tit" THE LIBRARY OF THE UNIVERSITY OF CALIFORNIA LOS ANGELES SCHOOL OF LAW HENDERSON'S WAR TAX GUIDE ACT OF OCTOBER 3, 1917 WITH NOTES AND COMMENTARIES ANNOTATED BY ELIAS H. HENDERSON, PK. B., J. D. Author of '1917 War Reoenue and Income Tax Guide" "Federal Antitrust Laws" "Federal Legislation" and "Income Tax Puzzles" FIRST EDITION T H3 19 iT Copyright, 1917 BY ELIAS H. HENDERSON PREFACE This book covers the War Tax Act of October 3, 1917, an- notated with those sections of the Income Tax Act of September 8, 1916, which are referred to, amended or repealed thereby. Following the statute are all of the Treasury decisions, opin- ions, and court decisions, in alphabetical order, pertaining to the Act of 1917, which have been rendered since the publication of the author's previous work on this subject, "Federal Legislation" January 1, 1915. The Federal Government obtains revenue from the tariff, excise, income, profits and inheritance taxes. Due to economical changes, the amount obtainable from internal revenue is not ade- quate to support the Government. In view of our foreign relations the tariff on imports is impractical. Hence the necessary funds to defray the expenses of the Government must be derived almost exclusively from tax on income, profits and estates. In the past, the interpretation of these laws has been delegated to the Com- missioner of Internal Revenue. A "Federal Tax Commission" should be created immediately in order to assist in the proper administration of the Federal Tax Laws. The time has now arrived when the tax payer is entitled to have a hearing before a competent tribunal on the difficult ques- tions arising daily under these laws. Arbitrary ruling and judicial legislation by administrative officials is contrary to the fundamental principles from which the nation derives the right to tax the people. Chicago, Illinois, U. S. A. November 15, 1917. CH I C AGO 1917 WAR TAX LAW An Act to Provide Revenue to Defray War Expenses and for Other Purposes. Be it enacted by the Senate and House of Representatives of the United States of America in Congress Assembled. TITLE I. WAR INCOME TAX Individual Normal Tax Section 1. That in addition to the normal tax imposed by subdivision (a) of section one of the Act entitled "An Act to increase the revenue, and for other purposes," approved Septem- ber eight, nineteen hundred and sixteen : 1 There shall be levied, assessed, collected, and paid a like normal tax of two per centum upon the income of every indi- vidual, a citizen or resident of the United States, received in the calendar year nineteen hundred and seventeen and every cal- endar year thereafter. '(ACT OF SEPTEMBER 8th, 1916) Section I (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; and a like tax shall be levied, assessed, collected and paid annually upon the entire net income received in the preceding calendar year from all sources within the United States by every individual, a non-resident alien, including interest on bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise. THE FEDERAL WAR TAX LAW, 1917 INDIVIDUAL SUR-TAX Section 2. That in addition to the additional tax imposed by subdivision (b) of section one of such Act of September eighth, nineteen hundred and sixteen i 1 There shall be levied, assessed, collected and paid a like additional tax upon the income of every individual received in the calendar year nineteen hundred and seventeen and every calendar year thereafter, as follows: 2 (ACT OF SEPTEMBER 8, 1916.) Section I (b) In addition to the income tax imposed by sub- division (a) of this section (herein referred to as the normal tax) there shall be levied, assessed, collected, and paid upon the total net income of every individual, or, in the case of a non-resident alien, the total net income received from all sources within the United States, an addi- tional income tax (herein referred to as the additional tax) of one pet centum per annum upon the amount by which such total net income exceeds $20,000 and does not exceed $40,000, two per centum per annum upon the amount by which such total net income exceeds $40,000 and does not exceed $60,000, three per centum per annum upon the amount by which such total net income exceeds $60,000, and does not exceed $80,000, four per centum per annum upon the amount by which such total net income exceeds $80,000 and does not exceed $100,000, five per centum per annum upon the amount by which such total net income exceeds $100,000 and does not exceed $150,000, six per centum per annum upon the amount by which such total net income exceeds $150,000 and does not exceed $200,000, seven per centum per annum upon the amount by which such total net income exceeds $200,000 and does not exceed $250,000, eight per centum per annum upon the amount by which such total net income exceeds $250,000 and does not exceed $300,000, nine per centum per annum upon the amount by which such total net income exceeds $300,000 and does not exceed $500,000, ten per centum per annum upon the amount by which such total net income exceeds $500,000, and does not exceed $1,000,000, eleven per centum per annum upon the amount by which such total net income exceeds $1,000,000 and does not exceed $1,500,000, twelve per centum per annum upon the amount by which such total net income exceeds $1,500,000 and does not exceed $2,000,000, and thirteen per centum per annum upon the amount by which such total net income exceeds $2,000,000. For the purpose of the additional tax there shall be included as income the income derived from dividends on the capital stock or from the net earnings of any corporation, joint-stock company or association, or insurance company, except that in the case of non-resident aliens such income derived from sources without the United States shall not be included. All the provisions of this title relating to the normal tax on in- dividuals, so far as they are applicable and are not inconsistent with this subdivision and section three, shall apply to the imposition, levy, assessment, and collection of the additional tax imposed under this subdivision. One per centum per annum upon the amount by which the total net income exceeds $5,000 and does not exceed $7,500; Two per centum per annum upon the amount by which the total net income exceeds $7,500 and does not exceed $10,000 ; -Three per centum per annum upon the amount by which the total net income exceeds $10,000 and does not exceed $12,500; Four per centum per annum upon the amount by which the total net income exceeds $12,500 and does not exceed $15,000; Five per centum per annum upon the amount by which the total net income exceeds $15,000 and does not exceed $20,000; Seven per centum per annum upon the amount by which the total net income exceeds $20,000 and does not exceed $40,000; Ten per centum per annum upon the amount by which the total net income exceeds $40,000 and does not exceed $60,000; Fourteen per centum per annum upon the amount by which the total net income exceeds $60,000 and does not exceed $80,000 ; Eighteen per centum per annum upon the amount by which the total net income exceeds $80,000 and does not exceed $100,000 ; Twenty-two per centum per annum upon the amount by which the total net income exceeds $100,000 and does not ex- ceed $150,000; Twenty-five per centum per annum upon the amount by which the total net income exceeds $150,000 and does not ex- ceed $200,000; Thirty per centum per annum upon the amount by which the total net income exceeds $200,000 and does not exceed $250,000; Thirty-four per centum per annum upon the amount by which the total net income exceeds $250,000 and does not ex- ceed $300,000; Thirty-seven per centum per annum upon the amount by which the total net income exceeds $300,000 and does not ex- ceed $500,000; Forty per centum per annum upon the amount by which the total net income exceeds $500,000 and does not exceed $750,000; Forty-five per centum per annum upon the amount by which the total net income exceeds $750,000 and does not exceed $1,000,000; Fifty per centum per annum upon the amount by which the total income exceeds $1,000,000. THE FEDERAL WAR TAX LAW, 1917 Individual Exemptions Section 3. That the taxes imposed by sections one and two of this Act shall be computed, levied, assessed, collected, and paid upon the same basis and in the same manner as the similar taxes imposed by section one of such Act of September eighth, nineteen hundred and sixteen i 1 Except that in the case of the tax imposed by section one of this Act (a) the exemptions of $3,000 and $4,000 provided in section seven of such Act of September eighth, nineteen hundred and sixteen : 2 '(ACT OF SEPTEMBER 8th, 1916) Section 1 (b) For the pur- pose of the additional tax there shall be included as income the income derived from dividends on the capital stock or from the net earnings of any corporation, joint-stock company or association, or insurance com- pany, except that in the case of non-resident aliens such income derived from sources without the United States shall not be included. All the provisions of this title relating to the normal tax on in- dividuals, so far as they are applicable and are not inconsistent with this subdivision and section three, shall apply to the imposition, levy, assessment, and collection of the additional tax imposed upon this sub- division. (c) The foregoing normal and additional tax rates shall apply to the entire net income, except as hereinafter provided, received by every vaxable person in the calendar year nineteen hundred and sixteen ana in each calendar year thereafter. "(ACT OF SEPTEMBER 8th, 1916) Section 7 (a) That for the purpose of the normal tax only, there shall be allowed as an exemption in the nature of a deduction from the amount of the net income of each af said persons, ascertained as provided herein, the sum of $3,000. plus $1,000 additional if the person making the return be a head of a family />r a married man with a wife living with him, or plus the sum of $1,000 additional if the person making the return be a married woman with a husband living with her; but in no event shall this additional exemption of $1,000 be deducted by both a husband and a wife: Provided, That only one deduction of $4,000 shall be made from the aggregate income of both husband and wife when living together: Provided further, That guardians or trustees shall be allowed to make this personal exemption as to income derived from the property of which such guardian or trustee has charge in favor of each ward or cestui que trust: Provided further, That in no event shall a ward or cestui que trust be allowed a greater personal exemption than $3,000, or, if married, $4,000, as pro- vided in this paragraph, from the amount of net income received from all sources. There shall also be allowed an exemption from the amount of the net income of estates of deceased persons during the period of administration or settlement, and of trust or other estates the income of which is not distributed annually or regularly under the provisions of paragraph (b), section two, the sum of $3,000, including such deduc- tions as are allowed under section five. THE FEDERAL WAR TAX LAW, 1917 9 As amended by this Act shall be respectively $1,000 and $2,000, and (b) the returns required under subdivisions (b) and (c) of section eight of such Act : l As amended by this Act shall be required in the case if net income of $1,000 or over, in the case of unmarried persons, and $2,000 or over in the case of married persons, instead of $3,000 or over, as therein provided, and (c) the provisions of sub- division (c) of section nine of such Act: 2 '(ACT OF SEPTEMBER 8th, 1916) Section 8 (b) On or before the first day of March, nineteen hundred and seventeen, and the first day of March in each year thereafter, a true and accurate return under oath shall be made by each person of lawful age, except as hereinafter provided, having a net income of $3,000 or over for the taxable year to the collector of internal revenue for the district in which such person has his legal residence or principal place of business, or if there be no legal residence or place of business in the United States, then with the collector of internal revenue at Baltimore, Maryland, in such form as the Commissioner of Internal Revenue, with the approval of the Secre- tary 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 allowances herein authorized: Pro- vided, That the Commissioner of Internal Revenue shall have authority to grant a reasonable extension of time, in meritorious cases, for filing returns of income by persons residing or traveling abroad who are required to make and file returns of income and who are unable to file said returns on or before March first of each year: Provided further, That the aforesaid return may be made by an agent when by reason of illness, absence, or nonresidence the person liable for said return is unable to make and render the same, the agent, assuming the responsibility of making the return and incurring penalties provided for erroneous, false, or fraudulent return. (c) Guardians, trustees, executors, administrators, receivers, con- servators, and all persons, corporations, or associations acting in any fiduciary capacity, shall make and render a return of the income of the person, trust, or estate for whom or which they act, and be subject to all the provisions of this title which apply to individuals. Such fiduciary shall make oath that he has sufficient knowledge of the affairs of such person, trust or estate to enable him to make such return and that the same is, to the best of his knowledge and belief, true and correct, and be subject to all the provisions of this title which apply to individuals: Provided, That a return made by one of two or more joint fiduciaries filed in the district where such fiduciary resides, under such regulations as the Secretary of the Treasury may prescribe, shall be a sufficient compliance with the requirements of this paragraph. '(ACT OF SEPTEMBER 8th, 1916) Section 9 (c) The amount of the normal tax hereinbefore imposed shall be deducted and withheld from fixed or determinable annual or periodical gains, profits, and in- come derived from interest upon bonds and mortgages, or deeds of trust or other similar obligations of corporations, joint-stock companies, associations, and insurance companies, whether payable annually or at shorter or longer periods, although such interest does not amount to $3,000, subject to the provisions of this title requiring the tax to be withheld at the source and deducted from annual income and returned and paid to the Government. 10 THE FEDERAL WAR TAX LAW, 1917 As amended by this Act, requiring the normal tax of in- dividuals on income derived from interest to be deducted -and withheld at the source of the income shall not apply to the new two per centum normal tax prescribed in section one of this Act until on and after January first, nineteen hundred and eighteen, and thereafter only one two per centum normal tax shall be deducted and withheld at the source under the provisions of such subdivision (c), and any further normal tax for which the recipient of such income is liable under this Act or such Act of September eighth, nineteen hundred and sixteen, as amended by this Act, shall be paid by such recipient. Computation of Income Tax Section 4. That in addition to the tax imposed by subdivision (a) of section ten of such Act of September eighth, nineteen hundred and sixteen :* 'Section 10. That there shall be levied, assessed, collected, and paid annually upon the total net income received in the preceding calendar year from all sources by every corporation, joint-stock company or association, or insurance company, organized in the United States, no matter how created or organized but not including partnerships, a tax of two per centum upon such income; and a like tax shall be levied, assessed, collected, and paid annually upon the total net income received in the preceding calendar year from all sources within the United States by every corporation, joint-stock company, or association, or insurance company organized, authorized, or existing under the laws of any foreign country, including interest on bonds, notes, or other interest-bearing obligation of residents, corporate or otherwise, and including the income derived from dividends on capital stock or from net earnings of resident corporations, joint-stock companies or associations, or insurance com- panies whose net income is taxable under this title: Provided, That the term "dividends" as used in this title shall be held to mean any dis- tribution made or ordered to be made by a corporation, joint-stock company, association, or insurance company, out of its earnings or profits accrued since March first, nineteen hundred and thirteen, and payable to its shareholders, whether in cash or in stock of the corpora- tion, joint-stock company, association, or insurance company, which stock dividend shall be considered income, to the amount of its cash value. The foregoing tax rate shall apply to the total net income received by every taxable corporation, joint-stock company or association, or insurance company in the calendar year nineteen hundred and sixteen and in each year thereafter, except that if it has fixed its own fiscal year under the provisions of existing law, the foregoing rate shall apply to the proportion of the total net income returned for the fiscal year ending prior to December thirty-first, nineteen hundred and sixteen, which the period between January first, nineteen hundred and sixteen, and the end of such fiscal year bears to the whole of such fiscal year, and the rate fixed in Section II of the Act approved October third, nineteen hundred and thirteen, entitled "An Act to reduce tariff duties and to provide revenue for the Government, and for other purposes," shall apply to the remaining portion of the total net income returned for such fiscal year. For the purpose of ascertaining the gain derived or loss sustained from the sale or other disposition by a corporation, joint-stock company, or association, or insurance company, of property, real, personal, or .THE FEDERAL WAR TAX LAW, 1917 11 As amended by this Act, there shall be levied, assessed, collected and paid a like tax of four per centum upon the in- come received in the calendar year nineteen hundred and seven- teen and every calendar year thereafter, by every corporation, joint-stock company or association, or insurance company, sub- ject to the tax imposed by that subdivision of that section, except that if it has fixed its own fiscal year, the tax imposed by this section for the fiscal year ending during the calendar year nineteen hundred and seventeen shall be levied, assessed, col- lected, and paid only on that proportion of its income for such fiscal year which the period between January first, nineteen hun- dred and seventeen, and the end of such fiscal year bears to the whole of such fiscal year. Computation of Income Tax The tax imposed by this section shall be computed, levied, assessed, collected, and paid upon the same incomes and in the same manner as the tax imposed by subdivision (a) of sec- tion ten of such Act of September eighth, nineteen hundred and sixteen: (See Sec. 4, page 10 note.) As amended by this Act, except that for the purpose of the tax imposed by this section the income embraced in a return of a corporation, joint-stock company or association, or in- surance company, shall be credited with the amount received as dividends upon the stock or from the net earnings of any other corporation, joint-stock company or association, or insur- ance company, which is taxable upon its net income as provided in this title. Territory Exempt Section 5. That the provisions of this title shall not extend to Porto Rico or the Philippine Islands, and the Porto Rican or Philippine Legislature shall have power by due enactment to amend, alter, modify, or repeal the income tax laws in force in Porto Rico or the Philippine Islands, respectively. TITLE II. WAR EXCESS PROFITS TAX Terms Defined Section 200. That when used in this title : The term "corporation" includes joint-stock companies or associations and insurance companies; The term "domestic" means created under the law of the United States, or of any State, Territory, or District thereof, and the term "foreign" means created under the law of any other possession of the United States or of any foreign country or government ; mixed, acquired before March first, nineteen hundred and thirteen, the fair market price or value of such property as of March first, nineteen hundred and thirteen, shall be the basis for determining the amount of such gain derived or loss sustained. 12 THE FEDERAL WAR TAX LAW, 1917 The term "United States" means only the States, the Terri- tories of Alaska and Hawaii, and the District of Columbia ; The term "taxable year" means the twelve months ending December thirty-first, excepting in the case of a corporation or partnership which has fixed its own fiscal year, in which case it means such fiscal year. The first taxable year shall be the year ending December thirty-first, nineteen hundred and seven- teen, except that in the case of a corporation or partnership which has fixed its own fiscal year, it shall be the fiscal year ending during the calendar year nineteen hundred and seventeen. If a corporation or partnership, prior to March first, nineteen hun- dred and eighteen, makes a return covering its own fiscal year, and includes therein the income received during that part of the fiscal year falling within the calendar year nineteen hundred and sixteen, the tax for such taxable year shall be that propor- tion of the tax computed upon the net income during such full fiscal year which the time from January first, nineteen hundred and seventeen, to the end of such fiscal year bears to the full fiscal year ; and The term "prewar period" means the calendar year nineteen hundred and eleven, nineteen hundred and twelve, and nineteen hundred and thirteen, or, if a corporation or partnership was not in existence or an individual was not engaged in a trade or business during the whole of such period, then as many of such years during the whole of which the corporation or partner- ship was in existence or the individual was engaged in the trade or business. The terms "trade" and "business" include professions and occupations. The term "net income" means in the case of a foreign cor- poration or partnership or a non-resident alien individual, the net income received from sources within the United States. Tax on Excess Profits Section 201. That in addition to the taxes under existing law and under this Act there shall be levied, assessed, collected, and paid for each taxable year upon the income of every corpora- tion, partnership, or individual, a tax (hereinafter in this title referred to as the tax) equal to the following percentages of the net income: Twenty per centum of the amount of the net income in excess of the deduction (determined as hereinafter provided) and not in excess of fifteen per centum of the invested capital for the taxable year; Twenty-five per centum of the amount of the net income in excess of fifteen per centum and not in excess of twenty per centum of such capital ; Thirty-five per centum of the amount of the net income in excess of twenty per centum and not in excess of twenty-five per centum of such capital; THE FEDERAL WAR TAX LAW, 1917 13 Forty-five per centum of the amount of the net income in excess of twenty-five per centum and not in excess of thirty- three per centum of such capital ; and Sixty per centum of the amount of the net income in excess of thirty-three per centum of such capital. For the purpose of this title every corporation or partner- ship not exempt under the provisions of this section shall be deemed to be engaged in business, and all the trades and busi- nesses 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. Exemptions This title shall apply to all trades or businesses of whatever description, whether continuously carried on or not, except (a) In the case of officers and employees under the United States, or any State, Territory, or the District of Columbia, or any local subdivision thereof, the compensation or fees received by them as such officers or employees ; (b) Corporations exempt from tax under the provisions of section eleven of Title I of such Act of September eighth, nine- teen hundred and sixteen : l '(ACT OF SEPTEMBER 8th, 1916) Section 11 (a) That there shall not be taxed under this title any income received by any First. Labor, agricultural, or horticultural organization; Second. Mutual savings bank not having a capital stock represented by shares; Third. Fraternal beneficiary society, order, or association, operating under the lodge system or for the exclusive benefit of the members of a fraternity itself operating under the lodge system, and providing for the payment of life, sick, accident, or other benefits to the members of such society, order, or association or their dependents; Fourth. Domestic building and loan association and co-operative banks without capital stock organized and operated for mutual purposes and without profit; Fifth. Cemetery company owned and operated exclusively for the benefit of its members; Sixth. Corporation or association organized and operated ex- clusively 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; Seventh. Business league, chamber of commerce, or board of trade, not organized for profit and no part of the net income of which inures to the benefit of any private stockholder or individual; Eighth. Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare; Ninth. Club organized and operated exclusively for pleasure, recrea- tion, and other nonprofitable purposes, no part of the net income of which inures to the benefit of any private stockholder or member; Tenth. Farmers' or other mutual hail, cyclone, or fire insurance company, mutual ditch or irrigation company, mutual or cooperative telephone company, or like organization of a purely local character, the income of which consists solely of assessments, dues, and fees col- lected from members for the sole purpose of meeting its expenses; Eleventh. Farmers', fruit growers', or like association, organized 14 THE FEDERAL WAR TAX LAW, 1917 As amended by this Act, and partnerships and individuals carrying on or doing the same business, or coming within the same description; and (c) Incomes derived from the business of life, health, and accident insurance combined in one policy issued on the weekly premium payment plan. Foreign Business Section 202. That the tax shall not be imposed in the case of the trade or business of a foreign corporation or partnership or a non-resident alien individual, the net income of which trade or business during the taxable year is less than $3,000. Deductions Section 203. That for the purpose of this title the deduc- tion shall be as follows, except as otherwise in this title provided : (a) In the case of a domestic corporation, the sum of (1) an amount equal to the same percentage of the invested capital for the taxable year which the average amount of the annual net income of the trade or business during the prewar period was of the invested capital for the prewar period (but not less than seven or more than nine per centum of the invested capital for the taxable year), and (2) $3,000; and operated as a sales agent for the purpose of marketing the products of its members and turning back to them the proceeds of sales, less the necessary selling expenses, on the basis of the quantity of produce furnished by them; Twelfth. Corporation or association organized for tne exclusive purpose of holding title to property, collecting income therefrom, and turning over the entire amount thereof, less expenses, to an organization which itself is exempt from the tax imposed by this title; or Thirteenth. Federal land banks and national farm-loan associations as provided in section twenty-six of the Act approved July seventeenth, nineteen hundred and sixteen, entitled "An Act to provide capital for agricultural development, to create standard forms of investment based upon farm mortgage, to equalize rates of interest upon farm loans, to furnish a market for United States bonds, to create Government de- positaries and financial agents for the United States, and for other purposes." Fourteenth. Joint stock land banks as to income derived from bonds or debentures of other joint stock land banks or any Federal land bank belonging to such joint stock land bank. (b) There shall not be taxed under this title any income derived from any public utility or from the exercise of any essential govern- mental function accruing to any State, Territory, or the District of Columbia, or any political subdivision of a State or Territory, nor any income accruing to the government of the Philippine Islands or Porto Rico, or of any political subdivision of the Philippine Islands or Porto Rico: Provided, That whenever any State. Territory, or the District of Columbia, or any political subdivision of a State or Territory, has, prior to the passage of this title, entered in good faith into a contract with any person or corporation, the object and purpose of which is to acquire, construct, operate, or maintain a public utility, no tax shall be levied under the provisions of this title upon the income derived THE FEDERAL WAR TAX LAW, 1917 15 (b) In the case of a domestic partnership or of a citizen or resident of the United States, the sum of (1) an amount equal to the same percentage of the invested capital for the taxable year which the average amount of the annual net income of the trade or business during the prewar period was of the invested capital for the prewar period (but not less than seven or more than nine per centum of the invested capital for the taxable year), and (2) $6,000; (c) In the case of a foreign corporation or partnership or of a non-resident alien individual, an amount ascertained in the same manner as provided in subdivisions (a) and (b) without any exemption of $3,000 or $6,000. (d) If the Secretary of the Treasury is unable satisfactorily to determine the average amount of the annual net income of the trade or business during the prewar period, the deduction shall be determined in the same manner as provided in section two hundred and five. If Not Engaged in the Business During Prewar Period Section 204. That if a corporation or partnership was not in existence, or an individual was not engaged in the trade or business, during the whole of any one calendar year during the prewar period, the deduction shall be an amount equal to eight per centum of the invested capital for the taxable year, plus in the case of a domestic corporation $3,000, and in the case of a domestic partnership or a citizen or resident of the United States $6,000. Continuation or Reorganization of a Business A trade or business carried on by a corporation, partnership, or individual, although formally organized or reorganized on or after January second, nineteen hundred and thirteen, which is substantially a continuation of a trade or business carried on prior to that date, shall, for the purposes of this title, be deemed to have been in existence prior to that date, and the net income and invested capital of its predecessor prior to that date shall be deemed to have been its net income and invested capital. Low Prewar Income Section 205. (a) That if the Secretary of the Treasury, upon complaint finds either (1) that during the prewar period a domestic corporation or partnership, or a citizen or resident of the United States, had no net income from the trade or busi- frpm the operation of such public utility, so far as the payment thereof will impose a loss or burden upon such State, Territory, or the District of Columbia, or a political subdivision of a State or Territory; but this provision is not intended to confer upon such person or corporation any financial gain or exemption or to relieve such person or corporation from the payment of a tax as provided for in this title upon the part or portion of the said income to which such person or corporation shall be entitled under such contract. 16 THE FEDERAL WAR TAX LAW, 1917 ness, or, (2) that during the prewar period the percentage, which the net income was of the invested capital, was low as com- pared with the percentage, which the net income during such period of representative corporations, partnerships, and indi- viduals, engaged in a like or similar trade or business, was of their invested capital, then the deduction shall be the sum of (1) an amount equal to the same percentage of its invested capital for the taxable year which the average deduction (deter- mined in the same manner as provided in section two hundred and three, without including the $3,000 or $6,000 therein referred to) for such year of representative corporations, partnerships, or individuals, engaged in a like or similar trade or business, is of their average invested capital for such year plus (2) in the case of a domestic corporation $3,000, and in the case of a domestic partnership or a citizen or resident of the United States $6,000. Determination of Deductions The percentage which the net income was of the invested capital in each trade or business shall be determined by the Commissioner of Internal Revenue, in accordance with regula- tions prescribed by him, with the approval of the Secretary of the Treasury. In the case of a corporation or partnership which has fixed its own fiscal year, the percentage determined by the calendar year ending during such fiscal year shall be used. Claim for Abatement (b) The tax shall be assessed upon the basis of the deduc- tion determined as provided in section two hundred and three, but the taxpayer claiming the benefit of this section may at the time of making the return file a claim for abatement of the amount by which the tax so assessed exceeds a tax computed upon the basis of the deduction determined as provided in this section. In such event, collection of the part of the tax covered by such claim for abatement shall not be made until the claim is decided, but if in the judgment of the Commissioner of In- ternal Revenue, the interests of the United States would be jeopardized, thereby he may require the claimant to give a bond in such amount and with such sureties as the commissioner may think wise to safeguard such interests, conditioned for the pay- ment of any tax found to be due, with the interest thereon, and if such bond, satisfactory to the commissioner, is not given within such time as he prescribes, the full amount of tax as- sessed shall be collected and the amount overpaid, if any, shall upon final decision of the application be refunded as a tax errone- ously or illegally collected. Ascertainment of the Net Income Section 206. That for the purposes of this title the net income of a corporation shall be ascertained and returned (a) for the calendar years nineteen hundred and eleven and nineteen THE FEDERAL WAR TAX LAW, 1917 17 hundred and twelve upon the same basis and in the same manner as provided in section thirty-eight of the Act entitled "An Act to provide revenue, equalize duties, and encourage the indus- tries of the United States, and for other purposes," approved August fifth, nineteen hundred and nine, except that income taxes paid by it within the year imposed by the authority of the United States shall be included ; (b) for the calendar year nineteen hundred and thirteen upon the same basis and in the same manner as provided in section II of the Act entitled "An Act to reduce tariff duties and to provide revenue for the Gov- ernment, and for other purposes," approved October third, nine- teen hundred and thirteen, except that income taxes paid by it within the year imposed by the authority of the United States shall be included, and except that the amounts received by it as dividends upon the stock or from the net earnings of other corporations, joint-stock companies or associations, or insurance companies, subject to the tax imposed by section II of such Act of October third, nineteen hundred and thirteen, shall be deducted ; and (c) for the taxable year upon the same basis and in the same manner as provided in Title I of the Act entitled "An Act to increase the revenue and for other purposes," ap- proved September eighth, nineteen hundred and sixteen : x '(ACT OF SEPTEMBER 8th, 1916) Section 2 (a) That, subject only to such exemptions and deductions as are hereinafter allowed, the net income of a taxable person shall include gains, profits, and income derived from salaries, wages, or compensation for personal service or 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 transaction 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 company, out of its earnings or profits accrued since March first, nineteen hundred and thirteen, and payable to its shareholders, whether in cash or in stock of the corporation, joint-stock company, association, or insurance com- pany, which stock dividend shall be considered income, to the amount of its cash value. . (b) Income received by estates of deceased persons during the period of administration or settlement of the estate, shall be subject to the normal and additional tax and taxed to their estates, and also such income of estates or any kind of property held in trust, including such income accumulated in trust for the benefit of unborn or unascertained persons, or persons with contingent interests, and income held for future distribution under the terms of the will or trust shall be like- wise taxed, the tax in each instance, except when the income is returned for the purpose of the tax by the beneficiary, to be assessed to the executor, administrator, or trustee, as the case may be: Provided, That where the income is to be distributed annually or regularly between existing heirs or legatees, or beneficiaries the rate of tax and method of computing the same shall be based in each case upon the amount of the individual share to be distributed. Such trustees, executors, administrators, and other fiduciaries are 18 THE FEDERAL WAR TAX LAW, 1917 As amended by this Act, except that the amounts received by it as dividends upon the stock or from the net earnings of other corporations, joint-stock companies or associations, or insurance companies, subject to the tax imposed by Title I of such Act of September eighth, nineteen hundred and sixteen, shall be deducted. Partnerships and Individuals The net income of a partnership or individual shall be as- certained and returned for the calendar years nineteen hundred and eleven, nineteen hundred and twelve, nineteen hundred and thirteen, and for the taxable year, upon the same basis and in the same manner as provided in Title I of such Act of Septem- ber eighth, nineteen hundred and sixteen, as amended by this Act, except that the credit allowed by subdivision (b) of section five of such Act shall be deducted. 