Schedule D. column 7; and Schedule H, Items 4 and 5. (Attach separate sh get^ Page*2 of Form 1041. Income Tax Supplementary Page 70, RETAIN THIS SHEET AND INSTRUCTION SHEET AVAILABLE FOR INSPECTION BY REVENUE OFFICER DETACH THE RETURN (CONTAIN- INC AFFIDAVIT) AND DELIVER OR SEND IT TO COLLECTOR OF INTERNAL REVENUE ON OR BEFORE THE ISTH DAY OF THE THIRD MONTH FOLLOWING THE CLOSE OF THE ACCOUNTING PERIOD KEEP THIS WORK SHEET AND THE INSTRUCTION SHEET of Work Sheet Torm KMl-tTNITED STATES INTERNAL REVENUE SERVICE WORK SHEET FOR FIDUCIARY RETURN OF INCOME FOR CALENDAR YEAR 1919 Or for period begun . — 1 19 , and ended ..... , 19.. PRINT NAMES AND ADDRESSES PLAINLY Name and I addreu of | fiduciary Name of estate or trust IF YOU NEED ASSISTANCE GO TO A DEPUTY COLLECTOR OR TO THE COLLECTOR’S OFFICE BUT FIRST READ INSTRUCTIONS - AND FILL OUT THIS SHEET (FACE AND BACK) IN PENCIL AS WELL AS YOU CAN 1. Wm a return of income for 1918 filed on behalf of the eetato or trust named above? . 2. If 80, to what collector’s office was it sent (give district or city and State)? Class or Secubities. Pamariz. Irrezaoi. Class or fiEcuBirixs. PamarAL. SAS It^LLA lUU lUlIUW iNTXRIST. lujr sources: OiaiB Iscoire (Give S ouaca). Amount. Pint Liberty Loan 3H% Bond# nneonTerteL.. eihcroblicBtiooeofthe U.8. issoed before Sept. 1. 1917. and ooLixaiionaof U. 8. poisesAioni... Tletorr UbertT Laan $ » ObU^oot of States and Terrltorlee, politi- eal flobdiTisfoB# thereof, and the District of ColniBbla $ ?. . . , '■ rai Farm Loui Bonds 1. Accumulated in— 2. 1918-19. 1 t 4. 1918. 6. 1913-15. *. stock diVKtends received duringtheaccountingperiod which weredeclared and paid between January 1 and November 1, 1918, both dates inclusive, or authorized or declared, and entered on tho boohs of the corporation within^ose datesaijd received duringsuch accountingperiod, and before March 27, 1919, ehall bo allocated aa follows: •S. I^ntppin ftkKlA KplAnr ..... T :t. a.. D 1_ . . (o) Received directly (b) Received indirectly $ s (c) ToT. 11,8 $ $ - $ $ 5 derived (sec instructions, page 2, I O? OBUOATIOKS. converted into Second Liberty Loan and Second Liberty Loan uncon- (b) Pim^an^econd iJberty IxJans convert’^Tnl^ Thh^Li^b’erty Loa^TncTThirT^ (c) First Liberty Loan converted into Fourth Liberty Loon ( Address or Tenant, Pi i.TiES (loUl of co!ui;:i> 3 uwmia tc 7. O-mF.R EiPENsrs liEix)w). Interest on corporationbonds containing tax-free covenant, on w! iic; ! a tax or i % was paid by debtor corporation tbrntiirh ofb^r fiihi : r. roliirnn M F. OTHER INCOME (not including dividends, or inicrest on obligations of !he Unl!f.l States). 1. Interest on bonds, mort-rafies, ant! other ol)li),-ations of domwtir and resident 2. Inlerest on bonds of foroiRn countries and corporations and dmdcnJs on slock of lorcs.i corporations inch arc not taxable b) tbc bm leu aiatca upon any portion of their not incomes — 3. Interest on bank deposits, mortRages, etc A. Amount paid for you by debtor corporation cn tax-free covenant bonds . 5 - G. TOTAI. NET INCOrvIE FROM ABOVE SOURCES I!. DEDUCTIONS NOT INCLUDED ABOVE. 1. Ililertst paiil 2, Taxes paid,. 3. Isissee by fire, etorm, etc. (explain I'.v f re, etorr _ _ ible liclow)-. A. Contributions and aicoi aside for r. F , e|c. flic 5, I'.ad dcdit.s and other deductions ]$ TotM -.. - j’ (a). Dividends, cash or slockrfrom’eandnTs ’of ccr^’rTlions larabie by the United Slrles upon any portion of their net inconits (including dividends on stock of persona! servic Corporations declared out of prof ts earned prior to January ], I'J lb;; 1 Tteceived dircrilvincliidir," 2. Teceived llirou;.h parlnerefiips, pcrsoual ecr\'K'C corporations ]Um4(n) column 2 $ and other fduciarica lUem -1 (P)Column 2, i,lusltemb(u),column83and4), $ Totai J (b). Total amount of interest on bonds and other obligations of the United Slates issued after September 1, 1917, and War Finance Corporation Bonds: Received directly, $ ; received through partncrsbiiis, poreonal scrvicecorpomtionE.audoUierSduciaricG, Totai i (c). Other income from partnerships, personal serrice corporations, and other fidutiuicA (Item 6 (i), column 7) K. Total net income. (I t Item 1 sbows minus quantity, deduct amount from total of J (at. J (b) and ,T (ci) — ex, TOO tx. TU.. tear, PROP EHn i osses, etc, aAmD_AS_DlDUCrigNS in sc.heduies a, d and H ABOl^ MuiM'r Va?us o^r?-?sv"lal?Mi ^ '"^ M^yi.l:rs*s'‘'(y>irGn) Orr, ' O.K.xi,cvraoPtHrv^hntn^.^^xiAoMarcs.tor aPtm S. A.^ mis R*rrj explanation of DEDUCTIONS claimed in Fc-tiediitc A, tines 7 and 10; F,-li.-d ub -_P , colum^ Page 4 of Form 1041. Income Tax Supplementary Page 72. Pj|e 1 d huboctm GENERAL INSTRUCTIONS FIDUCIARY RETURN I. RETURNS BY FIDUCIARIES. 1. Returns on Fonn KMI for estates and trusts. — Every fiduciary, or one lit case of Joint fiduciaries, must make a return on this form (Form KMlf for the estate or trust for which he acts, if the income of such estate or trust is distributable periodically, or the lax is payable by the beneficiaries, provided (a) the net income of such estate or trust for the taxable year was $1,000 or over or (i) any beneficiary of such estate or trust is a nonresident alien. 2. Returns on Form 1040 for estates and trusts.— In the case of (a) estates of decedents before final settlement and of (6) trusts, whether created by will or deed, for unascertained personsorpereonswith contingent interests, or(c)income hold for future distribution under the terms of the will or trust, the income is taxed to the fiduciary as a single person, except that from the income of a decedent’s estate there may first be deducted any amount prop- Jerly paid or credited to a beneficiary Under these conditions a fiduciary should make a iretum for the estate or trust on Form 1040 or 1040A. (See section 200 of the statute and Articles 1521 and 1522 of Regulations 45.) Ab an intestate’s real estate does not pass to his administrator, upon a sale by the heirs, whether before or after the settlement of the estate, each heir ie taxed indi^dually on any profit derived. The basis for computing the gain or lose on the sale of such property is set forth in Article 1562, Regulations 45. 3. Returns on Form 1040 for beneficiaries.— A return on Form 1040 or 1040A should be rendered by the fiduciary in the case of (a) income distributable to a nonresident alien, regardless of amount, (5) an ordinary guardianship of a minor (unless such minor himself makes a return), or committee for an insane person, if the net income for the taxable year amounted to $2,000 or over, if married and liting with wife or husband on the last d.ay of the taxable year, or the net income for the taxable year amounted to $1,000 or over, if not married or not living with wife or husband on the last day of the taxable year; (c) an iMtate" of a decedent before final settlement, and (d) if part of the income of a trust estate is distributed to beneficiaries and part ie retained for the benefit of the trust eeUte, a re- turn should be made on Form 1041 for the entire income of the trust estate and on Form 1010 for the retained portion of the income. As to any income properly paid or credited to a benefifiary, the income is taxable directly to the beneficiary 4. Return for decedent. — If the net income of a decedent from the beginning of the Uxable year to the date of his death was $1,000, if unmarried, or $2,000, if married and living with wife or husband, the executor or administrator shall make a return on Form 10-10 or 1040.4 for such decedent. 5. Returns for two trusts.- If two or more trusts, the income of which is taxable to the beneficiaries, were created by the same person and are in charge of the same trustee, the Injstee shall make a single return on Form 1041 for all such trusts, notwithstanding’that Uiey may arise from difierent instruments. If, however, a trustee holds trusts created by different persons for the benefit of the same beneficiary, he shall make a return on Form 1041 for each trust separately 6. For definition of a fiduciary and further instructions as to returns and tax liability •ee Articles 341 to 346, and 421 to 425, and 1521 to 1522 inclusive of Regulations 45. 11. ITEMS EXEMPT FROM TAX. The following items are exempt from income tdk. nowever, nontoxable income of the classes described in paragraphs 1. 3. 4. 5 and 6 should be reported in Item 3 page 1 of the return. ^ ° 1. Pay not exceeding $3,500, for active services in the military or naval forces of the Umted States, received during the taxable year prior to the termination of the present war as fixed by proclamation of the President. 2. Gifts (not m^e as a consideration for service rendered) and money and property acqmred under a will or by inheritance (but the income derived from money or property received by gift, will, or inheritance is taxable and must be reported). 3. Interest on bonds and otlier obligations of the United States issued before September I, 1917, and on such bonds and other obligations issued since that date, to the extent provided by the acts authorizing the issue thereof. See page 2 of Instructions, Item J (b). 4. Interest on bonds and other obligations of United Slates possessions (Philionines Porto Rico, etc.). ’ 5. Interest on bonds and other obb'gations of States, Territories, political subdivisions Uiereof (such as cities, counties, and townships), and the District of Columbia. 6. Income on Federal Farm Doan bonds of July 17, 1916. 7. Dividends upon stock of Federal Reserve Banks. However, dividends paid by member banks are treated as dividends of ordinary corporations. 8. Interest on bonds issued by the War Finance Corporation only if and to the extent provided in the acta authorizing the issue thereof. 9. Proceeds of life insurance policies paid upon the death of the insured to individual heneticiaries or the estate of the insured. 10 Amounts received by the insured under life insurance, endowment, and annuity cpntracu, provided such payments do not exceed the premiums paid in Tlie amount by which the total payments that have been received exceed the total premiiuns paid in is income and niu?t be refiorted in Schedule F 11. Amounts received Irom accident and health insurance and under workmen’s comiKinsauon acU plus the amount of any damages received by suit or agreement on u < ouut of injuries or sickness. 12. Compensation paid by a State or political subdivision thereol to its officers or employees. III. FARMER'S INCOME SCHEDULE. If any of the income of the estate or trust is derived from farming, a "Schedule of Farm lucerne and Expenses’’ (Form 1040F) should bo filled out and filed with this return Tlio net farm income, u shown by the Schedule, should bo included in Item 22 of Schedule A of this return. IV. PERIOD TO BE COVERED BY RETURN. In general, the regulations governing Iho preparation of returns by fiduciaries aro Us same as th<« governing imlividuals, which are as follows: The return of a taxpayer is made and his income computed for his t-ixablo year, which mc ius his fiscal year, or the calendar year if he has not eslablishial a fiscal year The liitui ■fi-.-ul year’’ means an accoiinling period of twelve months ending on the last day of any mcenth other than December. No fiiwal year will, however, be n . ismued uni, , bsl..re Its ilowj It was definitely eeUblishcd as an -acec, untiiig js-rl.a! by (he (kxpayer an I the books of sueh taxpayer were kept in accordance therewith. The taxable year 1919 is the c^ndar year 1919 or any fiscal year ending during the calendar year 1919. See sec- tion 200 of the statute. A taxpayer having an existing accounting period which is a fiscal year within the meaning of the statute not only needs no permission to make his return on the basis of such a taxable year, but is required to do so, regardless of the former basis of rendenng returns. A person having no such fiscal year must make return on the basis of the calendar year The first return under the present statute of a taxpayer who has here- tofore made return on a basis different from his accounting period wiU necessarily overlap his next previous return. For the method of adjusting the tax in such a case see secUon -Oo of the smtute and articles 1621-1621. Section 226 has no applicaUon to tbU situation. Lxeept in the cases of a return for the taxablh year 1919 and of a first return for income tax a taxpayer shaU make his return on the basis (fiscal or calendar year) upon which he made toa return for the taxable year immediately preceding unless, with the approval of the Commissioner, he has changed the basis of computing his net income If a taxpayer changes his accounting period, and not merely his taxable year to con- orm with hie existing accounting period, he shall as soon as pomible give to the coUcctor for traMmission to the Commissioner written notice of sueh change and of his reasons there- for The Commissioner wiU not approve a change of the basis of computing net income unless such nouee is given at a time which is both (a) at least thirty days before the due date of the taxpayer’s return on the basis of his existing taxable year and (5) at least tliirt y days before the due date of his return on the basis of the proposed taxable year If the . change in the basis of computing the net income of the taxpayer is approved by the Com- missioner the taxpayer shall thereafter make his returns upon the basis of the new account- ing penod in accordance with the requirements of section 226 of the statute and his net income shall be computed as therein provided. See Article 431, Regulations 45. V. SEPARATION OF INCOME, ASSIGNABLE TO DIFFERENT YEARS. In showing the distribution of income among beneficiaries in Item 7, page 1. enter separately the share of each beneficiary in income assignable to 1913-1915, 1916’ 1917 1918, and 1919(a11 other income). If Item Kahoweaminus quantity use this table to in- dicate the loss asai^able to each beneficiary. In the ca.se of income to be distributed to tho beneficiaries periodically, whether or- not Jl regular intervals, each beneficiary must include in his return his distributive share of the net iiicoine, even though not yet paid him. If the taxable year on the basis of which he makes hm return fails to coincide with the annual accounting period of the estate or trust, then he ^ould include in his return his distributive share for such accounting period ending within his taxable year, which income will be taxable at the rates for the year in which the income was received, except the income from partnerehips and personal service corporations which is included in Item 6 (5), column 7, and income from stock diMdciKls rojwrted m Item 1. which income should be allocated accordingly. VI. TIME AND PLACE FOR FILING. If the return is for the calendar year 1919 file it with the collector of internal revenue for the district in which the Cducivy resides or has his principal place of business so as to reach the collector’s office on or before March 15, 1920. If for a period other than a calen- dar year the return should be filed on or before the 15th day of the third month following the close of such period. If the fiduciary has no legal residence or principal place of busi- ness in the United St-ates the return should be forwarded to the Collector of Internal Rev- enue, Baltimore, Md (See Articles -ttl to 445, Regulations 45.) VII. AFFIDAVIT- 1 The affidavit must be executed by the individual or organization receiving, or having custody or control and management of, the income of the estate or trust If two or more individuals art jointly as a fiduciary, the affidavit may be executed by any one of them. ' *' 2. The oath will be administered without charge by any collector, deputy collector or internal-revenue agent. If an internal-revenue officer is not available, the return ehould be sworn to before a notary public, justice of the peace, or other person authorized to adininii^ter oaths. 3. Itisnolneccssarv'toshowthcstatemcntofnetincometotheofficerwlioadminiBtertf the oath. VIII. PENALTY FOR FAILING TO MAKE RETURN ON TIME. A penalty of not more than $1,000 attaches for failure to file the return within (he lime required by law If the failure ie willful or an attempt is made to defeat or eva.le tho tax, the penalty is $10,000 or imprisonment for not more than one year, or both to"e(her With cost of prosecution. ’ IX. WITHHOLDING AND INFORMATION AT THE SOURCE. If the fiduciary h.as the control, receipt, custody, disposal, or payment of fixed or determinable annual or periodical gains, profits, and income (other than income received as dividends from a corporation whose income ie subject to income tax) of any uourraident alien individual, he ie required to deduct and withhold income tax at the' rate of 8 per cent from such income paid on and after February 25, 1919, and make return thereof on Forui 1042, accompanied by Form 1098. Income tax in such cases was required to he widiheld at the ram of 2 per cent during the year 1918 and up to February 24, 1919. Tho fiducion' in excnitiiig Form 1010 for a nonresident alien should take credit thereon for any tax so withheld Every fiduciary who, during 1919, paid to any person salary, wages, commis- sions, rcuuls, etc., of $1,000 or more is required to make a true and accurate return to tlin Coinmsisioner of Internal Revenue showing the nature aud source of such piiymeiits and the iiaiiic and address of the person receiving them. Forma 1096 and 1099, for rejxirtiiig such iidoriiiutioii, will ho furnished by any collector of iiitenial revenue. In addition to exei iitiiig Forms 1099 under the conditions set lorlh above (ho fiduciary should execute Form 1099 showing the dislribulive share of each beneficiary re, sorted in Item 7, |. ■.:e 1, -wi4 Page 5 of Form_1041. Income Tax Supplementary Page 73. fa|t 2 (f Lolratfieitt INSTRUCTIONS FOR FILLING IN FIDUCIARY RETURN OF INCOME A. INCOME FR ^a^'sie'of of products of manufectunng. construction, mining, and Bgricidture. (For farm income see Instruction I U on the reverse side of this sheet. ) (6) Busincae service, such as transportation, storage, laundering, hotel and restau- rant service. livcry.and garage eervice, etc. . . > In general, report in Schedule A any income m the eanung of whi^ »xpen^ for labor, rent. etc., were incurred. Do not report here ps^erehip profits tr profito of personal service corporatioiis, which should be'ehtered under B, or dividends from other corporations, which should be entered under J. ^ ^ a. • If the estate or trust derives income from farming, enter on line 22 the net income from fanning, as shown by the “Schcduleof Farm Income and Expenses’ (Form 10401‘). If the books for the estate or trust are kept on the accrual basis, report such income instead of cash received, and report expenses incurred instead of expenses paid. Income received from sale ot lands, buildings, equipment, stocks, bonds, and other propr^notdealtin as a business and from liquidating divadends should be reported If a comnlete profit ‘and loss statement is made, showing all the information called for under “Cost of goods sold and “Other business deductions,” attach it to the return and enter the amount of net income on line 22, Schedule A. ^ j . j Kind of business.—State kind of goods dealt in or kind of services rendered, and whether manufacturer, jobber, wholesaler, retailer, importer, broker, etc. ^ Total sales and Income from business.— Report the tujtal amount denved from business less any discounts or allowances from the sale price or eervico char^. Inventories.— Write “C” or “Cor M“ on lines 8 and 10, immediately before the amount column; to indicate that inventories aro valued at either cost, or cost or market, whichever is lower, write “C or M.** . . , . . • Inventories at the end of the taxable penod must be valued on the same basis as those at the end of the preceding taxable period, unless permission to make a change has been first obtained from the Commissioner. If claims for loflees on inventonea or rebates on sales made under Section 214 (a) 12 of the act have been allowe^ the own- ing inventory must be correspondingly adjusted. (See articles 266 and 1581-1585.) ^ Other business deductions.— Do not include cost of business equipment or furm- ture, expenditures for replacements or for permanent improvements to property, or living and family expenses of any beneficiary. Salaries.— Enter as Item 12, salaries and wages not reported as lAbor under “ Cost of goods sold.’* . . , . • . ^ - Rent— Enter as Item IS, rent on busmess property m which the estate or trust has no equity. Do not include rent for dwelling occupied by any beneficiary for inlerest^^^SSer as Item 14, interest on business indebtedness to others. Do not include interest on capit^ investment of the estate or trust. ^ . Taxes.— Enter as Item 15, only toxea on business property or for carrying on busi- ness. Do not include taxes aioessed against local benefits of a kind tending to increase OM BUSINESS. the value of the property aaseesed, as for paving, sewers, etc., nor Federal income taxes. Stale inheritance taxes and Federal estate taxes are not deductible. Repairs, wear and tear, obsolescence, and property losses. — Enter as Item 16 (a) ordinar^rpairs required to keep property in usable coudition; (61 re,isonable allowance for exhaustion, wear and tear of property used in the trade or busincae, including a reasonable allowance for obsolescence; (e) losses of business prowrly by fire, storm, or other casualty, or theft, not compensated for by insurance or otherwise and not made good by repairs claimed as deductions. Explain these deductions in table at foot of page 2 of retum. The amount claimed for wear and tear (depreciation) incUiding obsotoManco should not exceed tho original cost of the property (or its value March 1, 1913, if acquired before thatdate) divided by its total estimated life in years. If obsolescence isclaimcd state in table at foot ot page 2 why useful life is loss than actual life. When the amount of depreciation and obsolescence allowed equals the cost of the property (or its value March 1, 1913) no further claim should be made. Depreciation of patents, copyrights, etc., and depletion of mines, etc. — If you wieh to claim a deduction on account of depreciation in the value of patents, copyrights, fran- chises, and other legal privileges, or oh account of depiction of mines or oil and gas wells, see Regulations 45. Amortization of war facilities.— If amortization of war facilities U claimed, the taxpayer is required to submit with this return the infqrmation and schedules called tor in Articles 181 to 188 of Regulations 45. Bad debts.