1 There shall be allowed (a) in the case of a domestic partner- ship the same deductions as allowed to individuals in subdi- vision (a) of section five of such Act of September eighth, nine- teen hundred and sixteen: 2 hereby indemnified against the claims or demands of every beneficiary for all payments of taxes which they shall be required to make under the provisions of this title, and they shall have credit for the amount of such payments against the beneficiary or principal in any accounting which they make as such trustees or other fiduciaries. (c) For the purpose of ascertaining the gain derived from the sale or other disposition of property, real, 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 thir- teen, shall be the basis for determining the amount of such gain derived. '(ACT OF SEPTEMBER 8th, 1916) Section 5 (b) For the purpose of the normal tax only, the income embraced in a personal return shall be credited with the amount received as dividends upon the stock or from the net earnings of any corporation, joint-stock company or association, trustee, or insurance company, which is taxable upon its net income as hereinafter provided. '(ACT OF SEPTEMBER 8th, 1916) Section 5 (a) That in computing net income in the case of a citizen or resident of the United States (a) For the purpose of the tax there shall be allowed as de- ductions First. The necessary expenses actually paid in carrying on any business or trade, not including personal, living, or family expenses; Second. All interest paid within the year on his indebtedness; Third. Taxes paid within the year imposed by the authority of the United States, or its Territories, or possessions, or any foreign country, or under the authority of any State, county, school district, or munici- pality, or other taxing subdivision of any State, not including those assessed against local benefits; Fourth. Losses actually sustained during the year, incurred in his business or trade, or arising from fires, storms, shipwreck, or other casualty, and from theft, when such losses are not compensated for by insurance or otherwise: Provided, That for the purpose of ascertaining the loss sustained from the sale or other disposition of property, real, personal, or mixed, acquired before March first, nineteen hundred and thirteen, the fair market price or value of such property as of March THE FEDERAL WAR TAX LAW, 1917 19 as amended by this Act; and (b) in the case of a foreign partnership the same deductions as allowed to individuals in subdivision (a) of section six of such Act 1 as amended by this Act. first, nineteen hundred and thirteen, shall be the basis for determining the amount of such loss sustained; Fifth. In transactions entered into for profit but not connected with his business or trade, the losses actually sustained therein during the year to an amount not exceeding the profits arising therefrom; Sixth. Debts due to the taxpayer actually ascertained to be worth- less and charged off within the year; Seventh. A reasonable allowance for the exhaustion, wear and tear of property arising out of its use or employment in the business or trade; Eighth (a) In the case of oil and gas wells a reasonable allowance for actual reduction in flow and production to be ascertained not by the flush flow, but by the settled production or regular flow; (b) in the case of mines a reasonable allowance for depletion thereof not to exceed the market value in the mine of the product thereof, which has been mined and sold during the year for which the return and computation are made, such reasonable allowance to be made in the case of both (a) and (b) under rules and regulations to be prescribed by the Secretary of the Treasury: Provided, That when the allowances authorized in (a) and (b) shall equal the capital originally invested or in case of purchase made prior to March first, nineteen hundred and thirteen, the fair market value as of that date, no further allowance shall be made. No deduction shall be allowed for any amount paid out for new buildings, permanent improvements, or betterments, made to increase the value of any property or estate, and no deduction shall be made for any amount of expense of restoring property or making good the exhaustion thereof for which an allowance is or has been made. "That section five of such Act of September eighth, nineteen hun- dred and sixteen, is hereby amended by adding at the end of subdivision (a) a further paragraph, numbered nine, to read as follows: "Ninth. Contributions or gifts actually made within the year of corporations or associations organized and operated exclusively for religious, charitable, scientific, or educational purposes, or to societies for the prevention of cruelty to children or animals, no part of the net income of which inures to the benefit of any private stockholder or in- dividual, to an amount not in excess of fifteen per centum of the tax- payer's taxable net income as computed without the benefit of this para- graph. Such contributions or gifts shall be allowable as deductions only if verified under rules and regulations prescribed by the Commis- sioner of Internal Revenue, with the approval of the Secretary of the Treasury." "(ACT OF SEPTEMBER 8th, 1916) Section 6. That in computing net income in the case of a nonresident alien (a) For the purpose of the tax there shall be allowed as de- ductions First. The necessary expenses actually paid in carrying on any business or trade conducted by him within the United States, not in- cluding personal, living, or family expenses; Second. The proportion of all interest paid within the year by 20 THE FEDERAL WAR TAX LAW, 1917 Invested Capital Defined Section 207. That as used in this title, the term "invested capital" for any year means the average invested capital for the year, as defined and limited in this title, averaged monthly. As used in this title "invested capital" does not include stocks, bonds (other than obligations of the United States), or other assets, the income from which is not subject to the tax imposed by this title nor money or other property borrowed, and means, subject to the above limitations; Corporations or Partnerships (a) In the case of a corporation or partnership: (1) Actual cash paid in, (2) the actual cash value of tangible property paid in other than cash, for stock or shares in such corporation or partnership, at the time of such payment (but in case such tangi- ble property was paid in prior to January first, nineteen hundred and fourteen, the actual cash value of such property as of Janu- ary first, nineteen hundred and fourteen, but in no case to exceed the par value of the original stock or shares specifically issued therefor), and (3) paid in or earned surplus and undivided such person on his indebtedness which the gross amount of his income for the year derived from sources within the United States bears to the gross amount of his income for the year derived from all sources within and without the United States, but this deduction shall be allowed only if such person includes in the return required by section eight all the information necessary for its calculation; Third. Taxes paid within the year imposed by the authority of the United States, or its Territories, or possessions, or under the authority of any State, county, school district, or municipality, or other taxing sub- division of any State, paid within the United States, not including those assessed against local benefits; Fourth. Losses actually sustained during the year, incurred in business or trade conducted by him within the United States, and losses of property within the United States arising from fires, storms, ship- wreck, or other casualty, and from theft, when such losses are not compensated for by insurance or otherwise: Provided, That for the purpose of ascertaining the amount of such loss or losses sustained in trade, or speculative transactions not in trade, from the same or any kind of property acquired before March first, nineteen hundred and thirteen, the fair market price or value of such property as of March first, nineteen hundred and thirteen, shall be the basis for determining the amount of such loss or losses sustained; Fifth. In transactions entered into for profit but not connected with his business or trade, the losses actually sustained therein during the year to an amount not exceeding the profits arising therefrom in the United States; Sixth. Debts arising in the course of business or trade conducted by him within the United States due to the taxpayer actually ascertained to be worthless and charged off within the year; Seventh. A reasonable allowance for the exhaustion, wear and tear of property within the United States arising out of its use or employ- ment in the business or trade; (a) in the case of oil and gas wells a reasonable allowance for actual reduction in flow and production to be ascertained not by the flush flow, but by the settled production or regular flow; (b) in the case of mines a reasonable allowance for de- THE FEDERAL WAR TAX LAW, 1917 21 profits used or employed in the business, exclusive of undivided profits earned during the taxable year: Provided, That (a) the actual cash value of patents and copyrights paid in for stock or shares in such corporation or partnership, at the time of such payment, shall be included as invested capital but not to exceed the par value of such stock or shares at the time of such pay- ment, and (b) the good will, trade-marks, trade brands, the franchise of a corporation or partnership, or other intangible property, shall be included as invested capital if the corporation or partnership made payment bona fide therefor specifically as such in cash or tangible property, the value of such good will, trade-mark, trade brand, franchise, or intangible property, not to exceed the actual cash or actual cash value of the tangible prop- erty paid therefor at the time of such payment; but good will, trade-marks, trade brands, franchise of a corporation or partner- ship, or other intangible property, bona fide purchased, prior to March third, nineteen hundred and seventeen, for and with interests or shares in a partnership or for and with shares in the capital stock of a corporation (issued prior to March third, nineteen hundred and seventeen), in an amount not to exceed, on March third, nineteen hundred and seventeen, twenty per centum of the total interests or shares in the partnership or of the total shares of the capital stock of the corporation, shall be included in invested capital at a value not to exceed the actual cash value at the time of such purchase, and in case of issue of stock therefor not to exceed the par value of such stock ; Individuals (b) In the case of an individual, (1) actual cash paid into the trade or business, and (2) the actual cash value of tangible property paid into the trade or business, other than cash, at the time of such payment (but in case such tangible property was paid in prior to January first, nineteen hundred and fourteen, the actual cash value of such property as of January first, nineteen hundred and fourteen), and (3) the actual cash value of patents, copyrights, good will, trade-marks, trade brands, franchises, or other intangible property, paid into the trade or business, at pletion thereof not to exceed the market value in the mine of the product thereof which has been mined and sold during the year for which the return and computation are made, such reasonable allowance to be made in the case of both (a) and (b) under rules and regulations to be prescribed by the Secretary of the Treasury: Provided, That when the allowance authorized in (a) and (b) shall equal the capital originally invested, or in case of purchase made prior to March first, nineteen hundred and thirteen, the fair market value as of that date, no further allowance shall be made. No deduction shall be allowed for any amount paid out for new buildings, permanent improvements, or betterments, made to increase the value of any property or estate, and no deduction shall be made for any amount of expense of restoring property or making good the exhaustion thereof for which an allowance is or has been made. 22 THE FEDERAL WAR TAX LAW, 1917 the time of such payments, if payment was made therefor spe- cifically as such in cash or tangible property, not to exceed the actual cash or actual cash value of the tangible property bona fide paid therefor at the time of such payment. Foreign In the case of a foreign corporation or partnership or of a non-resident alien individual the term "invested capital" means that proportion of the entire invested capital, as defined and limited in this title, which the net income from sources within the United States bears to the entire net income. Change of Business Ownership Section 208. That in case of the reorganization, consolida- tion or change of ownership of a trade or business after March third, nineteen hundred and seventeen, if an interest or control in such trade or business of fifty per centum or more remains in control of the same persons, corporations, associations, part- nerships, or any of them, then in ascertaining the invested capital of the trade or business no asset transferred or received from the prior trade or business shall be allowed a greater value than would have been allowed under this title in computing the in- vested capital of such prior trade or business if such asset had not been so transferred or received, unless such asset was paid for specifically as such, in cash or tangible property, and then not to exceed the actual cash or actual cash value of the tangible property paid therefor at the time of such payment. Nominal Capital Section 209. That in the case of a trade or business having no invested capital or not more than a nominal capital there shall be levied, assessed, collected and paid, in addition to the taxes under existing law and under this Act, in lieu of the tax imposed by section two hundred and one, a tax equivalent to eight per centum of the net income of such trade or business in excess of the following deductions : In the case of a domestic corporation $3,000, and in the case of a domestic partnership or a citizen or resident of the United States $6,000; in the case of all other trades or business, no deduction. Invested Capital Undeterminable Section 210. That if the Secretary of the Treasury is unable in any case satisfactorily to determine the invested capital, the amount of the deduction shall be the sum of (1) an amount equal to the same proportion of the net income of the trade or busi- ness received during the taxable year as the proportion which the average deduction (determined in the same manner as pro- vided in section two hundred and three, without including the $3,000 or $6,000 therein referred to) for the same calendar year THE FEDERAL WAR TAX LAW, 1917 23 of representative corporations, partnerships, and individuals, en- gaged in a like or similar trade or business, bears to the total net income of the trade or business received by such corporations, partnerships, and individuals, plus (2) in the case of a domestic corporation $3,000, and in the case of a domestic partnership or a citizen or resident of the United States $6,000. For the purpose of this section the proportion between the deduction and the net income in each trade or business shall be determined by the Commissioner of Internal Revenue in accord- ance with regulations prescribed by him, with the approval of the Secretary of the Treasury. In the case of a corporation or partnership, which has fixed it own fiscal year, the proportion determined for the calendar year ending during such fiscal year shall be used. Returns Section 211. That every foreign partnership having a net income of $3,000 or more for the taxable year, and every domestic partnership having a net income of $6,000 or more for the tax- able year, shall render a correct return of the income of the trade or business for the taxable year, setting forth specifically the gross income for such year, and the deductions allowed in this title. Such returns shall be rendered at the same time and in the same manner as is prescribed for income-tax returns under Title I of such Act of September eighth, nineteen hundred and sixteen, as amended by this Act. General Provisions Section 212. That all administrative, special, and general provisions of law, including the laws in relation to the assess- ment, 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 appli- cable 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 im- posed by this title. Section 213. That the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury, shall make all necessary regulations for carrying out the provisions of this title, and may require any corporation, partenership, or individual, subject to the provisions of this title, to furnish him with such facts, data, and information as in his judgment are necessary to collect the tax imposed by this title. Excess Profit Tax of March 3, 1917, Repealed Section 214. That Title II (sections two hundred to two hun- dred and seven, inclusive) of the Act entitled "An Act to pro- 24 THE FEDERAL WAR TAX LAW, 1917 vide increased 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 third, nineteen hundred and seventeen, is hereby repealed. 1 'REPEALED. (ACT OF MARCH 3, 1917) Section 200. That when used in this title The term "corporation" includes joint-stock companies or associa- tions, and insurance companies; The term "United States" means only the States, the Territories of Alaska and Hawaii, and the District of Columbia; and The term "taxable year" means the twelve months ending December thirty-first, except in the case of a corporation or partnership allowed to fix its own fiscal year, in which case it means such fiscal year. The first taxable year shall be the year ending December thirty-first, nine- teen hundred and seventeen. Section 201. That in addition to the taxes under existing laws there shall be levied, assessed, collected, and paid for each taxable year upon the net income of every corporation and partnership organized, authorized, or existing under the laws of the United States, or of any State, Territory, or District thereof, no matter how created or organized, excepting income derived from the business of life, health, and accident insurance combined in one policy issued on the weekly premium pay- ment plan, a tax of eight per centum of the amount by which such net income exceeds the sum of (a) $5,000 and (b) eight per centum of the actual capital invested. Every foreign corporation and partnership, including corporations and partnerships of the Philippine Islands and Porto Rico, shall pay for each taxable year a like tax upon the amount by which its net income received from all sources within the United States exceeds the sum of (a) eight per centum of the actual capital invested and used or employed in the business in the United States, and (b) that propor- tion of $5,000 which the entire actual capital invested and used or employed in the business in the United States bears to the entire actual capital invested; and in case no such capital is used or employed in the business in the United States the tax shall be imposed upon that portion of such net income which is in excess of the sum of (a) eight per centum of that proportion of the entire actual capital invested and used or employed in the business which the net income from sources within the United States bears to the entire net income, and (b) that proportion of $5,000 which the net income from sources within the United States bears to the entire net income. Section 202. That for the purpose of this title, actual capital in- vested means (1) actual cash paid in, (2) the actual cash value, at the time of payment, of assets other than cash paid in, and (3) paid in or earned surplus and undivided profits used or employed in the business; but does not include money or other property borrowed by the corpora- tion or partnership. Section 203. That the tax herein imposed upon corporations and partnerships shall be computed upon the basis of the net income shown by their income tax returns under Title I of the Act entitled "An Act to increase the revenue, and for other purposes," approved September eighth, nineteen hundred and sixteen, or under this title, and shall be assessed and collected at the same time and in the same manner as the income tax due under Title I of such Act of September eighth, nineteen hundred and sixteen: Provided, That for the purpose of this title a partnership shall have the same privilege with reference to fixing its fiscal year as is accorded corporations under section thirteen (a) of Title I of such Act of September eighth, nineteen hundred and sixteen: And provided further, That where a corporation or partnership THE FEDERAL WAR TAX LAW, 1917 25 Refunds Any amount heretofore or hereafter paid on account of the tax imposed by such Title II, shall be credited toward the pay- ment of the tax imposed by this title, and if the amount so paid exceeds the amount of such tax the excess shall be refunded as a tax erroneously or illegally collected. MUNITION TAX Amendments Subdivision (1) of section three hundred and one of such Act of September eighth, nineteen hundred and sixteen, is hereby amended so that the rate of tax for the taxable year nineteen hundred and seventeen shall be ten per centum instead of twelve and one-half per centum, as therein provided. Subdivision (2) of such section: 1 is hereby amended to read as follows : "(2) This section shall cease to be of effect on and after January first, nineteen hundred and eighteen." TITLE III. WAR TAX ON BEVERAGES Distilled Spirits Section 300. That on and after the passage of this Act there shall be levied and collected on all distilled spirits in bond at that time or that have been or that may be then or thereafter produced in or imported into the United States, except such distilled spirits as are subject to the tax provided in section makes return prior to March first, nineteen hundred and eighteen, covering its own fiscal year and includes therein any income received during the calendar year ending December thirty-first, nineteen hundred and sixteen, the tax herein imposed shall be that proportion of the tax based upon such full fiscal year which the time from January first, nineteen hundred and seventeen, to the end of such fiscal year bears to the full fiscal year. Section 204. That corporations exempt from tax under the pro- visions of section eleven of Title I of the Act approved September eighth, nineteen hundred and sixteen, and partnerships carrying on or doing the same business shall be exempt from the provisions of this title, and the tax imposed by this title shall not attach to incomes of partnerships derived from agriculture or from personal services. Section 205. That every corporation having a net income of $5,000 or more for the taxable year making a return under Title I of such Act of September eighth, nineteen hundred and sixteen, shall for the purposes of this title include in such return a detailed statement of the actual capital invested. Every partnership having a net income of $5,000 or more for the taxable year shall render a correct return of the income of the partner- ship for the taxable year, setting forth specifically the actual capital invested and the gross income for such year and the deductions here- inafter allowed. Such returns shall be rendered at the same time and 26 THE FEDERAL WAR TAX LAW, 1917 three hundred and three, in addition to the tax now imposed by law, a tax of $1.10 (or, if withdrawn for beverage purposes or for use in the manufacture or production of any article used or intended for use as a beverage, a tax of $2.10) on each proof gallon, or wine gallon when below proof, and a proportionate tax at a like rate on all fractional parts of such proof or wine gallon, to be paid by the distiller or importer when withdrawn, and collected under the provisions of existing law. Perfumes That in addition to the tax under existing law there shall be levied and collected upon all perfumes hereafter imported into the United States containing distilled spirits, a tax of $1.10 per wine gallon, and a proportionate tax at a like rate on all in the same manner and form as is prescribed for income-tax returns under Title I of such Act of September eighth, nineteen hundred and sixteen. In computing net income of a partnership for the purposes of this title there shall be allowed like deductions as are allowed to individuals in sections five (a) and six (a) of such Act of September eighth, nineteen hundred and sixteen. Section 206. 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 speci- fically 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, relating to returns and payment of the tax therein imposed, including penalties, are hereby made applicable to the tax required by this title. Section 207. That the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury, shall make all necessary regulations for carrying out the provisions of this title, and may require any corporation or partnership subject to the provisions of this title to furnish him with such facts, data, and information as in his judgment are necessary to collect the tax provided for in this title. Section 301. (1) That every person manufacturing (a) gunpowder and other explosives, excepting blasting powder and dynamite used for industrial purposes; (b) cartridges, loaded and unloaded caps or primers, exclusive of those used for industrial purposes; (c) projectiles, shells, or torpedoes of any kind, including shrapnels, loaded or unloaded, or fuses, or complete rounds of ammunition; (d) fire-arms, of any kind and appendages, including small arms, cannon, machine guns, rifles and bayonets; (e) electric motor boats, submarines or submersible vessels or boats; or (f) any part of any of the articles mentioned in (b), (c), (d), or (e); shall pay for each taxable year, in addition to the income tax imposed by Title I, an excise tax of twelve and one-half per centum upon the entire net profits actually received or accrued for said year from the sale or disposition of such articles manufactured within the United States: Provided, however, That no person shall pay such tax upon net profits received during the year nineteen hundred and sixteen derived from the sale and delivery of the articles enumerated in this section under contracts executed and fully performed by such person prior to January first, nineteen hundred and sixteen. THE FEDERAL WAR TAX LAW, 1917 27 fractional parts of such wine gallon. Such tax shall be collected by the collector of customs and deposited as internal revenue collections, under such rules and regulations as the Commis- sioner of Internal Revenue, with the approval of the Secretary of the Treasury, may prescribe. Importation of Spirits Prohibited Section 301. That no distilled spirits produced after the passage of this Act shall be imported into the United States from any foreign country, or from the West Indian Islands recently acquired from Denmark (unless produced from products the growth of such islands, and not then into any State or Territory or District of the United States in which the manu- facture or sale of intoxicating liquor is prohibited), or from Porto Rico, or the Philippine Islands. Under such rules, regulations, and bonds as the Secretary of the Treasury may prescribe, the provisions of this section shall not apply to distilled spirits imported for other than (1) beverage purpose or (2) use in the manufacture or production of any article used or intended for use as a beverage. Regulation as to Transfer, Gauging, Storing, Etc., of Spirits Section 302. That at registered distilleries producing alco- hol, or other high-proof spirits, packages may be filled with such spirits reduced to not less than one hundred proof from the receiving cisterns and tax paid without being entered into bonded warehouse. Such spirits may be also transferred from the receiving cisterns at such distilleries, by means of pipe lines, direct to storage tanks in the bonded warehouse and may be warehoused in such storage tanks. Such spirits may be also transferred in tanks, or tank cars to general bonded warehouses for storage therein, either in storage tanks in such warehouses or in the tanks in which they were transferred. Such spirits may also be transferred after tax payment from receiving cisterns or warehouse storage tanks to tanks or tank cars and may be tranferred in such tanks or tank cars to the premises of rectifiers of spirits. The Commissioner of Internal Revenue, with the ap- proval of the Secretary of the Treasury, is hereby empowered to prescribe all necessary regulations relating to the drawing off, transferring, gauging, storing and transportation of such spirits ; the records to be kept and returns to be made ; the size and kind of packages and tanks to be used ; the marking, branding, numbering and stamping of such packages and tanks ; the, kinds of stamps, if any, to be used ; and the time and manner of paying 28 THE FEDERAL WAR TAX LAW, 1917 the tax; the kind of bond and the penal sum of same. The tax prescribed by law must be paid before such spirits are removed from the distillery premises, or from general bonded warehouse in the case of spirits transferred thereto, except as otherwise provided by law. Under such regulations as the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury, may prescribe, distilled spirits may hereafter be drawn from receiving cisterns and deposited in distillery warehouses with- out having affixed to the packages containing the same distillery warehouse stamps, and such packages, when so deposited in warehouse, may be withdrawn therefrom on the original gauge where the same have remained in such warehouse for a period not exceeding thirty days from the date of deposit. Regulations as to Spirits for Non-Beverage Purposes Under such regulations as the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury, may prescribe, the manufacture, warehousing, withdrawal, and shipment, under the provisions of existing law, of ethyl alcohol for other than (1) beverage purposes or (2) use in the manu- facture or production of any article used or intended for use as a beverage, and denatured alcohol, may be exempted from the provisions of section thirty-two hundred and eighty-three, Re- vised Statutes of the United States. Under such regulations as the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury, may prescribe, manufacturers of ethyl alcohol for other than beverage purposes may be granted permission under the pro- visions of section thirty-two hundred and eighty-five, Revised Statutes of the United States, to fill fermenting tub in a sweet- mash distillery not oftener than once in forty-eight hours : Tax on Stock on Hand Section 303. That upon all distilled spirits produced in or imported into the United States upon which the Tax now imposed by law has been paid, and which, on the day this Act is passed, are held by a retailer in a quantity in excess of fifty gallons in the aggregate, or by any other person, corporation, partnership, or association in any quantity, and which are in- tended for sale, there shall be levied, assessed, collected, and paid a tax of $1.10 (or, if intended for sale for beverage pur- poses or for use in the manufacture or production of any article used or intended for use as a beverage, a tax of $2.10) on each proof gallon, and a proportionate tax at a like rate on an frac- tional parts of such proof gallon : Provided, That the tax on such distilled spirits in the custody of a court of bankruptcy in insolvency proceedings on June first, nineteen hundred and seventeen, shall be paid by the person to whom the court delivers THE FEDERAL WAR TAX LAW, 1917 29 such distilled spirits at the time of such delivery, to the extent that the amount thus delivered exceeds the fifty gallons herein- before provided. Tax on Rectified or Unlawfully Refined Spirits to Reduce Proof After Rectification Section 304. That in addition to the tax now imposed or imposed by this Act on distilled spirits there shall be levied, assessed, collected, and paid a tax of 15 cents on each proof gallon and a proportionate tax at a like rate on all fractional parts of such proof gallon on all distilled spirits or wines here- after rectified, purified, or refined in such manner, and on all mixtures hereafter produced in such manner, that the person so rectifying, purifying, refining, or mixing the same is a rectifier within the meaning of section thirty-two hundred and forty- four, Revised Statutes, as amended, and on all such articles in the possession of the rectifier on the day this Act is passed : Pro- vided, That this tax shall not apply to gin produced by the redis- tillation of a pure spirit over juniper berries and other aromatics. When the process of rectification is completed and the tax prescribed by this section has been paid, it shall be unlawful for the rectifier or other dealer to reduce in proof or increase in volume such spirits or wine by the addition of water or other substance ; nothing herein contained shall, however, pre- vent a rectifier from using again in the process of rectification spirits already rectified and upon which the tax has theretofore been paid. Exemptions The tax imposed by this section shall not attach to cordials or liqueurs on which a tax is imposed and paid under the Act entitled "An Act to increase the revenue, and for other pur- poses," approved September eighth, nineteen hundred and six- teen, nor to the mixing and blending of wines, where such blend- ing is for the sole purpose of perfecting such wines, according to commercial standards, nor to blends made exclusively of two or more pure straight whiskies aged in wood for a period not less than four years and without the addition of coloring or flavoring matter or any other substance than pure water and if not reduced below ninety proof: Provided, That such blended whiskies shall be exempt from tax under this section only when compounded under the immediate supervision of a revenue officer, in such tanks and under such conditions and supervision as the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury, may prescribe. General Provisions All distilled spirits taxable under this section shall be sub- ject to uniform regulations concerning the use thereof in the manufacture, blending, compounding, mixing, marking, brand- 30 THE FEDERAL WAR TAX LAW, 1917 ing, and sale of whisky and rectified spirits, and no discrimina- tion whatsoever shall be made by reason of a difference in the character of the material from which same may have been produced. The business of a rectifier of spirits shall be carried on, and the tax on rectified spirits shall be paid, under such rules, regulations, and bonds as may be prescribed by the Commis- sioner of Internal Revenue, with the approval of the Secretary of the Treasury. Penalty Any person violating any of the provisions of this section shall be deemed to be guilty of a misdemeanor and, upon con- viction, shall be fined not more than $1,000 or imprisoned not more than two years. He shall, in addition, be liable to double the tax evaded together with the tax, to be collected by assess- ment or on any bond given. Stamp Provisions Section 305. That hereafter collectors of internal revenue shall not furnish wholesale liquor dealer's stamps in lieu of and in exchange for stamps for rectified spirits unless the package covered by stamp for rectified spirits is to be broken into smaller packages. The Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury, is authorized to discontinue the use of the following stamps whenever in his judgment the interests of the Government will be subserved thereby: Distillery warehouse, special bonded warehouse, special bonded rewarehouse, general bonded warehouse, general bonded retransfer, transfer brandy, export tobacco, export cigars, export oleomargarine and export fermented liquor stamps. Installation of Meters Section 306. That the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury, is hereby authorized to require at distilleries, breweries, rectifying houses, and wherever else in his judgment such action may be deemed advisable, the installation of meters, tanks, pipes, or any other apparatus for the purpose of protecting the revenue, and such meters, tanks, and pipes and all necessary labor incident thereto shall be at the expense of the person, corporation, partnership, or association on whose premises the installation is required. Any such person, corporation, partnership, or association refus- ing or neglecting to install such apparatus when so required by the commissioner shall not be permitted to conduct business on such premises. THE FEDERAL WAR TAX LAW, 1917 31 Tax on Beer, Ale, Porter, Etc. Section 307. That on and after the passage of this Act there shall be levied and collected on all beer, lager beer, ale, porter, and other similiar fermented liquor, containing one-half per centum or more of alcohol, brewed or manufactured and sold, or stored in warehouse, or removed for consumption or sale, within the United States, by whatever name such liquors may be called, in addition to the tax now imposed by law, a tax of $1.50 for every barrel containing not more than thirty-one gal- lons, and at a like rate for any other quantity or for the fractional parts of a barrel authorized and denned by law. Removal of Liquors Section 308. That from and after the passage of this Act taxable fermented liquors may be conveyed without payment of tax from the brewery premises where produced to a contiguous industrial distillery of either class established under the Act of October third, nineteen hundred and thirteen, to be used as distilling material, and the residue from such distillation, contain- ing less than one-half of one per centum of alcohol by volume, which is to be used in making beverages, may be manipulated by cooling, flavoring, carbonating, settling, and filtering on the dis- tillery premises or elsewhere. Removal of Liquors The removal of the taxable fermented liquor from the brewery to the distillery and the operation of the distillery and removal of the residue therefrom shall be under the supervision of such officer or officers as the Commissioner of Internal Rev- enue shall deem proper, and the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury, is hereby authorized to make such regulations from time to time as may be necessary to give force and effect to this section and to safeguard the revenue. Tax on Wines, Vermuth, Cordials, Etc. Section 309. That upon all still wines, including vermuth, and upon all champagne and other sparkling wines, liqueurs, cordials, artificial or imitation wines or compounds sold as wine, produced in or imported into the United States, and hereafter removed from the custom-house, place of manufacture, or from bonded premises for sale or consumption, there shall be levied and collected, in addition to the tax now imposed by law upon such articles, a tax equal to such tax, to be levied, collected, and paid under the provisions of existing law. Excessive Stock Tax Section 310. That upon all articles specified in section three hundred and nine upon which the tax now imposed by law has been paid and which are on the day this Act is passed held 32 THE FEDERAL WAR TAX LAW, 1917 in excess of twenty-five gallons in the aggregate of such articles and intended for sale, there shall be levied, collected, and paid a tax equal to the tax imposed by such section. Tax on Brandy and Wine Spirits Section 311. That upon all grape brandy or wine spirits withdrawn by a producer of wines from any fruit distillery or special bonded warehouse under subdivision (c) of section four hundred and two of the Act entitled "An Act to increase the revenue and for other purposes," approved September eighth, nineteen hundred and sixteen i 1 there shall be levied, assessed, collected, and paid in addi- tion to the tax therein imposed, a tax equal to double such tax, to be assessed, collected, and paid under the provisions of exist- ing law. Tax on Brandy and Wine Used for Fortification Section 312. That upon all sweet wines held for sale by the producer thereof upon the day this Act is passed there shall be levied, assessed, collected, and paid an additional tax equiva- lent to 10 cents per proof gallon upon the grape brandy or wine spirits used in the fortification of such wine, and an additional tax of 20 cents per proof gallon shall be levied, assessed, col- lected, and paid upon all grape brandy or wine spirits withdrawn by a producer of sweet wines for the purpose of fortifying such wines and not so used prior to the passage of this Act. Tax on Sirups and Extracts Section 313. That there shall be levied, assessed, collected, and paid (a) Upon all prepared sirups or extracts (intended for use in the manufacture or production of beverages, commonly known as soft drinks, by soda fountains, bottling establishments, and other similar places) sold by the manufacturer, producer, or importer thereof, if so sold for not more than $1.30 per gallon, '(ACT OF SEPTEMBER 8th, 1916) Section 402 (c) That under such regulations and official supervision and upon the giving of such notices, entries, bonds, and other security as the Commissioner of In- ternal Revenue, with the approval of the Secretary of the Treasury, may prescribe, any producer of wines denned under the provisions of this section or section four hundred and one of this Act, may withdraw from any fruit distillery or special bonded warehouse grape brandy, or wine spirits, for the fortification of such wines on the premises where actually made: Provided, That there shall be levied and assessed against the producer of such wines a tax of 10 cents per proof gallon of grape brandy or wine spirits so used by him in the fortification of such wines during the preceding month, which assessment shall be paid by him within six months from the date of notice thereof: Provided further, That nothing herein contained shall be construed as exempting any wines, cordials, liqueurs, or similar compounds from the payment of any tax provided for in this section. THE FEDERAL WAR TAX LAW, 1917 33 a tax of 5 cents per gallon; if so sold for more than $1.30 and not more than $2 per gallon, a tax of 8 cents per gallon; if so sold for more than $2 and not more than $3 per gallon, a tax of 10 cents per gallon; if so sold for more than $3 and not more than $4 per gallon, a tax of 15 cents per gallon ; and if so sold for more than $4 per gallon, a tax of 20 cents per gallon ; and Tax on Soft Drinks (b) Upon all unfermented grape juice, soft drinks, or artifi- cial mineral waters (not carbonated), and fermented liquors containing less than one-half per centum of alcohol, sold by the manufacturer, producer, or importer thereof, in bottles or other closed containers, and upon all ginger ale, root beer, sarsaparilla, pop, and other carbonated waters or beverages, manufactured and sold by the mnufacturer, producer, or importer of the car- bonic acid gas used in carbonating the same, a tax of 1 cent per gallon ; and Tax on Mineral Waters (c) Upon all natural mineral waters or table waters, sold by the producer, bottler, or importer thereof, in bottles or other closed containers, at over 10 cents per gallon, a tax of 1 cent per gallon. Monthly Returns Section 314. That each manufacturer, producer, bottler, or importer shall make monthly returns under oath to the collector of internal revenue for the district in which is located the prin- cipal place of business, containing such information necessary for the assessment of the tax, and at such times and in such manner, as the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury, may by regulation prescribe. Tax on Carbonic Acid Section 315. That upon all carbonic acid gas in drums or other containers (intended for use in the manufacture or pro- duction of carbonated water or other drinks) sold by the manu- facturer, producer, or importer thereof, there shall be levied, assessed, collected, and paid a tax of 5 cents per pound. Such tax shall be paid by the purchaser to the vendor thereof and shall be collected, returned, and paid to the United States by such vendor in the same manner as provided in section five hundred and three. TITLE IV. MAN Cigars and Cigarettes Section 400. That upon cigars and cigarettes, which shall be manufactured and sold, or removed for consumption or sale, there shall be levied and collected, in addition to the taxes now 34 THE FEDERAL WAR TAX LAW, 1917 imposed by existing law, the following taxes, to be paid by the manufacturer or importer thereof; (a) on cigars of all descrip- tions made of tobacco, or any substitute therefor, and weighing not more than three pounds per thousand, 25 cents per thousand ; (b) on cigars made of tobacco, or any substitute therefor, and weighing more than three pounds per thousand, if manufactured or imported to retail at 4 cents or more each, and not more than 7 cents each, $1 per thousand ; (c) if manufactured or imported to retail at more than 7 cents each and not more than 15 cents each, $3 per thousand; (d) if manufactured or imported to retail at more than 15 cents each and not more than 20 cents each, $5 per thousand; (e) if manufactured or imported to retail at more than 20 cents each, $7 per thousand: Provided, That the word "retail" as used in this section shall mean the ordinary retail price of a single cigar, and that the Commissioner of Internal Revenue may, by regulation, require the manufacturer or im- porter to affix to each box or container a conspicuous label in- dicating by letter the clause of this section under which the cigars therein contained have been tax-paid, which must corre- spond with the tax-paid stamp on said box or container; (f) on cigarettes made of tobacco, or any substitute therefor, made in or imported into the United States, and weighing not more than three pounds per thousand, 80 cents per thousand ; weigh- ing more than three pounds per thousand, $1.20 per thousand. Regulations as to Packing and Cancellation of Stamps Every manufacturer of cigarettes (including small cigars weighing not more than three pounds per thousand) shall put up all the cigarettes and such small cigars that he manufactures or has manufactured for him, and sells or removes for consump- tion or use, in packages or parcels containing five, eight, ten, twelve, fifteen, sixteen, twenty, twenty-four, forty, fifty, eighty, or one hundred cigarettes each, and shall securely affix to each of said packages or parcels a suitable stamp denoting the tax thereon and shall properly cancel the same prior to such sale or removal for consumption or use under such regulations as the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury, shall prescribe ; and all cigarettes im- ported from a foreign country shall be packed, stamped, and the stamps cancelled in a like manner, in addition to the import stamp indicating inspection of the custom-house before they are withdrawn therefrom. Tobacco and Snuff Section 401. That upon all tobacco, and snuff hereafter manufactured and sold, or removed for consumption or use, there shall be levied and collected, in addition to the tax now imposed by law upon such articles, a tax of 5 cents per pound, to be levied, collected, and paid under the provisions of existing law. In addition to the packages provided for under existing law, manufactured tobacco and snuff may be put up and prepared by THE FEDERAL WAR TAX LAW, 1917 35 the manufacturer for sale or consumption, in packages of the following description : Packages containing one-eighth, three- eighths, five-eighths, seven-eighths, one and one-eighth, one and three-eighths, one and five-eighths, one and seven-eighths, and five ounces. Sections 400-1 Effective Nov. 2, 1917 Section 402. That sections four hundred, four hundred and one, and four hundred and four, shall take effect thirty days after the passage of this Act : Provided, That after the passage of this Act and before the expiration of the aforesaid thirty days, cigarettes and manufactured tobacco and snuff may be put up in the packages now provided for by law or in the packages pro- vided for in sections four hundred and four hundred and one. Floor Stock Tax Section 403. That there shall also be levied and collected, upon all manufactured tobacco and snuff in excess of one hundred pounds or upon cigars or cigarettes in excess of one thousand, which were manufactured or imported, and removed from factory or custom house prior to the passage of this Act, bearing tax- paid stamps affixed to such articles for the payment of the taxes thereon, and which are, on the day after this Act is passed, held and intended for sale by any person, corporation, partnership, or association, and upon all manufactured tobacco, snuff, cigars, or cigarettes, removed from factory or custom house after the passage of this Act but prior to the time when the tax imposed by section four hundred or section four hundred and one upon such articles takes effect, an additional tax equal to one-half the tax imposed by such sections upon such articles. Cigarette Paper Section 404. That there shall be levied, assessed, and col- lected upon cigarette paper made up into packages, books, sets, or tubes, made up in or imported into the United States and in- tended for use by the smoker in making cigarettes the following taxes : On each package, book, or set, containing more than twenty-five but not more than fifty papers, one-half of 1 cent ; containing more than fifty but not more than one hundred papers, 1 cent ; containing more than one hundred papers, 1 cent for each one hundred papers or fractional part thereof; and upon tubes, 2 cents for each one hundred tubes or fractional part thereof. TITLE V. WAR TAX ON FACILITIES FURNISHED BY PUBLIC UTILITIES, AND INSURANCE Rail or Water Freight Transportation Tax Section 500. That from and after the first day of November, ninteen hundred and seventeen, there shall be levied, assessed, collected, and paid (a) a tax equivalent to three per centum 36 THE FEDERAL WAR TAX LAW, 1917 of the amount paid for the transportation by rail or water or by any form of mechanical motor power when in competition with carriers by rail or water of property by freight consigned from one point in the United States to another ; Tax on Express Transportation (b) a tax of 1 cent for each 20 cents, or fraction thereof, paid to any person, corporation, partnership, or association, engaged in the business of transporting parcels or packages by express over regular routes between fixed terminals, for the transporta- tion of any package, parcel, or shipment by express from one point in the United States to another: Provided, That nothing herein contained shall be construed to require the carrier col- lecting such tax to list separately in any bill of lading, freight receipt, or other similar document, the amount of the tax herein levied, if the total amount of the freight and tax be therein stated ; Tax on Transportation of Persons by Rail or Water (c) a tax equivalent to eight per centum of the amount paid for the transportation of persons by rail or water, or by any form of mechanical motor power on a regular established line when in competition with carriers by rail or water, from one point in the United States to another or in any point in Canada or Mexico, where the ticket therefor is sold or issued in the United States, not including the amount paid for computation or season tickets for trips less than thirty miles, or for transportation the fare for which does not exceed 35 cents, and a tax equivalent to ten per centum of the amount paid for seats, berths, and state- rooms in parlor cars, sleeping cars, or on vessels. If a mileage book used for such transportation or accommodation has been purchased before this section takes effect, or if cash fare be paid, the tax imposed by this section shall be collected from the person presenting the mileage book, or paying the cash fare, by the con- ductor or other agent, when presented for such transportation or accommodation, and the amount so collected shall be paid to the United States in such manner and at such times as the Commis- sioner of Internal Revenue, with the approval of the Secretary of the Treasury, may prescribe ; if a ticket (other than a mileage book) is bought and partially used before this section goes into effect it shall not be taxed, but if bought but not so used before this section takes effect, it shall not be valid for passage until the tax has been paid and such payment evidenced on the ticket in such manner as the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury, may by regulation prescribe ; THE FEDERAL WAR TAX LAW, 1917 37 Tax on Telephone, Telegraph or Radio Communications and Pipe Line Transportation (d) a tax equivalent to five per centum of the amount paid for the transportation of oil by pipe line; (e) a tax of 5 cents upon each telegraph, telephone, or radio, dispatch, message, or conversation, which originates within the United States, and for the transmission of which a charge of 15 cents or more is imposed: Provided, That only one payment of such tax shall be required, notwithstanding the lines or stations of one or more persons, corporations, partnerships, or associations, shall be used for the tranmission of such dispatch, message, or conversation. Payor for Services to Pay Said Taxes Section 501. That the taxes imposed by section five hundred shall be paid by the person, corporation, partnership, or associa- tion paying for the services or facilities rendered. Tax on Transportation of Carriers' Own Commodities In case such carrier does not, because of its ownership of the commodity transported, or for any other reason, receive the amount which as a carrier it would otherwise charge, such car- rier shall pay a tax equivalent to the tax which would be im- posed upon the transportation of such commodity if the carrier received payment for such transportation: Provided, That in case of a carrier which on May first, nineteen hundred and seven- teen, had no rates or tariff on file with the proper Federal or State authority, the tax shall be computed on the basis of the rates or tariffs of other carriers for like services as ascertained and determined by the Commissioner of Internal Revenue: Provided further, That nothing in this or the preceding section shall be construed as imposing a tax (a) upon the transportation of any commodity which is necessary for the use of the carrier in the conduct of its business as such and is intended to be so used or has been so used; or (b) upon the transportation of com- pany material transported by one carrier, which constitutes a part of a railroad system, for another carrier which is also a part of the same system. Exemptions Section 502. That no tax shall be imposed under section five hundred upon any payment received for services rendered to the United States, or any State, Territory, or the District of Colum- bia. The right to exemption under this section shall be evi- denced in such manner as the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury, may by regu- lation prescribe. Collections and Returns Section 503. That each person, corporation, partnership, or association receiving any payments referred to in section five hundred shall collect the amount of the tax, if any, imposed by 38 THE FEDERAL WAR TAX LAW, 1917 such section from the person, corporation, partnership, or associa- tion making such payments, and shall make monthly returns under oath, in duplicate, and pay the taxes so collected and the taxes imposed upon it under paragraph two of section five hun- dred and one to the collector of internal revenue of the district in which the principal office or place of business is located. Such returns shall contain such information, and be made in such manner, as the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury, may by regulation prescribe. Tax on Issuance of Insurance Policies Section 504. That from and after the first day of November, nineteen hundred and seventeen, there shall be levied, assessed, collected, and paid the following taxes on the issuance of insur- ance policies : Life Insurance (a) Life Insurance: A tax equivalent to 8 cents on each $100 or fractional part thereof of the amount for which any life is insured under any policy of insurance, or other instrument, by whatever name the same is called : Provided, That on all policies for life insurance only by which a life is insured not in excess of $500, issued on the industrial or weekly-payment plan of insurance, the tax shall be forty per centum of the amount of the first weekly premium : Provided further, That policies of reinsurance shall be exempt from the tax imposed by this sub- division ; Marine, Fire and Inland Insurance (b) Marine, inland, and fire insurance : A tax equivalent to 1 cent on each dollar or fractional part thereof of the premium charged under each policy of insurance or other instrument by whatever name the same is called whereby insurance is made or renewed upon property of any description (including rents or profits), whether against peril by sea or inland waters, or by fire or lightning, or other peril : Provided, That policies of reinsur- ance shall be exempt from the tax imposed by this subdivision ; Casualty Insurance (c) Casualty insurance : A tax equivalent to 1 cent on each dollar or fractional part thereof of the premium charged under each policy of insurance or obligation of the nature of indemnity for loss, damage or liability (except bonds taxable under sub- division two of schedule A of Title VIII) issued or executed or renewed by any person, corporation, partnership, or association, transacting the business of employer's liability, workmen's com- pensation, accident, health, tornado, plate glass, steam boiler, ele- vator, burglary, automatic sprinkler, automobile, or other branch of insurance (except life insurance, and insurance described and taxed in the preceding subdivision): Provided, That policies of THE FEDERAL WAR TAX LAW, 1917 39 reinsurance shall be exempt from the tax imposed by this subdi- vision ; Exemptions (d) Policies issued by any person, corporation, partnership, or association, whose income is exempt from taxation under Title I of the Act entitled "An Act to increase the revenue, and for other purposes," approved September eighth, nineteen hundred and sixteen, 1 shall be exempt from the taxes imposed by this section. Return Regulations Section 505. That every person, corporation, partnership, or association, issuing policies of insurance upon the issuance of which a tax is imposed by section five hundred and four, shall, within the first fifteen days of each month, make a return under oath, in duplicate and pay such tax to the collector of internal revenue of the district in which the principal office or place of business of such person, corporation, partnership, or association is located. Such returns shall contain such information and be made in such manner as the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury, may by regu- lation prescribe. TITLE VI. WAR EXCISE TAXES Automobiles Sold by Manufacturer or Importer Section 600. That there shall be levied, assessed, collected, and paid (a) Upon all automobiles, automobile trucks, automobile wagons, and motorcycles, sold by the manufacturer, producer, or importer, a tax equivalent to three per centum of the price for which so sold; '(ACT OF SEPTEMBER 8th, 1916) Section 4. The following in- come shall be exempt from the provisions of this title: The proceeds of life insurance policies paid to individual bene- ficiaries upon the death of the insured; the amount received by the in- sured, as a return of premium or premiums paid by him under life insurance, endowment, or annuity contracts, either during the term or at the maturity of the term mentioned in the contract or upon the surrender of the contract; the value of property acquired by gift, bequest, devise, or descent (but the income from such property shall be included as income); interest upon the obligations of a State or any political subdivision thereof or upon the obligations of the United States or its possessions or securities issued under the provisions of the Federal farm loan Act of July seventeenth, nineteen hundred and sixteen; the compensation of the present President of the United States during the term for which he has been elected, and the judges of the Supreme and inferior courts of the United States now in office, and the compensation of all officers and employees of a State, or any political subdivision thereof, except when such compensation is paid by the United States Government. 40 THE FEDERAL WAR TAX LAW, 1917 Musical Instruments and Machines (b) Upon all piano players, grap'hophones, phonographs, talking machines, and records used in connection with any musical instrument, piano player, graphophone, phonograph, or talking machine, sold by the manufacturer, producer, or importer, a tax equivalent to three per centum of the price for which so sold; Moving Picture Films (c) Upon all moving-picture films (which have not been exposed) sold by the manufacturer or importer a tax equivalent to one-fourth of 1 cent per linear foot ; and (d) Upon all positive moving-picture films (containing a picture ready for projection) sold or leased by the manufacturer, producer, or importer, a tax equivalent to one-half of 1 cent per linear foot; and Jewelry (e) Upon any article commonly or commercially known as jewelry, whether real or imitation, sold by the manufacturer, producer, or importer thereof, a tax equivalent to three per centum of the price for which so sold ; and Sporting Goods, Etc. (f) Upon all tennis rackets, golf clubs, baseball bats, la- crosse sticks, balls of all kinds, including baseballs, footballs, tennis, golf, lacrosse, billiard and pool balls, fishing rods and reels, billiard and pool tables, chess and checker boards and pieces, dice, games and parts of games, except playing cards and children's toys and games, sold by the manufacturer, producer, or importer, a tax equivalent to three per centum of the price for which so sold; and Toilet Articles (g) Upon all perfumes, essences, extracts, toilet waters, cosmetics, petroleum jellies, hair oils, pomades, hair dressings, hair restoratives, hair dyes, tooth and mouth washes, dentifrices, tooth pastes, aromatic cachous, toilet soaps and powders, or any similar substance, article, or preparation by whatsoever name known or distinguished, upon all of the above which are used or applied or intended to be used or applied for toilet purposes, and which are sold by the manufacturer, importer, or producer, a tax equivalent to two per centum of the price for which so sold ; and Drugs, Patent Medicines and Preparations, Etc. (h) Upon all pills, tablets, powders, tinctures, troches or lozenges, sirups, medicinal cordials or bitters, anodynes, tonics, plasters, liniments, salves, ointments, pastes, drops, waters (ex- cept those taxed under section three hundred and thirteen of this Act), essences, spirits, oils, and all medicinal preparations, com- pounds, or compositions whatsoever, the manufacturer or pro- THE FEDERAL WAR TAX LAW, 1917 41 ducer of which claims to have any private formula, secret, or occult art for making or preparing the same, or has or claims to have any exclusive right or title to the making or preparing the same, or which are prepared, uttered, vended, or exposed for sale under any letters patent, or trade-mark, or which, if prepared by any formula, published or unpublished, are held out or recom- mended to the public by the makers, venders, or proprietors thereof as proprietary medicines or medicinal proprietary articles or preparations, or as remedies or specifics for any disease, dis- eases, or affection whatever affecting the human or animal body, and which are sold by, the manufacturer, producer, or importer, a tax equivalent to two per centum of the price for which so sold ; and Chewing Gum (i) Upon all chewing gum or substitute therefor sold by the manufacturer, producer, or importer, a tax equivalent to two per centum of the price for which so sold ; and Cameras (j) Upon all cameras sold by the manufacturer, producer, or importer, a tax equivalent to three per centum of the price for which so sold. Returns Section 601. That each manufacturer, producer, or importer of any of the articles enumerated in section six hundred shall make monthly returns under oath in duplicate and pay the taxes imposed on such articles by this title to the collector of internal revenue for the district in which is located the principal place of business. Such returns shall contain such information and be made at such times and in such manner as the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury, may by regulations prescribe. Stock on Hand Section 602. That upon all articles enumerated in subdivi- sions (a), (b), (e), (f), (g), (h), (i), or (j) of section six hun- dred, which on the day this Act is passed are held and intended for sale by any person, corporation, partnership, or association, other than (1) a retailer who is not also a wholesaler, or (2) the manufacturer, producer, or importer thereof, there shall be levied, assessed, collected, and paid a tax equivalent to one-half the tax imposed by each such subdivision upon the sale of the articles therein enumerated. This tax shall be paid by the person, cor- poration, partnership, or association so holding such articles. The taxes imposed by this section shall be assessed, col- lected, and paid in the same manner as provided in section ten hundred and two in the case of additional taxes upon articles upon which the tax imposed by existing law has been paid. Nothing in this section shall be construed to impose a tax 42 THE FEDERAL WAR TAX LAW, 1917 upon articles sold and delivered prior to May ninth, nineteen hundred and seventeen, where the title is reserved in the vendor as security for the payment of the purchase money. Boats, Yachts, Etc. Section 603. That on the day this Act takes effect, and thereafter on July first in each year, and also at the time of the original purchase of a new boat by a user, if on any other date than July first, there shall be levied, assessed, collected, and paid upon the use of yachts, pleasure boats, power boats, and sailing boats, of over five net tons, and motor boats with fixed engines, not used exclusively for trade or national defense, or not built according to plans and specifications approved by the Navy Department, an excise tax to be based on each yacht or boat, at rates as follows : Yachts, pleasure boats, power boats, motor boats with fixed engines, and sailing boats, of over five net tons, length not over fifty feet, 50 cents for each foot, length over fifty feet and not over one hundred feet, $1 for each foot, length over one hundred feet, $2 for each foot ; motor boats of not over five net tons with fixed engines, $5. In determining the length of such yachts, pleasure boats, power boats, motor boats with fixed engines, and sailing boats, the measurement of over-all length shall govern. In the case of a tax imposed at the time of the original pur- chase of a new boat on any other date than July first, the amount to be paid shall be the same number of twelfths of the amount of the tax as the number of calendar months, including the month of sale, remaining prior to the following July first. TITLE VII. WAR TAX ON ADMISSIONS AND DUES Admission Tax Section 700. That from and after the first day of November, nineteen hundred and seventeen, there shall be levied, assessed, collected, and paid (a) a tax of 1 cent for each 10 cents or frac- tion thereof of the amount paid for admission to any place, in- cluding admission by season ticket or subscription, to be paid by the person paying for such admission : Provided, That the tax on admission of children under twelve years of age where an admission charge for such children is made shall in every case be 1 cent; and (b) in the case of persons (except bona fide em- ployees, municipal officers on official business, and children under twelve years of age) admitted free to any place at a time when and under circumstances under which an admission charge is made to other persons of the same class, a tax of 1 cent for each 10 cents or fraction thereof of the price so charged to such other persons for the same or similar accommodations, to be paid by the person so admitted ; and (c) a tax of 1 cent for each 10 cents or fraction thereof paid for admission to any public performance for profit at any cabaret or other similar entertainment to which THE FEDERAL WAR TAX LAW, 1917 43 the charge for admission is wholly or in part included in the price paid for refreshment, service, or merchandise ; the amount paid for such admission to be computed under rules prescribed by the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury, such tax to be paid by the person paying for such refreshment, service, or merchandise. In the case of persons having the permanent use of boxes or seats in an opera house or any place of amusement or a lease for the use of such box or seat in such opera house or place of amuse- ment there shall be levied, assessed, collected, and paid a tax equivalent to ten per centum of the amount for which a similar box or seat is sold for performance or exhibition at which the box or seat is used or reserved by or for the lessee or holder. These taxes shall not be imposed in the case of a place the maxi- mum charge for admission to which is 5 cents, or in the case of shows, rides, and other amusements (the maximum charge for admission to which is 10 cents), within outdoor general