— Enter as Item 18 only debts which you have ascertained to be worth- less and have charged off during the year. A bad debt oflselliiig income accrued since March 1, 1913, will not be allowed as a deduction unless the amount was reflected in the income reported for the year in which the debt was created. In the case of debis existing prior to March 1, 1913, only their value on that date may be deducted upon subsequently ascertaining them to be worth- State under “ Explanation of deductions,” at the foot of the p^, how the debts were ascertained to be worthless. Insolvency of the debtor, iuability to collect by IcgM proceedings, or inability of debtor to pay as ascertained by a mercantile agency, woulil be a euniciciit indication of worthlessness, A debt, previously charged off as bad, must be returned as income for tho year io which collected. , . , . Bad debts arising out of loans not connected with business should be reported in Schedule H. Other expenses. — Expenses of administration of an estate, eueh as court costs, attorney’s foes, executor’s commissions, etc., are chargeable against the corpus of the estate and are not deductible. Expenses of management of a trust estate are deductible. Wet loss.— If the net cost of goods sold plus other business deductions is in excess oFthe total amount of sales and income from business, report the difference as a loss by using red ink or a minus sign. B. INCOME FROM PARTNERSHIPS, PERSONAL SER Report the ehare of the estate or trust (whether received or not) in the profits of a partnerahip or personal service corporation 45r in the income of another estate or trust. Do not include the part of suen share that consisted of dividends on stock of domestic or resident corporations (to be included in Item J (a)), interest on obhga- tions of the United States (to be included in Item J (b)), or interest on corporation bonds containing a tax-free covenant, received through fiduciaries upon which a tax of 2 per cent was paid (or will be paid) by the debtor corporation (to be included in Item E). VICE CORPORATIONS, AND OTHER FIDUCIARIES. Apportionment of partnership income between years. — If tho income waa received from a partnerahip or personal service coporation whose fiscal year differed from the • calendar year, assign to 1918 as many twelfths of your share of such income (except dividends and Liberty Bonds interest received through the partuorship or personal service corporation) as the number of months of tho fiscal year that fell in the calendar yeai 1918. Assign to 1919 the remainder of the share of such income, except stock dividends and Liberty Bond interest, which should be apportioned as provided instructions under J (a) and J (b) below. C. PROFIT FROM SALE OF LAND, BUILDING If the profits or losses on sales made through any one broker aggregated $1,000 or more, report the transactions on a separate line with the name and addreas of the broker. Kind of property. — Describe the property as definitely as you can in a word or two, as “farm,” “house,” “lot,” “stocks,” “bonds.” Sale price or liquidating dividends.— State the actual consideration or pnee, or, in case ofan exchange, tb^air market value of the property received. Cost— The basis for computing profit derived by an estate or trust from the sale ,S, STOCKS, BONDS AND OTHER PROPERTY. or other difiporitioQ of property is the fair market value as of March 1, 1913, If acquired by the fiduciary prior to tiiat date, or the inventory value at t!ic time of the death of the decedent if acquired by the fiduciary subsequent to March 1, 1913 (or the cost of the property if purchased by the fiduciary since th^t date). Leases. — If the total of columns 5 and 6 is iu excess of the total of columns 3 and 7, report the diSerence aa a loss by U3i|^ red ink or a minus sign. D. INCOME FROM REl Kind of property.— Describe briefly, as in C. ^ . Rent. — if property or crops was received in Ueu of cash rent, report the income as though the rent ha(l been paid in cash. Crops received as rent on a crop-share basis should DO reported as income for year in wliich disposed of (unless your return shows income accrued). MTS AND ROYALTIES. Repairs, wear and tear, obsolescence, depletion, and property losses.— See instruc- tions for Schedule A, above. Explain in table at foot of page 2 of the return. Other expenses.— Report taxes on rented or leased projierty and interest on indebti edness incurred or continued to purchase or carry it. Do not include taxes assessed against local benefits of a kind tending to increase the value of tho property assessed. E INTEREST ON CORPORATION BONDS CONTAINING TAX-FREE COVENANT, ON WHICH TAX OF 2% WAS PAID BY DEBTOR CORPORATION. Thia item should include all intercet received directly or through other fiduciaries I bonds. If exemption was claimed (by ^ing a yellow certificate, Form 1001), the tn- on bonds of corporations oiganiaed or doing business in the United States, containing a terest received must bo reported in b . The ainouiitcf tax paid by the debtor corpora- clause by which the debtor corporation agrees to pay the interest without any deduction tiou should bo reported as additiouo.1 income in Schedule F, hue 4. for taxes, provided exemption from withholding was not claimed by the owner of the | F. OTHER INCOME (NOT INCLUDING DIVIDENDS, OR INTEREST ON OBLIGATIONS OF THE UNITED STATES). Report in this schedule interest on bank deposits, notes, mortgages, etc., and all other taxable income for which no place is provided elsewhere on this return. H. GENERAL 1 Interest. — Report here intereet paid on other indebtedness as distinguished from business indebtedness (which should be reported under A or D above). Do not include interest on indebtedness incurred for the purchase of bonds and other odU- gations, the interest on which is exempt from tax, except interest on indebtedness incurred to purebaae or carry obligations of the United States, issued after September 24, 1917. ^ Texes. — Report here taxes paid on property not used in huainess, not including those assessed against local benefits of a kinroduce_ $ Machine v. Hire of te Breeding : 7ork n.ms fees j 1 1 1 Mulee Colts 1 i 1 1 xxugo — — Pi mi 1 1 1 Cotton Seed !; i Turkeys Sirup 1 i ! 11 1 ij 1 1 Lr:iir 1 Totat. . __ $ .1 Tot AL $ ' AIli& Suttor ........ ^ (Enter onli ne 2.) (Enter on line 3.) 4. Sale of Live Stock, Chops, or Other Items Purchased. Description. . Received. Cost. Profit. £,gg8 $ - j " a Z££aSi L UTAX.. (Enter ont inel.) (Enter on lino 4.) SUMMARY OF INCOME AND EXPENSES COMPUTED ON A CASH RECEIPT AND^DISBURSSareN^^BASIS^ 1. Sale of live stock and stock products raised 2. Sale of crops and crop products grown $ 1 7. Expenses (column 1, page 3) 8. Expenses (column 2, page 3) $ 1 1 4. Sale of stock, or other items purchased K PnoWTTA $ 1. J 11. Total Expenses ^ ■1’ ::: — — 1 6. Net faum profit to be reported in ScheduleA , line 21. F orm 1040A. or line 22, Fo r m KMO (Item 5 m inim I tein .U_K - ^ J.^1: [Page 1 of Form 1040F.] Income l ax Supplementary I’age 75, Page 2. farm INt’ENTORY FOR INCOME COMPUTED ON AN ACCRUAL BASIS. _ , , 'T Description. (Kind of animals, crops, or other products.) On n.txn AT Beginning of Year. PuucnA?r.n Dviux-i Vkak. R. VISED During Year. CONSUilED OR LOST During Year. SOLD During Year. •A r On Hand at End OF Year. Quan- tiiy. Inventory value. Quan- tity. Amount paid. Quan- tity. Inventory value. Quan- tity Inventory value. Quan- tity. Amount received. Quan- tity. Inventory value. 1 1 1 * ! j 1 I I 1 i 1 1 1 i 1 1 ! 1 I. 1 ! ! j i ! 1 1 ! ! 1 ■■■. - 1 1 Totals $ $ $ $ I$- . $ (Enteronlm6 4.) (Enter on lino 5.) SUMMARY OF INCOME AND EXPENSES COMPUTED ON AN ACCRUAL BASIS. 1. Inventxsry of live stock, crops, and products at end of year j $ . 2. Sales of live stock, crops, and products during year... .... 2a. Other miscellaneous receipts ^ 3. Total 4. Inventory of live stock, crops, and products at beginning of year .'. 6, Cost of live stock and products purchased during year 6, Gross profits (Item 3 minus the sum of Items 4 and 5) . 7. Expenses (column 1, page 3). 8. Expenses (column 2, page 3). 9. Repairs 10. Depreciation Total Expenses 12. Net farm profit to be reported in Schedule A, liiie‘21, Form 1040.^■, or line.2.2j: Form 1040 (Item 6 ihinuB Item 11 ).-. — t-.-I $ . 2 — 0615 [Page 2 of Form 1040F.] Income Tax Supplementary Page 76, FARM EXPENSES FOR TAXABLE PERIOD. Items. (1) Amount. Items. ^ (2) Amount. 1 1 $ 1 ■ j ' i' i VTillino on/4 crrin/lincf fc»/a/4 . 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P d^'g p 1-2 g'g o M 2 a o 'g p d 4J 4rt ^ O fH d ^ r2 © d 3 d ^ 2 s ^ 8 a 2 ■*" I 8 p © g d 3-4^'^ O bfl g ^ g-gM a oT^ ^'.S g I 2 1^ ^ © © o © --13 >14 © -d Si 4-0 © -1 •^1 © P P § © bO P P •5 P .2 “ I .I ^ •^' 3 s = d “iJia d o © bO „ 0 p 2 O d P b © d © o d ■*= P p ^ o P O Jjf © 8 a •5 © >0 p © w *0 .g .2 a © d d 3 © 'g 'S O X H d p >' Z © "o 2 g ^ p •55 p s ^ ^ .g g to P cl d ^ g i|l^ I s d © ■© a 7i d p s g © 2 p .3 2 43 p d a 2 d © “ 3 •3 d - w -4J kO P 2 '-' P •*^ .3 ‘'I'" d © _, ttj CO 2^^ d b © d oj d 2 ^ O Q © .1 P 2 ^ o o 2 © '^ S4^ d III:- X . . M P h P >44 © •g| il © o ^ vu .3 3 23 b . O CO -kJ © 2 X P eS P»- .*4» [Lower half of Form 1125.] Income Tax Supplamentary Page tl» Form 1126.— XmiTED STATES INTERNAL REVENUE SERVICE CERTIFICATE OF INVENTORY (To b* filed with CoUoctor of InUrnal Rarono* with Income Tee Return) FOR CALENDAR YEAR 19. Or for period begun - - /9 , and ended — .....r Name - - - - Address - - - - * PRINCIPAL CERTIFICATE Number of sheets submitted herewith. I swear (or affirm) that the closing inventory of the taxpayer named above, amounting to , was taken under my direction, and that to the best of my knowledge and belief is true and complete in evwj' respect; that the method of pricing the raw material, work in process, and finished goods was at *. - that I have carefidly read all of the instructions on the reverse side of this form; that this inventory was taken in accordance therewith; and that the following-named persons whose separate certificates are subscribed hereon or attached hereto, are the officers and employees under whose personal direction the various parts of this inventory were taken ; jVoTne. Title or positwn. Part of inventory taken. Amount. Sworn to and subscribed before me this day of . 19.. (Signature,) (Signature of offloer administerisg oath.) •State “cost" or “cost or market, whichever is lewer." If any other reconciled with stock. (Title.) (Title.) was used, describe fully, state why used and date on whldl inventory was bst SUBSIDIARY CERTIFICATE I (or we), the undersigned employees of the taxpayer named aboversweax (or affirm) that 1 (or we) personally directed and observed the taking of the parts of the inventory set opposite my (or our) names, and, to the best of . my (or our) knowledge and beli^, ia true and complete in every respect; that I (or we) have carefully read the instructions on the reverse side of this form and that the parts of the inventory for which I am (or we are) respioDsible was taken in accordance therewith. Signatwre. Title or position Part of inventory taken. Sworn to and subscribed before me this day of . (Signature of officer administering oath.) 19 (Title) [Page 1 of Form 1126.] Income Tax Supplementary Page 82 . INSTRUCTIONS. This certificate of inventory inust be eubmitted by all tax- payers engaged in a trade or business in which the production, purchase, or ede of merchandise of any kind is an income- producing faetSr. The principal certificate will be signed by the taxp^er or an executive officer, and the subsidiary certificate by officers and employees (such as department heads, superintendents, etf.) designated by the taxpayer or executive officer. If the taxpayer who fills in the principal certificate actually directs and observes the taking of the inventory, the subsidiary certificate need not be filled in. In case there is not sufficient space on this form to enter the names of those directed to take the inventory, or it is not con- venient for them to take the oath jointly, additional copies of this forth should be used, but the oath or the principal officer need only be made on the first sheet, stating thereon the number of sheets submitted. If the return has already been filed, the certificate should be sent to the collector of the district in which the return was filed. The attention of taxpayers is called to the following methods which, among others, are sometimes used in taking or valuing inventories, but which are not in accord with the regulations, viz: (a) Deducting from the inventory a reserve for price changes. (b) Taking work in process, or other parts of the inventory, at a nominal price or at less than its proper .value. (c) Oniitting portions of the stock on hand. (a) Using a constant price or nominal value for a so-called nor- md quantity of materials or goods in stock. («) Including stock in transit, either shipped to or from tax- payer, the title of which is not vested in taxpayer. (/) Using a constant, an average, or a nominal price. Section 203 op the Revenue Act op -1918. T^at ^eneyer in the opinion of the Commissioner the use of inventories is necebsary in order clearly to determine the income of any taxpayer, inventories shall be taken by such taxpayer upon such basis as the Commissioner, with the approval of the Secretary, may prescribe as conforming as nearly as may be to the best accounting practice in the trade or business and as most clearly reflecting the income. Extracts From Regulations 45. Art. 1581, Need of inventories. — In order to reflect the net income correctly, inventories at the beginning and ending of each year are necessary in every case in which the production, purcliase or sale of merchandise is an income-producing factor. The inventory should include raw materials and supplies on hand that have been acquired for sale, consumption or use in productive processes, together with all finished or partly finished goods. Title to the merchandise included in the inventory would be vested in the taxpayer and goods merely ordered for future delivery and for which no transfer of title has been effected should be excluded. The inventory should include merchan- dise sold but not shipped to the customer at the date of the inventory, together with any merchandise out upon consignment, but if such goods have been included in the sales of the taxable year they should not be taken in the inventory. It should also include merchandise purchased, although not actually received, to which title has passed to the purchaser. In this regard care should be exercised to take into the accounts aU invoices or other charges in respect of merchandise properly included in the inventory, but which is in transit or for other reasons has not been reduced to physical possession. Art. 1582. Valuation of inventories. — Inventories should be valued at (a) cost or (6) cost or market whichever is lower. Whichever basis is adopted must be applied to each item and not merely to the total of the inventory; that is, if for instance, basis {b) is adopted, the value of each item in the inventory will be measured by market if that is lower than coat, dr by'cost if that is lower than market. A taxpayer may, regardless of bk past practice, adopt the basis of cost or market whichever is lower, for his 1918 inventory, provided a dicclosure of the fact and that it represents a change is made in the return. There- after changes can be made only after permission is secured from the Commissioner. But see article 1585 for inventories by dedera in securities. Inventories should be recorded 'in a legible manner and properly computed and summarized, and should be preserved as a part of the accounting records of the taxpayer. Goods taken in the inventory which have been so intermingled that they can not be identified wi^ specific in- voices will be deemed to be the goods most recently purchased Art. 1583. Inventories at cost. — Cost means: (1) In the case of merchandise purchased, the invoice price less trade or other discounts except strictly cash discounts ap- proximating a fair interest rate, which may be deducted or not at the option of the taxpayer provided a consistent course is followed. To this net invoice price should be added transpior- tation or other necessary charges incurred in acquiring possession of the goods. (2) fn the case of merchandise produced by the taxpayer, (a) the cost of mw materials and supplies entering into or consumeu in connection with the product, (6) expenditures for direct labor, (c) indirect exjienses incident to and necessary for the production of the particular article, including in such indirect expenses a reasonable proportion of management expenses, but ;not including any. cost of selling or return on capital whether by way of interest or profit. In any industry in which the usual rules for computation of cost of production are inapplicable, costa may be approximated upon such basis as may be reason- able and in conformity with established trade practice in the particular industry. ^ Art. 1584. Inventories at market. — Market means the current bid price prevailing at the date of the inventory for the par- ticular merchandise, and is applicable to goods purchased and on hand and to basic materials in goods in process of manufaev ture and in finished goods on hand, exclusive, however, of goods on hand or in process of manufacture for delivery upon firm sales contracts at fixed prices entered into before the date of the inven- tory. Where no open market quotations are available the tax- payer must use such evidence of a fair market price at the date or dates nearest the inventory as may be available to him, such as sp’ecific transactions in reasonable volume entered into in good faith, or compensation paid for cancellation of contracts for purchase commitments. The burden of proof will rest upon Ibe taxpayer in each case to satisfy the Commissioner of the correct- ness of the prices adopted. Art. 1585. Inventories by dealers in securities . — A dealer in securities, who in his books of account regularly inventories unsold securities on hand either (a) at cost or (6) at cost or market value whichever is lower, may make his return upon the basis upon which his accounts are kept; provided that a description of the method employed shall be included in or attached to the return, that all the securities must be inventories. by the same method, and that such method must be adhered to in subsequent years, unless another be authorized by the Commissioner. For the puiq)ose of this rule a dealer in securities is a merchant of securities, whether an individual, partnership or corporation, with an established place of business, regularly engaged in the purchase of securities and their resale to customers, that is, one who as a merchant buys securities and sells them to customers with a view to the gains and profits that may be derived there- from. If such business is simply a branch of the activities car- ried on by such person, the securities inventoried as here pro- vided may include only those held for purooses of resale and not for investment. Taxpayers who buy and sell or hold securi- ties for investment or speculation, and not in the course of an established business, and officers of corporations and members of partnerships, who in their individual capacities buy and sell securities, are not dealers in securities within the meaning of this rule. s^-«mb [Page 2 of Form 1126.] Income Tax Supplementary Page 83. 1 .ej^oiToa.^ ravii \\ 10 ,}3U3 M-KOl «i UA) ii .t W-uia -M ba (o wK-fd lAr )qob« .o-jjJseri -wi *' . * f. t i o r L5f *. -it trt /'.•.'I il Mwhjo'iOl . tt "'•1 c... lo Ji»i Ji *5 D9v^''to^cI s-d ftli-Hyi*'} /bid# ii: bJaV^A -ai 9r,.iv.'4E rfj:-w dJ loa --.dl I'r->Bd JTl/lf Siif •id y/ !>f.rtS9D w il/V H-.' .:■>'/ ;vfcdu: Jkdi- ..r./'vVrisl'.oJ/rifl'/il a-’Uu (»-jiO/nJ 5* b j'l 'i ' •, -.r^ s^jyoaeif) dsjri lU'^rtsx }it-i-,x‘* ■r.liiii:* < .’ u Ty't-.'a • • »bjrl w) jciS -.0 wf Xi5« /-yi'fw' .>/« ; e •yn:',..i'.i >ta»! .mvj e isyjrf.r :■' /siij/ro e . -•totsuicij fcsbi/.. ^>d tu-' •‘'•dJ tH_ • •**'v': m linruioui vp / b) .iwoifx&i edJ V'i tnofar'M ■y^iih iukfi’-y ■■ J'^-*'-’ '?d*-'n U - Lvjint;'ii:» zo otat itj i;". Jqcfirs i cg si-.iV>T/;fa 7.' j; r .'.'. -vni etfj ^at) uf^C tCi v-5C»u> -baa r-t ianbi.'ai k‘) cV /ct r Ji V> bn*; t- ' to t,> -.r.^ at i - ./•■-t ;.vx'-ai. .■ jcaTik-ii d'jiiaciMihiibai .bbcxei vd) b a. .*-'-Lwq ,a,uv. att «♦:/ ’o 9>;iq bir.'iuc'i ^ ryd- 'kja.-nixo d'tJ-ji'a'^SGa»yt io nxyi‘vi.^iq •; at ?; £^<-. -^qr •lOiUt/riT- iUJtf'4'7 ao aiuj-.’. 10 v.-jUJ'ta lo ,.«!:7 v;iiljyi’.>U4 . -fi. »iiJ ■:■ . «' ,;> ■ .j Mi'-evn ?d viifa B« e ;ii'{ .ha’s f/alacai.TO /qr, - .f bdt ri -r-ttTyi'i vb-.» ;A/ilinldj4'i«* d:i7r b--'’.' e'd/.- ', ', . .•/Xfft:, bn.' -r'.:;; ..i:';q .jtisrm ed» B.yw.i jai^M-vk-diact U whoraavil .1-8-.': .; lA -.xt-7 edJ lol ^cdij’wq a b'‘- bvia' bifc^iDiuq sb og jMnjijqni! 5( f'ua .^bibni-roraui i<.:.r-jit ^'toiiana io 1> lol avjjq«JajXjR£n k> %i> buah /to asva.td ol'U botsf'^'^'* ’ ■ xs^ g^s oida’lif'ji mn 6<:ojr*^.yM -Ash (Kti Ja aoh.r ]g->.‘irn Ty': a ix2-jH .tniii f'J -l-JA!bv« O'! y ioi OC or: dVd* '- .’rt(.'t v;; d'jin^aL! iHL'trxI-rV^Sr.l asviik^h ■ xg^ »dr afdG’IV'jS sms 6<:ojr*-<.foyp iS'.H/ lo & oa : 't ^■jn itned f'l L’lOAiiGvii O'* >•■:'•/ tt* yioJnsvt' ( yd* jaeKry/i e^'ao x.> ni oi '»i rwnoMy -»'nt>!.-.v ai' Bc.qtirs-acrfiii ■’•T':'^[^ ■u>l «ih>t,--tu;.o io /T.'ilali-on.;:- ->1 ^a .' lo ,dJi4« bo-n; ddt rUM.: rM ilifi ^o>rq io «f/. ■»«»».: -ioOTWO Sdl io ■!9aojf»i45CnyD odJ vlurf.'.^ >:..| 'o’ ni i-alaob A— .3»iiityo9« ai awlisb yd 5?-.r»i*w5dilyi^t ^#4 ^ ■tjholu'jvo'i jano-voa iu eJ'-‘A aid ..i ud^i /.'‘i. nv’ ikT> W < V-.) iutijd KO >'d3 ,iu-’!d o«*'' BV-; • ■ ■ . • - . .y,,; ii- ,.;j^. ‘zat rf.i yd j. •-Kja yioiatrrai io AaoitaTsto liJtT .aoiJy^bflBn o/ft, dofdw cv. fi'>uJ%D<] lo aiunJ « it b!>B*ya« '*019001 c.l'il hold tiiP !o OftfbaadviOiJf io biae *» ,e3«;f>toq .103 wi gabol»«{ yn TO Tiy»qsaj erf* vd biogi" gw lirw • f,*qic>ah':^«rfT biia M»ifto yd ©laon.'koj 'o«ibjJ(be >di toi ,tso»fki orrttojxa {.•it i ^.T liboeicn'v?* *. aLn 'd 4c‘>iw,;t?q9b M dou*) ■wyolgofo toveqjteJ ” ■ il .w. dai y * '.»«»»* to*Tir>vaqx4J odi rd botaagmo y„ ,, y’iaar^flaiay^; '.i ' iaqbafrq oni ni stliiociw Joa b? -. 'mibiedua odi . .vUinvai lo gniiai odi 0 . 1 } iSi'no o? t3 -‘>l '-idt CO ooeQ^ juoi-.t?it.