amuse- ment parks, or in the case of admissions to such parks. No tax shall be levied under this title in respect to any ad- missions all the proceeds of which inure exclusively to the benefit of religious, educational, or charitable institutions, societies, or organizations, or admissions to agricultural fairs none of the profits of which are distributed to stockholders or members of the association conducting the same. Admission Defined The term "admission" as used in this title includes seats and tables, reserved or otherwise, and other similar accommodations, and the charges made therefor. Tax on Club Dues and Fees Section 701. That from and after the first day of November, nineteen hundred and seventeen, there shall be levied, assessed, collected, and paid, a tax equivalent to ten per centum of any amount paid as dues or membership fees (including initiation fees), to any social, athletic, or sporting club or organization, where such dues or fees are in excess of $12 per year ; such taxes to be paid by the person paying such dues or fees : Provided, That there shall be exempted from the provisions of this section all amounts paid as dues or fees to a fraternal beneficiary society, order, or association, operating under the lodge system or for the exclusive benefit of the members of a fraternity itself operat- ing under the lodge system, and providing for the payment of life, sick, accident, or other benefits to the members of such society, order, or association or their dependents. Returns Section 702. That every person, corporation, partnership, or association (a) receiving any payments for such admission, dues, or fees shall collect the amount of the tax imposed by section 44 THE FEDERAL WAR TAX LAW, 1917 seven hundred or seven hundred and one from the person making such payments, or (b) admitting any person free to any place for admission to which a charge is made shall collect the amount of the tax imposed by section seven hundred from the person so admitted; and (c) in either case shall make returns and pay- ments of the amount so collected, at the same time and in the same manner as provided in section five hundred and three of this Act. TITLE VIII. WAR STAMP TAXES Bonds, Debentures, Etc. Section 800. That on and after the first day of December, nineteen hundred and seventeen, there shall be levied, collected, and paid, for and in respect of the several bonds, debentures, or certificates of stock and of indebtedness, and other documents, in- struments, matters, and things mentioned and described in Schedule A of this title, or for or in respect of the vellum, parch- ment, or paper upon which such instruments, matters, or things, or any of them, are written or printed, by any person, corporation, partnership, or association who makes, signs, issues, sells, re- moves, consigns, or ships the same, or for whose use or benefit the same are made, signed, issued, sold, removed, consigned, or shipped, the several taxes specified in such schedule. Exceptions Section 801. That there shall not be taxed under this title any bond, note, or other instrument, issued by the United States, or by any foreign government, or by any State, Territory, or the District of Columbia, or local subdivision thereof, or municipal or other corporation exercising the taxing power, when issued in the exercise of a strictly governmental, taxing, or municipal function ; or stocks and bonds issued by co-operative building and loan associations which are organized and operated exclu- sively for the benefit of their members and make loans only to their shareholders, or by mutual ditch or irrigating companies. PENALTY FOR VIOLATIONS OF STAMP TAX PROVISIONS Penalty for Failure to Affix Stamps or Cancel Same Section 802. That whoever (a) Makes, signs, issues, or accepts, or causes to be made, signed, issued, or accepted, any instrument, document, or paper of any kind or description whatsoever without the full amount of tax thereon being duly paid ; (b) Consigns or ships, or causes to be consigned, or shipped, by parcel post any parcel, package, or article without the full amount of tax being duly paid ; (c) Manufactures or imports and sells, or offers for sale, or causes to be manufactured or imported and sold, or offered for THE FEDERAL WAR TAX LAW, 1917 45 sale, any playing cards, package, or other article without the full amount of tax being duly paid ; (d) Makes use of any adhesive stamp to denote any tax im- posed by this title without canceling or obliterating such stamp as prescribed in section eight hundred and four ; Is guilty of a misdemeanor and upon conviction thereof shall pay a fine of not more than $100 for each offense. Penalty for Fraudulent Use of Stamps, Dies or Plates Section 803. That whoever (a) Fraudulently cuts, tears, or removes from any vellum, parchment, paper, instrument, writing, package, or article, upon which any tax is imposed by this title, any adhesive stamp or the impression of any stamp, die, plate, or other article provided, made, or used in pursuance of this title ; (b) Fraudulently uses, joins, fixes, or places to, with, or upon any vellum, parchment, paper, instrument, writing, package, or article, upon which any tax is imposed by this title, (1) any adhesive stamp, or the impression of any stamp, die, plate, or other article, which has been cut, torn, or removed from any other vellum, parchment, paper, instrument, writing, package, or article, upon which any tax is imposed by this title; or (2) any adhesive stamp or the impression of any stamp, die, plate, or other article of insufficient value; or (3) any forged or counterfeit stamp, or the impression of any forged or counterfeited stamp, die, plate, or other article; (c) Willfully removes, or alters the cancellation, or defacing marks of, or otherwise prepares, any adhesive stamp, with intent to use, or cause the same to be used, after it has been already used, or knowingly or willfully buys, sells, offers for sale, or gives away, any such washed or restored stamp to any person for use, or knowingly uses the same ; (d) Knowingly and without lawful excuse (the burden of proof of such excuse being on the accused) has in possession any washed, restored, or altered stamp, which has been removed from any vellum, parchment, paper, instrument, writing, package, or article, is guilty of a misdemeanor, and upon conviction shall be punished by a fine of not more than $1,000, or by imprisonment for not more than five years, or both, in the discretion of the court, and any such reused, canceled, or counterfeit stamp and the vellum, parchment, document, paper, package, or article upon which it is placed or impressed shall be forfeited to the United States. Adhesive Stamp Regulations Section 804. That whenever an adhesive stamp is used for denoting any tax imposed by this title, except as hereinafter provided, the person, corporation, partnership, or association, using or affixing the same shall write or stamp or cause to be written or stamped thereupon the initials of his or its name and the date upon which the same is attached or used, so that the 46 THE FEDERAL WAR TAX LAW, 1917 same may not again be used : Provided, That the Commissioner of Internal Revenue may prescribe such other method for the cancellation of such stamps as he may deem expedient. Providing Stamp and Method of Affixing Same Section 805. (a) That the Commissioner of Internal Revenue shall cause to be prepared and distributed for the pay- ment of the taxes prescribed in this title suitable stamps denoting the tax on the document, articles, or thing to which the same may be affixed, and shall prescribe such method for the affixing of said stamps in substitution for or in addition to the method pro- vided in this title, as he may deem expedient. (b) The Commissioner of Internal Revenue, with the ap- proval of the Secretary of the Treasury, is authorized to procure any of the stamps provided for in this title by contract whenever such stamps cannot be speedily prepared by the Bureau of En- graving and Printing ; but this authority shall expire on the first day of January, nineteen hundred and eighteen, except as to im- printed stamps furnished under contract, authorized by the Com- missioner of Internal Revenue. Internal Revenue Laws Extended (c) All internal-revenue laws relating to the assessment and collection of taxes are hereby extended to and made a part of this title, so far as applicable, for the purpose of collecting stamp taxes omitted through mistake or fraud from any instrument, document, paper, writing, parcel, package, or article named herein. Stamps Furnished Postmaster General Section 806. That the Commissioner of Internal Revenue shall furnish to the Postmaster General without prepayment a suitable quantity of adhesive stamps to be distributed to and kept on sale by the various postmasters in the United States. The Postmaster General may require each such postmaster to give additional or increased bond as postmaster for the value of the stamps so furnished, and each such postmaster shall deposit the receipts from the sale of such stamps to the credit of and render accounts to the Postmaster General at such times and in such form as he may by regulations prescribe. The Postmaster General shall at least once monthly transfer all collections from this source to the Treasury as internal-revenue collections. Furnishing Stamps to United States Depositories Section 807. That the collectors of the several districts shall furnish without prepayment to any assistant treasurer or desig- nated depository of the United States located in their respective collection districts a suitable quantity of adhesive stamps for sale. In such cases the collector may require a bond, with suffi- cient sureties, to an amount equal to the value of the adhesive THE FEDERAL WAR TAX LAW, 1917 47 stamps so furnished, conditioned for the faithful return, when- ever so required, of all quantities or amounts undisposed of, and for the payment monthly of all quantities or amounts sold or not remaining on hand. The Secretary of the Treasury may from time to time make such regulations as he may find necessary to insure the safe-keeping or prevent the illegal use of all such adhesive stamps. SCHEDULE A. STAMP TAXES Effective Dec. 1, 1917 Tax Rate on Bonds, Debentures or Certificates of Indebtedness 1. Bonds of indebtedness: Bonds, debentures, or certificates of indebtedness issued on and after the first day of December, nineteen hundred and seventeen, by any person, corporation, partnership, or association, on each $100 of face value or fraction thereof, 5 cents : Provided, That every renewal of the foregoing shall be taxed as a new issue: Provided further, That when a bond conditioned for the repayment or payment of money is given in a penal sum greater than the debt secured, the tax shall be based upon the amount secured. Bond of Indemnity and Surety 2. Bonds, indemnity and surety: Bonds for indemnifying any person, corporation, partnership, or corporation who shall have become bound or engaged as surety, and all bonds for the due execution or performance of any contract, obligation, or re- quirement, or the duties of any office or position, and to account for money received by virtue thereof, and all other bonds of any description, except such as may be required in legal proceedings, not otherwise provided for in this schedule, 50 cents : Provided, That where a premium is charged for the execution of such bond the tax shall be paid at the rate of one per centum on each dollar or fractional part thereof of the premium charged : Provided further, That policies of reinsurance shall be exempt from the tax imposed by this subdivision. Capital Stock Issue 3. Capital stock issue: On each original issue, whether on organization or reorganization, of certificates of stock by any association, company, or corporation, on each $100 of face value or fraction thereof, 5 cents : Provided, That where capital stock is issued without face value, the tax shall be 5 cents per share, unless the actual value is in excess of $100 per share, in which case the tax shall be 5 cents on each $100 of actual value or fraction thereof. The stamps representing the tax imposed by this subdivi- sion shall be attached to the stock books and not to the certifi- cates issued. 48 THE FEDERAL WAR TAX LAW, 1917 Sale or Transfer of Capital Stock 4. Capital stock, sales or transfers: On all sales, or agree- ments to sell, or memoranda of sales or deliveries of, or transfers of legal title to shares or certificates of stock in any association, company, or corporation, whether made upon or shown by the books of the association, company, or corporation, or by any assignment in blank, or by any delivery, or by any paper or agreement or memorandum or other evidence of transfer or sale, whether entitling the holder in any manner to the benefit of such stock or not, on each $100 of face value or fraction thereof, 2 cents, and where such shares of stock are without par value, the tax shall be 2 cents on the transfer or sale or agreement to sell on each share, unless the actual value thereof is in excess of $100 per share, in which case the tax shall be 2 cents on each $100 of actual value or fraction thereof: Provided, That it is not intended by this title to impose a tax upon an agreement evidencing a deposit of stock certificates as collateral security for money loaned thereon, which stock certificates are not actu- ally sold, nor upon such stock certificates so deposited: Pro- vided further, That the tax shall not be imposed upon deliveries or transfers to a broker for sale, nor upon deliveries or transfers by a broker to a customer for whom and upon whose order he has purchased same, but such deliveries or transfers shall be accompanied by a certificate setting forth the facts: Provided further, That in case of sale where the evidence of transfer is shown only by the books of the company the stamp shall be placed upon such books ; and where the change of ownership is by transfer of the certificate the stamp shall be placed upon the certificate; and in cases of an agreement to sell or where the transfer is by delivery of the certificate assigned in blank there shall be made and delivered by the seller to the buyer a bill or memorandum of such sale, to which the stamp shall be affixed ; and every bill or memorandum of sale or agreement to sell before mentioned shall show the date thereof, the name of the seller, the amount of the sale, and the matter or thing to which it refers. Any person or persons liable to pay the tax as herein provided, or anyone who acts in the matter as agent or broker for such person or persons who shall make any such sale, or who shall in pursuance of any such sale deliver any stock or evidence of the sale of any stock or bill or memorandum thereof, as herein re- quired, without having the proper stamps affixed thereto with intent to evade the foregoing provisions shall be deemed guilty of a misdemeanor, and upon conviction thereof shall pay a fine of not exceeding $1,000, or be imprisoned not more than six months, or both, at the discretion of the court. Sale of Produce on Exchange 5. Produce, sales of, on exchange: Upon each sale, agree- ment of sale, or agreement to sell, including so-called transferred or scratch sales, any products or merchandise at any exchange. THE FEDERAL WAR TAX LAW, 1917 49 or board of trade, or other similar place, for future delivery, for each $100 in value of the merchandise covered by said sale or agreement of sale or agreement to sell, 2 cents, and for each additional $100 or fractional part thereof in excess of $100, 2 cents : Provided, That on every sale or agreement of sale or agreement to sell as aforesaid there shall be made and delivered by the seller to the buyer a bill, memorandum, agreement, or other evidence of such sale, agreement of sale, or agreement to sell, to which there shall be affixed a lawful stamp or stamps in value equal to the amount of the tax on such sale: Provided further, That sellers of commodities described herein, having paid the tax provided by this subdivision, may transfer such contracts to a clearing house corporation or association, and such transfer shall not be deemed to be a sale, or agreement of sale, or an agreement to sell within the provisions of this Act, provided that such transfer shall not vest any beneficial interest in such clear- ing house association but shall be made for the sole purpose of enabling such clearing house association to adjust and balance the accounts of the members of said clearing house association on their several contracts. And every such bill, memorandum, or other evidence of sale or agreement to sell shall show the date thereof, the name of the seller, the amount of the sale, and the matter or thing to which it refers ; and any person or persons liable to pay the tax as herein provided, or anyone who acts in the matter as agent or broker for such person or persons, who shall make any such sale or agreement of sale, or agreement to sell, or who shall, in pursuance of any such sale, agreement of sale, or agreement to sell, deliver any such products or mer- chandise without a bill, memorandum, or other evidence thereof as herein required, or who shall deliver such bill, memorandum, or other evidence of sale, or agreement to sell, without having the proper stamps affixed thereto, with intent to evade the fore- going provisions, shall be deemed guilty of a misdemeanor, and upon conviction thereof shall pay a fine of not exceeding $1,000, or be imprisoned not more than six months, or both, at the dis- cretion of the court. Exemption That no bill, memorandum, agreement, or other evidence of such sale, or agreement of sale, or agreement to sell, in case of cash sales of products or merchandise for immediate or prompt delivery which in good faith are actually intended to be delivered shall be subject to this tax. Drafts or Checks 6. Drafts or checks payable otherwise than at sight or on demand, promissory notes, except bank notes issued for circula- tion, and for each renewal of the same, for a sum not exceeding $100, 2 cents ; and for each additional $100 or fractional part thereof, 2 cents. 50 THE FEDERAL WAR TAX LAW, 1917 Conveyance 7. Conveyance: Deed, instrument, or writing, whereby any lands, tenements, or other realty sold shall be granted, assigned, transferred, or otherwise conveyed to, or vested in, the purchaser or purchasers, or any other person or persons, by his, her, or their direction, when the. consideration or value of the interest or property conveyed, exclusive of the value of any lien or en- cumbrance remaining thereon at the time of sale, exceeds $100 and does not exceed $500, 50 cents ; and for each additional $500 or fractional part thereof 50 cents : Provided, That nothing con- tained in this paragraph shall be so construed as to impose a tax upon any instrument or writing given to secure a debt. Custom House Entries 8. Entry of any goods, wares, or merchandise at any custom- house, either for consumption or warehousing, not exceeding $100 in value, 25 cents; exceeding $100 and not exceeding $500 in value, 50 cents; exceeding $500 in value, $1. Custom Bonded Warehouse 9. Entry for the withdrawal of any goods or merchandise from customs bonded warehouse, 50 cents. 10. Passage ticket, one way or round trip, for each pas- senger, sold or issued in the United States for passage by any vessel to a port or place not in the United States, Canada, or Mexico, if costing not exceeding $30, $1 ; costing more than $30 and not exceeding $60, $3 ; costing more than $60, $5 : Provided. That such passage tickets, costing $10 or less, shall be exempt from taxation. Proxies 11. Proxy for voting at any election for officers, or meeting for the transaction of business, of any incorporated company or association, except religious, educational, charitable, fraternal, or literary societies, or public cemeteries, 10 cents. Power of Attorney 12. Power of attorney granting authority to do or perform some act for or in behalf of the grantor, which authority is not otherwise vested in the grantee, 25 cents : Provided, That no stamps shall be required upon any papers necessary to be used for the collection of claims from the United States or from any State for pensions, back pay, bounty, or for property lost in the military or naval service or upon powers of attorney required in bankruptcy cases. Playing Cards 13. Playing Cards: Upon every pack of playing cards con- taining not more than fifty-four cards, manufactured or imported, and sold, or removed for consumption or sale, after the passage THE FEDERAL WAR TAX LAW, 1917 51 of this Act, a tax of 5 cents per pack in addition to the tax imposed under existing law. Parcel Post 14. Parcel post packages: Upon every parcel or package transported from one point in the United States to another by parcel post on which the postage amounts to 25 cents or more, a tax of 1 cent for each 25 cents or fractional part thereof charged for such transportation to be paid by the consignor. No such parcel or package shall be transported until a stamp or stamps representing the tax due shall have been affixed thereto. TITLE IX. WAR ESTATE TAX Section 900. That in addition to the tax imposed by section two hundred and one of the Act entitled, "An Act to increase the revenue, and for other purposes," approved September eighth, nineteen hundred and sixteen r 1 As amended (a) A tax equal to the following percentages of its value is hereby imposed upon the transfer of each net estate of every decedent dying after the passage of this Act, the transfer of which is taxable under such section (the value of such net estate to be determined as provided in Title II of such Act of September eighth, nineteen hundred and sixteen): '(ACT OF SEPTEMBER 8th, 1916) Section 201. That a tax (here- inafter in this title referred to as the tax), equal to the following percentges of the value of the net estate, to be determined as provided in section two hundred and three, is hereby imposed upon the transfer of the net estate of every decedent dying after the passage of this Act, whether a resident or nonresident of the United States: One per centum of the amount of such net estate not in excess of $50,000; Two per centum of the amount by which such net estate exceeds $50,000 and does not exceed $150,000; Three per centum of the amount by which such net estate exceeds $150,000 and does not exceed $250,000; Four per centum of the amount by which such net estate exceeds $250,000 and does not exceed $450,000; Five per centum of the amount by which such net estate exceeds $450,000 and does not exceed $1,000,000; Six per centum of the amount by which such net estate exceeds $1,000,000 and does not exceed $2,000,000; Seven per centum of the amount by which such net estate exceeds $2,000,000 and does not exceed $3,000,000; Eight per centum of the amount by which such net estate exceeds $3,000,000 and does not exceed $4,000,000; Nine per centum of the amount by which such net estate exceeds $4,000,000 and does not exceed $5,000,000; and Ten per centum of the amount by which such net estate exceeds $5,000,000. Section 203. That for the purpose of the tax the value of the net estate shall be determined (a) In the case of a resident, by deducting from the value of the gross estate 52 THE FEDERAL WAR TAX LAW, 1917 Estate Tax Rates One-half of one per centum of the amount of such net estate not in excess of $50,000 ; One per centum of the amount by which such net estate exceeds $50,000 and does not exceed $150,000; One and one-half per centum of the amount by which such net estate exceeds $150,000 and does not exceed $250,000; Two per centum of the amount by which such net estate ex- ceeds $250,000 and does not exceed $450,000 ; Two and one-half per centum of the amount by which such net estate exceeds $450,000 and does not exceed $1,000,000; Three per centum of the amount by which such net estate exceeds $1,000,000 and does not exceed $2,000,000 ; Three and one-half per centum of the amount by which such net estate exceeds $2,000,000 and does not exceed $3,000,000; Four per centum of the amount by which such net estate exceeds $3,000,000 and does not exceed $4,000,000 ; Four and one-half per centum of the amount by which such net estate exceeds $4,000,000 and does not exceed $5,000,000 ; Five per centum of the amount by which such net estate exceeds $5,000,000 and does not exceed $8,000,000 ; Seven per centum of the amount by which such net estate exceeds $8,000,000 and does not exceed $10,000,000; and Ten per centum of the amount by which such net estate exceeds $10,000,000. (1) Such amounts for funeral expenses, administration expenses, claims against the estate, unpaid mortgages, losses incurred during the settlement of the estate arising from fires, storms, shipwreck, or other casualty, and from theft, when such losses are not compensated for by insurance or otherwise, support during the settlement of the estate of those dependent upon the decedent, and such other charges against the estate, as are allowed by the laws of the jurisdiction, whether within or without the United States, under which the estate is being adminis- tered; and (2) An exemption of $50,000; (b) In the case of a non-resident, by deducting from the value of that part of his gross estate which at the time of his death is situated in the United States that proportion of the deductions specified in para- graph (1) of subdivision (a) of this section which the value of such part bears to the value of his entire gross estate, wherever situated. But no deductions shall be allowed in the case of a non-resident unless the executor includes in the return required to be filed under section two hundred and five the value at the time of his death of that part of the gross estate of the non-resident not situated in the United States. THE FEDERAL WAR TAX LAW, 1917 53 Exemptions Section 901. That the tax imposed by this title shall not apply to the transfer of the net estate of any decedent dying while serving in the military or naval forces of the United States, during the continuance of the war in which the United States is now engaged, or if death results from injuries received or disease contracted in such service, within one year after the termination of such war. For the purposes of this section the termination of the war shall be evidenced by the proclamation of the President. TITLE X. ADMINISTRATIVE PROVISIONS Tax on Imports and Exports West Indian Islands Section 1000. That there shall be levied, collected, and paid in the United States, upon articles coming into the United States from the West Indian Islands acquired from Denmark, a tax equal to the internal-revenue tax imposed in the United States upon like articles of domestic manufacture ; such articles shipped from said islands to the United States shall be exempt from the payment of any tax imposed by the internal-revenue laws of said islands : Provided, That there shall be levied, collected, and paid in said islands, upon articles imported from the United States, a tax equal to the internal-revenue tax imposed in said islands upon like articles there manufactured; and such articles going into said islands from the United States shall be exempt from payment of any tax imposed by the internal-revenue laws of the United States. Administrative Provisions Section 1001. That all administrative, special, or stamp pro- visions 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, corporation, partnership, or association liable to 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 of Internal Revenue, with the approval of the Secretary of the Treasury, may from time to time prescribe. Returns on Tax Paid Articles Section 1002. That where additional taxes are imposed by th,is Act upon articles or commodities, upon which the tax im- posed by existing law has been paid, the person, corporation, partnership, or association required by this Act to pay the tax shall, within thirty days after its passage, make return under oath in such form and under such regulations as the Commis- sioner of Internal Revenue, with the approval of the Secretary of the Treasury, shall prescribe. Payment of the tax shown to be due may be extended to a date not exceeding seven months 54 THE FEDERAL WAR TAX LAW, 1917 from the passage of this Act, upon the filing of a bond for pay- ment in such form and amount and with such sureties as the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury, may prescribe. Collection of Taxes and Penalties Section 1003. That in all cases where the method of col- lecting the tax imposed by this Act is not specifically provided, the tax shall be collected in such manner as the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury, may prescribe. All administrative and penalty provi- sions of Title VIII of this Act, in so far as applicable, shall apply to the collection of any tax which the Commissioner of Internal Revenue determines or prescribes shall be paid by stamp. Penalty for Failure to Make or Making a Fraudulent Return Section 1004. That whoever fails to make any return re- quired by this Act or the regulations made under authority thereof within the time prescribed or who makes any false or fraudulent return, and whoever evades or attempts to evade any tax imposed by this Act or fails to collect or truly to account for and pay over any such tax, shall be subject to a penalty of not more than $1,000, or to imprisonment for not more than one year, or both, at the discretion of the court, and in addition thereto a penalty of double the tax evaded, or not collected, or accounted for and paid over, to be assessed and collected in the same manner as taxes are assessed and collected, in any case in which the punishment is not otherwise specifically provided. Section 1005. That the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury, is hereby authorized to make all needful rules and regulations for the enforcement of the provisions of this Act. Tax Stamps on Hand Section 1006. That where the rate of tax imposed by this Act, payable by stamps, is an increase over previously existing rates, stamps on hand in the collectors' offices and in the Bureau of Internal Revenue may continue to be used until the supply on hand is exhausted, but shall be sold and accounted for at the rates provided by this Act, and assessment shall be made against manufacturers and other taxpayers having such stamps on hand on the day this Act takes effect for the difference between the amount paid for such stamps and the tax due at the rates pro- vided by this Act. Contract of Sale Made Prior to May 9, 1917, to be Executed After Oct. 3, 1917 Section 1007. That (a) if any person, corporation, partner- ship, or association has prior to May ninth, nineteen hundred THE FEDERAL WAR TAX LAW, 1917 55 and seventeen, made a bona fide contract with a dealer for the sale, after the tax takes effect, of any article (or, in the case of moving picture films, such a contract with a dealer, exchange, or exhibitor, for the sale or lease thereof) upon which a tax is im- posed under Title III, IV, or VI, or under subdivision thirteen of Schedule A of Title VIII, or under this section, and (b) if such contract does not permit the adding of the whole of such tax to the amount to be paid under such contract, then the vendee or lessee shall, in lieu of the vendor or lessor, pay so much of such tax as is not so permitted to be added to the contract price. The taxes payable by the vendee or lessee under this section shall be paid to the vendor or lessor at the time the sale or lease is consummated, and collected, returned, and paid to the United States by such vendor or lessor in the same manner as provided in section five hundred and three. The term "dealer" as used in this section includes a vendee who purchases any article with intent to use it in the manufacture or production of another article intended for sale. Disregard Fraction of Less Than One-Half Cent Section 1008. That in the payment of any 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 one cent. Advance Payment of Income and Excess Profit Taxes Section 1009. That the Secretary of the Treasury, under rules and regulations prescribed by him, shall permit taxpayers liable to income and excess profits taxes to make payments in advance in installments or in whole of an amount not in excess of the estimated taxes which will be due from them, and upon determination of the taxes actually due any amount paid in excess shall be refunded as taxes erroneously collected : Provided, That when payment is made in installments at least one-fourth of such estimated tax shall be paid before the expiration of thirty days after the close of the taxable year, at least an additional one- fourth within two months after the close of the taxable year, at least an additional one-fourth within four months after the close of the taxable year, and the remainder of the tax due on or before the time now fixed by law for such payment: Provided further, That the Secretary of the Treasury, under rules and regulations prescribed by him, may allow credit against such taxes so paid in advance of an amount not exceeding three per centum per annum calculated upon the amount so paid from the date of such payment to the date now fixed by law for such payment ; but no such credit shall be allowed on payments in excess of taxes determined to be due, nor on payments made after the expiration of four and one-half months after the close of the taxable year. All penalties provided by exist- 56 THE FEDERAL WAR TAX LAW, 1917 ing law for failure to pay tax when due are hereby made applicable to any failure to pay the tax at the time or times required in this section. Form of Payment of Income and Excess Profit Taxes Section 1010. That under rules and regulations prescribed by the Secretary of the Treasury, collectors of internal revenue may receive, at par and accrued interest, certificates of indebted- ness issued under section six of the Act entitled "An Act to authorize an issue of bonds to meet expenditures for the na- tional security and defense, and, for the purpose of assisting in the prosecution of the war, to extend credit to foreign govern- ments, and for other purposes," approved April twenty-fourth, nineteen hundred and seventeen, and any subsequent Act or Acts, and uncertified checks in payment of income and excess- profits taxes, during such time and under such regulations as the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury, shall prescribe; but if a check so received is not paid by the bank on which it is drawn the person by whom such check has been tendered shall remain liable for the payment of the tax and for all legal penalties and additions the same as if such check had not been tendered. TITLE XL POSTAL RATES Effective November 2, 1917 First Class Mail Increase Section 1100. That the rate of postage on all mail matter of the first class, except postal cards, shall thirty days after the passage of this Act be, in addition to the existing rate, 1 cent for each ounce or fraction thereof: Provided, That the rate of postage on drop letters of the first class, shall be 2 cents an ounce or fraction thereof. Postal cards, and private mailing or post cards when complying with the requirements of existing !aw, shall be transmitted through the mails at 1 cent each in addition to the existing rate. Free Postage That letters written and mailed by soldiers, sailors, and marines assigned to duty in a foreign country engaged in the present war may be mailed free of postage, subject to such rules and regulations as may be prescribed by the Postmaster General. Publication Provisions Section 1101. That on and after July first, nineteen hundred and eighteen, the rates of postage on publications entered as second-class matter (including sample copies to the extent of ten per centum of the weight of copies mailed to subscribers during the calendar year) when sent by the publisher thereof THE FEDERAL WAR TAX LAW, 1917 57 from the post office of publication or other post office, or when sent by a news agent to actual subscribers thereto, or to other news agents for the purpose of sale ; (a) In the case of the portion of such publication devoted to matter other than advertisements, shall be as follows: (1) On and after July first, nineteen hundred and eighteen, and until July first, nineteen hundred and nineteen, 1*4 cents per pound or fraction thereof; (2) on and after July first, nineteen hundred and nineteen, \y 2 cents per pound or fraction thereof; (b) In the case of the portion of such publication devoted to advertisements the rates per pound or fraction thereof for delivery within the several zones applicable to fourth-class mat- ter shall be as follows (but where the space devoted to adver- tisements does not exceed five per centum of the total space, the rate of postage shall be the same as if the whole of such publica- tion was devoted to matter other than advertisements) : (1) On and after July first, nineteen hundred and eighteen, and until July first, nineteen hundred and nineteen, for the first and sec- ond zones, \ l /4 cents; for the third zone, \y 2 cents; for the fourth zone, 2 cents ; for the fifth zone, 2% cents ; for the sixth zone, 2 l / 2 cents; for the seventh zone, 3 cents; for the eighth zone, 3^4 cents; (2) on and after July first, nineteen hundred and nineteen, and until July first, nineteen hundred and twenty, for the first and second zones, \ l / 2 cents; for the third zone, 2 cents; for the fourth zone, 3 cents ; for the fifth zone, Zy 2 cents ; for the sixth zone, 4 cents ; for the seventh zone, 5 cents ; for the eighth zone, S l / 2 cents ; (3) on and after July first, nineteen hundred and twenty, and until July first, nineteen hundred and twenty- one, for the first and second zones, 1^4 cents; for the third zone, 2 l / 2 cents; for the fourth zone, 4 cents; for the fifth zone, 4^4 cents; for the sixth zone, 5^ cents; for the seventh zone, 7 cents ; for the eighth zone, 7^4 cents ; (4) on and after July first, nineteen hundred and twenty-one, for the first and sec- ond zones, 2 cents; for the third zone, 3 cents; for the fourth zone, 5 cents; for the fifth zone, 6 cents; for the sixth zone, 7 cents ; for the seventh zone, 9 cents ; for the eighth zone, 10 cents ; (c) With the first mailing of each issue of each such pub- lication, the publisher shall file with the postmaster a copy of such issue, together with a statement containing such informa- tion as the Postmaster General may prescribe for determining the postage chargeable thereon. Daily Newspapers Section 1102. That the rate of postage on daily newspapers, when the same are deposited in a letter-carrier office for delivery by its carriers, shall be the same as now provided by law ; and nothing in this title shall affect existing law as to free circula- tion and existing rates on second-class mail matter within the county of publication : Provided, That the Postmaster General may hereafter require publishers to separate or make up to 58 THE FEDERAL WAR TAX LAW, 1917 zones in such a manner as he may direct all mail matter of the second class when offered for mailing. Religious, Educational Periodicals, Etc Section 1103. That in the case of newspapers and period- icals entitled to be entered as second-class matter and maintained by and in the interest of religious, educational, scientific, philan- thropic, agricultural, labor, or fraternal organizations or asso- ciations, not organized for profit and none of the net income of which inures to the benefit of any private stockholder or individual, the second-class postage rates shall be, irrespective of the zone in which delivered (except when the same are de- posited in a letter carrier office for delivery by its carriers, in which case -the rates shall be the same as now provided by law), lj/s cents a pound or fraction thereof on and after July first, nineteen hundred and eighteen, and until July first, nine- teen hundred and nineteen, and on and after July first, nineteen hundred and nineteen, \% cents a pound or fraction thereof. The publishers of such newspapers or periodicals before being entitled to the foregoing rates shall furnish to the Postmaster General, at such times and under such conditions as he may prescribe, satisfactory evidence that none of the net income of such organ- ization inures to the benefit of any private stockholder or indi- vidual. Miscellaneous Provisions Section 1104. That where the total weight of any one edi- tion or issue of any publication mailed to any one zone does not exceed one pound, the rate of postage shall be 1 cent. Section 1105. The zone rates provided by this title shall relate to the entire bulk mailed to any one zone and not to individually addressed packages. Section 1106. That where a newspaper or periodical is mailed by other than the publisher or his agent or a news agent or dealer, the rate shall be the same as now provided by law. Section 1107. That the Postmaster General, on or before the tenth day of each month, shall pay into the general fund of the Treasury an amount equal to the difference between the estimated amount received during the preceding month for the transportation of first class matter through the mails and the esti- mated amount which would have been received under the provisions of the law in force at the time of the passage of this Act. Postmasters' Salaries Section 1108. That the salaries of postmasters at offices of the first, second, and third classes shall not be increased after July first, nineteen hundred and seventeen, during the existence of the present war. The compensation of postmasters at offices of the fourth class shall continue to be computed on the basis of the present rates of postage. THE FEDERAL WAR TAX LAW, 1917 59 Clerk Hire Allowance Section 1109. That where postmasters at offices of the third class have been since May first, nineteen hundred and seventeen, or hereafter are granted leave without pay for mili- tary purposes, the Postmaster General may allow, in addition to the maximum amounts which may now be allowed such offices for clerk hire, in accordance with law, an amount not to exceed fifty per centum of the salary of the postmaster. Mailing Alcohol and Wines Section 1110. That section five of the Act approved March third, nineteen hundred and seventeen, entitled "An Act mak- ing appropriations for the Post Office Department for the year ending June thirtieth, nineteen hundred and eighteen," shall not be construed to apply to ethyl alcohol for governmental, scien- tific, medicinal, mechanical, manufacturing, and industrial pur- poses, and the Postmaster General shall prescribe suitable rules and regulations to carry into effect this section in connection with the Act of which it is amendatory, nor shall said section be held to prohibit the use of the mails by regularly ordained min- isters of religion, or by officers of regularly established churches, for ordering wines for sacramental uses, or by manufacturers and dealers for quoting and billing such wines for such purposes only. TITLE XII. INCOME TAX AMENDMENTS Section 1200. That subdivision (a) of section two of such Act of September eighth, nineteen hundred and sixteen :* is hereby amended to read as follows : "(a) That, subject only to such exemptions and deductions as are hereinafter allowed, the net income of a taxable person shall include gains, profits, and income, derived from salaries, Income Defined. '(ACT OF SEPTEMBER 8th, 1916) Section 2 (a) That, subject only to such exemptions and deductions as are herinafter 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 transaction 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 company, out of its earnings or profits accrued since March first, nineteen hundred and thirteen, and payable to its shareholders, whether in cash or in stock of the corpora- tion, joint-stock company, association, or insurance company, which stock dividend shall be considered income, to the amount of its cash value. 60 THE FEDERAL WAR TAX LAW, 1917 wages, or compensation for personal service of whatever kind and in whatever form paid, or from professions, vocations, busi- nesses, 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 business carried on for gain or profit, or gains or profits and income derived from any source whatever." Exemptions Section four of such Act of September eighth, nineteen hundred and sixteen : is hereby amended to read as follows : "Section 4. The following income shall be exempt from the provisions of this title: "The proceeds of life insurance policies paid to individual beneficiaries upon the death of the insured; the amount paid by him under life insurance, endowment, or annuity con- tracts, either during the term or at the maturity of the term mentioned in the contract or upon surrender of the contract; the value of property acquired by gift, bequest, devise, or descent (but the income from such property shall be included as in- come); interest upon the obligations of a State or any political subdivision thereof or upon the obligations of the United States (but in the case of obligations of the United States issued after September first, nineteen hundred and seventeen, only if and to the extent provided in the Act authorizing the issue thereof) or its possessions or securities issued under the provisions of the Federal Farm Loan Act of July seventeenth, nineteen hun- dred and sixteen ; the compensation of the present President of the United States during the term for which he has been elected and the judges of the Supreme and inferior courts of the United States now in office and the compensation of all officers and employees of a State, or any political subdivision thereof, except when such compensation is paid by the United States Govern- ment." Section 1201 (1). That paragraphs second and third of sub- division (a) of section five of such Act of September eighth, nineteen hundred and sixteen: 1 are hereby amended to read as follows: "Second. All interest paid within the year on his indebted- ness except on indebtedness incurred for the purchase of obliga- tions or securities the interest upon which is exempt from taxa- tion as income under this title; "(ACT OF SEPTEMBER 8th, 1916) Section 5. Second. All in- terest paid within the year on his indebtedness; Third. Taxes paid within the year imposed by the authority of the United States, or its Territories, or possessions, or any foreign country or under the authority of any State, county, school district, or municipality, or other taxing subdivision of any State, not including those assessed against local benefits; THE FEDERAL WAR TAX LAW, 1917 61 "Third. Taxes paid within the year imposed by the author- ity of the United States (except income and excess profits taxes) or of its Territories, or possessions, or any foreign country, or by the authority of any State, county, school district, or munic- ipality, or other taxing subdivision of any State, not including those assessed against local benefit;" Deductions Allowed (2) That section five of such Act of September eighth, nineteen hundred and sixteeji, is hereby amended by adding at the end of subdivision (a) a further paragraph, numbered nine, to read as follows: "Ninth, Contributions or gifts actually made within the year to corporations or associations organized and operated exclu- sively for religious, charitable, scientific, or educational pur- poses, or to societies for the prevention of cruelty to children or animals, no part of the net income of which inures to the benefit of any private stockholder or individual, to an amount not in excess of fifteen per centum of the taxpayer's taxable net income as computed without the benefit of this paragraph. Such con- tributions or gifts shall be allowable as deduction's only if verified under rules and regulations prescribed by the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury." Section 1202. That (1) paragraphs second and third of subdivision (a) of section six of such Act of September eighth, nineteen hundred and sixteen : are hereby amended to read as follows: "Second. The proportion of all interest paid within the year by such person on his indebtedness (except on indebtedness incurred for the purchase of obligations or securities the interest upon which is exempt from taxation as income under this title) which the gross amount of his income for the year derived from sources within the United States bears to the gross amount of his income for the year derived from all sources within and without the United States, but this deduction shall be allowed only if such person includes in the return required by section eight all the information necessary for its calculation ; "Third. Taxes paid within the year imposed by the author- ity of the United States (except income and excess profits taxes); or of its Territories, or possessions, or by the authority of any State, county, school district, or municipality, or other taxing subdivision of any State, paid within the United States, not including those assessed against local benefits ;" Deductions Allowed Non-Resident Aliens (2) Section six of such Act of September eighth, nineteen hundred and sixteen : is also further amended by adding a new subdivision to read as follows. 62 THE FEDERAL WAR TAX LAW, 1917 "(c) A non-resident alien individual shall receive the benefit of the deductions and credits provided for in this section only by filing or causing to be filed with the collector of Internal Revenue a true and accurate return of his total income, received from all sources, corporate or otherwise, in the United States, in the manner prescribed by this title; and in case of his failure to file such return the collector shall collect the tax on such income, and all property belonging to such non-resident alien individual shall be liable to distraint for the tax." Personal Deductions Section 1203 (1) That section seven of such Act of Sep- tember eighth, nineteen hundred and sixteen i 1 is hereby amended to read as follows : "Section 7. That for the purpose of the normal tax only, there shall be allowed as an exemption in the nature of a deduc- tion from the amount of the net income of each citizen or resi- dent of the United States, ascertained as provided herein, the sum of $3,000, plus $1,000 additional if the person making the return be a head of a family or a married man with a wife living with him, or plus the sum of $1,000 additional if the person making the return be a married woman with a husband living with her ; but in no event shall this additional exemption of $1,000 be deducted by both a husband and a wife: Provided, That only one deduction of $4,000 shall be made from the aggre- gate income of both husband and wife when living together; Provided further, That if the person making the return is the head of a family there shall be an additional exemption of $200 for each child dependent upon such person, if under eighteen years of age, or if incapable of self-support because mentally or physically defective, but this provision shall operate only in the case of one parent in the same family: Provided further, That guardians or trustees shall be allowed to make this personal exemption as to income derived from the property of which such guardian or trustee has charge in favor of each ward or cestue que trust: Provided further, That in no event shall a ward or cestue que trust be allowed a greater personal exemption than as provided in this section, from the amount of net income REPEALED '(ACT OF SEPTEMBER 8, 1916.) Section 7 (b) A nonresident alien individual may receive the benefit of the exemption provided for in this section only by filing or causing to be filed with the collector of internal revenue a true and accurate return of his total income, received from all sources, corporate or otherwise, in the United States, in the manner prescribed by this title; and in case of his failure to file such return the collector shall collect the tax on such income, and all property belonging to such nonresident alien individual shall be liable to distraint for the tax. THE FEDERAL WAR TAX LAW, 1917 63 received from all sources. There shall also be allowed an ex- emption from the amount of the net income of estates of deceased citizens or residents of the United States during the period of administration or settlement, and of trust or other estates of citizens or residents of the United States the income of which is not distributed annually or regularly under the provisions of subdivision (b) of section two, the sum of $3,000, including such deductions as are allowed under section five." (2) Subdivision (b) of section seven of such Act of Sep- tember eighth, nineteen hundred and sixteen is hereby repealed 1 Section 1204 (1) That subdivisions (c) and (e) of section eight of such Act of September eighth, nineteen hundred and sixteen 2 , are hereby amended to read as follows : "(c) Guardians, trustees, executors, administrators, re- ceivers, conservators, and all persons, corporations, or associa- tions, acting in any fiduciary capacity, shall make and render a return of the income of the person, trust, or estate for whom or which they act, and be subject to all the provisions of this title which apply to individuals. Such fiduciary shall make oath that he has sufficient knowledge of the affairs of such persons, trust, or estate to enable him to make such return and that the same is, to the best of his knowledge and belief, true and cor- rect, and be subject to all the provisions of this title which apply to individuals : Provided, That a return made by one or two or more joint fiduciaries filed in the district where such fiduciary resides, under such regulations as the Secretary of the Treas- ury may prescribe, shall be a sufficient compliance with the requirements of this paragraph : Provided further, That no re- turn of income not exceeding $3,000 shall be required except as in this title otherwise provided. "(e) Persons carrying on business in partnership shall be liable for income tax only in their individual capacity, and the share of the profits of the partnership to which any taxable partner would be entitled if the same were divided, whether divided or otherwise, shall be returned for taxation and the tax paid under the provisions of this title : Provided, That from the net distributive interests on which the individual members shall be liable for tax, normal and additional, there shall be excluded their proportionate shares received from interests on the obliga- *(ACT OF SEPTEMBER 8th, 1916) Section 8 (e) Persons carry- ing on business in partnership shall be liable for income tax only in their individual capacity, and the share of the profits of the partnership to which any taxable partner would be entitled if the same were divided, whether divided or otherwise, shall be returned for taxation and the tax paid under the provisions of this title: Provided, That from the net distributive interests on which the individual members shall be liable for tax, normal and additional, there shall be excluded their proportionate shares received from interest on the obligations of a State or any political or taxing subdivision thereof, and upon the ob- ligations of the United States and its possessions, and all taxes paid to the United States or to any possession thereof, or to any State, 64 THE FEDERAL WAR TAX LAW, 1917 tions of a State or any political or taxing subdivision thereof, and upon the obligations of the United States (if and to the extent that it is provided in the Act authorizing the issue of such obligations of the United States that they are exempt from taxation), and its possessions, and that for the purpose of com- puting the normal tax there shall be allowed a credit, as provided by section five, subdivision (b), for their proportionate share of the profits derived from dividends. Such partnership, when requested by the Commissioner of Internal Revenue or any dis- trict collector, shall render a correct return of the earnings, profits, and income of the partnership, except income exempt under section four of this Act, setting forth the item of the gross income and the deductions and credits allowed by this title, and the names and addresses of the individuals who would be entitled to the net earnings, profits, and income, if distributed. A partnership shall have the same privilege of fixing and mak- ing returns upon the basis of its own fiscal year as is accorded to corporations under this title. If a fiscal year ends during nineteen hundred and sixteen or a subsequent calendar year for which there is a rate of tax different from the rate for the preceding calendar year, then (1) the rate for such preceding calendar year shall apply to an amount of each partner's share of such partnership profits equal to the proportion which the part of such fiscal year falling within such calendar year bears to the full fiscal year, and (2) the rate for the calendar year during which such fiscal year ends shall apply to the remainder. (2) Subdivision (d) of section eight of such Act of Sep- tember eighth, nineteen hundred and sixteen 1 is hereby repealed: county, or taxing subdivision of a State, and that for the purpose of computing the normal tax there shall be allowed a credit, as provided by section five, subdivision (b), for their proportionate share of the profits derived from dividends. And such partnership, when requested by the Commissioner of Internal Revenue, or any district collector, shall render a correct return of the earnings, profits, and income of the partnership, except income exempt under section four of this Act, setting forth the item of the gross income and the deductions and credits allowed by this title, and the names and addresses of the in- dividuals who would be entitled to the net earnings, profits, and income, if distributed. (REPEALED) '(ACT OF SEPTEMBER 8th, 1916) Section 8 (d) 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 payment of fixed or determinable annual or period- ical gains, profits, and income of another individual subject to tax, shall in behalf of such person deduct and withhold from the payment an amount equivalent to the normal tax upon the same and make and render a return, as aforesaid, but separate and distinct, of the portion of the income of each person from which the normal tax has been thus withheld, and containing also the name and address of such person or stating that the name and address or the address, as the case may be, are unknown: Provided, That the provision requiring the normal tax of individuals to be deducted and withheld at the source of the THE FEDERAL WAR TAX LAW, 1917 65 Section 1205 (1) That subdivisions (b), (c), (f), and (g), of sections nine of such Act of September eighth, nineteen hun- dred and sixteen, 1 is hereby amended to read as follows : income shall not be construed to require the withholding of such tax according to the two per centum normal tax rate herein prescribed until on and after January first, nineteen hundred and seventeen, and the law existing at the time of the passage of this Act shall govern the amount withheld or to be withheld at the source until January first, nineteen hundred and seventeen. That in either case mentioned in subdivisions (c) and (d) of this section no return of income not exceeding $3,000 shall be required, except as in this title provided. '(ACT OF SEPTEMBER 8th, 1916) Section 9 (b) All persons, firms, copartnerships, companies, corporations, joint-stock companies, or associations, and insurance companies, in whatever capacity acting, in- cluding lessees or mortgagors of real or personal property, trustees acting in any trust capacity, executors, administrators, receivers, con- servators, employers, and all officers and employees of the United States having the control, receipt, custody, disposal, or payment of interest, rent, salaries, wages, premiums, annuities, compensation, remuneration, emoluments, or other fixed or determinable annual or periodical gains, profits, and income of another person, exceeding $3,000 for any taxable year, other than income derived from dividends on capital stock, or from the net earnings of corporations and joint-stock companies or associations, or insurance companies, the income of which is taxable under this title, who are required to make and render a return in behalf of another, as provided herein, to the collector of his, her, or its district, are hereby authorized and required to deduct and withhold from such annual or periodical gains, profits, and income such sum as will be sufficient to pay the normal tax imposed thereon by this title, and shall pay the amount withheld to the officer of the United States Government authorized to receive the same; and they are each hereby made per- sonally liable for such tax, and they are each hereby indemnified against every person, corporation, association, or demand whatsover for all payments which they shall make in pursuance and by virtue of this title. In all cases where the income tax of a person is withheld and de- ducted and paid or to be paid at the source, such person shall not receive the benefit of the personal exemption allowed in section seven of this title except by an application for refund of the tax unless he shall, not less than thirty days prior to the day on which the return of his income is due, file with the person who is required to withhold and pay tax for him a signed notice in writing claiming the benefit of such exemption, and thereupon no tax shall be withheld upon the amount of such exemption; Provided, That if any person for the purpose of obtaining any allowance or reduction by virtue of a claim for such exemption, either for himself or for any other person, knowingly makes any false statement or false or fraudulent representation, he shall be liable to a penalty of not exceeding $300. And where the income tax is paid or to be paid at the source, no person shall be allowed the benefit of any deduction provided for in sections five or six of this title unless he shall, not less than thirty days prior to the day on which the return of his income is due, either (l) file with the person who is required to withhold and pay tax for him a true and correct return of his gains, profits, and income from all other sources, and also the deductions asked for, and the showing thus made shall then become a part of the return to be made in his behalf by the person required to withold and pay the tax, or (2) likewise make application for deductions to the collector of the district in which return 66 THE FEDERAL WAR TAX LAW, 1917 "(b) All persons, corporations, partnerships, associations, and insurance companies, in whatever capacity acting, includ- ing lessees or mortgagors of real or personal property, trustees acting in any trust capacity, executors, administrators, receivers, conservators, employers, and all officers and employees of the United States, having the control, receipt, custody, disposal, or payment of interest, rent, salaries, wages, premiums, annuities, compensation, remuneration, emoluments, or other fixed or de- terminable annual or periodical gains, profits, and income of any nonresident alien individual, other than income derived from dividends on capital stock, or from the net earnings of a corpora- tion, joint-stock company or association, or insurance company, which is taxable upon its net income as provided in this title, are hereby authorized and required to deduct and withhold from such annual or periodical gains, profits, and income such is made or to be made for him: Provided, That when any amount allowable as a deduction is known at the time of receipt of fixed annual or periodical income by an individual subject to tax, he may file with the person, firm, or corporation making the payment a certificate, under penalty for false claim, and in such form as shall be prescribed by the Commissioner of Internal Revenue, stating the amount of such deduc- tion and making a claim for an allowance of the same against the amount of tax otherwise required to be deducted and withheld at the source of the income, and such certificate shall likewise become a part of the return to be made in his behalf. If such person is absent from the United States or is unable, owing to serious illness, to make the return, and application above provided for, the return and application may be made by an agent, he making oath that he has sufficient knowledge of the affairs and property of his principal to enable him to make a full and complete return, and that the return and application made by him are full and complete. Section 9 (c) The amount of the normal tax hereinbefore imposed shall be deducted and withheld from fixed or determinable annual or periodical gains, profits, and income derived from interest upon bonds and mortgages, or deeds of trust or other similar obligations of cor- porations, joint-stock companies, associations, and insurance companies, whether payable annually or at shorter or longer periods, although such interest does not amount to three thousand ($3,000.00) dollars, subject to the provisions of this title requiring the tax to be withheld at the source, and deducted from annual income and returned and paid to the government. Section 9 (f) All persons, firms, or corporations undertaking as a matter of business or for profit the collection of foreign payments of such interest or dividends by means of coupons, checks, or bills of ex- change shall obtain a license from the Commissioner of Internal Revenue, and shall be subject to such regulations enabling the Govern- ment to ascertain and verify the due withholding and payment of the income tax required to be withheld and paid as the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury, shall prescribe: and any person who shall knowingly undertake to collect such payments as aforesaid without having obtained a license therefor, or without complying with such regulations, shall be deemed guilty of a misdemeanor and for each offense be fined in a sum not exceeding $5.000, or imprisoned for a term not exceeding one year, or both, in the discretion of the court. THE FEDERAL WAR TAX LAW, 1917 67 sum as will be sufficient to pay the normal tax imposed thereon by this title, and shall make return thereof on or before March first of each year, and, on or before the time fixed by law for the payment of the tax, shall pay the amount withheld to the officer of the United States Government authorized to receive the same; and they are each hereby made personally liable for such tax, and they are each hereby indemnified against every person, corporation, partnership,* association, or insurance com- pany, or demand whatsoever for all payments which they shall make in pursuance and by virtue of this- title. "(c) The amount of the normal tax hereinbefore imposed shall also be deducted and withheld from fixed or determinable annual or periodical gains, profits and income derived from interest upon bonds and mortgages, or deeds of trust or other similar obligations of corporations, joint-stock companies, asso- ciations, and insurance companies (if such bonds, mortgages, or other obligations contain a contract or provision by which the obligor agrees to pay any portion of the tax imposed by this title upon the obligee or to reimburse the obligee for any portion of the tax or to pay the interest without deduction for any tax which the obligor may be required or permitted to pay thereon or to retain therefrom under any law of the United States), whether payable annually or at shorter or longer periods and whether such interest is payable to a non-resident alien individual or to an individual citizen or resident of the United States, subject to the provisions of the foregoing subdivisions (b) of this section requiring the tax to be withheld at the source and deducted from annual income and returned and paid to the Government, unless the person entitled to receive such in- terest shall file with the withholding agent, on or before Febru- ary first, a signed notice in writing claiming the benefit of an exemption under section seven of this title. Section 9 (g) The tax herein imposed upon gains, profits, and income 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 Commissioner of Internal Reve- nue and approved by the Secretary of the Treasury. The intent and purpose of this title is that all gains, profits, and income of a taxable class, as defined by this title, shall be charged and assessed with the corresponding tax, normal and additional, prescribed by this title, and said tax shall be paid by the owner of such income, or the proper representative having the receipt, custody, control, or disposal of the same. For the purpose of this title ownership or liability shall be determined as of the year for which a return is required to be rendered. The provisions of this title relating to the deduction and payment of the tax at the source of income shall only apply to the normal tax hereinbefore imposed upon individuals. 