‘i ion at ei'^d* v-ao cl '.i«o i<'[jod?i-or.6i airit lotUoit i '>41 ac. - ‘rft ,Jac»;Ia inti odi o» oi Am od yloo Itsofi .lA^badvatiogdnw ■ff (j/oda -j^a, .3* ,b»fe m'O'rf ybiy b -te’ii fl^Kiot ir .b)ia ea-T ‘'ifi db'afir -n hht-db td: i.bt,;{iw «;nrwo?iof ‘nrfi oi byllra et erj/nowit b noanai.;* f>dT T/‘T/i'k*v TO anblai ar NjbU iwrartennM tne jOiarfii,* snonw .dudfr .V'*/,irn(,.iJd>:gf»T'nft rfiaiqo odi ni iT/oaoitw ^ailT odi onitcnsi^b oi ■(Itsofo lobi'y ai \T43doD0n •( wnOvUSvai^b dDoa vd aoini orf UgA Koaoiaovni .ic-'-ycvizal yet lo oraorej ti!VfAqq«orfJ (Uiw ,i9noib*nf>fno0*>ril«0Pf?iJ8a fl >t/8noiit/T|x^i*> yani atp yhnoa aa iininnolao-y a. odHoeo'q lo bn/G««'tanuid to obmi odJt al o-iiioniq ?Aiutvyoo-M( -iaod «di oi od .ocuo jul odj aniJooIiOT yhs’jlq ieom M a:'OiTAJ:^p?JJ vf^-a i'i.g; oi nl-lbiijoicnfoi >a>eetl .!WX .-rcA ••of' Eiiad-3di n..’<;.'' i-fi lo exj^'.Tatjy ?uv-; -Jf|jJyUrn;yn*- tl .. ., _ lo nr.'!,;f-.4Wb-S4^' OW E.-U-- *?« r .u .: 'C '«d; Oi i>9yX.'S.nfi lo ixi D>btbnt oo ’k^iw •yayotioio i - nnw. > oorn odi •>^'|••/ oad)« 'ioi bndfMod knui Wiiooi douK tgiij brt£,b'- . v/i i 9 R. 4 ^Ji'aini 30 ©drf yd fe>shb b ••'<« ‘.;di b 'wpiq adi .•j^>i3fioqioq w 0!i<>^^-zdtbf!-d.ouo,df ytoo ii^'I'jcn yb'n.> -l^xjo-)«*bl9rt TO-^ofe 1/44 yua bn.n jowMii/fi. /•'m iw. b/si ‘.O ^ia io tu'dflJbAi i.W io Mto/ito f'cn' ,.vj:-.Jao<^ boi'iOd..M tLod boA yy/d^.afeiiqa-o i r:l-:u.xhdJ ai oilv .sqiw'ia/ikijq to lo aoinf-a'u wi ttalii# «»»i ;«(>!»- at tnoiw^ ioa y#ia , •• 'aw^rt . '■• . Siiiw.'-? bob f.ox'.no*. -■ .'•fl ii tr!!n.o». -.-yar tm-:'.'!/ ■ taoe?a 4 x 7 » 0 ' 4 rfi"doidv a; •‘t-'o vt)Y 9 ni v lea^ooc ais •uioy n s(iivt/L<'i'i-3/prf''ii no si oaibn/'OTi -ni lo ofj* lo ei-jayi^ ai -X J ii> coJacw-aioq^iilG.'. n J b'.-i * c.-.^ij '''Acd oyed »«riX b-rA Lkdvr.xayffiriX^h^irfBioA. Ut- d3M it. rs^rfi .t'fea-Jponq'ovhowUyiq VoIrr-i-mV Wy i>t-::'twr t^Undf jvMi lOdif itHiiwwiy» ylerv/a c.bons ba f rii .ia iein'''i>uj . odi ct ! iKjqt'." led Jntf bl**y ad J-.'-i blaoda-yodl ,l*o'no:Oi c^.-.vjt .tyr fvisjiOl tiHX ni '•tyirir.iKr orf* ot . y&altj wp obit ^ 'iriioio^’wiu sUntrrOoox’.hiftOXrJ oiujcilwwy'jod Mnorta ■yAi. ni fe-ybuloar vlr- qri lb 0 loi • ^is - "** rfoiQW !;f(! ,TtoJn6Viij if fcJaod ft'nt.-.*ao-/';l— lo xn/Uai/Ir.'/ 28?;t .^?A' TiWol ni (.r.-ad>> ie vV-'i^ b.Ga ccoit iwj oi linfqqs od iftCHt i xqobe p/ ('■•i*d T9vod-.>>'«'t' •>!ii rVi.", i \A ii .'i iGrft ;yTjJanvnf r A* i-y .ftitkf.Gtlj nj rct Uiir -^wdoavoi tq; oi jnaii dbiM lo ou'.h’t adJ jbotqoba at ip) atMo [.OKI I xaT 5 ancon t X8 sjj**? “p%rfward, Columbia. Service Station: Charleston. SOUTH DAKOTA (Comprising the State of South Dakota), Collector: James W. Mce, Aberdeen. TENNESSEE (Comprising the State of Tennessee), Collector: Edward B. Craig, Nashville. Service Stations: Memphis, Chattanooga, Knoxville, *Stamp Office Only. Income Tax Supplementary Page 105 INTERNAL REVENUE DISTRICTS AND COLLECTORS. TEXAS First District.- — Comprising that part of the State of Texas included in the following cJi; “ .81 .ti .¥ O^OE A -JoO ,j»0 StOE ETOE f^OE aoisiaaQ ,&siiriiSA^D"~. 8 TWT^^^ ^6 SiSCT onifrmk -.‘osei— ii . .QIQI isdjmsoaCI &oai8 batragl ,.pi9 tanoiaio^Q ,2snil«:a lBb6q8 ,2aailBiu|6^ dftjai^si'rsS; 5 '. ’ , ,': ^ 7fiV/-~.«mn'5 VioifipM- ,dd .gail) moil baedsvdj’id oaiooaic^o aiu^oA Z<>9t . . . ... .". ; ;r. ■ v;\rxji9qoiq.x^IfftframoD -- _ ^/ , ' '.' (.sraiaubrioiBW x‘*3Jb'jeiQ) ' • ■ Oct. i/ (.ooDsdoT) ti i.iriWili , •v- ■,(.0*>:>i;cioT) tahujla 8B W3i/iJ bnjB soijtUti \o xjsl oi xJiiidsjM itQZ ... . f ... . i . .- . .... ..vEl^l }o loA 3xb i^bau (.soTviaS xxi'r icW“-,8i3;iJotd jtiD‘x*T) .§0^ ,2£S: bxTB #ES ,£€£^,1^ ,0£S ,'^SS ,8S.S .atxA — - 0 Dc«io»at 31 j 5 fi gi x^ 3 bc»; 3 afl&-»utoi:aiid Ub>um^Av .gjoA EICI bna . ©riJ * labaur xffsqnjoa j 0. il0^£ .... :‘. .. ,..;'.. . (floiaidbb iiooa Ip.axiaij^ijO) •■ ' b-, ‘ r jcM.flbtjididoiq l»i3i^5i)3 IfiT IfiV/— .(ioA £I€i).X»l‘ 8Jja03'l 223 Di3) ■ ‘ A, ' ■ . . ' s \ (.3Divi32 ' .r . /',(.1onooIl5'’b3'taJBn3.l) ^w. " ; (iflOfJidfHoKi U^obs'i) *r>^' ' (.aaivisS. x$T^aW-Tr-.«§ini iooW— r*g83;isi 38m3) o 889DX3 JnuODOB flO flOilBlOqpKJDf lCJddb OJ> biiail. ; bnod jrfiBn3V03-333l-xJKT no -x«a.'3oioXJ(lidpill‘.oi> 0110,3 lo gnilft xiosInqiWoa jOJ' juh; Jaadsiirii {vH gnivfid i^dmaoi rijivr qirfaxsn^ifiq- x<^*3)'0QI> tu aldfixfij lo 8330X3 at noiiq^jisrs U.ooHisq , . . . . ... . . y. . . . .^.'. ,.. ... ,i..xC--.'.u. 1 .3Juooiii ibW — .J naxnJnioqqA jIo lowo^— '. xbT oxsiaS) ■i. " -•, ' tsoivisS.'XnT gniifisd-JetisJOJ no Oii'ocoaib ki ;,x}iijd6xsT I . . . 5’> . . '. . . , . \U j . ... :afarrod iBqbmnia : vd yisvooaib lo 38 Bo nl oorJiilqob lol’aonfiwoilAi — .ElOI ,1 doifiM ol inavpaaduB lax's it a . j 103883 1 bn s loaaal ■ftaa'S’xJod JnaCBdobiarq^-.-jr , voosi loi Jiu« gni^nlid or jnubaoaiq ^noiiibnoii)^ -£8^S ; ' : . , i^;jon3fli88338ii baoo38-^o 'farioq. eaxnO io yw 8£ XBj oj J03[d08 iauiJ cki xi^biisnsd odraxabl’d^. d8^S ,. . ,XBJ. fiioil iqrnoxa noBiaq b stnbd yiUna hb - ' ndjibsi/baufi J ^dl iii£lxi>x eoonuo© irioiV sxivbbxii . ffiijnbaes bnulai io} xxuBlOijinoQOtaxrixqiid c8 illv figuodb 83ZBJ lo visvnasi lolipci OI Jdgii dl ■ -bx bnc bold xisoc zan? itahmai&dk -mi misb f { W . . Oir.1. . 2 . y. . . jyidi . .. 0 , , jfio' ba^B vf osi^v ?.e r ! Iov. " (’.borvisQ ztisT icV/x^.v^iH. ,dd .gsH) \-y4 Nov :.. U-' • (-aliinfq gniioiJt'nafl)': (.soiviq^ xbT isV/ — .gogifido sgsimxnaQ) , r. .. Ol'-'v •> o*: “A. .J?0 esoe ** ..e '■ dTOE r »h p . >) i: - . r.>> fQ^'dr^r^c ^ ^SOE ms Aai. 8S0E QSOE Ni *v 080t »C1 180E . “ ,os ** ' .££ “ E80E “> ,dS *‘ ^80E AS *’ E80E AS:' > dfcOE T80E » nr »» .'♦tfikui oo;.^ IfiloaqS ;Vh V having CC8P ci I'nabU ■ ■.■ ' 'Wsf >* ,0E 8C0E * h ^E , V ’ ffibaqiS ■''( ai - .- *r ' 5. . . “ A. -vq'/i. ^80E .u' ;.iiu ■>'>7.1 • , '■t-s.Ov- .BS .Xbl ooiebaU S x^“L xjoigbaCI ,EI AroVi OQOE " IW ybl-.r soot ,dX ^'Vuic^ EeOE J» 0 .. Ifthydcf?. 1 ;ic. <-oVl AS .voM ^QOE d 9 (rE aeoE , ‘.x’iT bxnbSnl .ti i 55it^‘^TiiJx23^3lqqo8 ia-ai-so'i RUNNING TABLE OF CONTENTS. PART 11—1920. (Page 433 (^2420) et seq.) Regulations, Special Rulings, Decisions, etc., issued since December 22, 1919. All previous matters are fully indexed. The matters listed below are not indexed. T. D. Date Subject Paragraph Decision Sept. 27, 1920 Collection by distraint, from members of suc- cessor partnership, of tax assessed ex parte against long since dissolved corporation 3018 3097 Dec. 6, (industrial alcohol.) 3098 7, (National prohibition.) 3099 (C 10, fi (Tobacco.) 3100 cc 11, a (Stamp Taxes — War Tax Service.) 3101 C( 16, a Art. 292, Reg. 45, Rev., amended. Traveling ex- penses Correction of above 3019 3065 Decision (C 16, a Increase in value of capital assets when realized by sale or other disposition, by one not a trader or dealer therein is not income, and hence is not taxable as such 3021 3102 24, Decision. Liability to tax of U. S. citizens resi- dent in Philippines 3066 3103 u 27, (Stamp Taxes. — War Tax Service.) 3104 << 27, a Art. 1585 (a), Reg. 45, Rev., amended. — Inven- tories of live stock dealers and other farmers.. 3068 3105 27, iC Contributions to Red Cross, etc., by corporations in 1918: statements to be filed and additional tax to be paid at once to avoid 5% penalty, with interest 3069 3106 iC 29, (National prohibition.) 3107 C( 29, a Arts. 201-208, 210, 215-217, 219, 222 and 224, Reg. 45, Rev., amended. — Depletion (1921 Service). 3108 ii 30, a Art. 1582, Reg. 45, Rev., amended. — Valuation of inventories 3072 3109 30, iC Art. 1584, Reg. 45, Rev., amended. — Inventories at market 3073 END OF 1920 SERVICE. Income Tax. Supplementary Page 115. t6 suctAt ornmnja • '(.pi-lb loti^sir) ' '‘fj ,SS St>i^ b&u2su ...otd .snoiabdCI ^:gailuSL JtodqS <8noft£!us?^ , > "b ^zabni 3;-ic milfir.i 8i;oivytq HA. s - • .b^jtabai Joe yiii wobci ^3Jdil 3-ioJlaia »rfT .a .T noiabaO! -303 lo nadraaoi tnoi} ^aj£}Ssib :xd noiluinoa^/ O^Qi sjifiq 7.a bo33a3£& «6i lo ^qiibiannsiq ^o^l^9■^ ^10& . . .nobfiioq-loa bavlosaib yaoia giiol Jankg* I (.Iqi’ooi* (finisybcl) BS.il T;j {.aan;<^nio'Tq Ibhou^H) ^ (.033Bd0T) ^ XftT ifl'//— ^saXiiT qmBld) -ia gflibvaiT .b'ybn.aeiR 'SaH diA^ i?lGt *, - • ...... --isstiaq; tdOC . . . '. .avodc lo noiJaonoJ basHni/ nari'J/ nJ^zis IcjiqBo lo awb/ oi aasaianl labfiii A itoa oRO vd.^noilieoqsib laiiio lo aUa xd ■ si yonad bn* ^oinoani loa ai niaiorll lalBabs^io •' rbea id oid«xBJ ion V efTaijiVb .8 .11 lo xbj or ^illidBU .aoUnoU ddOt .eaniqqjlld’^ cl inob ' (.aoiviad XfiT IB // — ^.«s>kbT qfnclS) -navnr*^«bobxioi3CiB ^vaH <8^ t(®| 8d8I .liA 15t\0f. ladio bafc aioleob ^looirovil to aaho'j ^ slic'd Jinoqioo '(d ».aJ3 ,i^O‘iO baX oJ feuoiliidiiieo^ IfifioijibLs fatJi balfl ad ol alnaqQaJBJS ;'diCl cL . bio/6 Ol aaao iz bicq ad o? q 50€ k imoiai Hii w (.noilkliiioiq ^i^ss buB sss <«is .^is-eis ,ois t8os:.ios .suA iSei) noriolqoCI*--.bobaaraR ,;vo>i f2^ -S^H .(oDtYiaa lo notJfiuIfiV— Jiebfldxaii ,ftk ' i ... i . .tsnotnsvn: aahoinavfli — .babaainB .goH .JiA t^Oe laiiiimis aisa .rqo8 vZ',’ r ■,- iY " ,d . aaCl *- BQOt n cOl Vf^Oc 2% ,11 >1 OOib %% .dl ** loie %» .dl )) noiaiasG '* 'f' . »» *• _s:oie »• ,IS .' *» LOU ’ >* * foie ** «> 2012 »* tOS " b012 ** ,Qs: ;0IG ‘ ■ r . >> ,oe 80R - ,ot Vl poie .aoivflsfa osQi to a^ia ■V-- ^ r. ‘ ■ >■'■' -t i . • . ‘ TAtf] ,i : /J ■■y .isT amoDfll .211 38»^ ’■'.5 12 - 8-20 CONSULT THE PINK SHEET. GENERAL INDEX TO THE LAW AND REGULATIONS. Revised to December 6, 1920, THE REFERENCES ARE TO PARAGRAPH NUMBERS. COMMENT. This index is very comprehensive and it is believed that by means of it any subject embraced within the Service may readily be found. It is to be borne in mind, however, that in many cases immediately succeeding paragraphs of a group treat of the same phase of an identic subject. Obviously a reference to the first paragraph of such a group is all that is necessary. To do more would serve no helpful purpose, and would, indeed, prove confusing. Atotement claims: (See “Claims for abatement” at 2, Index Page 6.) Absence: agent may make return . . 674 Absence as cause for extension of time for filing returns. .1847, 1850 Acceptances: purchase and sale of on account of nonresident foreign corporations. .2670 Accident expenses: reimbursement of . . 1127 Accident Insurance, combined with life and health in'one policy . .994 Accident insurance: proceeds of exempt. .1111, 1114 Accounting: charging off depreciation. . 1363 Closing depreciation account . . 1371 Accounting for gross income. .807, 945, 2421 Accounting methods regularly employed . .778 Changing. .784 Amended returns. .785, 2504 Asking authority to change. .786 In case of installment sales. .914, 2822, 2965 In case of inventories . .1092 If no accounting method has been employed. 779/798 No specified method prescribed . .788 To reflect true income. ,779, 788 Accounting period: annual . .778, 793 Change of. .800, 2763, 2784 Returns . .1855 Net Income based on. .778 Nom-esident aliens. .1541 Accounts current: withholding tax on Interest on. .1612, 1620 Accounts payable as Income determining factor. .771 Accounts receivable as Income determining factor. .771 Accounts receivable purchased: uncollectible, as bad debts.. 1319 Accrual of Income. . 783 As opposed to constructive receipt. ,946 Accrual to cash receipts basis: change.. 784, 786 “Accrued or paid”. .781 Accruing foreign taxes to be paid. .1283-1301, 2711, 2892, 2960 Active service in military' or naval forces defined . . 1176 Acts: constitutionality of Act of 1909: recent cases. .2317, 2517 Act of 1913. .2242; also, 2517, 2651, 2673, 2815, 2935, 2960, 2985 Acts of 1916, 1917,*1918. .2241, 2575, 2713, 2766, 2813, 2835 Acts of 1916, of 1917, of 1918: entitling of. .773 Actual vs. record owner of stock. .1777 Ad valorem penalties. . 1885, 1886, 1894, 1896, 2011, 2015 Collected as part of the tax. . 1897, 1903 Additional tax (See “Surtax” at 1, Index Page 35.) Additional tax payments. .1882, 1889 Foreign taxes: overestimating accruals .. 1288, 1294 Additions and betterments. .791, 1188, 1200 Made by lessee or tenant. .939, 1231, 2899, 2900 Administration of act. .2227 Administration of estate. .637 Amounts paid or cr'Kiited to legatees during. .646, 658 “Period of administration” defined. .638 Administrative provisions of law, general, are applicable. . 1998 Administrator (See “Executor” at 2, Index Page 14.) Advertising expenses. . 1198, 1227 Other than trade advertising. .1227 Sale of Liberty Bonds, etc. . 1227 Advisory Tax Board. .2211 Dissolved.. 2228 Personnel. .2216 Procedure before . . 2222 Submission of questions to. .2221 Succeeded by Committee on Review and Appeal . . 2224 Index Page 1, CONSULT THE PINK SHEET. GENERAL INDEX. The references are to paragraph numbers. Affiliated corporations. .1835 Assessment of tax. .1824, 1829 “By the same interests” defined. .1838, 1841 Change in ownership during year. .1842 Consolidated returns of . .1821, 1827 Credit for taxes by foreign corporation . . 1843 Differing fiscal years. .1832 Foreign corporations . . 1843 Government contracts: chief income from . . 1822 . Public utilities . . 1833, 1839 Specific credit of $2,000. . 1826 Agency: personal service corporation . . 685 Borrowed capital . . 692 Agent vs. fiduciary . . 672 Agent for nonresident alien: what constitutes. .1679 Return by. .1579 . Agent having entire charge of property is not a fiduciary . . 672 Agent may make return. .673 For nonresident alien. . 1679 Agents, Income tax: duties of . . 1868 Leaves of absence . . 2239 Agents of foreign corporations. .1018, 1019, 1044, 1048 Agricultural colleges: compensation of certain employees .. llo7 iic-r Agricultural experiment stations: compensation of certain employees, .llo/ Agricultural organizations. .740, 756 Clubs.. 766 Contributions to fairs. .1228 Alabama state income tax. .2561 Alaska included in “United States” . . 1009 Income accruing to .. 1164 Interest on obligations. .1130, 1135, 2872, 2971 Alaska: salaries of Government employees. .803, 2813, 2835 Allen property custodian. .1854, 2814 Bond interest. . 1699, 2497, 2503, 2814 All aliens presumed to be nonresidents . . 623, 1599 Change of status. .1608 Leaving the country . .2073 , , ^ . Nonresident (See “Nonresident aliens” at 1, Index Page 2o.) Resident: what income of, is liable to tax. .611 Credit for certain foreign taxes. .1286, 2711, 2892 Form 1078 should be filed by all. .624 Loss of residence. .622, 1611 Proof of residence. .621, 623, 1600 Reliance on Form 1078 by employer. .523, 625, 1600 Seamen. .519, 1647 coo Status on last day of taxable year governs as to tax liability - Withholding against, unless proof of residence is furnished . . 52o Alimony. . 1129, 1186 . , i i iobo Allocation of assessments for construction and maintenance of local benents. . izxjz Allocation of credits to particular income. . 628 Allocation of deductions to particular source . . 489,'],629 Foreign corporations. . 1033, 1035 Nonresident aliens. . 1562 Allocation of different rates to particular income. .628 Allocation of dividends to particular years. . 816. 866 Application of different rates. .631, 860, 2884 Allocation of income to particular source. .489 Allowance for amortization. . 1376 Redetermination of. .1395 Allowance for credit for foreign taxes paid or accrued. .1293, 1301, 2 <11, 2 9- Allowances to one’s own chil^en. . 1186 Ambassadors, foreign. .1163 Amended returns: Amortization claims . . 1382 Banks on account of method of handling discounts. .787 Change in accounting methods. .785, 2504^ Claims in abeyance: recent unsettled conditions. .946 Depreciation: failure to take. .1373 Losses discovered in later year. .792 Not required in certain cases. .1994, 2702 Refunded taxes paid in prior years. . 1263, '2775 Time to be allowed to make. .1992 Amortization. .1376 Allowances received, as gross Income. .891 Bonds of corporation: sinking fund. .902, 1374 Reserve; investment of in corporation’s own bonds . .902. lo Amortization allowances: special, due to war. .1376 Amended returns . . 1382 Computation of . . 1393 Costs In connection with. .1386 Depreciation vs. amortization. . 1385 Information to be furnished by taxpayer. .1390 R^etermination of.. 1377, 1896 Salvage values ^.1887, 1888 Seo^ of provision . , 188^ Index Page 2, CONSULT THE PINK SHEET. GENERAL INDEX. The references are to paragraph numbers. Analysis of credit for taxes paid or accrued . . 1290 Ancillary administrator; return liability .. 699 Annual and periodical payments. .1596, 1736 Annual report of Commissioner . . 1987 Annuities. . 938, 1113, 1114 Charged upon devised land. .938 Apartment house, depreciation of: court case. .1355 Appeal from collector’s Increase of taxable income on return. .1866 Application to change method of accounting. .786 Apportionment of deductions: Foreign corporations. .1033, 1035 Nonresident aliens. . 1562 Appreciation in value of assets Accrual of income; appreciation is not. .783 Decedent prior to death . . 686 Executor’s custody prior to distribution in kind . . 686 .Architect’s services as part of cost of building.^ 1190 Army and navy: Compensation . . 1172 Equipment. .1186 Return requirements. . 1176 Salaries paid by employers during war. . 1226 Army contract surgeons; compensation. .1176 Army Nurse Corps, Female; compensation .. 1172 Assessment districts special: exempt interest. .1135, 2872, 2971 Assessment insurance companies. .1003 Assessment of the tax. .2030 Continuing effect of prior laws . . 2032 First installment. .2013 Five year limitation . . 2029 Notice of may be sent by mail. .2027 Three year limitation. .2035 Second assessments: abatement and refund. .2176 Suits to restrain assessment or collection of the tax. .2164 Assessments for local benefits. .1260 Assessments on stock. .950, 1190 Assignees operating business or property of a corporation. . 1785 Associated charities: gifts to . . 1457 Associations are “corporations”. .729, 730 Common-law trusts. .730, 732, 2399 Partnership vs. association. .731 Trust vs. association. .732 Attorney’s fees in connection with refunds, deduction. .2779 Attorney General’s opinions Alien Property Custodian: Returns by. .2814 Change in taxable year: loss in inventory. .2784 Community property . .2903 Depletion in case of discovery by taxpayer subsequent to March 1, 1913. .2972,v' Dividends paid in Liberty bonds .. 829 , tt o onrw.. Foreign corporations and partnerships: income frona U. S. .2994 Liberty bonds as medium for payment of debt or dividend . . 829 National banks may not lawfully declare stock dividends. .2993 Salaries of U. S. judges. .2813 2835 Attorney-in-fact is not a “fiduciary” . . 672 Auction: personal service corporation. .585 Automobile insurance companies, mutual. .767 Automobile license fees. . 1253 Automobiles, excise tax on sale of deductibility . . 1254, 2484, 2652 Automobiles: farmers.. 897 Automobiles, pleasure: depreciation. .1331 Automobiles: statement as to estimated life of . . 1354 Bad debts: Compromises. . 1321 Deductibility . . 1316 Examples of. .1319 Recoveries. .945 Worthless mortgages. .1320 Worthless securities. .1323 , . .. , tt a Baltimore: place for filing returns if no domicile or place of business in the u. a. Bank, Federal Land. .752 Income from securities of. .1131, 1136 Bank, Federal Reserve: dividends on stock. .1137 Bank, Federal Reserve Member: dividends on stock. .1137 Bank Interest: credited but not drawn. .947 Bank Interest: withholding tax on. .1612, 1620 Bank stock: taxes paid by bank. .1256 Bankruptcy in connection with bad debts. .1318, 1319 Bankruptcy: liability of trustee in. .701, 968-970, 1785 Banks as dealers in securities. . 1096 Banks: depositors’ guaranty fund. .1207 Banks: deposits; deductibility of interest paid. .1238 Banks, domestic and foreign; debit and credit items. .1621 Banks; method of handling discounts. .787 Banks, national: assessments on stockholders of. .1190 Stock dividends not lawful . .2993 1812, 1814 Index Page 3. CONSULT THE PINE SHEET. GENERAL _INDEX. The references are to paragraph numbers. Banks, private: association, partnership or corporation. .731, 842 Income from; if considered corporations, is considered dividend. .842 Income from, if not considered corporation . . 894 Banks: proper employment of income. .607 Banks: shrinkage in value of securities. .1308, 1346 Beneficiaries Accident insurance. .1111, 1114 Credits allowed to . . 666 Depreciation sustained by estate or trust. .657, 2563 Health insurance. .1111, 1114 Income and excess profits taxes paid to other jurisdictions by estates or trusts. .1287 Income received through fiduciaries subject to surtax. .492 Incl uding dividends , . 4a4 Income, tax-paid by fiduciaries, is free of tax when received by beneficiaries. .643 Legatees; amounts credited to, during administration. ,646, 663 Liability for direct payment of tax. .645 Liability for payment of tax follows the estate. .643 Life insurance. . 1112, 1114, 1197 Corporation beneficiaries. .809, 1197 Partnership beneficiaries . . 2420 Policies insuring lives of officers or employees. .1191, 1197 Losses sustained by estate or trust. .656, 2563 Nonresident alien; return by fiduciary. .681, 705, 2569 Taxable year differing from that of estate or trust. .648 Ultimate beneficiary exempt from tax: effect of on taxability of income accruing to estate. .642, 2985 United States bond exemptions. .1167 Bequests. . 1128 No deductible loss to decedent. .2507 Valuing on subsequent disposition. .1074 Betterments. .791, 1188, 1200 BUI in equity: enforcement of tax lien. .2072 Board and lodging as part of salary . . 889, 2568 Information at the source. .1739, 2568 Board in lieu of cash rent. .940 Boards of trade. .746, 764 . Bond in connection with credit for accrued foreign taxes. .1288, 1293, 1301 Bond in connection with estabilshmept of replacement fund with compensation for lossef^ . .942 Bondboiders: assessments on, by agreement. .1190 Bonds, amortizing: sinking funds. .902, 1374 Bonds and stock received in exchange for property. .1079, 2506 Bonds: assignee assuming payment of . .1669 Bonds, District of Columbia: interest on. .1130, 1135, 2872, 2971 Bonds eschanged for stock. .1077-1079, 2506 Bonds; foreign owned: usufruct of .. 1678 Bonds, municipal: interest on. .1130, 1135, 2872, 2971 Bonds, penal: U. S. bonds in lieu of sureties . . 1500 Bonds purchased between interest dates. .903, 1677, 2817, 2889 Bonds: sale and retirement of, by corporation. .951, 1244, 1675 Bonds: shrinkage in value of . . 1308, 1323, 1343 Bonds, State: interest on. .1130, 1135, 2872, 2971 Bonds: tax-free covenant (See “Tax-free covenant bonds” at 1, Index Page 37.) Bonds, United States (See “United States bonds” at 1, Index Page 38.) Bonds, War Finance Corporation: interest on. .1133, 1138, 2480 Bonds, worthless: as bad debts. .1323 Bonus common stuck In connection with sale of preferred or bonds. .911 Bonus stock to employees. .889, 946, 1222 Bonuses generaUy . .87 6, 1219 Bookkeeping Change of method . .784, 786 ' - In case of installment sales . . 914, 2822, 2965 ’ ' In case ol inventories . 1092, 2877 If no books have been kept. .779, 793 Method: no specified method prescribed. .788 Taxable year. .780, 794 Change of. .800, 2763, 2784 To reflect true income. .778, 788 Books and papers: examination of . . 1877, 1999 Books and papers to be maintained . . 1998 Borrowed capital: personal service corporations. .692 Branch banks or offices: licensee for the collection of foreign items. .1760 Branch offices to make returns of information. .1738 Branches of foreign Insurance companies in the United States. .1018 Brewers: obsolescence ol good will, trade brands, etc.. 1333 Brokerage: peisonal service corporation. .686, 686 Borrow^ capital . .692 Brokers acting for nonresident aliens. . 1579, 1680 Brokers: returns^of information by .. 1764 Building and land acquired lor lump sum: depreciation. . 1348. 1349, 2901 • ' Building and loan associ&tiuns: domestic. .743, 768 Amounts credited to shareholders. .947 Maturity ol shares. .947 Building: architect’s services as part ol cost of . .1190 Index Page 4. CONSULT tHE PINE SHEEt. GENERAL INDEX. The references are to paragraph numbers. Buildings: demolition or razing of . . 1306 Buildings: expeaditures for new 1188 By lessees on leased ground. .1231, 2695, 2899, 2900 Buildings: loss of useful value of. .1307 buildings: statement as to estimated life ol . .1354 Buildings: voluntary removal of .. 1306 Business: income from. .804, 891 Business insurance: premiums on. .1198, 1203, 2704 Reserves in lieu of insurance 1204 Business (cagnes. 746., 764 Business losses. .1303, 2507 Losses outside of business. .1310, 1311, 2807 (Court case under 1913 Act. .2754) Business of a corporation: scope. .506 Calendar year as basis for computing income. .793 Change to fiscal. .800, 2763 Change from fiscal. .2763, 2784 California Irrigation assessment^dlsiricts . . 1262 California special partnerships. .734 Campaign contributions . . 1227 Canadian corporation: apportionment of deductions. .1036 Canceled contracts; recent unsettled conditions. .945 Cancellation of debt. .943 Capital assets, sale of: income from. .804, 809, 966, 1244 f Capital expenditures vs. expense. .790, 1188, 1190 Construction and maintenance of local benefits: assessments .. 1262 Estates and trusts. .1190 Excessive compensation to oflBcers, etc . . 1211, 1215 Farmers . .897 Items to be depreciated. .790, 1188, 1189, 1200 Mines. .1430 Organization fees of a corporation. .1192 Professional men. .1201 Public utilities. .1205 Railroads. . 1206 Sale of its capital stock by a corporation. .1193 Timber. .1442, 2949 Wells: oil and gas. .1431 Capital: interest on, is not deductible. .1243 Capital stock: additional assessments_on. .950 Capital stock: exchange of property for. .1080 Capital stock: expenses incident to sale of. .1193 Capital stock: sale of, at premium or discount. .949, 1194, 1244 Capital stock tax. .1254 Additional for year ending June 30, 1918. .1255 Carrying charges: real estate. .1064 Car. trust certificates: interest paid on. .1239 Trustees: status of . .1240 Cases (See Table of Cases on Supplementary Page 107.) Supreme Court cases. .2241, 2242: also, 2517, 2575, 2651, 2673, 2713, 2766, 2813, 2816, 2835, 3014 Cash :r gross income and deductions not necessarily “in cash”. .780, 810 Salaries and wages . . 889 Cash receipts to accrual basis: change. .784, 786 Casualty losses. . 1303, 1305, 1311 ‘ Compensated for: replacement fund. .941, 942 Cemetery companies. .744, 759 Cent: fractional part of . .2089 Certificates of indebtedness Exempt status of interest. .1139, 1141, 1153 (II) Payment of taxes by means of. .2091, 2508 Certificates of ownership (See “Ownership certificates’* at 1, Index Page 26.) Chambers of commerce. .746, 764 Charitable purposes Corporations organized for. .746, 760 Gifts on account of (See “Gifts” at 2, Index Page 18.) Charter money received by nonresident aliens . . 1546 Chautanquas. .761 Checks, uncertified: payment of taxes by means of . .2091 Churches and church funds: gifts to.. 1453, 1467 Citizens defined.. 512 Leaving the country. .2083 Residing abroad. .612, 616 Serving foreign governments . , 1163 What income of is subject to tax. .611 Citizenship. .614 Civic leagues or organizations. .747, 765 Claim: unconditional on March 1, 1913.. 1177 ^ Claims for allowance of net loss. . 1107 * Claims for abatement: 2030, 2115, 2702 Efiect'on collection of the tax. .2119 Effect on interest on delayed tax payments. .2012 Inventory losses . .1467, 1482 Rebate payments . . 1467, 1482 Second assessments .. 2176 Suit against U. S. may be maintained under certain conditions. .2982, but sse 3014 Index Page 5. CONSULT THE PINK SHEET. GENERAL INDEX. The references are to paragraph numbers. Claims for credU against future installments ^ Foreign taxes: underestimated accruals .. 1288, 1294 Stock dividends under 1913 Act .21^9 2653, 2842, 2885 2982, 3014 0l return, ol prior year,. .2121 Amounts recovered by suit. .2210 Foreign corporation ..lOM Inventory losses . .1471, 148.S Limitation . .2122, 2180 ^ ^ oiqa 2159 May be filed with Commissioner 2159 NOTresideut alien.: eaces. amount, withheld .. 1679 Rebate payments . . 148ii Itock'di'riden* under 1913 Acts .2132, 2644, 2653, 2842. 288S |Sfno*trMtaL\d^K^^^^ Med. .2177, 2982, ,014 » \"eMy'SeTt.-ryufen^ni-lo S..1467. 1471. 1482 aalSi uLettleif: war contract, etc . .94., g'.?h»vatra«^^^ aubm pleasure, recreation, etc. .748, 7bt> &a'errS|et7r aliens. ,519 Collection Districts. .Sup. Pages 101-106 a&'otfnmriM Eerenue. Sllefmrs rma“f fni.dr‘,”toough dfetric^ . . 1867 To renort violations of law . . gJUbo , goo Collec?ors^to render assistance and to answer questions . . 1 Colleges: compensation of certain employees .. 1167 Commerce: income from . 804 Commercial men’s associations. .7,^3 771 Commercial net Income as statutory net income . .771 SmS7on business: pcmonal service cnrporation . .686 Borrowed capital . . 592 Commissioner defined. .504 ^uthorize§°to make rules and regulation . . 2227 Certifying as to unreasonable accumulation of profits . . 4 , gSrnffil^iSSirmiking^ by. .1986 Return.. 703 . Committee on Review and Appeal. .2224 Common law partnerships .. 606 Common law Receivers 701 Common law trusts. .730, 632, 2399 Common stock as bonus. .911 „ j -f. oqn3 Community property of husband and wife. .290o ^ Wka; Governmentemployees..803, 2813, 2835 Bonuses. .876, 1219 Commissions; executor s. .1190, Commissions on insiirance Premiums . . 87J, 887 Commissions paid: buying and selling securities .. 1190 Commissions paid salesmen .. 873, 1223 Credited but not drawn . . 876 Paid in stock . . 1225 Contingent. .1212 gSricl“ Cof;S: - 30 vcrnmeut 2813, 2836 g*:li’i'r.\?r\s”eU”oT,’r2r4.”^^^^^^^ Gross income .. 803, 2813, 2o3d oqiq 2835 Hawaii; government employees . 803. 2813, 2835 Information at source. .1728, 1/35 Ki“ot UnTed StX Co«t. .803: 2669, 2713, 2766. 2818, 2886 ‘i?X1;nltr\d prior to. .1177 Index Page 6. CONSULT THE PINK SHEET. GENERAL INDEX. The references are to paragraph numbers. Compensation for personal serrices — Concluded. Ministers: fees paid to . .873 Minors: allowances or wages to one’s own children. .Ilob Municipal officers and employees. .1167 Nonresident aliens: earned abroad .. 1546 Not determined until completion of services. .873, 874, 2421 Notarie,s public: fees of .. 1167 Paid other than in cash. .889, 2568, 2650 Information at the source. .1739, 2568 Paid in notes . .890 Paid in stock. .889, 946, 1222, 1225, 2650 Pensions . . 87.3, 1226 Percentage of profits . . 873 President of the United States. .803, 2669, 2713, 2766 Priests; fees paid to . . 873 Property: salary as part payment for. .1211, 1215 Public schoo J teachers . . 1167 Quarters, mileage, expenses, per diem, etc. .879 Reasonable; to be deductible, must be. .1210, 1213, 2489 Receivers appointed by State courts; commissions. .1167 Retired pay of Federal officers. .873 ^ Retiring allowan'*e.s . .873, 1226 Soldiers and sailors (Army and Navy) . . 1173 Salaries paid by employers during the war. .1226 State officers and employees . .1167 Certain college and university employees. .1167 Stockholdings: based on .. 1211, 1215 Tips. .873 Uncollectible. . 1319 , . , . iooa Completed and closed transaction: exchange of property for stock in corporation . 1080 Compromises of indebtedness. . 1321 Compromises of penalties. .1928 Computation of amortization claim . .1393 „„„„ , Computation of depletion. .1416, 1417, 1440, 2902, 2944 Computation of depreciation. .1350, 1359, 1360, 1363, 2894 Computation of net income. .780, 783 Computation of surtax . . 486 In case of sale of mine or well , . 488 Computation of tax. .477, 636, 713 Condemnation of real estate for public purposes . .941 Replacement fund . .941, 942 Congressmen; mileage. . 1187 Conservator included in term “fiduciary” . . 670 Consolidated returns of affiliated corporations. .1821 Foreign corporations .. 1827, 1843 Forms for making. .1827^ Personal service corporations . . 1827 Underlying necessity for. .1826 Consolidations: gain or loss resulting from .. 1082 Profit or loss from subsequent sale of securities . • ”479 Constitutionality of Act of 1909 (recent cases) . .2317, 2ol7 ocki oc'tq oqik Constitutionality of Act of 1913: cases in Supreme Court. .2242; also, 2517, 2651, 2673, 2815 ConstitutioTi^ility of Acts of 1916, 1917, 1918: cases in Supreme Court. .2241; also, 2575, 2713, 2766 Construction of local benefits: assessments for. .1262 Constructive receipt of income. .783, 946 As opposed to accrual of income. .946 By decedent prior to death . .685 Commissions paid salesmen. .876 Consuls, foreign. .1163 Contingent compensation. .1212 Contracts, canceled: recent unsettled conditions. .945 Contracts, long term . .892 Contracts; State: independent contractors . . 893 Contracts to purchase: relation to inventories. .2785 Contributions (See “Gifts” at 2, Index Page 18.) Co'operativc associations. .749, 768 Dairies . .768 Co-operative telephone companies. .749, 767 Co-owners of oil lands. .736 Co-owners of vessels: of other property, .736 Copyrights: amounts expended for securing. .1190 Copyrights: depreciation of .. 1332, 1861 Copyrights: sale of.. 912 Copyrights, cost of: deter mi natIon''of cost of. .1861 Corporations 718 Advertising: trade and other.. 1198, 1227 Affiliated corporations .. 1821, 1836 Assignees operating business or property. .1785 Bonds: sale and retirement of . .961 Business of: scope. .606 Campaign contributions . . 1227 C^n'eelUtidn bf Indebtedness to or by stockholder. ,948 Index Page 7 CONSULT THE PINK SHEET, GENERAL INDEX. The references are to paragraph numbers. Corporations — Concluded. Capital stock: sale of its own. .949, 1193,11244 Capital stock tax: additional . . 1254, *125 6 Charitable contributions. .1181, 1227 Consolidated returns . . 1821 Consolidations: profit or loss . . 1082 Credits against income. . 1527 Credits against the tax. .646, 1295’ Deductions"allowed (See “Deductions” at 1, Index Page^lO.) Defined . . 728 Dissolution: distributions on. .866 Receiver or trustee. .701, 968 Dividends received are deductible. .1325 Received from foreign corporations taxable on their net income. .2482 Domestic corporation defined . . 1532 Employment of income of. .606 Excess profits taxes paid to the United States. .1529 Excess profits taxes paid to other jurisdictions. .645, 1282, 1295 Exempt corporations. .739 Corporation owned by an exempt corporation. .725 Information at source to be supplied by. .1737 Proof of.. 754 Salaries paid by. .878 Withholding by. .1624 , ^ Expenses deductible or otherwise (See “Expenses” at 3, Index Page 14.) Family . . 724 Foreign (See “Fo’rlgn Corporations” at 2, Index Page 16.) Gifts made by. .1181. 1227, 1460 Gross Income of . . 808 Income taxes paid to other jurisdictions. .645, 1282, 1295 Income: what income is taxable. .720 Incorporation fees. .1192 . Insurance of employees (or officers) for benefit of corppration..809, 1191, 1196 Insurance of employees (or officers) for benefit of employees. .889, 983, 1197, 2oovi Interest deductions . . 1232 Liability to tax. .720 Limited partnership a.s corporation . .735 Liquidating. .968, 1816, 1818, 1819, 2770 Lobbying expenses . . 1227 Losses. .1304, 2507, 2807 Mergers; profit or loss . . 1082 Net income; how computed. .770 Organization expenses . . 1192 Ownership certificates . . 1697 Partnership; corporations as members of. .736 Pension fund: contributions to . . 1226 Personal service corporations (See 1, at Index Page 27.) Persons; corporations are considered ’as . .472 Preferred stock; redemption of. .966 Public utility operating State owned property , ,727 Receiver for. .701, 968, 1785 Reorganizations: profit or loss . . 1082 Returns by . . 1778 Accounting period changed. .1861 Specific credit of $2,000. .1531 Accounting period changed . . 1861 . nrmn Stockholders: Assets distributed may be followed for corporation tax. ,,2770 Surtax; corporations not liable to. .493 Tax on.. 713, 2770 Taxes deductible . . 1249 Taxes paid on stock for stockholders. .1256 Treasury stock . .949 Trustees in bankruptcy. . 1786 Undistributed profits. .497 Tax under 1917 Act. . 509 United States bonds; application of exemptions to stockholders, .1159 United States bonds: interest on, not subject to income tax . .1528, 1533 Withholding at source’against domestic and foreign resident; none. .1595 Withholding at source against nonresident foreign corporations. .1614 Correction of returns. .1866, 1989 Cost, determination of: real estate. .1064 Costt^determination of: patents or copyrights . .1361 Cost: Inventories. .1092, 1093, 2877 Cost of goods sold. .891, 1198 * Import or tariff duties . .1264, 2775 Cost or market Inventories . . 1092, 1094, 2834 Costumes: depreciation . . 1881 Cotton exchanges: Incorporated . .764 Cotton exchanges may not be exempt. .764 Country fairs. .756 GUti to by certain corporations . . 1228 c t Index Page S* CONSULT THE PINK SHEET. GENERAL INDEX. The references are to paragraph numbers. 1 Coopons: Conatructlve receipt of interest. .947, 1631 Exchanged for other property . . 947 For funding bonds . . 1674 Joint owners . . 1667 March 1, 1913: due and payable prior to. .1631 Matured but not collected. .947, 1631 Maturity dates: difiFeiing . . 1668 Ownership certificates (See “Ownership certificates” at 1, Index Page 26 ) Presented without ownership certificates. .1704, 2498, 2703, 2751 Purchased abroad. .1634 Withholding at source on interest . . 1626, 1636 (See “Withholding at the source” at 2, Index Page 40.) Court costs: expenses of administration. .1190 Court decisions (See Table of Cases. .Sup. pages 107-108.) Coarts, district: jurisdiction of. .1878 Credit for amounts withheld at source. .1719, 1722, 2817, 2889 Foreign corporations . . 1051 Credit for excess amounts paid on installment tax payments . . 1881 Cre«t for excess profits taxes paid to the United States . . 1529 >“come and excess profits taxes paid to other jurisdictions. .1283, 1295, 2711 2892 Affiliated domestic and foreign corporations .. 1843 Analysis of credit. .1290 Conditions of allowance of credit . . 1293 Estates and trusts: beneficiaries of. .1287 Evidence in support of claim . . 1289 Foreign corporations . . 1042, 1843 Meaning of terms . . 1292 Partnership: members of . .672, 1287 Personal service corporations: stockholders of . .600 Porto Rico and Philippines: individuals and corporations. .644, 646 Redetermination of tax when credit proves incorrect . . 1294 Resident aliens. .1286, 2711, 2892 Underestimated accruals .. 1294 Credit for taxes. .1283, 1295, 2711, 2892 Foreign corporations . . 1042 Credits against income for corporations. .1627 Apportioning on change of accounting period. .1861 Consolidated returns of affiliated corporations . . 1826 Foreign corporations . . 1041, 1633 Credits against income for normal tax. .1513 AUocation of, to particular income. .628 Beneficiaries of estates and trusts . .666 Dividends . . 1614 Exception in the ^se of dividends from certain Porto Rican and Philippine cor- porations . . 640, 643 Foreign corporation dividends. .1517, 2482, 2895 Estates and trusts . . 667 Interest on United States bonds. .1616 Nonresident aliens. .1570, 1671 Allowed conditionally . .1574 Partnerships: members of . . 671 Specific exemption. .1618 Surtax: these credits not applicable to. .483, 1516 Credits against installments still due. .2121, 2124 Stock dividends under 1913 Act. .2129 Stock dividends under 1916, 1917 and 1918 Act. .2132,'2644, 2653. 2842 Credits against the tax. .1283, 1295, 2711, 2892 Afi^iated domestic and foreign corporations. .1843 Amounts withheld at source. .1051, 1719, 1722, 2817, 2889 Foreign corporations . . 1042 Credits against tax or installments thereof due. .2121, 2124 Foreign taxes: underestimated accruals . . 1288, 1294 Stock dividends under 1913 Act. .2129 Stock dividends under 1916, 1917 and 1918 Acts. .2132, 2644, 2663, 2842 Suit not to te maintained unless claim for credit or refund has been filed . .2177 Crop losses. .898 Crop shares . . 896 Crops taking more than year to produce. .896. 897 Customs duties . . 1264, 2775 Cyclone insurance companies, mutual. .749, 767, 2960 Dairies, cooperative. .768 Damages paid: when deductible. .792 Damages received: injuries or sickness . . 1111, 1114 Date of tax return in connection with Liberty Bond exemptions. .2568 Dealers in securities: inventories. .1096 Banka as. .1096 Debtor defined . . 1663 Debts, bad.. 1816 Recoveries. .946 Decedent Appreciation In value of assets prior to death . .688 Basis of drtermining gain or loss on sale of assets of estate of . .686 Constructive Receipt of ineome prior to death . .686 Index Page 9. CONSULT THE PINK SHEET. GENERAL INDEX. The references are to paragraph numbers. Decedent— Concluded Creditor of: bad debts.. 13 19 Death between March 1, 1913, and October 3, 1913. .687 Delay in payment of tax. .2011, 2014 Dividends declared prior to death. .685 Dividends earned and accumulated during hisjife..b58 Interest accrued prior to death . .685 _ No deductible loss to, through divesting of property . .2507 Property of, passing to executor . .638, 686 Return of income to time of death . . 684, 699, 1526 Specific exemption. .684, 1526 lArTiAO'v Decisions of Courts (See Table of Cases . . Sup. Pages „ Declaration of intention to become citizen: effect on citizenship. .512 As proof of residence. .519 ' Declaration of dividend is not a distribution . .815 T)eclarat?oP of teriuination of taxable period. .207o , * 40 ^ bedSon of tax at the source (See “Withholding at the source at 2, Index Page 40.) 1 Deductions. .1179 _ Allocation of to particular source . .489, 629 N onresident aliens .,1562 Amortization allowance, .1376 , , j o77q Attorney’s fees and cost of collection of refund. .27 oav Fiduciaries: returns by (See "Returns by Fiduciaries at 1, Index Page 30) Fiduciaries; taxes to be paid by . .641 Liability attaches to person of fiduciary . . 643 Fiduciary defined. .670_ "Agent” vs. "fiduciary” . .672 Committee of property of incompetent. .671, 703, 2705 Estate or inheritance taxes paid. . 1264, 2839, 2848 Foreign fiduciaries. .706 Information at the source: returns of . .1743 Law of individuals applicable to fiduciaries . .711 Ownership certificates to be used by fiduciaries . . 1673 Power of attorney. .672 Final returns. .1816-1819, 2770 -/.-■oa^'a Fire Insurance companies, mutual. .749, 767,_29bU Fire insurance on own house .. 1186 a,o Fire losses compensated for: replacement fund . .942, 943 Fire losses deductible. .1303, 1305, 1312 First taxable year. .798 Fiscal year defined. .797 Change to calendar or to other fiscal. .800, 1862, 2784 Must be definitely established. .799 Fiscal years differing in case of affiliated corporations. .1832 Fiscal years embracing parts of calendar years with differing rates.. 613, 627 Corporations. .622, 626 Individuals. .625, 626 Partnerships. .601 Personal service corporations. .601, 624 Fixed and determinable annual payments. .1596, 1736 Food Administration Grain Corporation Notes .1160 Foreclosure proceedings: status of bad debt deduction. .1320 Bonds of insolvent corporation, secured by mortgage . . 1323 Foreign ambassadors. .1163 Foreign consuls. .1163 Foreign corporations. . 1008 ^ , ..1 , • nmn Acceptances; purchase and sale of, on account of the foreign corporation . .2670 Accounts current: interest on . . 1620 Agent of.. 1018, 1019, 1044, 1048 Index Page 15. CONSULT^THE PINK SHEET. GENERAL INDEX. The references are to paragraph number#. For^gn corporations — Concluded Commissions on sales made abroad . .1028 Consolidated returns . . 1827, 1843 Credit for amounts withheld at source. .1061 Credits against income . , 1041, 1633 Credits against tax . .1042 Deductions allowed . . 1028 Apportionment and allocation of. .1033, 1036 Income solely from dividends and interest. .1036 Dividends of . .1617, 2482, 2895 Dividends on domestic stock. .1025 Deductions allowed . . 1036 Exempt organizations . . 1012 Exemption claims at the source . . 1619 Extension of time for filing returns . . 1852 Gross income of.. 1016. 1025, 1027, 2994 . ^ Income: what income is taxable. .720, 2670, 2994 “ Interest: debit and credit items between banks. .1621 Interest deductions. .1031 Interest on accounts current . . 1620 Interest on domestic securities. .1025 Deductions allowed. .1036 Net income of. .1015, 2994 Ownership certificates. .1696, 1697 Personal service corporations .. 674, 584 Principal office of . . 1048 Profits on manufacture and disposition of goods in U, S , . 1027 Returns by . .1044 Extension of time for filing . . 1852 Steamship companies .. 1023, 1546, 3011 Stock dividends . .864 Tax on . . 1007 Tax-free-covenant bonds: U. S. fiscal agent.. 1646, 2780 Taxes deductible. .1032 Withholding at the source .. 1614, 1626, 1642 Foreign diplomatic ministers. .1163 Foreign fiduciaries. .706 No exemption claims at source. .710 Foreign governments: income from United States sources. .1162 American citizens serving. .1163 Officials of . . 1163, 1646 Foreign insurance companies. .1018 Branches in the United States. .1018 Foreign items: collection of . . 1749 Exchange: prevailing rate governs, when deposited abroad, ,900 Information at the source. .1749 Branch offices . . 1760 License required . .1766 Ownership certificates. .1751, 2750, 2751, 2780 When none accompanies item. .2498, 2751 Penalties . . 1767 Returns of information. .1762 Source of information. .1760 Substitute certificates not permitted . . 1762 Foreign partnerships. .1010, 1553, 2994 Accounts current, interest on: withholding. .1612 Ownership certificates. .1696, 1697 Foreign steamship companies. .1023, 3011 Charter money and freight payments . . 1646 Foreign taxes paid. . 