68 THE FEDERAL WAR TAX LAW, 1917 License Required for Foreign Collections "(f) All persons, corporations, partnerships, or associations, undertaking as a matter of business or for profit the collection of foreign payments of interest or dividends by means of cou- pons, checks, or bills of exchange shall obtain a license from the Commissioner of Internal Revenue, and shall be subject to such regulations enabling the Government to obtain the informa- tion required under this title, as the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury shall prescribe ; and whoever knowingly undertakes to collect such payments as aforesaid without having obtained a license therefor or without complying with such regulations, shall be deemed guilty of a misdemeanor and for each offense be fined in a sum not exceeding $5,000, or imprisoned for a term not exceeding one year, or both, in the discretion of the court. General Provisions "(g) The tax herein imposed upon gains, profits, and in- comes not falling under the foregoing and not returned and paid by virtue of the foregoing or as otherwise provided by law shall be assessed by personal return under rules and regulations to be prescribed by the Commissioner of Internal Revenue and approved by the Secretary of the Treasury. The intent and purpose of this title is that all gains, profits, and income of a taxable class, as defined by this title, shall be charged and assessed with the corresponding tax, normal and additional, prescribed by this title, and said tax shall be paid by the owner of such income, or the proper representative having the receipt, custody, control, or disposal of the same. For the purpose of this title ownership or liability shall be determined as of the year for which a return is required to be rendered. "The provisions of this section, except subdivision (c) relat- ing to the deduction and payment of the tax at the source of income shall only apply to the normal tax hereinbefore imposed upon non-resident alien individuals." (2) Subdivisions (d) and (e) of section nine of such Act of September eighth, nineteen hundred and sixteen, are hereby repealed r 1 '(REPEALED) Section 9 (d) And likewise the amount of such tax shall be deducted and withheld from coupons, checks, or bills of exchange for or in payment of interest upon bonds of foreign countries and upon foreign mortgages or like obligations (not payable in the United States), and also from coupons, checks, or bills of exchange for or in payment of any dividends upon the stock or interest upon the obligations of foreign corporations, associations, and insurance companies engaged in business in foreign countries. And the tax in such cases shall be withheld, deducted, and returned for and in behalf of any person subject to the tax hereinbefore imposed, although such interest or dividends do not exceed $3,000, by (1) any banker or person who shall sell or otherwise realize coupons, checks, or bills of exchange drawn or made in payment of any such interest or THE FEDERAL WAR TAX LAW, 1917 69 Section 1206 (1) That the first paragraph of section ten of such Act of September eighth, nineteen hundred and sixteen i 1 is hereby amended to read as follows : "Section 10 (a) That there shall be levied, assessed, col- lected, and paid annually upon the total net income received in the preceding calendar year from all sources by every cor- poration, joint-stock company or association, or insurance com- pany, organized in the United States, no matter how created or organized, but not including partnerships, a tax of two per centum upon such income ; and a like tax shall be levied, assessed, collected, and paid annually upon the total net income received in the preceding calendar year from all sources within the United States by every corporation, joint-stock company or association, or insurance company, organized, authorized, or existing under the laws of any foreign country, including interest on bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise, and including the income derived from dividends on capital stock or from net earnings of resident corporations, joint-stock companies or associations, or insurance companies, whose net income is taxable under this title." Undistributed Profits (2) Section ten of such Act of September eighth, nineteen hundred and sixteen: is hereby further amended by adding a new subdivision as follows : "(b) In addition to the income tax imposed by subdi- vision (a) of this section there shall be levied, assessed, collected, and paid annually an additional tax of ten per centum upon the amount remaining undistributed six months after the end of each calendar or fiscal year, of the total net income of every dividends (not payable in the United States), and (2) any person who shall obtain payment (not in the United States), in behalf of another of such dividends and interest by means of coupons, checks, or bills of exchange, and also (3) any dealer in such coupons who shall purchase the same for any such dividends or interest (not payable in the United States), otherwise than from a banker or another dealer in such coupons. (e) Where the tax is witheld at the source, the benefit of the ex- emption and the deductions allowable under this title may be had by complying with the foregoing provisions of this section. "(ACT OF SEPTEMBER 8th, 1916) Section 10. That there shall be levied, assessed, collected, and paid annually upon the total net in- come received in the preceding calendar year from all sources by every corporation, joint-stock company or association, or insurance company, organized in the United States, no matter how created or organized but not including partnerships, a tax of two per centum upon such income; and a like tax shall be levied, assessed, collected, and paid annually upon the total net income received in the preceding calendar year from all sources within the United States by every corporation, joint-stock company or association, or insurance company organized, authorized, or existing under the laws of any foreign country, including interest on bonds, notes, or other interest-bearing obligations of resi- dents, corporate or otherwise, and including the income derived from 70 THE FEDERAL WAR TAX LAW, 1917 corporation, joint-stock company or association, or insurance company, received during the year, as determined for the pur- poses of the tax imposed by such subdivision (a), but not in- cluding the amount of any income taxes paid by it within the year imposed by the authority of the United States. "The tax imposed by this subdivision shall not apply to that portion of such undistributed net income which is actually invested and employed in the business or is retained for em- ployment in the reasonable requirements of the business or is invested in obligations of the United States issued after Sep- tember first, nineteen hundred and seventeen : Provided, That if the Secretary of the Treasury ascertains and finds that any portion of such amount so retained at any time for employment in the business is not so employed or is not reasonably required in the business a tax of fifteen per centum shall be levied, as- sessed, collected, and paid thereon. "The foregoing tax rates shall apply to the undistributed net income received by every taxable corporation, joint-stock company or association, or insurance company in the calendar year nineteen hundred and seventeen, and in each year there- after, except that if it has fixed its own fiscal year under the pro- visiqns of existing law, the foregoing rates shall apply to the proportion of the taxable undistributed net income returned for the fiscal year ending prior to December thirty-first, nineteen hundred and seventeen, which the period between January first, nineteen hundred and seventeen, and the end of such fiscal year bears to the whole of such fiscal year." Corporate Deductions Section 1207 (1) That paragraphs third and fourth of sub- division (a) of section twelve of such Act of September eighth, nineteen hundred and sixteen 1 are hereby amended to read as follows : dividends on capital stock or from net earnings of resident corporations, joint-stock companies or associations, or insurance companies whose net income is taxable under this title: Provided, That the term "divi- dends" as used in this title shall be held to mean any distribution made or ordered to be made by a corporation, joint-stock company, associa- tion, or insurance company, out of its earnings or profits accrued since March first, nineteen hundred and thirteen, and payable to its share- holders, whether in cash or in stock of the corporation, joint-stock company, association, or insurance company, which stock dividend shall be considered income, to the amount of its cash value. Section 12. Third. The amount of interest paid within the year on its indebtedness to an amount of such indebtedness not in excess of the sum of (a) the entire amount of the paid-up stock outstanding at the close of the year, or, if no capital stock, the entire amount of capital employed in the business at the close of the year, and (b) one- half of its interest-bearing indebtedness then outstanding; Provided, That for the purpose of this title preferred capital stock shall not be considered interest-bearing indebtedness, and interest or dividends paid upon this stock shall not be deductible from gross income; Provided THE FEDERAL WAR TAX LAW, 1917 71 "Third. The amount of interest paid within the year on its indebtedness (except on indebtedness incurred for the pur- chase of obligations or securities the interest upon which is exempt from taxation as income under this title) to an amount of such indebtedness not in excess of the sum of (a) the entire amount of the paid-up capital stock outstanding at the close of the year, or, if no capital stock, the entire amount of capital employed in the business at the close of the year, and (b) one- half of its interest-bearing indebtedness then outstanding: Pro- vided, That for the purpose of this title preferred capital stock shall not be considered interest-bearing indebtedness, and interest or dividends paid upon this stock shall not be deductible from gross income : Provided further, That in cases wherein shares of capital stock are issued without par or nominal value, the amount of paid-up capital stock, within the meaning of this section, as represented by such shares, will be the amount of cash, or its equivalent, paid or transferred to the corporation as a consideration for such shares : Provided further, That in the case of indebtedness wholly secured by property collateral, tangible or intangible, the subject of sale or hypothecation in the ordinary business of such corporation, joint-stock company or association as a dealer only in the property constituting such collateral, or in loaning the funds thereby procured, the total interest paid by such corporation, company, or association within the year on any such indebtedness may be deducted as a part of its expenses of doing business, but interest on such indebted- further, That in cases wherein shares of capital stock are issued without par or nominal value, the amount of paid-up capital stock, within the meaning of this section, as represented by such shares, will be the amount of cash, or its equivalent, paid or transferred to the corporation as a consideration for such shares; Provided further, That in the case of indebtedness wholly secured by property collateral, tangible or intangible, the subject of sale or hypothecation in the ordinary business of such corporation, joint-stock company or association as a dealer only in the property, constituting such collateral, or in loaning the funds thereby procured, the total interest paid by such corporation, company, or association within the year on any such indebtedness may be deducted as a part of its expenses of doing business, but interest on such indebtedness shall only be deductible on an amount of such indebtedness not in excess of the actual value of such property collateral; Provided further, That in the case of bonds or other indebtedness, which have been issued with a guaranty that the interest payable thereon shall be free from taxation, no deduction for the payment of the tax herein imposed, or any other tax paid pursuant to such guaranty, shall be allowed; and in the case of a bank, banking association, loan or trust company, interest paid within the year on deposits or on moneys re- ceived for investment and secured by interest-bearing certificates of indebtedness issued by such bank, banking association, loan or trust company; Fourth. Taxes paid within the year imposed by the authority of the United States, or its Territories, or possessions, or any foreign country, or under the authority of any State, county, school district, or municipality, or other taxing subdivision of any State, not including those assessed against local benefits. 72 THE FEDERAL WAR TAX LAW, 1917 ness shall only be deductible on an amount of such indebted- ness not in excess of the actual value of such property collateral ; Provided further, That in the case of bonds or other indebtedness, which have been issued with a guaranty that the interest pay- able thereon shall be free from taxation, no deduction for the payment of the tax herein imposed, or any other tax paid pur- suant to such guaranty, shall be allowed ; and in the case of a bank, banking association, loan or trust company, interest paid within the year on deposits or on moneys received for investment and secured by interest-bearing certificates of in- debtedness issued by such bank, banking association, loan or trust company shall be deducted ; "Fourth. Taxes paid within the year imposed by the au- thority of the United States (except income and excess profits taxes), or of its Territories, or possessions, or any foreign coun- try, or by the authority of any State, county, school district, or municipality, or other taxing subdivision of any State, not in- cluding those assessed against local benefits." Deductions Foreign Corporations (2) Paragraphs third and fourth of subdivision (b) of section twelve of such Act of September eighth, nineteen hundred and sixteen :* are hereby amended to read as follows: "Third. The amount of interest paid within the year on its indebtedness (except on indebtedness incurred for the pur- chase of obligations or securities the interest upon which is exempt from taxation as income under this title) to an amount '(ACT OF SEPTEMBER 8th, 1916) Section 12. Third. The amount of interest paid within the year on its indebtedness to an amount of such indebtedness not in excess of the proportion of the sum of (a) the entire amount of the paid-up capital stock outstanding at the close of the year, or, if no capital stock, the entire amount of the capital employed in the business at the close of the year, and (b) one-half of its interest-bearing indebtedness then outstanding, which the gross amount of its income for the year from business transacted and capital invested within the United States bears to the gross amount of its in- come derived from all sources within and without the United States: Provided, That in the case of bonds or other indebtedness which have been issued with a guaranty that the interest payable thereon shall be free from taxation, no deduction for the payment of the tax herein imposed or any other tax paid pursuant to such guaranty shall be allowed; and in case of a bank, banking association, loan or trust company, or branch thereof, interest paid within the year on deposits by or on moneys received for investment from either citizens or residents of the United States and secured by interest-bearing certificates of in- debtdedness, issued by such bank, banking association, loan or trust company, or branch thereof; Fourth. Taxes paid within the year imposed by the authority of the United States, or its Territories, or possessions, or under the authority of any State, county, school district, or municipality, or other taxing subdivision of any State, paid within the United States, not including those assessed against local benefits; THE FEDERAL WAR TAX LAW, 1917 73 of such indebtedness not in excess of the proportion of the sum of (a) the entire amount of th paid-up capital stock out- standing at the close of the year, or, if no capital stock, the entire amount of the capital employed in the business at the close of the year, and (b) one-half of its interest-bearing indebted- ness then outstanding, which the gross amount of its income for the year from business transacted and capital invested within the United States bears to the gross amount of its income derived from all sources within and without the United States : Provided, That in the case of bonds or other indebtedness which have been issued with a guaranty that the interest payable thereon shall be free from taxation, no deduction for the payment of the tax herein imposed or any other tax paid pursuant to such guaranty shall be allowed ; and in case of a bank, banking asso- ciation, loan or trust company, or branch thereof, interest paid within the year on deposits by or on moneys received for invest- ment from either citizens or residents of the United States and secured by interest-bearing certificates of indebtedness issued by such bank, banking association, loan or trust company, or branch thereof; "Fourth. Taxes paid within the year imposed by the au- thority of the United States (except income and excess profits taxes), or of its Territories, or possessions, or by the authority of any State, county, school district, or municipality, or other taxing subdivision of any State, paid within the United States, not including those assessed against local benefits." Withholding Income of Non-Resident Aliens Section 1208. That subdivision (e) of section thirteen of such Act of September eighth, nineteen hundred and sixteen r 1 is hereby amended to read as follows : "(e) All the provisions of this title relating to the tax authorized and required to be deducted and withheld and paid to the officer of the United States Government authorized to receive the same from the income of non-resident alien individ- uals from sources within the United States shall be made ap- plicable to the tax imposed by subdivision (a) of section ten upon income derived from interest upon bonds and mortgages or deeds of trust or similar obligations of domestic or other J (ACT OF SEPTEMBER 8th, 1916) Section 13 (e) All the pro- visions of this title relating to the tax authorized and required to be deducted and withheld and paid to the officer of the United States Government authorized to receive the same from the income of non- resident alien individuals from sources within the United States shall be made applicable to incomes derived from interest upon bonds and mortgages or deeds of trust or similar obligations of domestic or other resident corporations, joint-stock companies or associations, and in- surance companies by nonresident alien firms, copartnerships, companies, corporations, joint-stock companies or associations, and insurance com- panies not engaged in business or trade within the United States and not having any office or place of business therein. 74 THE FEDERAL WAR TAX LAW, 1917 resident corporations, joint-stock companies or associations, and insurance companies by non-resident alien firms, co-partnerships, companies, corporations, joint-stock companies or associations, and insurance companies, not engaged in business or trade within the United States and not having any office or place of business therein." Penalty for Failure to File Return Section 1209. That section eighteen of such Act of Septem- ber eighth, nineteen hundred and sixteen 1 is hereby amended to read as follows: "Section 18. That any person, corporation, partnership, as- sociation, or insurance company, liable to pay the tax, to make a return or to supply information required under this Title, who refuses or neglects to pay such tax, to make such return or to supply such information at the time or times herein specified in each year, shall be liable, except as otherwise specially pro- vided in this title, to a penalty of not less than $20 nor more than $1,000. Any individual or any officer of any corporation, partnership, association, or insurance company, required by law to make, render, sign, or verify any return or to supply any information, who makes any false or fraudulent return or state- ment with intent to defeat or evade the assessment required by this title to be made, shall be guilty of a misdemeanor, and shall be fined not exceeding $2,000 or be imprisoned not exceeding one year, or both, in the discretion of the court, with the costs of prosecution : Provided, That where any tax heretofore due and payable has been duly paid by the taxpayer, it shall not be re-collected from any withholding agent required to retain it at its source, nor shall any penalty be imposed or collected in such cases from the taxpayer, or such withholding agent whose duty it was to retain it, for failure to return or pay the same, unless such failure was fradulent and for the purpose of evading payment." Information to Commissioner Compulsory Section 1210. That section twenty-six of such Act of Sep- tember eighth, nineteen hundred and sixteen, as amended by the Act entitled "An Act to provide increased revenue to defray the expenses of the increased appropriations for the Army and Navy and the extensions of fortifications, and for other purposes." '(ACT OF SEPTEMBER 8th, 1916) Section 18. That if any in- dividual liable to make the return or pay the tax aforesaid shall refuse or neglect to make such return at the time or times hereinbefore speci- fied in each year, he shall be liable to a penalty of not less than $20 nor more than $1,000. Any individual or any officer of any corporation, joint-stock company or association, or insurance company required by law to make, render, sign, or verify any return who makes any false or fraudulent return or statement with intent to defeat or evade the assess- ment required by this title to be made shall be guilty of a misdemeanor, and shall be fined not exceeding $2,000 or be imprisoned not exceeding THE FEDERAL WAR TAX LAW, 1917 75 approved March third, nineteen hundred and seventeen, is hereby amended to read as follows : "Section 26. Every corporation, joint-stock company or as- sociation, or insurance company subject to the tax herein imposed, when required by the Commissioner of Internal Revenue, shall render a correct return, duly verified under oath, of its payments of dividends, whether made in cash or its equivalent or in stock, including the names and addresses of stockholders and the num- ber of shares owned by each, and the tax years and the applica- ble amounts in which such dividends were earned, in such form and manner as may be prescribed by the Commissioner of In- ternal Revenue, with the approval of the Secretary of the Treasury." Brokers' Returns of Customer Names, Etc. Section 1211. That Title I of such Act of September eighth, nineteen hundred and sixteen, is hereby amended by adding to Part III six new sections, as follows: "Section 27. That every person, corporation, partnership, or association, doing business as a broker on any exchange or board of trade or other similar place of business shall, when required by the Commissioner of Internal Revenue, render a correct return duly verified under oath, under such rules and regulations as the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury, may prescribe, show- ing the names of customers for whom such person, corporation, partnership, or association has transacted any business, with such details as to the profits, losses, or other information which the commisioner may require, as to each of such customers, as will enable the Commissioner of Internal Revenue to determine whether all income tax due on profits or gains of such customers has been paid. Returns by Party Making Payments to Others Section 28. That all persons, corporations, partnerships, as- sociations, and insurance companies, in whatever capacity acting, including lessees or mortgagors of real or personal property, trustees acting in any trust capacity, executors, administrators, receivers, conservators, and employers, making payment to an- other person, corporation, partnership, association, or insurance company, of interest, rent, salaries, wages, premiums, annuities, compensation, remuneration, emoluments, or other fixed or deter- one year, or both, in the discretion of the court, with the costs of prosecution: Provided, That where any tax heretofore due and payable has been duly paid by the taxpayer, it shall not be re-collected from any person or corporation required to retain it at its source, nor shall any penalty be imposed or collected in such cases from the taxpayer, or such person or corporation whose duty it was to retain it, for failure to return or pay the same, unless such failure was fraudulent and for the purpose of evading payment. 76 THE FEDERAL WAR TAX LAW, 1917 minable gains, profits, and income (other than payments de- scribed in sections twenty-six and twenty-seven), of $800 or more in any taxable year, or, in the case of such payments made by the United States, the officers or employees of the United States having information as to such payments and required to make returns in regard thereto by the regulations hereinafter provided for, are hereby authorized and required to render a true and accurate return to the Commissioner of Internal Rev- enue, under such rules and regulations and in such form and manner as may be prescribed by him, with the approval of the Secretary of the Treasury, setting forth the amount of such gains, profits, and income, and the name and address of the recipient of such payment: Provided, That such returns shall be required, regardless of amounts, in the case of payments of interest upon bonds and mortgages or deeds of trust or other similar obligations of corporations, joint-stock companies, asso- ciations, and insurance companies, and in the case of collections of items (not payable in the United States) of interest upon the bonds of foreign countries and interest from the bonds and divi- dends from the stock of foreign corporations by persons, cor- porations, partnerships, or associations, undertaking as a matter of business or for profit the collection of foreign payments of such interest or dividends by means of coupons, checks, or bills of exchange. "When necessary to make effective the provisions of this section the name and address of the recipient of income shall, be furnished upon demand of the person, corporation, partner- ship, association, or insurance company paying the income. "The provisions of this section shall apply to the calendar year nineteen hundred and seventeen and each calendar year thereafter, but shall not apply to the payment of interest on obligations of the United States. Excess Profits Tax Credits "Section 29. That in assessing income tax the net income embraced in the return shall also be credited with the amount of any excess profits tax imposed by Act of Congress and as- sessed for the same calendar or fiscal year upon the taxpayer, and, in the case of a member of a partnership, with his propor- tionate share of such excess profits tax imposed upon the part- nership. (Under Act of March third, nineteen hundred and seventeen, repealed.) "Section 30. That nothing in section II of the Act approved October third, nineteen hundred and thirteen, entitled "An Act to reduce tariff duties and to provide revenue for the Govern- ment, and for other purposes," or in this title, shall be construed as taxing the income of foreign governments received from investments in the United States in stocks, bonds, or other domestic securities, owned by such foreign governments, or THE FEDERAL WAR TAX LAW, 1917 77 from interest on deposits in banks in the United States of moneys belonging to foreign governments. Dividends Defined "Section 31 (a) That the term 'dividends' as used in this title shall be held to mean any distribution made or ordered to be made by a corporation, joint-stock company, association, or insurance company, out of its earnings or profits accrued since March first, nineteen hundred and thirteen, and payable to its shareholders, whether in cash or in stock of the corporation, joint-stock company, association, or insurance company, which stock dividend shall be considered income, to the amount of the earnings or profits so distributed. Deferred Dividends "(b) Any distribution made to the shareholders or mem- bers of a corporation, joint-stock company, or association, or in- surance company, in the year nineteen hundred and seventeen, or subsequent tax years, shall 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 distributee for the year in which received, and shall be taxed to the dis- tributeee at the rates prescribed by law for the years in which such profits or surplus were accumulated by the corporation, joint-stock company, association, or insurance company, but noth- ing herein shall be construed as taxing any earnings or profits accrued prior to March first, nineteen hundred and thirteen, but such earnings or profits may be distributed in stock dividends or otherwise, exempt from the tax, after the distribution of earnings and profits accrued since March first, nineteen hun- dred and thirteen, has been made. This subdivision shall not apply to any distribution made prior to August sixth, nineteen hundred and seventeen, out of earnings or profits accrued prior to March first, nineteen hundred and thirteen. Insurance Not Deductible "Section 32. That premiums paid on life insurance policies covering the lives of officers, employees, or those financially interested in any trade or business conducted by an individual, partnership, corporation, joint-stock company or association, or insurance company, shall not be deducted in computing the net income of such individual, corporation, joint-stock company or association, or insurance company, or in computing the profits of such partnership for the purposes of subdivision (e) of sec- tion nine." Withheld Taxes Released Section 1212. That any amount heretofore withheld by any withholding agent as required by Title I of such Act of Sep- tember eighth, nineteen hundred and sixteen : 78 THE FEDERAL WAR TAX LAW, 1917 On account of the tax imposed upon the income of any individual, a citizen or resident of the United States, for the calendar year nineteen hundred and seventeen, except in the cases covered by subdivision (c) of section nine of such Act, as amended by this Act, shall be released and paid over to such individual, and the entire tax upon the income of such individual for such year shall be assessed and collected in the manner prescribed by such Act as amended by this Act. TITLE XIII. GENERAL PROVISIONS Section 1300. That if any clause, sentence, paragraph, or part of this Act shall for any reason be adjudged by any court of competent jurisdiction to be invalid, such judgment shall not affect, impair, or invalidate the remainder of said Act, but shall be confined in its operation to the clause, sentence, para- graph, or part thereof directly involved in the controversy in which such judgment shall have been rendered. Repeal Section 1301. That Title I of the Act entitled "An Act to provide increased revenue to defray the expenses of the increased appropriations for the Army and Navy and the extension of fortifications, and for other purposes," approved March third, nineteen hundred and seventeen, be, and the same is hereby, repealed. Section 1302. That unless otherwise herein specially pro- vided, this Act shall take effect on the day following its passage. Approved, October third, nineteen hundred and seventeen. DIGEST OF COURT AND TREASURY DECISIONS RULES, REGULATIONS, OPINIONS AND COMMENTARIES GOVERNING THE ADMINISTRATION AND OPERATION OF THE ACT OF SEPTEMBER 8, 1916 ACT OF OCTOBER 3, 1917 TREASURY DECISIONS Abatement or Refund of Taxes, Form To Be Used: Claims for re- funding of assessed taxes and penalties must be made on Form 46. The burden of proof rests upon the claimant. All the facts relied upon in support of claim should be clearly set forth under oath. The claim should be still further supported by an affidavit of the deputy collector of the proper division, and by certificate of the collector. Claims for abatement of taxes and penalties erroneously or illegally assessed, or which are abatable under remedial acts, etc., must be made out upon Form 47. (Reg. 14, Revised.) Claims for Refund of Excess Amount Withheld at Source: Claims for abatement of taxes erroneously assessed, or which are excessive in amount, may, prior to collection thereof, be filed under the provision of said Sec. 3320, Rev. St., either by withholding agent by whom assess- ment was made, or by the person on account of whom such taxes were withheld. (Art. 33, Reg. 33.) When it is found that a withholding agent has failed to withhold tax and make return, field officers will at once procure the return re- quired by law and regulations. The delinquent return should be ac- companied by claim, executed on Form 47, for the abatement of such items of tax as can be shown to have been paid by the individual tax- payers. The delinquent withholding return will then receive consid- eration in connection with personal returns or to be made by individuals concerned. (Letter 1265.) Accounts Kept on Basis Other Than of Actual Receipts and Dis- bursements: As this office requires no special system of bookkeeping, neither does it require any specific method by which net income shall be returned by corporations. (T. D. 2161.) It is immaterial whether deductions except for taxes and losses are evidenced by actual disbursements in cash, or whether evidenced in such other way as to be properly acknowledged by corporate officers and so entered on books of the corporation as to constitute a liability against assets of corporation making the return. Except as the same may be modified by provisions of the act, limiting deductions and au- thorizing others, the net income as returned for the purpose of the tax should be the same as that shown by books or annual balance sheet. (Art. 158, Reg. 33.) Accounts Payable: Representing ordinary necessary expenses of maintaining and operating business and property of corporation, if actually charged into the expense account, and entered on books as to constitute a liability against assets of company, and so treated in prep- aration of return of annual net income, they will not be included in deduction in year in which they are actually paid in cash, or its equiva- lent, such accounts payable may be deducted from gross income of year in which expenses were incurred. This ruling applies only to accounts payable representing ordinary and necessary expenses of maintaining and operating business; that is, to such expenses as are incurred by corporation in producing gross income which is required to return. (Acting Commissioner David A. Gates, March 2nd, 1915.) 