1281-1301, 2711, 2892 Foreign trade: sales in. .810, 2994 ^ Foreign trade, vessels: resident and nonresident^liens. .519 Forgiveness of indebtedness . ,943 I Forms and their uses: (See also Supplementary _Page^l.)j 17 — Notice and demand for tax. .2021 46 — Claims for refund of taxes and penalties erroneously collected ,.2 133 46 — Claim for allowance of net loss. .1107 46 — Claim for refund: inventory losses or rebate payments. .1482 47 — Claim for abatement of taxes erroneously assessed . .2119 47 — Claim for abatement: inventory losses or rebate payments. .1482, 1483 47A — Claim for credit against future installments of the tax. .2124 ‘ Because of payment of tax on stock dividends. .2646, 2653, 2842 1000 — General use of . . 1695 ^ L 1000— Personal service corporations in connection with tax-free covenant bond interest. .1696 1000 — Alien property custodian. ,1699, 2503, 2814 1000 — Bank receiving coupon without ownership certificate attached,^! 704, 2762 1000 — Registered bonds; no ownership certificate filed by owner.. 1706 1000 — Foreign tax-free-covenant bond interest. .1761, 2750, 2751, 2780 >. 1000 — Partnership with member having personal exemption in excess of taxable income . .2966 1001 — General use of . .1697 1001 — Exemption claims by citizens and residents on tax-free covenant bond interest. .1647 Index Page 16, CONSULT THE PINK SHEET. GENERAL INDEX. The references are to paragraph numbers. Forms and their uses — Continued 1001 — Alien property custodian. .1699, 2503, 2814 1001 — Registered bonds: no ownership certificate filed by owner . . 1706 Sinking Fund Trustee. .2876 1001 A — Ownership certificate in connection with foreign items. .1751, 2750, 2751, 2780 lOOlA — Foreign tax-free-covenant bond interest. .1751, 2750, 2780 1001 B — Exemption claims by nonresident aliens on tax-free-covenant bond interest. .1650, 2501 1010 — License for collecting foreign items . . 1758 1012 — Monthly return of amounts withheld at source on bond interest . . 1709 1012 — Monthly return — foreign items . . 1752 1013 — Annual return ol amounts withheld at source on bond interest. .1709 1013 — Annual return — foreign items. .1752 1017 — Application for license for collection of foreign items . . 1758 1031T — Tentative annual return form for corporations. .1850 (See ^2570) 1040 — Annual return by individual: net income of more than $5,000. .1773 — Same: by minor . .702 — Same; by fiduciary for individual or estate or trust. .684 — Same: by foreign fiduciary . .706 — Same: by fiduciary for decedent to time of death. .684, 699 — Same: by fiduciary for nonresident alien beneficiary . . 705, 2569 — Same: by receiver for individual . .701 — Same: by guardian of minor or committee for incompetent. .703 — Same: by alien member of foreign partnership. .1554 — Same: by nonresident alien. .1579 1040A — Annual return by individual: net income of $5,000 or less. .1773 — Same; by minor . . 702 — Same: by fiduciary for individual or estate or trust. .684 — Same: by foreign fiduciary. .706 — Same: by fiduciary for decedent to time of death. .684, 699 — Same: by fiduciary for nonresident alien beneficiary. .705, 2569 — Same: by receiver for individual . .701 — Same: by guardian of minor or committee for incompetent. .703 — Same: by alien member of foreign partnership. .1554 — Same: by nonresident alien. . 1079 1040C — Return by nonresident aliens for taxable period 1919: on leaving the country . . 2082 1040T — Tentative annual return form for individuals . . 1850 1041 — Annual return by fiduciary of distributed or distributable income.. 684 — Same: by foreign fiduciary. .706 — Same; two trusts. .700 — Same: two or more nonresident beneficiaries. .705 1042 — Annual return of amounts withheld at source on other than bond interest. .1709 1042 — Return of information covering payments to nonresident aliens and certain foreign corporations . . 1746 1068 — Substitute certificate of ownership: tax not to be paid at source , . 1700 1069 — Substitute certificate of ownership tax to be paid at source. .1700 1066 — Partnership annual return . . 660 1065 — Personal service corporation annual return . . 697 1065 — Annual return by receiver for partnership. .701 1078 — Certificate for use by alien to show residence. .523, 1600 Disposition of by withholding agents. .624, 627 Oath 628 Records thereof to be made by employers. .627 Reliance on by employers . . 523, 524, 1600 Resident aliens should file to avoid inconvenience. .524 Substitutes for. .623, 1600 Use of is proof of residence unless rebutted . .619, 1600 Witnesses . .528 1087 — Disclosing that record owner is not actual owner of stock. .1777 1096 — Annual list return of information at the source (miscellaneous payments aggregating $1,000).. 1736 — Same: by partnerships, personal service corporations and fiduciaries. .1743 1096A — Monthly list return of bond interest where there has been no withholding .. 1710 1096B — Annual list return of bond interest where there has been no withholding. .1710 1096B — Annual list return of foreign items. .1752 1097 — Returns of information relating to dividends . . 1763 1098 — Annual information return of amounts other than bond interest paid to nonresident aliens or to foreign corporations having no oflTice or place of business in the United States .. 1709, 1746 1099 — Annual slip retirrn of information at the source (miscellaneous payments aggre- gating $1,000).. 1736 — Same: by partnerships, personal service corporations and fiduciaries . . 1743 1100 — Returns of information by brokers, .1766 1114 — Application for permission to establish a replacement fund for fosses compen- sated for . . 942 1116 — ^ecific exemption claimed at source by nonresident alien employee. .1677 1116 — Claim for credit for foreign taxes paid — individuals. .1293 1117 — Bond for use in connection with form 1116. .1293 1118 — Claim for credit for foreign taxes paid — corporations. .1301 — Same; foreign corporations . . 1042 1119 — Bond for use in connection with form 1118. .1301 Index Page 17. CONSULT THE PINK SHEET. GENERAL INDEX. The references are to paragraph numbers. Forms and their uses — Concluded 1120 — Annual return by corporations generally. .1780 — Same: foreign corporations .. 1044 — Same: consolidated return by affiliated corporations. .1827 1122 — Return by affiliated corporations in connection with consolidated returns. .1827 1124 — Bond in connection with claim for abatement on account of inventory losses or rebate payments. .1485, 1508 Forms: table of current, and reproduction of (See Supplementary Page 1.) Forms to be supplied to taxpayers. .1787 Fractional part of cent. .2089 Fractional part of year: return covering. . 1863 Franchises: depreciation on account of . . 1332 Fraternal beneficiary societies. .742, 757 Freight by boats: certain associations organized' to carry. .764 Fruit growers' associations acting as sales agents. .750, 768 Fruit growing organizations 755 (See “Farms and farmers” at 1, Index Page 15.) Fruit trees; depreciation and loss by death. .2665 Furniture in house: depreciation. . 1331 Gain or loss, basis for determining, on disposition. .1055, 1305, Assets of decedent’s estate. .686 Bequests . . 1074 Bonds: sale and retirement of. .951 Bonus stock. .911 Capital assets . . 966, 1244 Consolidations . . 1082 Depfet^n to be given consideration . .1058, 1305, 2507 Depreciation to be given consideration . .1058, 1305, 2507 Exchange of property for other property . .1076, 2506 Homestead. .2804 Gifts . . 1074 Good will. .913 Insurance policies. .1177, 2485 Lumber. .1072 Mergers . . 1082 Partial liquidating dividend: sale of stock. .868 Patents . .912 Personal property on installment plan. .914, 2672, 2822, 2965 Real estate in lots . 931 Real estate on deferred payment plan. .932, 937, 2672 Real estate on installment plan. .932, 936, 2672 Reorganizations . . 1082 Rights.. 911 Securities, by committee for incompetent. .2705 Itock’dMdends: sale of stock received. . 865, 911, 2655, 2847, 2884, 2885 Stock received in connection with merger, consolidation or reorganization . . 108 /, 1088, Value as of March 1, 1913: basis for determining. .1058, 2804 Gain or profit from every source is taxable. .806, 2810 Gambling. .1305, 2507, 2807 Gas district bonds. .1135, 2872, 2971 Gas Wells (See “WeUs” at 1, Index Page 40.) General administrative provisions of law applicable .. 1998 Gentlemen farmers. .896, 898 Gifts made: Associated charities; to.. 1457 Churches and church funds: to. .1453, 1457 Corporations: by.. 1181, 1227, 1448, 1460, 2499, 2516, 2666 For benefit flowing directly to the corporation. . 1227 Employees: employers to . .877, 1219 Estates or trusts: by . .652, 2499, 2516, 2666 Individuals: by . .1447, 2499, 2516, 2666 Loss suffered by donor; none. .2507 Needy family: to . . 1458 Nonresident aliens: by . . 1567 Partnerships; by . .652, 2516, 2666 Benefit of, taken by members. .554, 2516, 2666 Personal service corporations: by.. 696 Property other than money given: valuing. .1448, 2499, 2516, 266b No taxable profit accrues to donor. .1469 Real estate to city for public park. .1448, 2499, 2516, 2666 Red Cross: to.. 14 52, 1457 ^ Securities g ven: no taxable profit to donor . . 145y Stockholders to corporation: Forgiveness of indebtedness. .943 Stock for resale. .949 Voluntary assessment on stock. .950 War chests. .1448, 2499, 2516, 2666 Y. M. C. A..1457 Gifts received.. 1128 Gain or loss from sale of . . 1074 Stock.. 1076 Index Page 18 . CONSULT THB PINK SHEET. GENERAL INDEX. The references are to paragraph numbers. Good will considered in valuing stock as of March 1, 1913. .1063 Good will: depreciation of .. 1332 Good will: sale of . .913 Government amortization claims: recent unsettled conditions . .946 Government contract defined . .578 Canceled: compensation: amended returns . .945 Commissioner to have access to . .579, 580 Consolidated returns of affiliated corporations. .1822 Personal service corporations . .575, 684 Railroads . .579 Returns in connection with. .579, 680 Unenforcible contracts subsequently ratified . . 579 Government employees: salaries of. .803, 873, 2813, 2835 Pensions and retired pay . .873 Quarters, mileage, subsistence, etc . . 879 Grain growing organizations. .755 (See “Farms and farmers' at 1, Index Page 15.) Gratuities to employees . .876, 1209 Gross income . . 802 Corporations . .808 Exclusions from . . 1109 Farms and farmers . .896 Foreign corporations. .1016. 1025, 1027 From business. .891 , , . . j tios Gift bequest, devise, descent: income from property received. .lUf4, Income on which tax withheld included. .1718, 1722 Income taxes paid by another to be included . .869, 871 Insurance companies. .983, 2873 Need not be in cash . .780, 810 Nonresident alien individuals. .1542, 1545 When accounted for. .807, 945, 2421 Group Insurance; premiums on. .2650 Guam: taxation of certain citizens of . .531 Guardian included in term “fiduciary” . .670 May make return. .673, 702. 703 Guardian : income collected by, for infant . 644 Hail insurance companies: mutual. .749, 767, 2960 Harbor district bonds. . 1135, 2872, 2971 Hawaii included in “United States”. ,1009 Income accruing to. .1164 Interest on obligations of. .1130, 1135, 2872, 2971 Salaries of Government employees. .803, 2813, 2835 Hawaiian partnerships. .550 Head of family: defined.. 1522 Return requirements. .1770, 2903 Specific exemption. .1519, 1522 Head tax as proof of resiffence 519 , oq. Health insurance, combined with life and accident in one policy. .994 Health insurance: exempt. .1111, 1114 Holding companies for exempt organizations . . 751 Holding companies guaranteed dividends for subsidiaries. .1192 Holding companies taking up earnings of subsidiaries on books. .1327 Holding companies withholding profits from stockholders. .498, 506 Homestead: disposition by original entryman. .2804 Horticultural organizations. .740, 755 Clubs.. 766 Horse race winnings and losses. .2807 Husband and wife: Community property. .2903 Returns by. .1769, 1771 Delinquency of one return. .1771 Specific exemption . . 1619, 1523 Divisible as they please. .1526 Surtax computed on separate incomes. .490 United States bond exemptions. .1156 Wife abroad, in case of resident alien. .521 Wife of nonresident alien . .613 Hypothetical questions: rulings on 2230 Illegal transactions: losses in. .1305, 2507, 2807 Illegally acquired compensation. .1215 Illinois limited partnerships . . 734 Illness (See “Sickness” at 1, Index Page 33.) Import duties,. 1254, 2775 Impro^v of: mines, oil and gas wells. .1397, 1432, 1433, 1443, 2950 Made by lessee. .939, 2695, 2899 Permanent. .791, 1188, 1189, 1200 Income accounted lor, when. .807, 946, 2421 Income accruing prior to March 1, 1913. Income accumulated in trust , .639, 641, 2 J3o Income accumulated or distributed in discretion of trustee.. 642 Income: allocation of, to particular source. . .489 Income collected by guardian for Infant. .644 Index page 19. CONSULT THE PINK SHEET. GENERALi INDEX. The references are to paragraph numbers. Income: constructive receipt of. .783, 946 As opposed to accrual . .946 By decedent prior to death . .685 Income distributable to beneficiaries . . 644 Income from every source is taxable. .806, 2810 Income held for future distribution. .640, 641 Income: illegally acquired. . 1216 Income, net (See “Net Income" at 1, Index Page 24.) Income tax in Porto Rico and Philippine Islands. .634 Income taxes paid for another .. 869, 871, 1231, 1279, 1280, 2817, 2900 Income taxes paid to other countries Credit for . .1283, 1296, 2711, 2892 Affiliated domestic and foreign corporations. .1843 Estates and trusts: beneficiarieB of. .1287 Foreign corporations . . 1042, 1843 Partnerships; members of . .572, 1287 Personal service corporations; stockholders of. .600 Porto Rico and Philippine Islands . . 644, 645 Deductible . . 1281, 1282 Effect on liability to U. S. Income tax. .476 Income taxes paid to possessions of the U. S. As a credit . . 644, 645 As a deduction. .1247, 1253 Income taxes paid to the United States: not deductible .. 1246. 1263 Incompetent: return for . .703 Incorporation fees.. 1192 Incurred or paid.. 781 Indebtedness; forgiveness of . .943 Indemnifying of withholding agents.. 1717 Individuals, tax on Normal tax. .476 Surtax.. 482 Information at the source (See “Returns of Information at Source” at 2, Index Page 31.) Inheritance taxes. .1264, 2839, 2848 Injuries; amounts paid to employees on account of. .1226 Injuries; amounts received on account of. .1111, 1114 Insane person; return for . .703 Delay in payment of tax. .2011, 2014 Insolvent persons: delay in payment of tax . .2011, 2014 Inspection of retorns. .1955, 2427, 2450 State officials. .1970, 2456 StfMskholdera . .1972, 2442, 2473 Inspectors, Income tax: duties of . .1868 Leaves of absence . . 2239 Installment purchases of Victory Notes.. 1155 Installment sales: Changing method of accounting. .914, 915, 2822, 2965 Isolated sales by one not a dealer. .2672 Personal property, .914, 2822, 2965 Real Estate . .932 Installments: payment of tax in. .2000 Does not apply in case of failure to make return . . 1899 If installments are not paid when due all of tax is payable, .2017 Recomputation of . . 1880 Insurance, accident and health: exempt. 1111, 1114 Insurance agents and agencies: information at the source. .1740 Premiums collected in one year turned over to company in next. .2517 Insurance companies are “corporations”. .729 Foreign. .1018 Branches in United States . , 1018 Returns of . . 1002 1003 Tax on. .983. 2517, 2673, 2815 Insurance companies, mutual: certain exempt . .749, 767, 2960 Insurance: compensation for losses. .1303-1305, 1310-1312 Insorance fund for benefit of employees. .983 Insurance, life (See “Life Insurance” at 2, Index Page 22.) Insurance on life of officer or employee, for benefit of employer. .1191, 1196, 2704 Insurance on own house. . 1186 Insurance policy: surrender value as of March 1, 1913. .1177, 2485 Insurance premiums: commissions on. .873, 887 On own policy by agent. .888 Insurance premiums, business; as expense items. .1198, 1203, 2704 Reserves in lieu of .. 1204 Insurance premiums received by agent in one year remitted to company in next. .2517 Insurance premiums paid to employer. .889, 1191, 1196, 2660 Insurance: War Risk. . 1114 Intangible property: depreciation. .1332 Interest accrued prior to March 1, 1913. .1177 Status as to withholding. .1177 Interest as income.. 805 Brokers: carrying securities for customers. .905 Constructive receipt of . .947 By decedent prior to death . . 685 March 1, 1913; accrued prior to. .1631 Nonresident aliens. .1643, 1645, 1546 Index Page 20. CONSULT THE PINK SHEET. GENERAL INDEX. The references are to paragraph numbers. Interest as income — Concluded oq \ United States bond interest (See United States bonds at 2, Index Page 38.) Summary of tax exemptions. .1152 Year of accrual. .1631 Interest deductions . . 1232 Banks on deposits . . 1238 Capital: interest on. .1243 Car -trust certificates . . 1239 Equipment trust certificate . . 1239 Foreign corporations . . 1031 Mortgage indebtedness. .1232, 1236 Nonresident aliens . . 1563 Preferi ed stock . . 1238 Purchasing and carrying tax-free obligations. .1233 Dividend paying stock. .1237 Scrip dividends. .1238 Tax-free covenant bond interest: State tax paid by debtor. .1280 Interest on accounts current: withholding. . 1612, 1620 Interest on domestic securities: information at source. .1747 Interest on domestic securities: withholding of tax .. 1625 (See “Withholding at the source” at 2, Index Page 40.) Interest on tax: delayed payments . .2010, 2011, 2014 Interest paid in lieu of rental.. 967 Interest, tax-free: when distributed as dividend. .816 Internal revenue agents, inspectors, etc.: duties of. .1868 Leaves of absence. .2239 Internal Revenue Collection Districts. .Sup. Pages 101-106 Names and addresses of collectors. .Sup. Pages 101-106 Intestate’s real estate.. 642 Invalidating clause.. 2240 Inventories. .789, 1090, 2834, 2877 Accrual method necessary where inventories are used . .783 Basis adopted to be applied to each item . . 1092 Changes in method of valuing. .1092, 2877 Contracts to purchase goods. .2785 Cost.. 1093, 2877 Cost or market, whichever is lower . . 1092 Dealers in securities. 109 5 Depreciation does not apply to inventories .. 1331 Dry goods dealers. .2877 Farmers. .896, 898, 899, 2692 Income determining factor . .771 Inveetment of funds in, is proper employment of income. .607 Live stock raisers. .2692 Lossev substantial: special .. 1467, 1477, 2784 Lumber manufacturers. .2706 Market. .1094, 2834 Materials.. 1199 Supplies 1199 Unidentifiable goods 1092 Valuation of. .1092, 2877, 2834 What to be included in 10:>1 Inventory losses: special .. 1467, 1477, 1605 Invested capital :affiliated corporations .. 1821 Invested capital: value on March 1, 1913, has no bearing on. .1068 Invested capital: valuing in case of mergers, consolidations of reorganizations. Iowa drainage district assessments . . 1262 Irrigation companies, mutual . .749, 767 Irrigation districts Assessments for . . 1262 Bonds of: shrinkage in value . 1309 Interest on bonds of. . 1135, 2872, 2971 Joint adventure or venture.. 736 Joint fiduciaries: returns by . .681 Joint owners of bonds.. 1667 Joint owners of property not necessarily partners . . 736 Joint returns by husband and wife 1769, 1770, 2903 Joint-stock companies are “corporations” . .729 2669 , 2713 , 2766 , 28i8 , 2835 Judgments in connection with bad debts. . 1318 Judgments pa'd: when deductible . .792 Judgments received: when included in gross income.. 945 Jurisdiction of district courts. .1878 Kindt Compensation paid in. .889, 2568, 2660 Dividends paid in . .828 Exchanges generally. .1076, 2506 Farm produce exchanged. .896 Partnership dtetributions on dissoiution . . 1089 Property passing to legatee . . 638, 686 Labor as expense item . . 1198, 1208 Labor organizations. .740, 755 .1087 Index Page 21. CONSULT THE PINK SHEET. GENERAL INDEX. The references are to paragraph numbers. Land and buildings acquired for lump sum: depreciation. .1348, 134?, 2901 Land apart from buildings: no depreciation. .1331 Land: sale, of, in^lots . .931 Land: sale'of, on installment or deferred payment plan . .932, 2672 Landlord (See “Lessees and Lessors” at below.) Last due date . . 1820 Leased line certificates: dividends . .910 ^ Leased property: dividends and interest in lieu of rental. .967 Leasehold, purchase of: apportioning the expense . .1231, 2900 Leaseholds, mines and oil and gas wells: depletion. .1401, 1409, 1410 Leaves of absence of interna revenue officers . . 2239 Leaving country: declaration of termination of taxable period. .2073 Legal holiday in connection with last due date . .1820^ Legatees: amounts paid or credited to duiing administration. .646, 653 Depreciation allowances to lessee who has erected a building on leased ground. 1231, 2900 Improvements made by lessee. .939, 1231, 2695, 2899, 2900 Leased line certificates: dividends. .910 Leaseholds: apportioning the expense .. 1231, 2900 oo'to Mines, oil and gas wells: depletion apportioned . .1401, 1408-1410, But not under prior Acts. .2319, 2668 New buildings: cost of erecting by lessee. .1221, 2695, 2899, 2900 Payments made to another than the lessor . .939, 967, 2399 Rent and rentals as items of expense. .1229 Rent and rentals as items of income. .805, 939, 2899 Repairs made by lessee . . 1231, 2900 Royalties . . 9 39 , 2 89 9 Stock trust certificates: dividends 910 Taxes paid by tenant. .1231, 2900 Levee districts: Assessments for . . 1262 Interest on bonds of. .1135, 2872, 2971 Tennessee. .1262 LfabilUiee: assuming . .966 Liabilities of one year: effect on next year . .792 Liability of fiduciaries . .677 Liability of withholding agent. .1716 Liability to tax, generally. .474 Aliens: status on last day of taxable year governs. .622 Beneficiaries: for payment by. .646 Citizens and resident aliens. .611 Corporations . .717, 720 Estates and trusts. .637 Fiduciaries: for payment by 641 Foreign corporations . . 1015, 2994 Insurance companies , .983 Nonresident aliens. .611, 618, 1636 Partnership? . .646, 651 Personal service corporations . . 693 Liberty bonds (See “United States bonds” at 1, Index Page 38.) “Date of the tax return” . .2558 Summary of. for exemptions. .1162 License fees or taxes . . 1254 Automobile licenses .. 1263 ^ License: none required for use of substitute certificates. .1701 License required for collection of foreign items. .1755 Licenses: depreciation on account of .. 1332 Life, health, and accident insurance combined in one policy . .994 Life insurance companies. .983, 986, 2873 Life insurance: premiums on groups . .2650 Life insurance policy: surrender value as of March 1, 1913. .1177, 2430 Lifelinsurance: premiums on own .. 1186 , ,,oi hoc o 70 /« Life-insurance: premiums on, when a beneficiary under the policy . .1191, 1196, 2704 Life. Insurance; proceeds of .. 1112, 1114 Annuity and endowment contracts . .938 Corporation beneficiaries. .809, 1197, 2704 "Distributions on paid up policies. .938, 1119 Dividends: 938, 1113, 1118, 1119 i Estate of insured .. 