82 TREASURY DECISIONS Accounts Receivable Are Income for the Year Created: The net income of the individual in the mercantile business should be ascertained from his books, and the actual inventory of his merchandise which is in accordance with established procedure, in all mercantile businesses. Value at Which Stock Is Carried on the Books of the Owner Is Not Conclusive Evidence of Its Actual Value: U. S. v. Guggenheim Explora- tion Co. U. S. District Court, S. D., N. Y. (238 Fed. 231.) The Guggenheim Exploration Co. and the American Smelting and Refining Co. were owned in 1905 by practically the same stockholders. By arrangement between the two, the American Smelters Exploration Co. was organized. The Guggenheim Co. turned over to it certain property which was valued by directors of the American Smelters Exploration Co. at $49,000,000.00, and preferred and common stock to the aggregate par value of forty-nine million dollars was issued in payment therefor to the Guggenheim Company. The Guggenheim Company disposed of most of this stock almost immediately thereafter, but retained 112,490 shares of the common stock carrying it on its books at a nominal valuation of $1.00 until 1911, when these shares were sold to the American Smelting and Refining Co. for $6,749,400.00, or $60.00 per share. No shares of common stock of the American Smelters Exploration Company had been sold on the market prior to this transaction. Consequently there was no indication of its value such as would have been given by market prices. The government claimed that the difference between the book value of the stock and the sum received for it upon its sale constituted a profit upon which a tax was due, and the amount not having been included in the 1911 return of the company, this suit was commenced by the government for the recovery of the tax. The court HELD that bookkeeping, facts do not constitute income but only real facts do. The burden of proof was upon the government to show by fair preponderence of evidence that the stock was worth but one dollar ($1.00). The enhanced value of property which accrues in the gradual increase in its value during a series of years prior to an effective date of an Income Tax Law does not become income, gains or profits taxable under such act. (Citing 236 Fed. 653.) The court decided that there is no income, gain or profit accruing to the defendant during the taxable year in question. Additions and Betterments: Amounts expended for this purpose constitute an increase in capital investment and are not proper deduc- tions. (Art. 118, Reg. 33.) Expenses of administration of an estate, such as court costs, attor- ney's fees, etc., are chargeable against corpus of estate and are not allowable deductions in return of fiduciary in Form 1041. (T. D. 2090.) Agents: Agents not acting in fiduciary capacity have no responsi- bility to the withholding of tax or making return of income turned over to resident aliens or citizens of the United States, but responsible rep- resentatives in charge of income of non-resident aliens must make return on Form 1040, revised, and pay tax thereon. (T. D. 2090.) An agent in entire charge of property executing leases, collecting rents, and paying expenses and charges in connection with same out of such funds as collected, turning over net proceeds to his principal by virtue of power of attorney conferred upon him, is not a fiduciary within the meaning of the Income Tax Law. (T. D. 2135.) There may be fiduciary relationship between an agent and a prin- cipal, but the word agent does not denote a fiduciary within the meaning of the Income Tax Law. (T. D. 2090.) Real estate agents not required to deduct and withhold normal tax from rents collected, though amount be in excess of $3,000. Agent stands in place of landlord, and receives money in the same capacity as the landlord would receive same. (T. D. 2090.) Withholding Agent's Return When Form 1038 Filed: Withholding agent should make entries on Form 1042 from facts before him after receiving authority from collector for refundment of part of amount TREASURY DECISIONS 83 previously withheld. When he has received notification of amount of tax to be refunded he has sufficient information to make correct entries. (T. D. 2135.) Debtor May Appoint Withholding Agent: In matters pertaining to collection of tax upon filing with collector for the district a proper notice of such appointment. (Art. 38, Reg. 33.) Paying Agent, Notice of Appointment of: This notice should be placed on file in office of collector of the district in which debtor cor- poration has principal place of business, and said collector should notify collector for the district in which withholding agent is located. (T. D. 2135.) Withholding agent required to file return with collector for district where he is located, and not with collector for district in which debtor corporation is located. (T. D. 2135.) Agent, Authorized, May Sign Certificate: Authorized agents may sign certificates for persons for whom they act, and withholding agents with whom such certificates are filed, if satisfied with identity of persons so signing, shall so mark certificate, giving name and address of person thus certifying. Certificates so verified may be accepted without ques- tion as to authority of such agent. (Art. 43, Reg. 33.) Withholding Agents May Substitute Their Own Certificates for Certificates Attached to Coupons Presented for Collection: Responsible banks, bankers, and collecting agents receiving coupons for collections with certificates of ownership attached, may substitute for said certifi- cates its own certificates Form 1058 for exemptions claimed or Form 1059 for exemptions not claimed, and shall keep a complete record of each transaction. Annual List Return of Withholding Agent: Annual list return (Form 1013) in duplicate is required of debtor or withholding agent of normal tax withheld from interest payments made upon bonds or other similar obligations. (Art. 50, Reg. 33.) In all cases annual list return required of withholding agents (of which monthly return will form a part as required by regulations) should be made and sworn to and filed as now required by existing regulations, and the jurat for annual return will cover entire returns thus made. (T. D. 1997.) Withholding Agent not required by law to forward to collector tax withheld by him. until after notice of assessment, and then pay- ment should be made on or before June 30th of each year. (T. D. 2131.) Tax Deducted by Collecting Agency, Debtor Does Not Again De- duct Tax, but in Lieu Thereof Delivers to Collector Certificates of Such Collecting Agency: A certificate, Revised Form 1002, should accom- pany coupon to debtor corporation in order that normal tax may not be withheld again, and should coupons pass through hands of other collecting agencies, debtor corporation, upon receipt of Form 1002, should treat such certificate as an exemption certificate. (T. D. 2135.) Alien, Agent Of: Whether an individual or a corporation, for non-resident alien, should execute Form 1040, Revised, for the prin- cipal when he is liable for tax on income passing through agent's hands. (T. D. 2135). Alien Real Estate Agent who collects rents from property owned by non-resident aliens, pays for repairs and maintenance, and submits bal- ance to his principal comes within (T. D. 2109) and (T. D. 2313) is required to make return on Form 1040, Revised, accounting only for funds payable by him to non-resident beneficiary. Commission Retained by Life Insurance Agent on his own policy is held to be income accruing to agent. (T. D. 2137.) Foreign Corporations and Fiscal Agents Defined: "Foreign cor- porations," as used in T. D. 1992, was intended to include municipal private corporations holding charters under laws of foreign countries, and "fiscal agents" are referred to as financial agents in ordinary sense, 84 TREASURY DECISIONS upon whom law casts duties with reference to withholding tax, as are imposed upon withholding agents of domestic corporations. When a foreign government has fiscal agents in the United States for the purpose of paying interest on its obligations, such agents will be charged with the duty of withholding and paying tax on such interest payments, except to extent of exemption claims. When such foreign corporations have issue of bonds payable in the United States or without the United States at option of owner of bonds and where coupons from such bonds are presented for payment to fiscal agents in the United States of such foreign corporations, or to a bank, or collecting agency with ownership certificate attached, then in all such cases said coupons shall be treated as domestic items, and aforesaid fiscal agents charged with duties and responsibilities of withholding tax. i Where, however, such coupons are not presented with such owner- ship certificates attached, they shall only be received by licensed bank or collection agency, and when so received shall be treated as foreign items. This ruling is made in explanation and amendment of T. D. 1992, and other applicable regulations. (T. D. 2006.) Interest on Registered Foreign Bonds Payable in the United States to Fiscal Agents: Where foreign corporation has an issue of registered bonds the interest on which is payable to a fiscal agent in the United States, certificates of exemption may be filed with said fiscal agent in manner and form as prescribed by T. D. 1974, and payments shall be made in accordance with provision of same. (T. D. 1992.) License Required For Branch Offices: Of Collecting Agents; When any person, firm or corporation shall have branch offices, and desire to collect foreign items through branch offices, the application for a license or licenses shall be made by person, firm or corporation through its principal office. Application for licenses in such cases shall be made to collector of internal revenue for district in which home office is located. (Art. 57 Reg. 33.) Foreign Corporations Doing Business by Agent: Law provides that normal tax imposed by it shall be collected upon entire net income accruing to foreign corporations from business transacted or capital in- vested in this country. Such corporation may transact business or have capital invested in this country through an agent as though it were in- vesting the same direct from its home office through branch office in the United States. An agent doing business in this country, buying and selling products of foreign corporations, is to all intents a branch of such corporation in transacting business in this country. Buying and selling of products in this country through local agent on behalf of such corporation is transacting business within meaning of Federal Income Tax Law in this country, and such corporation will be required to make return of annual net income covering business so transacted. (T. D. 2137.) When a foreign corporation sends a representative to this coun- try to solicit business, merchandise thus sold to be shipped direct to consignee, held that such corporation is transacting business in this country. A corporation thus conducting business in this country is required to make return even if such representative has only a mailing address in this country and returns should be made to Collector of District in which such representative has his mailing address. (T. D. 2161.) Agricultural Organizations: Corporations owning sugar or other plantations, and disposing of the product thereof held to be operating for profit and not entitled to exemption as agricultural organizations. (T. D. 2090.) Aliens, Resident: That place where an individual has his per- manent home and principal establishment, and to which when absent he has intentions of returning; indicates permanency of occupation as TREASURY DECISIONS 85 distinct from lodging or temporary occupation. HELD: that where for business purposes or otherwise an alien is permanently located in the United States; has there his principal establishment and there so occupied or employed, even though his domicile may be without the United States, he will be held within the definition of * * * "Every person residing in the United States, though not a citizen thereof." (T. D. 2242). Aliens, Intending to Become Permanent Residents: Aliens coming to the United States with the intention of becoming resident citizens within the meaning of the Income Tax Statute, may establish that fact and have privilege of resident alien by filing with withholding agents a certificate in (Form 1078) under oath, certificate shall be filed by withholding agents with Collectors of Internal Revenue as justifi- cation for withholding on basis of "residence" in the United States. (T. D. 2242). Alien Individuals, Non-Residents: An American Woman who mar- ries a foreigner takes the nationality of her husband. (T. D. 2090). Aliens, Royalties Received by Non-Resident : Royalties paid non- resident aliens under agreement of purchase of certain patent rights, payments being based upon quantity of goods produced by use of said patents; held to be income accruing to said individual by reason of property owned or business carried on within the United States; the corporation or individual purchasing and using patent rights required to make return of income therefrom on (Form 1040), revised, and pay tax, normal and additional assessed upon such income. (T. D. 2137). Aliens, Interest on Bonds, Dividends: Income accruing non- resident aliens in the form of interest from bonds and dividends on the stock of domestic corporations is subject to the income tax imposed by the act of October 3d, 1913. (T. D. 2313). Aliens, Non-Resident, Additional Tax: Non-resident aliens are subject to additional tax or sur-tax the same as a citizen of the United States or resident thereof. Dividends on Stock of Domestic Corporations Received by Non- Resident Aliens: Dividends on stock of domestic corporations which pay tax on their net income are not subject to the normal tax when received by individuals. They are subject to the normal income tax of corporations and subject to the additional tax only as to individuals. (T. D. 2109.) Aliens, Method of Claiming Exemption by Non-Resident: Foreign Dividends Payable in the United States; Exemption Certificate 1063 as provided in T. D. 1998 is made applicable to said persons in claiming exemption from income tax on dividends payable in the United States from stock of foreign corporations. (T. D. 2012). Exemption May Be Claimed for Non-Resident Aliens by Responsi- ble Bank: A certificate (Original Form No. 1071) is provided which may be executed by responsible banks or bankers, foreign or domestic, on behalf of non-resident owners of stock of foreign corporations for the purpose of claiming exemption. (T. D. 2030). T. D. 2030 and all rulings heretofore made which are in conflict herewith are hereby superseded and repealed. (T. D. 2313). A certificate will be provided to take the place of Form 1071. (Letter signed by Acting Commissioner David A. Gates, dated April 5th, 1916.) For making effective the provisions of T. D. 2313 there are hereby provided for use after July 1, 1916, two certificates, to be known as Form * * and Form 1071 Revised. Certificate Form 1071 Re- vised will be printed by the Government and furnished without cost. Banks desiring to furnish their own certificates may do so, but said certificates must conform in every description as used by the Gov- ernment. Aliens, Returns and Payment of Tax by Non-Resident: The liability to render personal returns on or before March 1st, next 86 TREASURY DECISIONS succeeding the tax year, of annual net income from sources within the United States during the preceding calendar year, attaches to non- resident aliens. Therefore a return on Form 1040 Revised is required except where total tax liability has or is to be satisfied * * * by personal return on Form 1040 Revised rendered in their behalf. Re- turns should be rendered to the collector of the district in which non- resident alien carries on his principal business, or in the absence of principal business within the United States and in all cases of doubt, to the Collector of Internal Revenue at Baltimore, Maryland. (T. D. 2313). Returns in Payment of Tax by Agents or Representatives: The responsible heads or representatives of non-resident aliens in charge of property owned or business carried on within the United States, shall make return on Form 1040 Revised, and shall pay all taxes assessed upon the income received by them in behalf of their non-resident alien principals. (T. D. 2109). Aliens, Non-Resident Returns and Payment of Tax on Income From Domestic Corporations: Incomes derived by non-resident aliens from domestic corporations are subject to the Federal Income Tax, normal or additional, or both, as the case may be, and said tax shall be paid by owner of such income, a representative having control of the same. In all cases, the proper representative in the United States of said party, shall make returns to him on all such incomes coming into his control as provided by (T. D. 2109 and 2313): Provided, where all income shall have been paid over by the representative to his prin- cipal on or before September 8th, 1916, or where the stockholder of record shall not between September 8th and December 31, 1916, be in receipt or have control of income of his principal, said representative shall be relieved from paying said tax, and leaving the same a charge against his principal, to be collected by any means at the disposal of the Commissioner of Internal Revenue; but where such representative shall have custody or control subsequent to September 9th, 1916, he shall pay total tax due upon said income of said principal in his custody and control for the entire year 1916 and subsequent years. When actual owner is non-resident alien individual, a return shall be made whenever the amount of the net income is over three thousand ($3,000.00) dollars, and the custodian shall pay the tax found by such returns to be due, said return shall be made on income tax Form 1040. (T. D. 2313) is hereby amended accordingly. (T. D. 2402). (Under act of 1916.) Agents, Responsibilities Of, for Non-Resident Alien Owners of Domestic Stock and Bonds: The custodian of securities is, for in- come tax purposes, the agent of the non-resident alien owner, and as such is responsible for a proper return of all the income that accrues on said securities. The agent is also charged with the responsibility of making complete return of all gains derived from sale, and being so charged, it is his duty to place himself in possession of all facts neces- sary for the termination of the amount of profit or loss which may arise from such sale. Administrators, Executors or Trustees, Returns and Payment By: A fiduciary acting as trustee, executor or administrator, where there is only one beneficiary, he being a non-resident alien, return shall be made on Form 1040, Revised; but where there are two or more beneficiaries, being non-resident aliens, return shall be made on Form 1041, Revised; and a personal return on Form 1040, Revised, for each of them. (T. D. 2313). If income accrues to a non-resident alien beneficiary, through the hands of trustees, they shall make and render a return of the net income for the person for whom they act. Aliens, Non-Resident, Deduction at the Source on Miscellaneous Incomes: All parties in whatever capacity acting, having disposal or control of profits, gains and income of whatever kind, to a non- TREASURY DECISIONS 87 United States, shall deduct from such income, regardless of amount, and pay to Collector of Internal Revenue authorized to receive the same, such sum as will be sufficient to pay the normal tax, and shall make an annual return on Form 1042. (T. D. 2109-2313). Aliens, Non-Resident, Deductions for Expenses, Etc., May Be Claimed at the Source: Form 1008, revised, claiming the benefit of such deductions, may be filed by non-resident aliens or their represen- tatives, with the withholding agent or Collector of Internal Revenue for the district in which the return is required to be made. (T. D. 2313.) Aliens, Non-Resident, Ownership Certificates Shall Accom- pany Coupons, Etc.: For the purpose of declaring ownership, and recognized banks, and bankers, are permitted, when authorized by owners to sign the certificates with Forms and Instruction provided on the certificate. Certificate 1004, revised, provided to be furnished with coupons detached from bonds or other obligations of domestic corporations owned by non-residents alien individuals or fiduciaries, is hereby revised to include firms and organizations; and a certificate to be known as Form 1004, revised November 22nd, 1916, is provided for use of non-residenr alien individuals, firms, organizations or fiduciaries, for the purpose of declaring ownership of bonds, of domestic corporations, etc., and to be attached to interest coupons when presenting said coupons for premium. (T. D. 2399.) Alien, Non-Resident Certificates May Be Printed in Two Languages: Certificates of ownership to be filed by non-resident aliens shall be printed in the English language, and directly underneath each line may be printed the text of said certificate in a foreign language. In executing these certificates, amounts shall be filled in by using United States dollar values. These certificates shall be the same as prescribed by regulations of all certificates of ownership. (T. D. 1926.) Alien, Non-Resident Endorsement by Responsible Agent Not Required: Reputable banks or collecting agents may execute certificate of ownership which is required to be filed by non-resident aliens, and the endorsement, "Satisfied as to the identity and responsibility of agents," is not required. Non-Resident Alien, Specific Exemptions May Not Be Claimed at the Source By: A non-resident alien is not entitled to the benefit of the Specific Exemption provided in Section 7 of the Act dated September 8th, 1916, prior to the close of the tax year, and, therefore, no exemption certificate for the use of a non-resident alien is provided. If subsequent to the close of the tax year, but not later than March 1st, of the next succeeding year, a return is filed, he may obtain a refund of taxes when his return shows his income to be less than three thousand ($3,000.00) dollars. (Under act of 1916.) Aliens, Non-Residents, Exemptions May Be Claimed by Re- sponsible Banks: Responsible bankers may claim exemption on behalf of non-resident aliens holders of stock or bonds of corporations of foreign countries, for the purpose of claiming exemption from the income tax on dividends on such stock using Form 1071, modified, to be filed with foreign bonds when presented to paying agent in the United States. If the non-resident alien bond owner does not present his coupon for payment or collection to a bank or banker, but direct to a paying agent in the United States, such coupon should be accom- panied by Exemption Certificate Form 1071, revised, so modified to show personal ownership of bonds. Tax Deductible at Source on Interest from Domestic Obligations Accruing to Non-Resident Alien Partnerships: Under the act of Sep- tember 8th, 1916, the normal tax should be withheld at source of income in the United States from income of non-resident alien firms, co-part- 88 TREASURY DECISIONS nerships, joint stock companies or associations, and insurance compa- nies not engaged in business or having any place of business in the United States. The income withheld is such derived from interest on bonds, mort- gages or deeds of trusts, or similar obligations, regardless of amount. Including and from and after September 9th, 1916, and to and in- cluding December 31st, 1916, normal tax will be withheld from such in- come at rate of 1 per cent on amount thereof. Including and from Janu- ary 1st, 1917, the normal tax will be withheld from such income at the rate of 2 per cent on the amount thereof. (T. D. 2374.) Alien Non-Resident Authorization of Acceptance of Form 1001, Prior to January 1, 1917, When Stamped "Not Exempt": When certificate Form 1001, revised, has been executed by non-resident alien organiza- tions, not having any place of business in the United States, to accom- pany coupons detached from bonds or obligations of domestic cor- porations, they may be accepted by debtor corporation prior to January 1, 1917, if words "not exempt" were stamped in bold type across face of certificate. Debtor corporations and withholding agents will be held liable under T. D. 2374, for normal tax, to be withheld as provided by Act of September 8, 1916. (T. D. 2377.) Stock Owned by Non-Resident Alien Corporation or Firm Reported in Name of Citizen or Resident of the United States: When stock in domestic or resident alien corporation whose income is subject to normal tax is issued in name of another than non-resident alien corporation, dividends on such stock will not be subject to withholding of normal tax under provision of Section 13 (f), of act of September 8, 1916, except when debtor corporation or withholding agent have knowledge that actual owner of stock is non-resident alien corporation subject to with- holding. (T. D. 2382.) Stock, Record Owner Not to Make Return and Pay Tax for Non- Resident Alien Actual Owner of Partnership: When it shall appear from disclosure that actual owner is non-resident alien partnership, all certifi- cates making such disclosure shall be transmitted to collector for in- formation of Commissioner of Internal Revenue, but no return will be made for such partnership, and no amount retained from such income by representative of such partnership in the United States, until so in- structed by Commissioner of Internal Revenue. (T. D. 2401.) Stock, Record Owner to Make Return and Pay Tax for Non-Resident Alien Actual Owner of Corporation: Where actual owner is non-resident alien corporation, and record owner is an individual, firm or corporation in the United States, reco'rd owner will be held for income tax purposes to have receipt, custody, control and disposal of income, and will be required to make return for actual owner and pay such tax found to be due. Such return shall be made on Form 1031 (1030 or 1030-A), for insurance companies. (T. D. 2401.) Returns and Payment of Taxes for Non-Resident Alien Corporations Receiving Income From Domestic Corporate Obligations Through Rep- resentative in the United States: Income derived by non-resident aliens from domestic corporations is subject to normal or additional tax, or both, as the case may be, and said tax shall be paid by proper repre- sentative having disposal of same. In all cases proper representative in the United States for non-resi- dent alien, with respect to such income coming into his custody, shall make return and pay tax thereon; however, where all income should have been paid over by representative to his principal on or before the first day of September 8, 1916, or where stock holder of record shall not between September 8, and December 31, 1916, be in receipt or have control of income of said principal, such representative will be relieved from paying such tax, leaving same a charge against non-resident aliens. But where such representative shall have in his custody or control sub- sequent to September 8, 1916, income of said principal, he shall pay TREASURY DECISIONS 89 total tax due upon income of such non-resident alien in his custody and control for entire year 1916 and subsequent years. When actual owner is non-resident alien individual, a return shall be made whenever amount of income is three thousand dollars ($3,000) or over. (T. D. 2402.) Exemption, Method of Claiming by Non-Resident Aliens on Foreign Dividends Payable in the United States: Exemption certificate 1063 as provided in T. D. 1998 is extended and made applicable to the use of such persons. (T. D. 2012.) Exemption, Method of Claiming by Non-Resident Alien on Bonds When Presenting Coupons to Fiscal Agent in the United States: If non-resident alien bond owner does not present his coupons for payment or collection to a bank or banker, but direct to paying agent in the United States, such coupons should be accompanied by exemption cer- tificate Form 1071 revised, so modified as to show personal ownership of bonds. (From letter signed by Deputy Commissioner L. F. Speer, and dated June 13th, 1916.) Exemption May Be Claimed for Non-Resident Aliens by Responsi- ble Bank: A certificate is hereby provided for the claim of such exemp- tions by above said parties on behalf of resident alien, owners of stocks and bonds of foreign corporations. (T. D. 2030.) Certificate form 1071 revised will be printed on yellow paper for such purposes. (T. D. 2325.) Liability of Foreign Fiduciaries for Non-Resident Alien Benefi- ciaries: In connection with income received from sources within the United States if a foreign trust company has charge of the estate or trust, the net income which is distributed annually or periodically among non-resident alien beneficiaries the fiduciary should execute a return on Form 1041, 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, and in executing the latter returns the fiduciary may claim the benefit of the personal exemption to which beneficiary is entitled under the provision of Section 7 of the Act of September 8th, 1916. If a 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 term of will or trust, the estate or trust will be considered a taxable entity and fiduciary will be required to render a return on Form 1040, Revised (October, 1916), covering so much of its total income as is derived from sources within the United States, and may claim an exemption of $3,000 under provisions of Section 7. 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 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 source. (Form 1040, Revised, when presented for payment or collection by foreign fiduciary, and the interest paid on such coupons will be sub- ject to withholding of normal tax at source, but the benefit of exemp- tion provided by Section 7 after September 8th, 1916, may be granted to fiduciary when annual return or returns required of him can be properly filed. (Commissioner W. H. Osborn, December 28th, 1916.) Refund to Non-Resident Alien at End of Year of Amounts in Excess of Liability Withheld at Source During the Year: To obtain a refund of tax withheld at source, where no tax liability exists by reason of personal exemption and allowable deductions, non-resident aliens are required by law to file or cause to be filed with collectors true and accurate annual returns of total income from sources in the United States, and these 90 TREASURY DECISIONS returns will be examined in connection with corresponding withholding returns, so that instructions may be issued by this office to withholding agents to refund proper amounts, and for this purpose returns of aliens should have statement attached showing accurately amount of tax with- held with names and postoffice addresses of all withholding agents. (Act- ing Commissioner David A. Gates, January 25th, 1917.) Income Tax Liability of Bank on Dividends Deposited Direct by Debtor Corporation to Credit of Non-Resident Alien Stockholders: This office acknowledges receipt of your letter of February 6th, 1917, repeated here: "Certain non-resident aliens have money invested in American securities; they have instructed the corporations in which their money is invested to have the dividends deposited to their credit in a certain banking institution. The banking institution receives these deposits, places them to the credit of the parties mentioned, and they are from time to time at the disposal of the non-resident aliens, the bank having no further control over them. The bank renders a statement periodically showing amounts received and the balance to the non-resident aliens' credit. Does this make the bank responsible for the filing of the income tax returns as agents for the non-resident aliens?" In reply you are advised that the transaction designated by you does not constitute the bank an agent for the non-resident alien for the purpose of rendering income tax returns. (Commissioner W. H. Osborn, February 8th, 1917.) Payment of Tax by Non-Resident Alien: This office cannot author- ize any departure from the requirements of the law, which are, that inter- nal revenue taxes are payable in cash. Certified checks drawn in favor of collectors on national or state banks or trust companies located in cities where the respective collectors deposit their collections, or such "out of town" certified checks as can be cashed without expense to the govern- ment. (From letter signed by Deputy Commissioner G. E. Fletcher dated March 31st, 1917.) Dividends Paid to Non-Resident Alien Partnerships as Record Own- ers of Domestic Stock: A non-resident alien partnership which has standing in its name a large number of stocks of United States corpora- tions, which stocks are the property of its clients, and the dividends are mailed directly from this country by the paying corporations to the non- resident alien partnership and by it distributed to its clients, has no lia- bility to execute certificates or to make returns but will be subject to being assessed for the tax on this income, unless it shows that the income is actually collected and paid to its clients. There, therefore, appears to be an indirect obligation to furnish this information. Dividends paid on American stocks registered in the name of a non- resident alien partnership are not subject to the withholding of the nor- mal tax at the source, under the provisions of the Income Tax Act of September 8th, 1916, unless an income tax ownership certificate, form 1087, was filed, evidencing the fact that the actual owner of the stock in question is a non-resident alien corporation, etc., having no office or place of business in the United States. A foreign co-partnership deriving income from sources within the United States, is not itself subject to income tax under the provisions of the Act of September 8th, 1916, but each of its individual members is sub- ject to that tax, upon his distributive share in such income, and, inas- much as the dividends paid on domestic stock will, in the absence of a showing to the contrary, be held to be income to the registered owners of such stocks, the foreign co-partnership, to release its individual mem- bers from tax liability, should file with the debtor or corporation, or its duly authorized withholding agent, certificates, form 1087, disclosing actual ownership. (Deputy Commissioner L. F. Speer, April 7th, 1917.) Withholding Tax at the Source on Stock Dividends Paid to Non- Resident Alien Corporations: While the Federal Income Tax Law of September 8th, 1916, Section 13 (f), specifically provides that dividends paid to non-resident alien corporations, joint-stock companies, etc., hav- TREASURY DECISIONS 91 ing no office or place of business in the United States, are subject to the withholding of normal tax at the source, it does not prescribe a method to be followed in the withholding of that tax, and, therefore, the question as to how tax is to be withheld from a dividend paid up in stock or script, is one for adjustment between debtor corporation and recipient of divi- dends. In view of the fact that domestic corporations will be held liable for normal tax at the rate of 2% on any dividend paid on stock registered in name of and actually owned by a foreign corporation, joint-stock com- pany, etc.; haying no office or place of business in the United States, the office deems it proper to suggest that in the case of a dividend paid in stock or script, the debtor corporation may protect its own interest by requiring the foreign stockholder to deposit with it, prior to the payment of dividend, an amount equal to the tax the former will be required to pay to the Federal Government; or the resolution providing for the divi- dend may be so drawn as to permit the debtor corporation in the case of a dividend paid to a non-resident alien corporation stockholder, to deduct from the surplus from which the dividend is to be paid, and to retain in its treasury an amount sufficient to meet the withholding requirements and issue stock and script in payment of the balance due on the stock held by such shareholders. Each corporation so far as the law is concerned, must provide its own method for performing the duties required of it as a withholding agent in each case where that method is not specifically provided by the law. (Commissioner L. F. Speer, April 10th, 1917.) Alimony, considered a personal expense, to person paying it, and not an allowable deduction in his return. (T. D. 2090.) Appreciation of Value of Capital Assets Not Evidenced by Receipt of Cash or Equivalent: Losses due to fluctuation during a taxable year, in the value of capital assets, even though evidenced by book entries, do not constitute losses "actually sustained," as, within the meaning of the law (Section 2, Act of October 3rd, 1913) may be allowable deduction from gross income. Losses are not actually sustained as a result of a transaction until losses have been definitely ascertained, and the amount they represent has irredeemably disappeared from the assets of an individual or corporation. Likewise and conversely, any appreciation in the value of assets due to appraisal, or adjustment and taken on the books, is held not to be income within the meaning of the law until such appreciation has been converted into cash or its equivalent. A book entry reflecting enhanced value of assets evidences an increase in net worth of corporation or in- dividual for that year, an increase which under adverse conditions may disappear next year. An increase in the value thus evidenced is in- tangible, unstable, and is not such income contemplated by the Federal Income Tax Law for the purpose of tax. Returnable and taxable income is that realized during the year. That which is evidenced by receipt of cash or its equivalent. Until any appreciation taken upon the books has been so realized, it will not be required in return as income. In the event of sale of the assets, the increase in whose value it has been taken upon the books, the profit or income to be returned as a result of the sale will be determined upon the basis of the difference between the cost and the selling price of the assets. Instructions herein before given will not in any way affect the "reasonable allowance for depreciation," any portion of the book value representing the value of "Good will" shall be eliminated from the cal- culation, and allowable depreciation being deductable, being an amount properly written off and charged against income to measure the loss due to wear and tear, and exhaustion of physical property. Any ruling previously made by this office in conflict with holdings hereinbefore made are, superseded by this letter, if any returns, adjust- 92 TREASURY DECISIONS ments, or assessments, made in accordance with previous rulings will in nowise be affected by the foregoing instructions. Assessments on Stocks: Assessments on capital stock by corpora- tion, regarded as an investment of capital, and not an allowable deduc- tion in return, of the individual. (T. D. 2090.) Voluntary Assessments Paid to Make Good Deficit: The amount paid by stockholders pursuant to a so-called voluntary assessment, are additional payments for the stock which they hold, and such payments are simply additions to the capital stock of the company. Since amounts paid on account of capital stock issued do not constitute income within the meaning of the Federal Income Tax Law, it is held that such pay- ments represent voluntary assessments upon stock held by individual stockholders, and do not constitute income to be returned for the pur- pose of the income tax. Special Assessments paid to local benefits in connection with real estate are held to be expenditures which add to the value of the prop- erty and should be capitalized, whether such expenditures were made prior to, or subsequent to the incidents of the tax; that is to say, such expenditures, no matter when paid, become in effect a part of the property. 