1112, 1114 Individual beneficiaries . .1112, 1114, 1197, 2704 Partnership beneficiaries .2420 Light district bonds. . 1135, 2872, 2971 n , j 0170 Limitation as to suits for recovery of taxes wrongfully collected . .2173 Limitation of surtax: sale of mines, oil and gas wells . .487 Limitation on assessment of or suits for collection of taxes. .2029 LimitaUon'on claim for^credlt against future installments or for refund as result of examination of returns of prior years . .2122 Limitation on ordinary claims for refund . .2180 Limited partnerships. .734 Certain, held to be corporations. .736 Liquidating corporation: gross income of . .968 Distribution of assets . .866 Returns.. 969, 1816, 1818, 2770 ’ Index Page 22. CONSULT THE PINK SHEET. GENERAL INDEX. The references are to paragraph numbers. Liquidating dividends. .866 t, j . iooo Liquor dealers: obsolescence of good will, trade brands, etc . . List of individuals making returns to be posted. .1986 Livestock: farmers . .896-899, 2692 Living expenses. . 1185 Living quarters furnished employees. .889, 2650 Lobbying expenses. . 1227 Local benefits: assessments or taxes for . . 1260 Construction vs. maintenance . . 1262 Lodge system defined. .757 Lodging in lieu of cash rent. .940 Losses. .1303, 2507, 2807 Basis for determining on sale or other disposition . . 1053 case under 1913 Act. .2754) Business. .1303, 2507 Outside of business. .1310-1312, 2807, (Court Buildings: voluntary removal or demolition of . .1306 Capital stock: sale of own by corporation . .949, 1194, 1244 Depreciation: effect to be given to, in computing. .1058, 1305, 250 < Discovered in later year . .792 Embezzlement: when deductible . .792 « • • ckc okcq Estates and trusts: bearing on taxable income of beneficiaries . .655, 2563 Farmers . .898 Fruit trees by death . .2665 Gifts made; no loss to donor. .2507 Gross income: losses in connection with. .891 Illegal transactions. .1305, 2507, 2807 Insurance. .1303-1305, 1310-1312, 2507 ^ icna o7sa Inventory losses, substantial: special. .1467. 1477. 1505, 2784 Machinery: scrapping of old . .1306 Net losses. .1097 Nonresident aliens. .1566 Rebate payments: special . .1468, 1477, 1505 Replacement fund; compensation for losses . .941, 942 Reserves for . .1322 Residence: individual’s own . .1305, 2507 Stocks and bonds: shrinkage of value.. 1308, 1323, 1343 Theft: when deductible. .792 Trees by death. .2665 Useful value: loss of.. 1307 Lumber: gain or loss from sale of . .1072 Lumber manufacturers; inventories . .2706 Machinery, amoritzation of: war purposes . .1376 Machinery: scrapping of old. .1306 Machinery: statement as to estimated life of . .1364 Maintenance of local benefits: assessments for .. 1262 1/197 Manufacture and disposition of goods in U..S.;j profits of foreign corporations . .1027 Nonresident alien individuals . .1644 Manufacturing business :_.lncome^from . .891 March 1. 1913: Bad debtslexlsting'prior.to . . 1318 Bequests acquired prior to: sale of . -lO'’ Depreciating property: basis for . .1348, 2901 Discovery of mines, oil and gas wells subsequent to. .1410, 1426, 29 <2 Dividends accrued prior to. .1177, 2651 Dividends ^rom prior earnings . .826 Dividends from subsequent earnings. .812 Gain or loss based on value on. .1056, 1305 Gifts acquired prior to: sale of . . 1074 Income accruing prior to. .1177 Insurance policy: surrender value. .1177, 2485 Interest accrued prior to. .1631 Lumber value on . . 1072 Services rendered prior to. .1177 Timber value on. .1072, 1445, 2952 Value on, how determined . .1058 Has no bearing on invested capital . .1058 Marine Corps: compensation .. 1172 Marine insurance companies: mutual . .996 Mariners. .519, 1647 Market: inventories .. 1092, 1094, 2834 , , * „i mai okor “Market value” in connection with exchange of property for stock., 1081, 2506 Market values: effect on depreciation . . 1359, 2894 Marriage settlement: amount paid under. .1129 Married persons: returns by .. 1769, 1770, 1771, 2903 Married persons: specific exemption .. 1619, 1623 Divisible as they please ,. 1626 Maryland ground rents: payments m^de for. ,1236 Massachusetts savings bank. .766 Massachusetts Trusts. .732, 2399 Material as expense item: manufacturer. ,1198, 1199 Inventories in connection with . ,1199 Meals and lodgings while traveling. . 1187 Mechanic arts, colleges: compensation of certain employees,, 1167 Merchandising business: gross Income from . ,891 Index Page 23, CONSULT THE PINK SHEET. GENERAL INDEX. The references are to paragraph numbers. Merchant Marine Act, 1920 (Sec. 23) . .2712 Mergers: profit or loss resulting from . . 1082 Profit or loss from subsequent sale of securities . . 1087. 2479 Michigan limited partnerships. .734 -i Michigan partnership association. .735 Mileage. .879, 1187 Military and naval forces of the United States; defined. .1173 Active service defined .. 1176 Compensation of during war. .1172 < Return requirements . . 1176 Extension of time for ^ing. .1852 - May file at Baltimore. .1815 t'- ; Mines: depletion of .. 1397 . ‘ Depreciation of improvements . .1397, 1482 Lessees. .1401, 1409-1410, 2319, 2668, 2372 Under prior Acts. .2319, 2668 Mines; depreciation of improvements .. 1432 Mines: discovery of. .1426, 2972 Mines, sale of: limitation of surtax. .487 Mining business: gross income from. .891 Ministers: fees received by . .873 Ministers, foreign diplomatic. .1163 Minors: allowances or wages to one’s own children . .1186 Minors: return and tax liability . .702 Income of, a.s parents income. .702 Return for, by guardian. .673, 702, 703 Minors: United States bond interest exemptions .. 1156 Models: depreciation .. 1362 Mortgage foreclosure in relation to bad debts . . 1320 Mortgage foreclosure: return by receiver. .1786 Mortgage indebtedness; interest paid on. .1232, 1236 Mortgage on property purchased by State: interest on. .1136 Mortgaged real estate; receiver of rents, etc. .701 Municipal bonds: interest and discount on. .1130, 1135, 2872, 2971 Interest on indebtedness to purchase or carry. .1233 Ownership certificates not required . .1659 Municipal officers and employees: compensation. .1167 Special counsel . . 1170 Municipal taxes deductible . . 1248 Except local benefits assessments . .1260 Munition inspectors of foreign governments . 1546 Mutual automobile insurance companies 767,2360 Mutual ditch or irrigation companies. .749, 767 Mutual hall, cyclone or fire insurance companies. .749, 767, 2960 Mutual insurance companies taxable. .983, 996, 2517, 2673, 2815 Mutual marine insurance companies. .996 Mutual savings banks. .741, 756 Mutual telephone companies. .749, 767 National banks: assessments on stockholders of. .1190 Stock dividends not lawful. .2993 National farm loan associations. .752 Income from securities. .1131, 1136 National Red Cross: gifts to. .1447, 1452, 1457 Naturalized citizens residing abroad. .512, 515 Navy, Army and; compensation. .1172 Navy Nurse Corps, Female: compensation. .1172 Net income defined. .771 I Net Income: how computed. .769, 780,|783 Accounting methods . .778 To reflect true income . .779, 780 Affiliated corporations . . 1828 Corporations . .7'<0 Estates and trusts. .651 Foreign corporations . .1015 Individuals . .769 Nonresident aliens . .1540 Partnerships . . 552 Personal service corporations. .696 Statutory vs. commercial net income. .771 Net income is based on annual accounting period . .778 , 793 Change of accounting period. .800, 2763, 2784 Net income of affiliated corporations. .1821, 1828 Net losses. . 1097 Beneficiaries of estate or trust . . 1106 Claim for . .1107 Partnerships. .668, 1105 New buildings: expenditures for .. 1188 By lessees on leased ground. . 1231, 2695, 2899, 2900 k ^ New York limited partnerships. .734 New York transfer tax. . 1265, 2839, 2848 No greater aggregate par or face value: application of the limitation. .1086 Non-par-valne stock; in connection with mergers, consolidations and reorganizations .. 1086 Normal tax on citizens and residents . .476 Credits (See “Credits” at 1, Index Page .9) Spebfal rat© of first $4,000 applies to each individual . .481 Index Page 24, CONSULT THE PINK SHEET. GENERAL INDEX. The references are to paragraph numbers. Normal tax on estates and trusts . .636 Normal tax on nonresident aliens. .481, 1636 Credits (See "Credits at 1, Index Page 9.) Notaries public; fees received by. . 1167 Notes (See “Promissory notes” at 1, Index Page 28.) Notice and demand for tax. .2019 In case of first installment. .2013 In case of no return or false return . . 1899 Notice in connection with change of accounting period. .801 I Nonresident aliens.. 511, 618, 1536 ’ Actual vs. record owner of stock . . 1777 Agents of . . 1579 All aliens presumed to be nonresidents . . 623, 1699 American wife of. .613 Annual accounting period . . 1541 Brokers acting for . . 1579, 1580 Change of status . .1608 Charter money received by. .1646 Contributions to charitable, etc., institutions . . 1667 Credits .. 1570, 1571, 1677 Allowed conditionally. .1574 Source; credits may not be claimed at generally. .1676 Source; specific exeroptionon claimed at. .1576 Deductions allowed . . 1561 Allowed conditionally. .1574 Source: may not be claimed at source generally. .1576 Defined. .618, 1536 Distraint: property subject to, for tax . . 1682 Dividends on domestic stocks as income. .1543, 1545 1646 As credit 1571 Exempt income of . .1546 Extension of time for filing returns. .1852 Freight payments received by - . 1546 Gross income of . . 1642, 1545, 2994 Income not subject to tax . . 1546 Income of not subject to tax . . 1646 Interest deductible . . 1563 Interest on accounts current and on bank deposits. .1612 Interest on domestic securities as Income . . 1543, 1646, 1546 Leaving the country . . 2073 Losses deductible . , 1565 Manufacture and disposition of goods In United States. . 1644. 1646 Net income of. .1640, 2994 Normal tax on. .481, 1636 Ownership certificates for use by. .1677, 1649 Partnerships, foreign:1663, 2994 Personal service compensation earned abroad . .1546 Property of, subject to distraint for tax . . 1682 Record vs. actual owner of stock . . 1777 Refund by employer for amounts withheld . .1679 Refund by government of excess amounts withheld . .1679 Rentals on property abroad . .1646 Returns . .1679 By agents . .1679 By fiduciaries. .680, 706, 2669 Deductions and credits allowed only if full return is made . 1674 Extension of time. .1852 When filed.. 1808, 1809 Where filed.. 1811, 1812 Salaries of: withholding of tax. .1685 Seamen . . 1547 Specific exemption. .1670, 1677, 2505 Claiming at source. .1576, 1649, 2601 Status determined on last day of taxable year.. 622 Stock: profit from sale of . . 1662 Surtax.. 482, 1639 Tax: payment of . .1684 Tax withheld at source. .1686, 1626, 1636 Taxes deductible . . 1664 United States bond Interest. .1660 As credit. .1671 Wages of: withholding of tax. .1686 Withholding of tax at source .. 1686, 1626, 1636 (See "Withholding of tax at source” at 2, Index Page 40.) Nonresldept foreign corporation defined.. 1010 (See “Foreign corporations” at 2. Index Page 16.) Nonresident foreign corporations; withholding at the source .. 1614, 1626, 1636 (See “Withholding at the source” at 2, Index Page 40.) Oath: returns to he rrade under.. 1788 Obsolescence of business property .. 1328 Failure to take into consideration prior to 1918. .1369, 2894 Good will, trade names, brands, etc. . 1332, 1338 prohibition legislation: effect of. . 1333 (See “Depreciation” at 1, Index Page 11.) **Of a purely local character” . .767 Index Page 25, CONSULT THE PINK SHEET, GENERAL INDEX. The references are to paragraph numbers. Offers in compromise. .1928, 1944 Officers: insurance on lives of. .1191, 1196 Oil lands: co-owners of . .736 Oil wells (See “Wells” at 1, Index Page 40.) Orchards: depreciation and death of trees. .2665 Orchestral music organizations . .761 Organization expenses of a corporation. .1192 Owner unknown: withholding on bond interest .. 1627, 1644 1 Ownership certificates. .1659, 2764, 2816 Addresses on . . 1662 Agent: no stamp “Satisfied as to identity” required . . 1670 Fac-simile signatures . . 1664, 1703 Fiduciaries: use of proper certificates by. .1673 Foreign items. .1751, 2498, 2750 Furnished by Government. .1684 Improper form, substitution of proper certificate by collecting agent. .2764 Indorsement on back not required 1671 Initials . 1665 Interest dates: purchase and sale of bonds between. . 1677, 2817, 2889 Interrogatories to be answered fully . . 1660 Joint owners . . 1667 Language: may be printed in more than one . . 1688 Maturity dates: differing. .1668 Necessity for . . 1669 None: coupons presented without certificates. .1704, 2498, 2703, 2751 Number of bonds not required 1661 Old forms acceptable. .1691, 2671 Partnership with member having personal exemption in excess of taxable income. .2966 Privately printed . . 1685 Registered bonds. .1695, 1697, 1706 Retirement of bonds . 1676 Return of monthly 1709 Signatures . . 1664-1666 Size, color, etc 1682 Substitute certificates. .1700, 2500, 2764, 2816 Use of not permitted when 1700. 1762 Tax-free bond interest; no certificate required. .1669 Tax-free-covenant bond interest. .1647, 1650, 1695, 1697, 2817, 2899, 2966 Trustee under mortgage deed of trust. .1680 Trusts: more than one . . 1667 United States bond interest; no certificate required . . 1669 Usufruct of foreign owned. .1678 Withholding not required. .1697 Withholding requir^ . .1696, 2966 Paid or accrued.. 781 Paid or incurred. 781 Parent of minor 702 Partition proceedings, receiver in.. 701 Partnershipa . . 646 Association vs. partnership. .781 Corporations as members of partnership. .736 Corporations; partnerships not considered as. .473 Credits allowed members. .671 Dissolution of . . 1089 Distributive shares of members: Accounted for by member. .664 Constructive receipt of. .664, 947 Shown on return of firm . .557 Domestic partnership defined . .1632, 1553 Foreign . . 1010, 1663, 2994 Gifts or contributions. .652, 2516, 2566 Benefit of, taken by members. .654, 2616, 2566 Hawaiian partnerships. .650 Income of, how computed . .662 Information at the source: returns of . .1743 Insurance, proceeds of: received by. .2420 Joint owners of property. .736 Joint ventures . .736 Limited.. 734, 736 Net losses . .668 New partner admitted . . 1089 Ownership certificates .. 1696, 1697,2966 Persons; partnerships considered as . .472 Private banks . .731 Readjustment of partnership interests . . 1089 Receiver for . .701 Returns required . .661, 656 Contents of 666, 661, 1089 Selling out to corporation: future salaries as part of purchase price. .1211 Tax liability of member 646, 651 Fiscal year partnerships . .601 Tax rates differing: application of different rates to particular income. .632 Taxable year embracing parts of calendar years with differing rates . .601 Taxable year of member and firm differing. .666 United States bonds; application of exemptions. .1158 Index Page 26, CONSULT THE PINK SHEET. GENERAL INDEX. The references are to paragraph numbers. Patent Infrlntfement, judgment paid: when deductible . .792 Patent Infringement, judgment received. .945 Patenta, depreciation of. .1332, 1361 Patents, cost of: determination of . .1361 Patents, royalties on .939 Patents, sale of . .912 Paying agents may be appointed by debtors. .1654 Payments made, on account of creditor to anothor . .869, 871, 1231, 125b, 2yuu Penal bonds: U. S. bonds as security. .1500 Penalties. . 1864 Compromises . . 1928 Disclosure of contents of returns. .1976 By stockholder of corporation after Inspection .. 1973 Failure to make return. . 1889, 1901, 1902 Failure to supply information relative to Government contracts on request.. 581 Faise returns. .1864, 1884, 1889, 1902 Foreign items: collection of . .1757 Information at source .. 1902 Refund of penalties erroneously collected. .2116 Specific penalties . . 1902 Will not be asserted in certain cases, .1904 Suits to enjoin collection of . .2175 Tax: neglect or refusal to pay . .1902, 2011, 2016 Tax payments: delay in maldng . .2011, 2016 Tentative returns: failure to file complete return . • looO Understatements in returns. ,1864, 1884, 1889, 1902 Withhol^^i^g ^^t p^y tax by debtor or creditor when other has done 90.. 1721 , Pennsylvania ground rents: payment for .. 1236 Pennsylvania partnerships. .735 Pension funds: contributions to .. 1226 Pensions. .873, 1226 Per diem allowance in lieu of subsistence. .886 Percentage of profits: salary based on. .873 Permanent Improvements . .791, 1188. 1200 On leased property .. 939, 1231, 2899, 2900 “Person” defined.. 472 Personal expenses vs. business expenses .. 1185 Personal property sold on installment plan. .914, 2672, 2822, 2965 Personal service corporations. .593, 753 Activities of stockholders. .587 Capital of . .691 Borrowed capital. .592 Change of ownership . .690 Consolidated returns . . 1827 Defined.. 673 583 Dividend distributions . .816, 1325 Credits to stockholders. .600, 1514 Distributions that are not dividends. .827 Excess profits tax . .697 Credit to stockholders . . 604 Foreign corporation not included . .674, 584 Gifts made by . .596 Government contracts. .676, 684 Income of, how computed . .696 Information at the source: returns of . .1743 Ownership certificates . .1696 Partial personal service. .686 Personal service defined . . 585 Retu ns by . .697 Stock owned by another corporation . .684 Stockholders; Activities of . .687 Capital Invested by . .692 Distributive shares to be returned by. .696, 699 Fiscal year corporations. .601 Stocwfolders'of^corporatlon which withholds its profits taxed as members of personal ser^dce corporations. .497 Tax liability. .693 ........ Fiscal years beginning in 1917 . .596, 697 ^ Tax rates differing; application of different rates to . Taxable years embracing parts of calendar years with different rates . .601, Test as to what is a personal service corporation. .683 Trading as a principal. .675, 584 United States bonds: application of exemption# . . 1168 Philippine Islands: income taxes in . .634 Credit for income and excess profits taxes. .844, 645, 1^28.3 Dividends of corporations there taxed . . 640, 543 Taxation of citizen of United States resident in Philippines.. 544 Taxation of certain corporations. .634, 645 Taxation of certain citizens of. .631 534 Withholding against Philippine corporations, .845 lodcr Page 27. CONSULT THE PINK SHEET. GENERAL INDEX. The references are to paragraph numbers. Photographer: personal service corporation. .^86 Pipe extensions: public utilities. .1205 Political subdivision of State or Territory Defined. .1135 Income accruing to. .1164 Interest on obligations of. .1135, 2872, 2971 Officers and employees: compensation. .1167 Port improvement bonds. .1135, 2872, 2971 Porto Rico: income taxes in . . 534 Credit for income and excess profits taxes. .544, 545, 1283 Dividends paid by corporations there taxed . . 540, 543 Taxation of citizens of the United States resident in Pcrto Rico 544 Taxation of certain corporations. .534, 545 Taxation of certain citizens of Porto Rico. .531, 534 Withholding against Porto Rican corporations . . 545 Possessions of the United States defined . .533, 1292 Credit for taxes paid to. .544, 645, 1283 Income taxes in Porto Rico and the Philippines. .634 Tax liability of citizens of . .631 Postage is not a tax . . 1253 Postal savings bank accounts: interest on. . 1139 Poultry raising organizations. .765 (See “Farms and farmers” at 1, Index Page 15.) Power of attorney does not create fiduciary relationship 672 Preferred stock: dividends vs. interest. .1238 Preferred stock: redemption of. .965 Premium: bonds issued or retired at. .951 Premium: capital stock sold at. .949 Premium coupons: subtraction for redemption of . . 1178 Premium; fidelity bond . . 1202 Premium; preferred stock redeemed at, .965 Premiums collected by agents in one year remitted to company in next. .2517 Premiums life insurance: when a beneficiary under the policy. .1191, 1196, 2704 Premiums: on own life insurance. .1186 Premiums on group insurance. .2650 Present war defined. .1174 Termination of. .1175 President of the United States: salary. .803, 2669, 2713 Prevention of cruelty to children or animals: gifts on account of (See “Gifts ’ at 2, Index Page 18 ) Corporations orearised for 746 760 Priests: fees received by . . 873 Principal office of foreign corporation. .1048 Prior laws: continuing effect of . .2032 Private banks. .731, 842. 894 Privilege taxes deductible. .1254 Professions: Capital expenditures incident to. . 1201 Expenses incident to. .1186, 1201 Income from. .804 Profit or loss (See “Gain or loss” at 1, Index Page 18.) Prohibition legislation: obsolescence allowances on account of. .1383 1 Promissory notes: As compensation. .890 Discounted: accounting for proceeds . 890 Sales of personal property. .914, 2822, 2965 Sales of real property . .936. 937 Valuing in connection with allowance for bad debts. .1318, 1323 Proof of residence by aliens. .521, 523 Propaganda: expenditures for exploitation of . .1227 Property : Amoritzation: property used for war purposes 1376 Deprec ation of . . 1328 (See “Depreciation” at 1, Index Page 11.) Dividends paid in 828 Exchanged for other property. .1076, 2506 Exhaustion of . . 1328 (See “Depreciation” at 1, Index Page 11.) Income from dealings in . . 804 Loss of useful value. .1307 Losses on account of. .1303. 1305. 1311 Compensation for; replacement fund.. 941, 942 Obsolescence of . . 1328 Salary as part payment for. .1211, 1215 State purchasing property subject to mortgage, .1135 Title to: cost of defending or perfecting. .1190 Use of permanently discontinued . .1371 Public records: returns are. . 1955. 2450 Public school teachers; compensation. .1167 Public utility: affiliated corporation for consolidated return .. 1833, 1839 Public utility operating State owned property. .727 Public utility privately operated under contract with State.. 1166 Public utility: service connections or pipe extensions .. 1206 Purchasing agents of foreign governments . . 1546 Index Page 28, CONSULT THE PINK SHEET. GENERAL INDEX. The references are to paragraph numbers. Purpose to avoid surtax; undistributed profits of corporations . .497 Evidence of. .606 Quarters: federal employees . .879 Quarters furnished employees. .889, 2650 Race or race track associations. .755 Race track winnings and losses. .2807 Railroad fares. .1187 Railroads: government contracts. .679 Railroads: interest on car-trust or equipment trust certificates . .1239 Railroads: special tax provisions. .737 Expenses of . . 1206 Rates for computing depreciation . . 1352 Rates, tax (See “Tax rates ” at 1, Index Page 36.) Razing of old buildings. . 1306 Real estate apart from improvements; depreciation. .1331, 1848. 1349, 2901 Real estate as compensation for services: title in dispute. .945 Real estate: determination of cost. .1064 Real estate sold in lots. .931 Real estate sold on instalment or deferred payment plan. .932, 2672 Real estate transferred by excercise of right of eminent domain or in anticipation thereof.. 941 Rebate payments, special: allowance for. .1468. 1477. 1506 Receipts for taxes. .2102 Amounts withheld at source . .2114 Receiver appointed by State court: commissions 1167 Receiver in partition proceedings. .701 Receiver of corporation in liquidation. ,968 Receiver of rents and profits of mortgaged parcel. .701, 1786 Receiver operating business or property of a corporation . 1786 Receivers: returns by. .701, 1786 Common law. .701 In possession of part only of property of individual 669. 701 Statutory. .701 Reclamation district bonds. .1135, 2872, 2971 Recomputation of tax installments. . 1880 Record vs. actual owner of stock. .1777 Records to be kept. .1998 By employers of Form 1078 received. .527 Recoveries of bad debts or accounts charged off . .946 Recoveries on Judgments. .945 Recoveries on patent infringements. .946 Red Cross: gifts to .1447,1462.1467 Redemption of bonds by corporations. .951 Redemption of preferred stock. .966 Redemption of trading stamps: subtraction for. .1178 Refund claims (See “Claims for refund" at 1, Index Page 6.) Refund by employers of excess amounts withheld against nonresident aliens. .1606, 1610 Refund of amounts found to be due the taxpayer as result of examination of returns of prior years . .2121 Refund of excess amounts paid on account of underestimating foreign tax accruals. . 1288, 129 i Refund of excess amounts paid on installment tax payments. .1882 Refund of taxes paid in prior years: effect on income. .1263, 2775 Registered interest: no ownership certificate filed by owner. .1706 Regulations: Commissioner authorized to make. .2227 Regulations No. 45: promulgation of . .2228 (See Finder Page 1, immediately following page 432.) Religious purposes: gifts on account of (See “Gifts" at 2, Index Page 18.) Corporations organized for. .745, 760 Removal of old buildings. . 1306 Renewal premiums: commissions on. .887 Rent as expense . . 1229 Leasehold: purchase of. . 1231, 2900 Professional men. .1186, 1201 Rent as income. .805, 939 Improvements by lessee rental . .939, 2899 Payments in lieu of rental . .939, 940, 967, 2899 Rental value, loss of or increase of: effect on depreciation. .1359, 2894 Reorganization of corporations: profit or loss resulting from . .1082 Profit or loss from subsequent sale of securities . . 1087, 2479 Reorganization defined . . 1085 Reorganization of partnership. .1089 Repairs as deductible or nondeductible item. .1189, 1200 Lessees . . 1231, 2900 Local benefit assessments . . 1262 Replacement fund for loss. .941, 942 Replacements: expense vs. capital investment. .791, 1188, 1200 Repossessing property sold on installments or on deferred payment plan.. 914, 927, 936, 937, 2822, 2965 Inability to repossess. .930 Reserve funds: insurance companies. .991 +, 2617 Net decrease, as income. .985 Released reserve taxable income. ,2617 Reserves for losses. . 1322 Reserves in lieu of insurance . . 1204 Residence abroad: citizen. .511, 612, 515 Residence: depreciation on .. 1331 Index Page 29. CONSULT THE PINK SHEET. GENERAL INDEX. The references are to paragraph numbers. ,1306 Residence, loss of status: by alien. .622, 1611 Residence, loss of individual’s own by fire, etc . Sale of. .2507 Residence, proof of: by alien. .619, 521, 623, 1600 By use of Form 1078. .619, 623 Resident aliens: taxable status of .. 511 . , loac ovii 9M9 Credit for income and excess profits taxes paid to foreign countries. .1286, 2711, With children abroad is not “head of family” . .1522 With wife abroad is not “living with wife” for purposes of specific exemption. . 1628 Resident foreign corporation defined . . 1010 (See “Foreign corporations” at 2. Index Page 15.) Retailers: inventories. .1090, 2877 Retired pay or retiring allowances. .873, 1226 Retirement of bonds, by corporation. .961, 1244 Ownership certificates . . 1675 Sinking fund. .902, 1374 Returns. .1766 Absence. .674, 1847 Accounting period: calendar year or fiscal year . 799 Change of . .800, 1855, 2763, 2784 Advisable to make return even though no net income. .1772 Affiliated corporations. .1821, 1827 AUen^^operty custodian: property turned over to.. 1854, 2497, 2814 Amended returns (See "Amended returns” at 1, Index Page 2.) Assistance from collectors in preparing . . 1803 Basis for making .. 799 Bond interest where no withholding . .1710 Brokers: special .. 1764 Calendar year or fiscal year basis. .799 Community property. .2903 ^ Consolidated returns of affiliated corporations . . 1821 Affiliated corporations defined . . 1835 Assessment of tax . . 1824, 1829 Different fiscal years . . 1832 Foreign corporations . . 1843 Forms for making . . 1827 Government contracts . . 1822 Necessity for . . 1826 Net income . . 1828 Public utiUties . , 1833, 1839 Specific credit of $2,000 . . 1825 Corporations: annual tax returns by . . 1778 Affliated corporations. . 1821, 1827 Assignees operating business or property. .1785 Change of corporate name . . 1784 Consolidated returns . . 1821, 1827 Dissolved prior to October 4, 1917. .1783 Dissolved prior to passage of Revenue Act of 1918. . 1780 Dissolved prior to time for filing return. .1781, 1819 Foreign corporations . . 1044 Forma for making . . 1780 In existence during any part of year . . 1780 In liquidation. .969, 1816, 1818, 2770 Organization not perfected and no income. .1780 Receivers, trustees in bankruptcy and trustees in dissolution. .701, 968, 969, 1786 Correct returns essential . .792 Correction of. .1866, 1989 Decedent to time of death . . 684, 699 Disclosing contents of . .1976 (See “Inspection of returns” at 1, Index Page 31.) Dividend payments: special . . 1762 Dividends: actual vs. record owner . . 1777 Each year’s return to be complete in itself . .792 Examination of persons and books. .1877 Extension of time for filing. .1847, 2570 Failure to make return. .1889, 1901, 1902 False returns . . 1864, 1884, 1889, 1902 Fiduciaries: returns by. .654, 669, 676 Administration of estate completed . . 699 Contents of . . 682 For nonresident alien. .680, 706, 2569 Foreign fiduciaries. .706 Forms to be used . .684 Guardian or committee. .703 Income of minor. .702 Receiver. .701 Termination of trust. .699 Two or more joint fiduciaries. .681 Two trusts. .700 Final returns. .1816, 1818, 1819, 2770 Fiscal or calendar year basb. .799 Foreign corporations . . 1044 Foreign items . .1749 Index Page 30. CONSULT THE PINK SHEET. GENERAL INDEX. The references are to paragraph numbers. Returns — Concluded. Forma for making returns. .1737 Corporations . . 1780 Consolidated returns . . 1827 Fiduciaries . . 684_ Foreign corporations . . 1044 Individuals. .1773 Information at the source. .1736, 1743, 1746, 1748 Nonresident aliens. .1579 Partnerships . . 560 Personal service corporations . . 597 Withholding at the source. .1709 Fractional part of year. .1863 Furnishing copies of returns .. 1968, 1969, 2450 Government contracts. .579, 580 Head of family . . 1770 Husband and wife.. 1769, 1770, 1771, 2903 Community property. .2903 Delinquency of one return. .1771 Incompetents . .703 Increases by collector. .1864 Individuals . . 1766 Forma for making. .1773 Information at the source . .1728 „ , , r. \ (See "Returns of information at the source” at 2, Index Page dl.) Inspection of generally. .1956, 2427, 2450 State officials. .1970, 2456 Stockholders of corporation. .1972, 2442, 2473 Insurance companies . . 1002 Last due date . . 1820 Legal holiday . . 1820 List of individuals making . . 1986 May be requested of any person . .1876 Minors.. 702, 703 Nonresidence. .674 Nonresident aliens: by.. 1579 u j Deductions and credits allowed only if full return be made., 1574 For nonresident by agents. .1579 For nonresident by fiduciaries. .680, 705, 2569 Forms for making. .1579 Oath: returns to be made under. .1788 Partnerships. .551, 555, 2966 Accounting period changed . . 560 Contents of. .556, 561, 1089 Form for making . . 560 Period covered by . . 655, 660 Period covered by. .799 Change of . .800, 1855, 2763, 2784 Personal service corporations . . 697 Place of filing . .1811 Profits and losses: how reported . . 1776 Public records. .1955, 2450 Receivers. .701, 968, 969, 1785 Rent receipts: how reported. .1774 Secret of . .1976 „ i u \ (See "Inspection of returns at 1, above.) Sickness.. 674, 1847 ^ ^ Soldiers and sailors . .1176, 1816, 1852 Sunday.. 1820 , Tax-free-covenant bond interest: how reported . .1774 Tentative returns. .1787, 1850, 2570 TmsteeJin&hft^on and in bankruptcy . .701, 968, 969, 1785 Understatements. .1864, 1884, 1889, 1902 United States bond holdings . .1134, 1773 Verification of . . 1788 When filed. .1807 Where filed.. 1811 Withholding at the source. 1707, 1709 (See “Withholding at the source at 2, Index Page 40.) Returns of Information at the source. .1728 $1,000: returns as to payments aggregating. .1736 Annuities . .1744 . t • u*. -in a a Bills paid for merchandise, telephone, freight, etc. .1744 Board and lodging in lieu of cash . .1739 While traveling. .1744 Branch offices: heads of, to report. .1738 Branches of business houses in foreign countries . .1744 Brokers: customers’ transactions . . 1764 Corporations: payments made to . . 1744 Dividends. .1744, 1762, 2895 Fiduciary returns. .1748 Index Page 31 CONSULT THE PINK SHEET. GENERAL INDEX. The references are to paragraph numbers. Retariis of information — Concluded Foreign items. .1749 License required. .1755 Name and address to be furnished on demand. .1753 Ownership certificates. .1751 When none accompanies item. .2498 Penalties. .1757 Return of information . . 1752 Source of information . . 1750 Substitute certificates not permitted . . 1752 Forms for making returns. .1736, 1743, 1746, 1748 Government salaries to employees . . 1744 Insurance agents and agencies . . 1740 Interest on corporate obligations . . 1747 Large number of employees moving from place to place . .1738 Miscellaneous payment aggregating $1,000 . . 1736 Name and address to be supplied on demand . .1753 No returns required in certain cases. .1744, 2895 Nonresident aliens .. 1744, 1746 Ownership certificates constitute returns in case of bond interest. .1748 Partnership returns . . 1743 Payee not actual owner of income . . 1754 Personal service corporation returns. .1743 Piece work payments . . 1742 Rent payments . . 1744 Sailors, resident alien . . 1548 United States bond interest . . 1744, 1745 Wages and salaries of employees. .1738, 1742 When filed.. 1736 Where filed.. 1736 Revenue Act of 1916; of 1917; of 1918: entitling of . .773 Review and Appeal: Committee on. 2224 Revocable deed of trust . . 654 Rights, sale of. .911 Road district bonds. .1135, 2872, 2971 Royalties as income. .809, 939, 2899 Rules and regulations: Commissioner authorized to make. .2227 Rulings upon abstract questions. .2230 Sailing permits. .2082 Sailors; merchant marine; resident or nonresident aliens . .519, 1547 Naval forces of the United States: compensation . .1172 Equipment of. .1186 Return requirements. .1176 Extension of time for filing . . 1852 May file at Baltimore . .1815 Salary paid by employer during war. .1226 Salaries: As item of expense . , 1208, 2489 As item of income . . 873 (See “Compensation for personal services’* at 2, Index Page 6.) Sale of Bonds (its own) by a corporation. .951, 1244 Capital assets: income from. .804, 809, 966, 1244, 2876 Capital stock by a corporation. .949, 1193, 1244 Lumber . . 1072 Plant, machinery, equipment, etc., installed or acquired on or after April 6, 1917: losses. .1099 Property to corporation for its stock . . 1080 Timber . .1072 Sales agents: farmers’ or fruit growers’ associations acting as . .750, 768 Sales: income from . .804 Basis for determining profit or loss. .1055, 1305 Deferred payment sales. .914-937, 2822, 2965 In foreign commerce. .810 Installment sales. . 914-936, 2672, 2822, 2965 Personal cre^t of vendee. .914, 2822, 2965 Salvage values: amortization claims. .1387, 1388 Salvage values: gain or loss on sale of depreciable property . .1371 Sample room: use oL. 1187 Savings bank interest credited but not drawn. .947 Scho^ district bonds. .1135, 2872, 2971 Scientific purposes; gifts on account of (See “Gifts’’ at 2, Index Page 18.) Corporations organized for. .745, 760 Scrapping of old machinery . . 1306 Scrip dividends . .828 Interest on . . 1238 Seamen alien or otherwise. .519, 1547 Second assessments: abatement and refund. .2176 Secrecy of returns. .1976 (See “Inspection of returns’’ at 1, Index Page 31.) Secret formulae or processes: depreciation of . .1332 Secretary defined . . 503 net Index Page 32. CONSULT THE PINK SHEET. GENERAL INDEX. The references are to paragraph numbers. Secared debts taxes , . 1253 Necarities : Commissions paid, for buying or selling. .1190 Dealers in : inventories . . 1095 Banks as . . 1096 Income from as gross income. .805, 809, 891, 2876 Foreign corporations. .1025 "'■■Nonresident aliens . . 1543 Purchase of by corporation not employment of income in its business . . 506 Purchased and carried for customers: interest paid and received . .905 Shrinkage in value of, or worthless. .1308, 1323, 1343 State: interest and discount on. .1130, 1135, 2872, 2971 United States (See “United States bonds” at 1, Index Page 38.) Selling expenses in connection with gross income. .891 In connection with net income. .1198 Separation agreement: amount received by. .1129, 1186 Service connections: public utility . .1205 Sewer district bonds. .1135, 2872, 2971 Shareholders (See "Stockholders” at 1, Index Page 34.) Ships (See “Vessels” at 1, Index Page 39.) Shipwreck losses .. 1303, 1305, 1311 Compensated for: replacement fund. .941, 942 1 Sickness: Agent may make return . .674 Amounts received on account of; insurance, etc . .1111, 1114 Cause for extension of time for filing returns. .1847, 1850 Single person: specific exemption . .1518 Sewer district bends. . 1135, 2872, 2971 Sinking funds. .2876 Additions not deductible. .1374 Creation of. .2876 Employment of income . .507, 2876 Investment in corporation’s own bonds. .902, 1374 Sixteenth Amendment to the Const: tuition . .2269 Smith-Lever Act: compensation of college employees . .1167 Soldiers: Compensation of. .1172 Equipment of . . 1186 Return requirements. .1176 Extension of time for filing . . 1852 May file at Baltimore. .1816 Salaries paid by employers during the war . 1226 Source: information at fSee '‘Returns of information at source” at 2, Index Page 81.) Source: withholding at (See “Withholding at the source” at 2, Index Page 40.) Special assessment districts: Exempt interest on obligations of. .1513 Taxes for benefit of . . 1260 Special counsel to a municipality. .1170 2 Specific exemption .. 1158 Corporations. .1531 Affiliated. .1825 Apportioning on change of accounting period. .1861 Date determining status for. .1526 Decedent dying during taxable year. .1626 Dependents . . 1524 Estates and trusts . . 667 Fiduciaries for beneficiaries. .673, 682, 704 Heads of families .. 1519, 1522 Married persons. .1519, 1523 Divisible as they please. .1526 Nonresident aliens. ,1570, 1577, 2505 Claiming at source. .1576, 1649 Single persons. .1518 Surtax; specific exemption does not apply to. .495 Tax-free-covenant bond interest: withholding. .1646 Nonresident aliens . . 1649 Specific penalties. .1902, 2015 Recoverable by suit only. .1903 Will not be asserted in certain cases. ,1904 Stamp taxes are deductible. ,1254, 2652 State Contracts: income from. .893 State: income accruing to.. 1164 Public utilities operated under contract. .1165 Workmen’s compensation insurance funds. .1166 State officers and employees: compensation . .1167 State officers: inspection of income tax returns. .1970, 2456 State securities interest on. .1130, 1135, 2872, 2971 Dividends by corporations receiving such tax free interest. .815 Interest payments on indebtedness to purchase or carry. .1233 Ownership certificates not required. .1659 Purchase by State of property subject to mortgage. .1136 State taxes deductible. .1248, 1253 Tax-free-covenant bond interest . . 1280 Index Page 33. CONSULT THE PINK SHEET, GENERAL INDEX. The references are to paragraph numbers. Statement as to inventory losses and rebate payments. .1484 Statement as to net losses sustained . . 1107 Statement as to redemption of trading stamps. .1178 Statement by foreign corporations when claiming ^refund of excess amounts withheld at source . . 1053 Statement by nonresident aliens when claiming refund of excess amounts withheld at source. .1679 Statement (affidavit) to be filed by exempt organizations .. 754 Statements made as part of or supplemental to returns: inspection of. .2436 Statements to be submitted on request: Government contract data. .579, 580 In case of unreasonable accumulation of profits by corporation .. 600 Statements to be submitted on requesting authority to change method of accounting. .786 Statements to be submitted with return: Allocation of deduction and income to particular source. .489 Depletion of mines. .1424 Depletion of oil and gas wells. .1425 ff Depletion of timber. .1444, 2951 Liberty and other United States bond holdings. .1134 Statistical information to be reported annually by Commissioner. .1987 Statutory net income vs. commercial net income. .771 Statutory receivers. .701 Steamship companies foreign . .1023 Stock, bank: taxes paid by bank. .1256 Stock: actual vs. record owner of. .1777 Stock: bonus in common in connection with sale of preferred or bonds. .911 Stock: bonus to employees. .889, 946, 1222 Stock, capital: sale of its own by a corporation. .949, 1193, 1244 Expenses incident to sale of. .1193 Stock: commissions paid in . .1225 Stock dividends (See “Stock dividends” at 1, Index Page 12.) Stock exchanged for other property . . 1077, 2506 Mergers, consolidations and reorganizations . . 1082, 2479 Stocks and bonds exchanged for other property . .1079 Stock insurance companies. .1003 Stock in trade: no depreciation of. .1331 Stock, non par value: in connection with mergers, consolidations or reorganizations. .1085 Stock of other companies: dividends paid in . .828 Stock paid and received by way of compensation. .889, 946, 1222, 1226, 2660 Stock, preferred dividends vs. interest . . 1238 Stock, preferred: redemption of. .965 Stock, profit or loss from sale of. .911 By a corporation of its own . .949, 1193, 1244 Expenses incident to sale of by a corporation. .1193 Nonresident aliens. .1552 Slock raising corporations. .755 (See “Farms and Farmers” at 1, Index Page 15.) Stock received as gift. ,1075 Slock received in payment for property . . 1080 Stock returned to corporation for resale. .949 Stock: treasury .. 949 Stock trust certificates: dividends. .910 Stock: value as of March 1, 1913. .1060 Good will considered. .1063 Stock: worthless, as a deduction. .1308 I Stockholders: Actual vs. record owners of stock . . 1777 Assessments on stock. .950, 1190 Assets distributed may be followed for corporation’s tax. .2770 Building and loan associations: amounts credited to. .947 Canceling debt of, or to, corporation. .943 Consolidations: profit or loss. .1082, 2479 In corporation failing to distribute profits. .497 In corporation owning mine or well in connection with sale thereof, .488 Inspection of corporation’s return . . 1972, 2442, 2473 Liquidating corporation: tax collectible from stockholders. .1818, 2770 Mergers: profit or loss. ,1082, 2479 Mines and wells: no depletion allowance. .1407 Names and addresses, and distributive shares to be furnished by corporation on request . . 500 National bank; assessments on . .1190 Personal service corporation . . 587 Tax liability. .593 United States bond interest exemptions. .1158 Reorganizations: profit or loss . . 1082, 2479 Returning stock to corporation for resale. .949 Salaries as officers. .1211, 1215 United States bond interest in relation to the corporation. .1159 Personal service corporations .. 1158 Unreasonable accumulations of profits: stockholder under no obligation to ascertain facts . . 602 Stockholdings: salaries based on. .1211, 1215 Stocks and bonds received in exchange for property . . 1079, 2606 Stocks and bonds: shrinkage in value of, or worthless. .1308, 1323, 1343 Index Page 34, CONSULT THE PIN SHEET. GENERAL INDEX. The references are to paragraph numbers. Storm losses.. 1303, 1305 1312 o.i Compensated for; replacement fund. .941, 942 Crops by farmers, .898 Subsidiaries: dividends on stock of. .1327 Guaranteed by holding company .. 1192 Subsidiary relationship: reasonable expenditure of income in stock of subsidiary Substitute certificates. .1700, 2500 Endorsement on certificates of ownership. ,1702 Fac-simile signatures. .1703 License: none required. . 1701 Use of not permitted. .1700, 1752 Subtraction for redemption of trading stamps, .1178 Suits for collection of taxes . .2070 Five vear limitation . . 2029 Suits for recovery of taxes wrongfully collected. .2177, 2982, 3014 Claims for refund of amounts recovered by. .2210 Example of proper procedure. .2189, Limitation as to such suits . .2178, 2982, 3014 ^ oom May be brought only against the collector who collected the taxes.. 2201 Suits to restrain assessment or collection of the tax. .2164 Suits to restrain or enjoin collection of penalties, .2175 Sunday in connection with last due date. .1820 Supertax (See “Surtax” below). Supplies as expense item . .1198, 1199 Inventories in connection with . .1199 SDpremi'c«S?fdSi'nsf Act ot 1913. .2242: also, 2517, 2661. 2673, 2816 Acts of 1916, 1917, 1918. .2241, 2575, 2713, 2766 Act of 1909 (recent cases) . .2317, 2517, 3014 Surgeons, army contract: compensation . .1176 Surplus: dividend distributions . .818, 825 Beneficiaries: income received through fiduciaries .. 492 Dividends received through fiduciaries .. 494’ Citizens and residents. .482 Computation of surtax . . 486 In case of sale of mine or well. .488 Corporations not liable to. .493 . jan Corporations withholding profits to relieve stockholders of tax . .497 Credits for normal tax not applicable to surtax. .483, 1516 Estates and trusts. .636 Husband and wife: separately computed. .490 Mines, oil and gas wells, sale of: maximum limitation . .487 Nonresident aliens. .482, 1539 Sword, cost of: army officer. .1186 Tangible property: depreciation . .1331 Tariff duties.. 1264, 2775 Tax Board: Adrlsory . ,2211 • xj j tcooi Tax collected as prescribed by Commissioner unless otherwise provided. .16831 Tax: collection and payment of. .2000 Assessment of. .2013, 2030 Five year limitation . .2029 Notice of may be sent by mail. .2027 Three year limitation. .2032 Claims for abatement: effect of . .2012 Distraint. .2071 Enforcement of tax lien by bill in equity . .2072 Extension of time. .2008 Fractional part of cent. .2089 In full.. 2006, 2017 In installments .. 2000 Assessment of first installment. .2013 Credit or refund for excess payments . .1881 Does not apply in case of failure to make return . .1899 If not paid when due all of tax becomes payable . .2017 Notice and demand for first installment. .2013 Penalties: understatements. .1884 Recomputation of . . 1880 Interest on . .2010, 2011, 2014 Penalties. .1902, 2011, 2016 Receipts. .2102 Suits for. .2029, 2032, 2070, 2982, 3014 Suits to restrain collection of . .2164 Treasury certii.cates of indebtedness . .2091, 2608 Uncertified checks. .2091 When paid. .2000-2009 When withheld at source. .1708 Where paid. .2007 Tax: Interest on . .2010, 2011, 2014 « j » • o'rno Tax liability corrected: adjustment of over a period of prior years. .2702 Tax lien: enforcement of by bill in equity . .2072 .606 Index Page 35. CONSULT THE PINK SHEET GENERAL INDEX. The references are to paragraph numbers. 1 Tax notice and demand. .2019 First installment. .2013 In case of no return or false return. .1899 May be sent by mail. .2027 Tax on corporations. .713 Foreign corporations . . 1007 Insurance companies, 983, 2517 Tax on estates and trusts . . 636 Paid by beneficiaries . . 645 Paid by fiduciaries. .641 Tax on foreign corporations. .1007 Tax on Individuals . . 511 Normal tax . .476 Surtax . . 482 Undistributed profits of corporations. .497 Tax on Insurance companies. .983, 2517, '2*673, 2815, 2960 Tax on members of partnerships. .546, 551 Tax on nonresident aliens. .511, 1535 Normal tax. .481, 1536 Surtax. .482, 1539 Tax on railroads under government control. .737 Tax on stockholders of personal corporation . . 593 Tax rates differing for parts of taxable year. .613, 627 Allocation of different rates to particular income. .628 Corporations . . 622, 626 Individuals .. 625, 626 Partnerships . . 601 Personal service corporations. .601, 624 Tax rates for 1918: Corporations. .715 Individuals: Normal tax. .477 Special for citizens and residents. .478 opecial rate applies to each individual .481 Surtax . . 485 Nonresident aliens. .1537, 1539 Tax rates for 1919 and subsequent years: Corporations . . 716 Individuals: Normal tax. .479 Special for citizens and residents. .480 Special rate applies to each individual. .481 Surtax . . 485 Nonresident aliens. .1538, 1539 Tax rates (surtax) for prior years. .861 Tax rates on dividends. .816, 823 On stock dividends. .856, 861 Tax rates: withholding at source. .1626, 1645 Tax receipts. .2102 Tax: recomputation of . 1880 cieditiJr^‘foTri719^® “Withholding of tax at the source” at 2, Index Page If paid by creditor then not recollected from debtor 1720 Taxable year. .780, 794 Change of . .800, 2763, 2784 Declaration of termination of. .2073 First taxable year . . 798 Taxable year embracing parts of calendar years with different rates.. 613. 627 Corporations . . 622, 626 Individuals. .625, 626 Partnerships. .601 Personal service corporations . . 601, 624 Taxes, additional: payment of. .1882, 1899 Foreign taxes: overestimated accruals .. 1288, 1294 Taxes: credit for excess profits taxes payable to United States. 1529 Taxes: credit for income and excess profits taxes paid or accrued to other tions. .544, 545, 1283, 2711, 28D2 Taxes deductible or not deductible . . 1245 Bank stock: taxes paid by bank. .1256 Capital stock tax. .1254, 1255 Estate taxes. . 1264, 2839, 2848 Federal excise, etc. .1254, 2484, 2652, 2775 Foreign corporations. .1032 Foreign taxes . . 1281 Income and excess profits taxes: other jurisdictions. .1281, 1282 Income and excess pro 'Its taxes: United States. .1246, 1253 Inheritance taxes . . 1264, 2839, 2848 New York transfer tax. .1265, 2839, 2848 Local benefit taxes or assessments. .1260 Construction vs. maintenance. . 1262 Municipal taxes . . 1248, 1260 Nonresident aliens . . 1564 Paid for or on account of another: deductible .. 1280 Not deductible by the payor. .1256, 1264, 1279 40.) jurisdic- Index Page 36. CONSULT THE PINK SHEET. GENERAL INDEX. The references are to paragraph numbers. Taxe.s deductible or not deductible — Concluded Postage is not a tax . . 1253 Refund of taxes paid in prior years: effect on income. .1263, 2775 Secured debts taxes. .1253 Stamp taxes. .1254, 2652 State taxes, 1248, 1253 Tax-free-covenant bond interest: tax paid by obligor. .869, 1279 Undistributed profits tax of 1917 Act. .510 United States taxes. .1246, 1254, 2484, 2652, 2775 Taxes, foreign .. 1281-1301, 2392 Taxes paid for another as additional income to him . . 869, 871, 1231, 1256 I Tax-free-covenant bond interest: Bonds not containing covenant m.ay not be considered tax-free. .1633 Car or equipment trust certificates . . 1242 Court case. .1652 Foreign corporation with United States fiscal agent. .1645, 2780 Form of covenant which relieves debtor of obligation to withhold. .1651 Old 1 % covenant. .1643 Partnership. .1695, 2966 Tax paid by obligor additional interest to obligee . . 869 Tax paid by obligor not deductible by him . . 1279 Except in case of State taxes so paid . . 1280 Tax paid by obligor not deductible by obligee. .869 May be credited, however. .1719 Withholding tax at source (See “Withholding at the source” at 3, Index Page 40.) Tax»free obligations. .1130, 2872, 2971 Interest payments on indebtedness to purchase or carry. .1233 Dividend paying stock. .1237 Taxpayer defined. .470 Teachers, public school: compensation. .1167 Telephone companies, mutual or cooperative. .749, 767 Tenants (See “Lessees and lessors” at 1, Index Page 22.) Tennessee levee districts: assessments. .1262 Tentative returns . . 1787, 1850, 2570 Termination of present war. .1175 Termination of taxable period: declaration of. .2073 Terms defined: Active service in military or naval forces. .1176 Affiliated corporations. .1835 By the same interests. .1838, 1841 Citizen.. 612 Collector . . 605 Commissioner. .604 Corporation . .728 Debtor.. 1653 Dividend . .811 Domestic corporation . , 1632, 15.53 Domestic partnership. .1532, 1563 False (“false” returns) . . 1259 Farm . . 896 Farmer. .896 Fiduciary. .670 Fisca’ year . .797 Foreign corporation or partnership. .1008, 1653 Foreign country. .1292 Government contract . . 678 Lodge system . .767 Lumber manufacturer. .2710 Market value. .1081, 2506 Military and naval forces. .1173 Net income. 771 Net loss. .1097 Nonresident alien. .618, 1636 Paid. .781 Paid or accrued . . 781 Paid or incurred. .781 Period of administration or settlement. .638 Person . 472 Persona! service corporation . . 673, 683 Political subdivision of state or territory. .1135, 2872, 2971 Possession of the United States. 1292 Present war . . 1 174 Reasonable cause for delay in filing return. .1901 Reasonable compensation as salary .1210, 2489 Reorganizations . .1086 Secretary . . 603 Taxable year. .794 Taxes paid during taxable year; In connection with credit for taxes 12^2 Taxpayer. .470 Termination of present war. .1176 United States . . 1009 Withholding agent . . 1 622 Territories; income accruing to. .1164 Territories: obligations of. .1130, 1136, 2872, 2971 Index Page 37. f CONSULT THE PINK SHEET. GENERAL INDEX. The references are to paragraph numbers. Territories; officers or employees of. .803, 2813, 2835 Texas; community property of husband and wife. .2903 Theatrical properties and costumes; depreciation. .1331 Theft, loss from; when deductible. .792 Tips. .873 Title in dispute; real estate received for services. .P45 Title to property; cost of perfecting or defending. .1190 Timber; depletion .. 1397, 1438, 2944 Depreciation of improvements. .1443, 2950 Timber; profit or loss from sale of. . 1072 Valuing on March 1, 1913, or on date of acquirement. .1072, 1445, 2952 Trade brands; depreciation of. . 1332 Trade marks; depreciation of. . 1332 Trade names; depreciation of .. 1332 Trades; income from. .804 Trading as a principal: personal service corporations. .575, 584 Trading stamps: redemption of. .1178 Transfer tax (New York) not deductible. .1265, 2839 ,2848 Transfers of property (See “Gain or Loss: basis for determining” at 1, Index Page 18.) Traveling expenses. .1187 Treasury Certificates of Indebtedness Exempt status of interest. .1139, 1141, 1153 (II) Payment of taxes by means of. .2091, 2508 Treasury Decisions: effective date of. .2229 Treasury stock. .949 Trees: depredation and loss by death . .2665 Truck farms (See “Farms and Farmers” at 1, Index Page 15.) Trust deeds with tax-free-covenant: bonds issued under. .1645 Trustee; car-trust or equipment trust certificates. .1240 Trustee: compensation over period of years. .874 Trustee in bankruptcy. .701, 968-970 Trustee In dissolution of corporation. .701, 968 Trustee included in term "fiduciary” . .669 Trustee to trustee: transfer of property; appreciation in value.. 686 Trustee who is also executor. .638 Trusts: common-law . .730, 732, 2399 Trusts (See “Estates and trusts” at 1, Index Page 13.) Trusts, Massachusetts. .732, 2399 Trusts: sinking fund. .2876 Uncertified checks: payment of taxes by means of. .2091 Uncompleted contracts. .892 Understatements in returns. .1864, 1884, 1889, 1902 Undistributed profits of corporations; tax liability. .497 Tax under 1917 Act. .609 Undistributed profits tax, 1917 Act Deductibility as a “tax”. .510 Fiscal years ending in 1918. .509 Undivided profits and surplus: dividends. .818, 825 . . Unearned Increment; depreciation . .1351 ff United States bonds: Dividends paid in . .825, 829 Valuing the dividend . . 840 Interest on (See at 1, Index Page 38.) Medium for payment of debt or dividend. .829, 872 Security in connection with penal bonds. .1600 Stock exchanged for . . 1077 Undistributed profits invested in . . 608 2 United States bonds (including Liberty, and Victory notes): interest on.. 1132, 1138 ,116<2 Advertising sale of: expense of . . 1227 Application of exemption; Corporations and their stockholders. .1169 Estates and trusts and beneficiaries. .1167 Husband, wife, and children. .1156 Partnership and members. .1158 Personal service corporations and stockholders. .1168 Corporations not subject to income tax on . .1528, 1533 Credit against income for corporations. .1528, 1533 Credit for individual normal tax. .1516 Beneficiaries of estate or trust . . 665 Estates and trusts . . 667 Nonresident aliens. .1571 Partnerships: members of . .671 Personal service corporations: stockholders of . .600 "Date of the tax return”. .2558 Effect of conversion of Liberty bonds. .1154 Effect of installment plan payments. .1155 Food Administration Grain Corporation notes.. 1160 Information at the source . .1744, 1745 tooo tooc Interest payments on indebtedness to purchase or carry certain . .1233, 14ao Mutual organization receiving. .767 Nonresident aliens . .1560 As credit.. 1671 Original subscription to Victory notes. .1149 Index Page 38, CONSULT THE PINK SHEET. M (. I, / 1 I' I GENERAL INDEX. The references are to paragraph numbers United States bonds — Concluded Ownership certificates not required. .1659 Return of . .1134 Treasury certificates of indebtedness. .1139, 1141, 1163 (II) Victory Liberty Loan notes. .1146, 1152 “Date of the tax return”. .2558 Original subscription to. .1149 War Savings Certificates. .1139, 1141, 1153 (II) United States contracts (See “Government contracts” at 1, Index Page 19.) United States courts: Jurisdiction of District Court. .1878 Salaries of judges. .803, 2669, 2713, 2766, 2813, 2835 “United States” defined. .1009 United States: taxes imposed by authority of. .1246, 1254, 2652 Unreasonable accumulation of profits by a corporation. .497 Evidence of . . 606 Stockholders under no obligations to ascertain facts . . 602 United States bonds: investment in . .608 What constitutes “unreasonable accumulation”. .607 Use of forms (See “Forma” at I, Index Page 16.) Useful value.. 1307 Validating clause. .2240 Valuing: Bad debts existing prior to March 1, 1913. .1318 Bequests on subsequent disposition . .1074 Bonds, worthless: in connection with bad debts . . 1323 Compensation paid other than in cash . . 889, 2650 Deposits: for purposes of depletion . .1412 Depreciation: valuing property for purposes of . .1348, 2901 Patents and copyrights . .1361 Dividends paid in Liberty bonds. .840 Dividends paid in property . .828 Dividends paid in stock. .849, 2841, 2884 Subsequent sale of stock. .865, 2655, 2847, 2884, 2885 Gifts on subsequent disposition . .1074 Gifts when made in kind. .1448, 2499, 2516, 2666 Good w ill on sale of . .913 Insurance policies: surrender value. .1177, 2485 March 1, 1913: fair market price or value on. .1058, 2804 Market value. .1081, 2506 Mines, oil and gas wells: date of discovery or 30 days thereafter .. 1426, 1429 Promissory notes in counection with bad debts. .1318, 1323 Promissory notes received as compensation . . 890 Stock on March 1, 1913. .1060, 1063 Stock received as stock dividend: sale of. .865, 2655, 2847, 2884, 2885 Stock received in connection with merger, consolidation or reorganization ,, 1087, 1088 Stock sold on which partial liquidating dividend has been paid. .868 Timber. .1072, 1440, 1445, 1446, 2946 2952, 2953 Warrants received for public work done. .893 Vessels amortization of: war purposes .. 1376 Vessels: co-owner* of . ,736 Vessels: foreign steamship companies. .1023 Charter money and freight payments. .1546 Vessels: residence of seamen . .619 ... , . . Vessels: special exemption on proceeds of sale of under certain conditions. .2712 Victory Liberty Loan notes. .1146, 1152 “Date of the tax return”. .2558 Installment purchases. .1155 Original subscription . .1149 Violations of iaw to be reported by collectors . .2068 Virgin Islands: taxation of certain citizens of. .631 Credit for income and excess profits taxes paid to . . 1283, 1292 Vocational Rehabilitation Fund: contributions to. .1447 Vocations: income from . .804 Voluntary assessments on stock . .960 Wages (See “Compensation for personal services” at 2, Index Page 6.; War: amortization of buildings, equipment, vessels, etc., used for war purposes .. 1376 War chests: gifts to, as common agency. .1448, 2499, 2516, 2666 War Finance Corporation bonds: interest on. .1133, 1138, 2480 Credit for corporation tax . .1528 Credit for normal tax . . 1615 War: “present war” defined .. 1174 War profits tax (See Excess-profits taxes” at 1, Index Page 14.) War Risk Insurance. .1114 War: salaries paid to absent employees during. .1226 War Saving Certificates: exempt status of interest. .1139, 1141, 1163 (II^ War termination of: defined.. 1176 Wards; return for. .703, 704 Warrant of distraint: $5 charge. .2016, 2747 Warrants received for public work done. .893 Water district bonds. .1135, 2872, 2971 Wear and tear of property (See “Depreciation” at 1, Index Page 11 .) 39 . CONSULT THE PINK SHEET. / GENERAL INDEX. The references are to paragraph numbers Wells o5l and gas: depletion. .1397, 2874, 2902, 2972 . . . Combined holdings. .2874 Depreciation of improvements . . 1433 - Discovery . . 1410, 1428 2972 Lessees .. 1401, 1409-1410, 2319, 2668, 2972 Under prior Acts. .2319, 2668 Wells, oil and gas; discovery of. .1428 Wells, oil and gas; sale of: maximum surtax limitation . .487 Widov: statutory allowance paid to. .642 Wife (See “Husband and wife” at 2, Index Page 19.) Withholding agents defined. .1622 Withholding agents held liable. .1716 Withholding agents indemnified. .1717 Withholding agents may be appointed by debtors. .1654 Withholding in 1918 . .1711 Releasing excess amounts withheld. .1714 Withholding at the source. .1585 1918: special. .1711 Assignee assuming payment of bonds. .1659 Banks, domestic and foreign: debit and credit items. .1621 Certificates required .. 1695, 1697 u j- , * -icoc Citizens and residents: no withholding except on tax-fre^covenant bondinterest . .1635 Corporations, domestic and foreign resident: no withholding against . .159o Coupons exchanged for funding bonds. .1672 Coupons purchased abroad . .1634 Credit for amounts withheld. .1719, 1722 Foreign corporations. .1051, 1723 Creditor paying the tax it is not recollected from debtor . 172U Debtor only withholds the tax . . 1658 Dividends: no withholding in any case 1594 Employers: duties of . .1597 Exemption claims at the source .. 1697 ... u iciq Foreign corporations having office or place Nonresident aliens for specific exemption. 1577, 164J 2„U1 Ownership certificates (See “Ownership certificates at 1, index Page 2b.) Tax-free-covenant bond interest: citizens and residents ..lb4b, Iby/ Tax-free-covenant bond interest: nonresident aliens. .1649 Fixed or determinabl e annual or periodical income defined . .lo9b Foreign bonds: tax-fee-covenant bond interest. .1751, 2750, 2/bO Foreign corporations. .1614 Credit for amounts withheld. .1051 . car Porto Rican and Philippine corporations are foreign corporations . .546 Income on which tax is withheld included in creditor s return . .1718, 1722 Interest on bank deposits or accounts current. .1612, 1620 Interest on domestic securities . . 1625 March 1, 1913: interest due prior to. .1631 Rates in force during year of collection apply . .1631 Unknown owners. .1627, 1644 March 1, 1913, interest due prior to: no withholding. .1631 Miscellaneous income. .1585, 1596 Nonresident aliens. .1585 Interest on domestic securities . .1625 Specific exemption claimed at source. .1577, 1649, 1650, 2501 Wages or salaries of . .1585. 1595-1611 Ownership certificates . .1695, 1697 (See “Ownership certificates” at 1, Index Pap ib.) Paying or withholding agents may be appointed by debtors. .lbb4 Penalties . .1902 Rates . .1626, 1645 Rlfutds SflyceL'lmount, withheld against nonresident alien, .. 1606. 1610 Refund by Government of excess amounts withheld: Foreign corporations. .1053 Nonresident aliens . .1579 ..... .err- Retirement of bonds within an interest period . .1670 Returns of amounts withheld. .1707, 1709^ Salaries of aliens unless proof of resident is furnished. .523 Specific exemption claims at the source by oo^^resident alien Bv nonresident alien owners of tax-free-covenant bonds. .1649, 1650 Substitute certificates. .1700 2764, 2816 Tax-free-covenant bond interest. .1636 oo foT.frpe 1633 Bonds not containing covenant may not be treated as tax free. .1633 Car or equipment trust certificates . .1242 Court case. .1652 ..a -jcdc Exemption claims by citizens and residents . .1646 Exemption claims by nonresident aliens .. 1649, 1650, 2501 unl^d^ 6,cal agent. .1645. 27S0 ?l^t!,5,£r,Sl!:‘,.emSrhaving>erso„al e,emption in exce,, of taxable Tax is additional income to creditor . . 869 Index Page 40. CONSULT THE PINK SHEET 1 1 GENERAL INDEX The references are to paragraph numbers. withholding at the source — Concluded Tax is not deductible by either creditor or debtor. .869, 1279 Creditor credits the tax . .1719, 1722 Debtor may deduct State tax paid . . 1280 Trust deeds with covenant . . 1646 Unknown owners. .1630, 1644 Tax paid to Government by withholding agent. .1708, 1709 Receipts for. .2114 Unknown owners of domestic securities. .1627, 1644 Working capital; employment of funds as. .507 Workmen’s compensation; accident or sickness. .1111, 1114 Workmen’s comrensation insurance funds. State: income accruing to. .1166 Worthless debts . . 1316 Recoveries .. 945 Worthless securities: deductibility .. 1308, 1323 Y. M.C.A.: ts to.. 1467 Year; accounting. .779, 793 Changing. .800, 2763, 2784 Year taxable. .780, 794 Change of. .800, 2763, 2784 Declaration of termination of. .2073 First taxable year . .2073 Year taxable: embracing parts of calendar years with different rates . .618, 627 Corporations . . 622, 626 Individuals. .625, 626 Partnerships . . 601 Personal service corporations. .601, 624 Index Page 41 Ol0rp0ratittw ®rust Organized kijjJ.8924*; Ser^^ices These ar^ loose leaf binder Services containing, In addition to the respective Acts as amended and now in effect, all official matters, in force, issued sisice the pa^ the respective original Acts, compiled, crdss-referenced, and ced, and kept up to date at ail times by th^ans of additional ^tibse ally numbered printed pages sent to subscribers under first-class postri' Poriiial regulations, informal rulings. Supreme Court decisions, and •r court cases are embodied in these Services. Federal Income Xax Service — Covers the Fedex'al Income Tax L-aw a the oiT.cial regulations, efc., bearing thereon. Federal War Tax Service-Covers practically all the strictly^ Internal Revenue Tax Lav7s, except the Income Tax Law, due to the war^ ;^d the official regulations, etc.., beanhg thereon. (Does not touch on h^t, wine, spirit^ soft drinks, tobacco, i:iarcotics or child labor.) Federal Re&e.»we Act Service — Covers the Federal Reserve Act and official regulations, etc., bearing thereon. Federal Trade Commission, Service — Covers the Federal Trade Commis- sion Act and the Federal Anti-Trust Act (the Clayton Act) and the official orders, rulings, complaints, etc., bearing thereon. New York Income Tax Service-Covers the New York Personal and Cor- poration Income Tax Laws and the official regulations, etc., bearing thereon. p Departments Corporation Oepartiiient — Assists attorneys in thix organization of cor- porations and in th% licensing of foreign corporations in every state and the Provinces of Canada. Report and Ts^^^epartinent — Attends for attorneys to corporation reports ; end tax matters in every State and Province. ° -Reports on pending legislation; furnishes copies lew laws in every State and Congress. Trust Department — Acts as trustee under deed of trust, custodian of securities, .escrow depository and deposit or3^ for reorganization com- rnittees. Legislative Departc^ent- of bills Transfer Depat^ent — Acts as registrar and transfer agent of stocks, bonds and notes. ® ^ Federal Department — Reports decisions of the United States Suprerpe Court, rulings of the Interstate Commerce Commivssion, Federal Trade Commission, Bureau of Internal Revenue and Federal Reserve Board." Furnishes agent at Washington for common carriers to accept serv- ice of orders, process, etc., of Interstate Commerce Commission. THE CORPORAnON TRUST COMPANY .37 Wall Street, New York Affiliated with ®f)e Coiporation ISCru^t Companp System 15 ExebanRe Place, Jeroey City Oreanized 1892 I; Bouton, 53 State Street (Corporation Regiatration Co.) Chicago, 112 W. Adams Street Pittsburgh, 1202 Oliver Bldg. Washington, 501 Colorado Bldg. Philadelphia, 1428 I.^nd Title Bldg,, iy Portland, Me., 2S1 St. jo’em Street ; f | St. Loai'i, Federal Reserve Battk Bldgv Wilmington, 4 lOS dttPoiit Bldg, (Corporation Trust Co» of AnadrSca} Los Angeles, Title Insurance Bldg. (The ^Corporation Company)