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 excess of the carrying charges over the incidental income received may be added to and made part of the cost of the property. As a general proposition involving acquirement and holding of property for further sale acquired prior to incidents of tax from which there is but a normal income, insufficient to meet carrying charges it is proper to add to the original cost of the property the carrying charges of interest, insurance and taxes actually paid and from that amount deduct the incidental income which may have been received between the date of purchase and date of incidents of tax. The result thus shown will be the cost of the property or amount to be excluded from proceeds when sale is made. Assessment and Payment of Tax, Amended Return Not Required When Audit Reveals Necessity for Further Tax: Hereafter where an individual has been found subject to further tax as a result of an audit by the collector an amended return will not be required. In cases where further tax is to be assessed collectors will be advised by letter from the Treasury Department of the amount of further tax to be assessed and reasons for making the same. Notice of Assessment May Lawfully Be Given by Mail: Notice of assessment (Form 17) may lawfully be given by mail and if so given presumed to have been received. The burden upon taxpayer to prove contrary in order to avoid penalty. (U. S. v. Gen. Inspection & Loading Co., 204 Fed. 657.) Insurance Companies, Life: Life insurance companies are author- ized to omit from gross income such portions, if any, of actual premiums received from any individual stockholders as shall have been paid back or credited to policy holders, or as an abatement of his premium. In so far as "deferred dividends" payable at a stated period represents a "portion of any actual premium received," such deferred dividend may be included in amount to be omitted from gross income for year in which they were actually paid back, credited to policy holder, or applied as an abatement of premium. In the case of dividends credited or apportioned annually to policy holder, only aggregate amount so actually credited or apportioned during premium paying periods, and not any accretion thereto, can be excluded from gross income. In case of whole life or five-year distribution policies, deferred dividends may be excluded from gross income to the extent they are paid back, or credited to the insured. (Art. 100, Reg. 33.) TREASURY DECISIONS 93 Dividends paid by mutual life insurance companies, representing the excess loading of premiums over cost of insurance and used by policy holders to reduce subsequent premiums held not "income receipts," and not, therefore, subject to taxation under corporation tax, act Sec. 38. (Mutual Benefit Life Ins. Co. v. Herold, 198 Fed. 199.) Insurance Companies, Foreign Assessments: In the case of as- sessment insurance companies, the actual deposits of sums paid to ter- ritorial offices pursuant to the law as additions to guarantee of reserve funds shall be treated as payments required by law to reserve funds. Tax: Assessment for Fiscal Year: In case of corporations making returns for fiscal year, the assessment shall be made and notice given on or before the expiration of ninety days from date when returns are required to be filed. (Art. 177, Reg. 33.) Notice of Assessment and Demand by Collector for Tax, Penalty and Interest: When assessment has been made, collectors will, on receipt of their return list, at once issue preliminary notices of assessments (Form 627), and where in any case the tax assessed is not paid before 30th day of June, or in case of corporations designating their own fiscal year within 105 days following the date on which return shall have been filed, notice and demand (Form 17) should be at once issued, and unless the tax in such case is paid within ten days after such notice, general demand for tax, penalty and interest (Form 21) should at once be issued. Immediate notice and demand (Form 17), will, however, be served in case of failure to file return within specified period. (Art. 197, Reg. 33.) The necessity of issuing Form 17 is two-fold: First, to determine date when 5 per cent penalty accrues and interest at 1 per cent per month begins to run, and, second, to complete the government lien on property belonging to the taxpayer. In special excise and income tax assessments a notice on Form 647 is required to be given in all cases where required return is filed in due time. This, however, is simply a preliminary notice of assessment, to be followed, in case of non-payment, by formal notice and demand if the law clearly contemplates and which court holds to be necessary before the legal taxpayer becomes chargeable with penalty and interest. (T. D. 1995.) Taxes, Suits to Restrain Assessment or Collection Thereof: "No suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court." (Section 3224, Rev. St.) See Dodge v. Wm. H. Osborn, Commissioner of Internal Revenue, 240 U. S. 118, February 21, 1916.) Profit from Sale or Disposition of Capital Assets: For purpose of determining income resulting from sale of capital assets and amount to be accounted as income under this act, there shall be included any and all profits resulting from such sale. (Art. 108, Reg. 33.) In ascertaining net income derived from sale of taxable assets, if such assets were acquired subsequent to January 1st, 1909 (on March 1st, 1913), the difference between selling and buying price will consti- tute an item to be added or subtracted from gross income according to whether selling price was greater or less than buying price. (Art. 109, Reg. 33.) Appreciation in Value of Capital Assets Not Evidenced by Sale or Other Disposition Thereof: Referring to T. D. 2005, it will be observed that losses due to fluctuation during taxable year in value of capital assets, even though evidenced by book entries, do not constitute "actual losses sustained" as, within meaning of the law (Section 2, Act of Octo- ber 3d, 1913), may be allowably deducted from gross income. Losses are not actually sustained until, as a result of a completed transaction such losses have been definitely ascertained and the amount they rep- resent has irredeemably disappeared from assets of individual cor- poration. 94 TREASURY DECISIONS Likewise and conversely any appreciation in value of assets due to appraisal or adjustment and taken up on the books of individual or corporation is held not to be income within meaning of the law until such appreciation, as a result of closed transaction, has been converted into cash or its equivalent; that is, have been realized as an addition to and part of tangible assets of individual or corporation. A book entry reflecting only an enhanced value of assets during year evidences an increase in net worth of corporation or individual for that year, which may disappear under adverse conditions the next year. An in- creased value thus evidenced is intangible and is not income as con- templated by the income tax law. Returnable and taxable income is that actually realized during the year evidenced by receipt of cash or its equivalent. Until appreciation taken up on the books has been so realized it is not required to be re- turned as income. It should be understood, however, that in the event of sale of assets, increase in whose value has been taken upon the books, the profit or income to be returned as a result of sale will be determined upon basis of the difference between cost and selling price of assets; that is, actual values and not book values. Instructions hereinbefore given will not in any way affect "reason- able allowance for depreciation, if any," which the law authorized as deduction from gross income, provided that in computing the same any portion of book value representing "good-will" shall be eliminated from calculation, an allowable depreciation being an amount properly written off and charged against income to measure due to loss, wear, tear, and exhaustion of physical property. All rulings previously made by this office in conflict with the hold- ings hereinbefore made are superseded by this letter, but any returns, adjustments, or assessments made in accordance with previous rulings will in nowise be affected by foregoing instructions. (Letter to Col- lectors, August 14th, 1914.) Agricultural and Horticultural Associations: Agricultural and Hor- ticultural Associations specifically enumerated as exempt are held to be such associations as County Fairs, or like organizations, not themselves engaged in such pursuits, but which, by means of awards, etc., are in- tended to encourage better production and no part of whose income inures to the benefit of any private individual. (T. D. 1737.) Associations, Fruit Growers: Whose purpose is to promote mutual benefit of their members in marketing their products, and not or- ganized for profit, having no capital stock represented by shares, whose income is derived wholly from membership fees, necessary to meet ex- penses, are horticultural societies within meaning of law and not sub- ject to make return or pay tax. (T. D. 2090.) Building and Loan Associations, Domestic: A domestic Building & Loan Association is held to be one organized pursuant to laws of the United States, or of a State or Territory thereof, or under laws appli- cable to Alaska or District of Columbia. Mutuality in operation and in distribution of profits and benefits is essential to exemption. An asso- ciation issuing different classes of stock upon which different rates of interest are guaranteed or paid, does not come within exempted class. (Art. 87, Reg. 33.) Under the Corporation Excise Tax Law it was decided that a Build- ing & Loan Association is exempt though it issue both prepaid and installment stock. (Harold v. Park View & Loan Association, 210 Fed. 577) but that a Building & Loan Association issuing Preferred Stock is not exempt. (Pacific Building & Loan Association v. Hartson, 201 Fed. 1011.) Private Banks, Income From: In case of banks which have the form of corporations and held to be associations within the meaning of the Federal Income Tax Law, it is not the purpose of this TREASURY DECISIONS 95 office to assess against such banking association and then also against the individual members. Income which the members of the association receive from the bank because of their investment therein will be con- sidered dividends. (T. D. 2152.) Bank Owned by Individual or Partnership: Where it is clearly shown that a bank is owned by one man, it is evident such bank is not an association within the meaning of the Federal Income Tax Law, and therefore will not be required to make return such as corportaions and associations are required to make, but if individual owners have net incomes of three thousand dollars ($3,000.00) or more, he is required to make a return on Form 1040, showing in such return income received from all sources. (T. D. 2137.) Banks, Private, which have no formal organization, but in the name of individuals who compose the firm, as John Smith & Co.; held to be co-partnerships, and as such not required to make return. In such cases, individuals who compose the firm, if they have net incomes in excess of three thousand dollars ($3,000.00) are required to make re- turns on Form 1040. (Under act of 1916.) Private Banks as Partnerships: Private banks having no formal organization and transact business in the name of individuals who compose the firm, as John Smith & Co., held to be co-partnerships, and as such are not required to make returns. In such cases indi- viduals who compose firm, if they have a net income in excess of $3,000 will be required to make returns on Form 1040, accounting for the earnings accruing to them from such bank. Interest on Bank Deposits: Interest on bank deposits, or on cer- tificates of deposit, whether paid or accrued and unpaid, must be in- cluded in return. (Article 67, Reg. 33.) Interest on Bank Accounts should be returned as income, for the year in which credited. Banks, Bankers, Trust Companies and other Banking Institutions receiving deposits of money are not required to withhold at source normal tax on interest paid or accruing to depositors, but all such interests, whether paid or accrued and unpaid, must be included in annual income return of person entitled to receive such interest, whether on open account or on certificate of deposit. (Art. 67, Reg. 33.) Banks Receiving for Collection Interest Orders, of Checks Bearing Endorsement: Collecting agents receiving for collection interest orders or checks bearing endorsement may present said interest orders or checks for collection without requiring certificate of ownership there- with. (T. D. 1974.) Private Banks: Private banks which have form of corporate or- ganizations, elect officers and board of managers, have distinctive name and distribute their earnings upon basis of amount of capital invested by members or owners, are held to be associations and should make return in their organized capacity. (T. D. 2137.) The holders of stock or owners of bank, exempt from normal tax to extent of dividends which they receive, from such private banks as make returns in their organized capacity and pay income in accordance there- with. Individual owners not required to make return as income for purpose of normal tax upon any dividends from bank whioh pays tax on its earnings, but for purpose of super tax dividends, should be re- turned as income. (T. D. 2137.) When it can be clearly shown that a private bank is owned by one man, it is evidence that such bank is not an association within means ing of income tax law, and therefore such bank will not be required to make return as association, but if individual owner has income of $3,- 000 or more, he will be required to make return on Form 1040. (T. D. 2137.) 96 TREASURY DECISIONS Gross Income of Banks and other financial institutions consist of revenue derived from operation of the business, including income, gains, or porfits from all other sources, as shown by entries on books of accounts, with calendar or fiscal year for which return is made. (Art. 96, Reg. 33.) Dividends on Stock of Federal Reserve Banks Are Exempt: Income or dividends on the stock of Federal Reserve Banks is exempt from Income Tax. (Extract from Federal Reserve Bulletin of April 1st, 1916.) Bank Guaranty Fund: Banking corporations, which, pursuant to laws of the state, in which they are doing business, are required to set apart, keep and maintain in their bank the amount levied assessed against them by state authorities as a "depository guaranty fund," may deduct from their gross income the amounts so set apart each year to this fund, provided that such fund is set aside and carried to credit of the State Bank Board, or duly authorized state officers, and may be with- drawn by such board or state officers upon demand for reimbursing depositors in insolvent banks, provided no portion of the amount thus set aside and credited is returnable under existing laws of the state to the assets of the banking corporation. In such cases the amount of guar- antee fund thus levied against banking corporation and so set apart, is not longer an asset of bank, but a nature of tax "imposed by author- ity of the state," and as such authority of the state, is deductible from gross income of banking corporation. (T. D. 2152.) Taxes assessed against the stockholders of a bank and paid by bank itself in behalf of the stockholders do not constitute an allowable deduction from gross income of bank, but do constitute an allowable deduction in the return of the individual. The amount of taxes so paid should be included in his return as income, said amount being con- sidered additional dividend to amount of taxes paid. (T. D. 2135.) The capital stock outstanding of a banking corporation is the per- sonal property of individual stockholders. Hence, any tax paid on the value of this property is a liability of the owner, on the requirement of a state law when a bank shall pay for the stockholders cannot be con- sidered authority under which the bank may deduct from its gross income the taxes so paid. If a banking corporation in the return of annual net income for the year 1913 prior years afterward deducted from gross income amount of tax paid upon value of the capital stock outstanding and in the hands of the stockholders, such corporations are required to file minute returns in which amount of said tax so paid shall be eliminated from deductions, and assessment will be returned accordingly. (T. D. 2161.) Beneficiaries, Dividends, Received Through Fiduciaries: Dividends in the hands of fiduciaries and belonging to the beneficiaries are not subject to the normal tax, but subject to the additional tax to the beneficiary whenever the beneficiary's income from all taxable sources is in excess of $20,000.00. (T. D. 2090.) (Under act of 1916.) Individual Return by Beneficiary: A beneficiary is liable for nor- mal tax upon amount of net income derived from all taxable sources through a fiduciary, less amount of exemption claim, and amount of tax withheld at source, and is also liable for additional tax upon income in excess of twenty thousand ($20,000.00) dollars. (T. D. 2090.) Taxpayer is required to account only for the actual amount received from fiduciary. Unless beneficiary is under some disability which requires fiduciary to act, beneficiary will make own return and account for income tax upon his net income. (T. D. 2090.) Beneficiary shall not be required to pay again the normal tax on amount on which tax has been paid when such amount was distributed. (T. D. 1906.) TREASURY DECISIONS 97 Board, Lodging, Etc., Received in Lieu of Cash for Rent: Board, lodging or other considerations received in lieu of rent is considered income equal to the amount of the indebtedness, in payment of which it is received, and should be returned as income by its recipient. (T. D. 2135.) Bond May Be Required By Commissioner of Internal Revenue Before Issuing License: Where commissioner is not sufficiently in- formed as to responsibility of applicant, or when in any case he deems it advisable, he may, upon recommendation of collectors, require of applicant a bond, in duplicate, with satisfactory sureties, and a penal sum equal to estimated amount of tax to be withheld by such applicant during any one year. (Art. 56, Reg. 33). Minimum penal sum to be one thousand ($1,000.00 dollars, and maximum not in excess of one hundred thousand ($100,000.00) dollars. One of the duplicate copies of bonds shall be retained in office of collector of internal revenue with whom filed, and the other forwarded to the Commissioner of Internal Revenue at Washington, D. C. (T. D. 1909.) A form of bond to be given in such cases will be furnished collectors upon application for same. (Art. 56, Reg. 33.) Bond For License Must Be Renewed Annually on or Before January First: Bond, if required, must be filed for calendar year 1914 and for each calendar year thereafter. All bonds must be renewed or new bonds furnished on or before January 1st, of each successive year. (T. D. 1909.) License Revoked For Failure to Renew Bond: Failure to give a renewed bond in cases where bond is required will automatically revoke license. (T. D. 1909.) License Issued Without Bond: When licenses are issued without bond, collector will each year inquire into, and satisfy himself to financial responsibility of licensee. (Art. 56, Reg. 33.) Bond Amount Required For Collecting Agency Having Branch Offices: The bond in such cases shall be based on total amount of business transacted by both home office and its branches. (T. D. 1909.) Fidelity Bond, Premium On: Where an employee is required to furnish bond incident to his employment, and pays premium on such bonds, such expense constitutes an allowable deduction in computing net income. (T. D. 2090.) Bonds Containing Tax-Free Covenant Clause: The stipulation in bonds guaranteeing non-assessability against them is a contract between the corporation and the bondholder as far as the income tax law applies and are no different for this purpose than bonds carrying no such clause. Debtor corporation or its duly authorized withholding agent will be held responsible for normal tax when no exemption is claimed. (T. D. 1948.) . (T. D. 2090.) Bonds; Apportionment of Losses Due to Sale Below Par: Bonds disposed of for a price less than par, and are redeemable at par; it is held that because of fact that bonds may be redeemed at their face value, the loss sustained by reason of their sale for less than their face value may be pro-rated over the period of life of the bond. (Art. 135, Reg. 33.) Bonds, Loss Incurred by Retirement of: If bonds were issued at par, then corporation may deduct difference between par and price at which purchased for retirement. If bonds were issued at a premium, and such premium accounted for as income for year and which issued, then difference between par and the purchase price may be deducted as a loss, but if premium at which bonds were issued had not been carried into income account the loss to be claimed should be the difference between the price at which bonds were issued and the purchasing price. 98 TREASURY DECISIONS In event that bonds were issued at a discount, and discount was charged against earnings of year in which issued, the difference between purchase price and par value may be considered loss, but if discount on bonds was pro-rated over life of bond and annual proportion charged against annual income, amount to be charged off as loss for year, in which bonds were purchased for retirement, should be the difference between price at which bonds were issued and purchase price minus an allowance for sums charged off annually on account of pro-rated discount on such bonds. (Acting Commissioner J. E. Fletcher, March 3rd, 1915.) Bonds, Retirement of: Where bonds under contract provision are retired with interest period and prior to expiration of full term of bonds, ownership certificates are required, and should cover that part of inter- est period between beginning of such period and date of retirement. (T. D. 2090.) Bonds Purchased by Trustee Under Mortgage Deed of Trust, Not Required: It is held in the case where corporate bonds are purchased "by trustee under mortgage deed of trust out of money from sinking fund when bonds are not retired or cancelled but held alive and inter- est continued on coupons, interest paid to trustee being held for account of corporation issuing bond" that trustee merely acts as agent for debtor corporation, and that Corporation itself or trustee if authorized to act as agent, should execute income tax certificates, (Form 1001, Re- vised) to accompany coupons detached from bonds. It is held that if legal title to bonds rest with trustee he should execute exemption cer- tificate (Form 1015, Revised) or (1019, Revised) to accompany coupons detached from bonds and presented for payment. (Commissioner W. H. Osborn, December 6th, 1916.) Bonds, Each Issue Require Separate Certificates of Ownership: Certificates are made on prescribed forms by each owner of bonds, for coupons or interest orders for each separate issue of bonds or obliga- tions of each debtor. Certificates to be Executed by Individuals to Accompany Coupons in Case of Registered Bond: If owners of bonds are individuals, who are citizens or residents of the United States, ownership certificates shall accompany coupons. Or the interest on registered bonds shall be filed with payor, and certificates shall describe bonds and show amount of coupons attached and due such owner, and name and address of owners, and if registered, names other than owners, such names and addresses should also be given. Certificates shall also show whether claim is made for exemption or not, and must be signed by claimants, using their ordinary business signatures. Also postoffice and street address of claimants, and date signed. (Art. 42, Reg. 33.) Bonds, Purchase and Sale of Between Interest Dates: Where such a bond is purchased, seller is not required to execute an ownership certificate, but such certificate will be required from purchaser of bond when coupon is attached and presented for payment. Bonds, Foreign Owned, Belonging to American Citizens or Resi- dents: Where certain American bonds which are property of Swiss citizens, but which belongs to an American citizen, coupons, when making collections, should be accompanied by certificate of ownership signed by or in behalf of the person entitled to receive the income. Tax Previously Withheld May Be Paid to Creditor on Filing Cer- tificate of Exemption in Case of Interest on Registered Bonds: Where, because of failure to file certificates claiming exemption, in compliance with the regulations, interest has been withheld for payment of normal tax, debtors may, upon filing proper certificates as provided in Art. 42 to extent of exemption claimed, release and pay amount of such income withheld. (T. D. 1974.) Tax Withheld on Salary and Bonus: If an employee's total com- TREASURY DECISIONS 99 N, pensation is paid to him at one time withholdings should occur at that time; and both the company's withholding return and employee's indi- vidual return should take consideration of this item for the year in which it is paid. Where part of the compensation is in the form of monthly salary and part in the form of a bonus not fixed until after January 1st of the succeeding year, the two parts of any one year's compensation cannot be considered together for the purposes of with- holding the tax and making returns; but the fixed salary of one year should be considered together with the bonus received on or after January 1st of that year. Thus, if the services were received in the year 1914, the employee's compensation would be liable to withholding whenever fixed salary in bonus paid on or after January 1st, 1914, amounted to $3,000, subject to the exemptions claimed under the law. The bonus to be paid on or after January 1st, 1915, belong to the tax year 1915, together with the fixed salary received during 1915. (T. D. 2135.) (Under act of 1916.) Bonus is considered taxable income: Special payments by corpora- tion as extra compensation to its employees may be deducted from gross income if it is shown that compensation is paid for services ren- dered. If such compensation is a gratuity or voluntary payment for which no service is rendered, the amounts so paid are not deductible. (T. D. 2152.) Salaries Paid by Exempt Organizations are subject to the Income Tax Laws and should return as income by the individuals. Living Quarters as Part of Salary: Where living quarters are furnished in addition to salaries the rental value of same is regarded as income subject to tax. (T. D. 2090.) Gifts, Gratuities or Bonuses to Employees: Gifts or gratuities to employees in service of a corporation are not properly deductible in ascertaining income. (T. D. 2090.) Bookkeeping, System Required: No particular system of bookkeep- ing or accounting will be required by this department. However, the business transacted by corporation must be so recorded that each and every item set forth in return of annual net income may be readily verified by examination of the books of account. (Art. 182, Reg. 33.) Corporations' Books: Must Confirm Annual Returns: The books of a corporation are assumed to reflect the fact as to its earnings, income, etc. Hence, they will be taken as the best guide in determining net income upon which tax imposed by this act is calculated. Except, as the same may be modified by provisions of the law, wherein certain deductions are limited, the net income disclosed by books and verified by the annual balances, shall be the same as that returned for taxation. (Art 183, Reg. 33.) Corporations, Domestic: Return of Whose Books Are Kept Abroad: In case of a domestic corporation whose books of account and other data are kept in foreign countries, return should be made to the Collector of Internal Revenue of the district in which they have their principal office in this country. Otherwise, return of annual net income of said corporation should be made to the collector of the district in which are located the statutory offices of the corporation. (T. D. 2137.) Corporation Keeping Books in Accordance With Standard Systems of Accounting Make Their Returns on Basis on Which Their Books Are Kept, Provided the Books so Kept and Returns Made Reflect the True Net Income of the Corporation of Each Year: Under provision Sub- Paragraph (d) of Section 13 of Title (l) of the Act of September 8th, 1916, it will be permissible for corporations which accrue on their books monthly or other stated periods, amounts sufficient to meet fixed annual or other changes, to deduct from their gross income so accrued, pro- vided such accruals approximate as nearly as possible the actual liabili- ties for which the accruals are made, and provided that in cases wherein 100 TREASURY DECISIONS deductions are made on the actual basis as hereinbefore indicated, income from fixed and determinable sources accruing to corporations must be returned, for purpose of the tax, on the same basis. In cases wherein pursuant to consistent practice of accounting of corporations, or pursuant to requirement of Federal, State or Municipal authority, corporations set up and maintain reserve to meet liabilities, the amount of which on the date of payment or maturity of which is not definitely determined, or determinable, at the time the liability is in- curred, it will be permissible for the corporations to deduct from their gross income the amounts credited to such reserves each year, provided that amounts deductible on account of reserves shall approximate as near as can be determined the actual amounts which experience has demonstrated will be necessary to discharge the liabilities incurred during the year, and for the payment of which addition to the reserves were made; and provided if it shall be found that the amounts credited to any such reserve is in excess of the reasonable or probable needs of the corporation to meet and discharge the liabilities for which the reserve is credited, excess of such reserves shall be at once disallowed as a deduction and restored to income for the purpose of the tax; and pro- vided further, that in no event will sinking funds or other reserves set up to meet additions, betterments, or other capital obligations, constitute allowable deductions from gross income. This ruling contemplates that the income in authorized deductions shall be computed and accounted for on the same basis, and that the same practice shall be consistently followed year after year. Amounts paid up in discharge of any liability or obligation for which a reserve has been set up, and hereinbefore outlined, will, when paid, be charged to the reserve created to meet it, in so far as such reserve is sufficient to meet the liability, provided always that the liability is of a character, which constitutes an allowable deduction within the meaning of the law. If upon investigation it shall be found that returns made upon basis of accruals and reserves do not reflect the true net income, the corpora- tion so failing in this way to return the true net income will not there- after be permitted to make its returns upon any basis other than that of actual receipts and disbursements. The reserves contemplated by the foregoing ruling are those reserves only which are set up to meet some actual liability incurred, the amount necessary to discharge which cannot at the time be definitely determined and not the reserves to meet losses contingent upon shrinkage in values, losses from bad debts, capital investments, etc., which losses are deduct- ible only when definitely determined as the result of a closed or com- pleted transaction, and are charged off. (T. D. 2433.) January 19th, 1917. Accounting for Dividends Distributed by a Corporation Which Had Surplus or Undivided Profits, on March 1st, 1913: Under title (1) of the Act of September 8th, 1916, any distribution made or to be made by a corporation out of its earnings or profits accrued since March 1st, 1913, and payable to its stockholders, whether in cash or in stock of the com- pany, will be subject to the income tax for the year in which received. In each case where dividends are declared and paid out of surplus of profits earned prior to March 1st, 1913, the corporation should specifically inform the stockholders that dividends were declared and paid out of such surplus and profits, and proper entries must be made on books of the corporation showing from what surplus or earnings the dividends were paid. It is immaterial to this office whether dividends are paid out of current earnings or surplus acquired prior to March 1st, 1913, but for the purpose of the Federal Income Tax, it is necessary this office be fully advised in the return of annual net income whether or not the dividends received was paid out of surplus earned prior or subsequent to March 1st, 1913. (Acting Commissioner David A. Gates, and dated January 23rd, 1917.) Calendar Year: It is noted that some corporations are apt to mis- TREASURY DECISIONS 101 understand the rulings of this office relative to establishing a fiscal year as basis of its return of annual net income. In this connection you are requested not to accept a return made on any basis other than the calendar year ending Dec. 31st, unless the corporation filing such reurn has properly established a fiscal year. (Letter No. 1148 to col- lectors.) Capital Stock, Proceeds of, Sale of, Are Not Income: The amount received by a corporation for the original issue and sale of its capital stock is held to be capital of the corporation. In cases where the stock, as orig- inally issued, is sold at prices at greater or lesser than par value, neith- er premium nor discount will be taken into account in determining net income of corporation for year in which stock was sold. This is purely a capital transaction and income is neither increased nor decreased by reason of sale, per se, of stock at a price greater or less than its par value (T. D. 2090.) Capital Stock: Outstanding, Paid Up. Full amount of stock, as represented by the par value of the shares issued is to be regarded as paid up capital stock, except when such stock is assessable on account of deferred payments, or payable in installments, in which case the amount actually paid on such shares will constitute the actual paid up capital stock of corporation. (Art. 95, Reg. 33.) In making return of annual net income for purpose of income tax, every corporation in making such returns must report under item 1 of return form the total par value of its stock, both common and pre- ferred, outstanding, at the close of the year. Stocks outstanding at the close of the year and upon the basis of which dividends are or may be paid was held to be paid up capital stock within the meaning of the law. For this purpose, it is immaterial whether stock be paid for in cash or other assets. The fact that notes are given in payment of stock issued and that notes have not been paid in full at time returns are made is immaterial. (T. D. 2137.) Capital Stock Paid Up and Outstanding When Shares Are Without Par Value: "Paid up capital stock," as used in this act, is held to mean that amount of capital paid in and for which certificates of shares are issued. For the purpose of the act, it is not essential that shares, when issued, shall have set put therein a nominal or par value. Hence, for purpose of the act, it is held that shares of stock issued, whether with or without a par or nominal value, are "paid up capital stock" within meaning of law; and the amount to be set forth in the return as one of the determining elements in computing the amount of interest which may be allowably deducted is the amount of capital actually received by cor- poration and for which shares are issued. In case of shares of stock issued with a par value fully paid up and non-assessable, the par value of all such shares so issued is paid up capital tock of corporation. In case of shares of stock issued without par value the amount of capital actually received and for which such shares are issued is paid up capital stock. And in the case of capital stock issued with par value, so in the case of stock issued without par value, the amount of the "paid up capital stock," for the purpose of this act should not be increased except as new capital is paid in and for which additional shares are issued. In cases wherein snares of stock are issued without par value, such stock is obviously common stock. If it should occur that such shares are issued as bonuses in connection with shares of preferred stock, which must have a par or nominal value, and entire capital paid in is represented by entire value of preferred stock, then and in that case the "paid up capital stock" for all purposes of the income tax law, will be par value of pre- ferred stock. If both common and preferred stock are issued for a cash or other equivalent consideration, the "paid up capital stocks" within meaning of 102 TREASURY DECISIONS law will be the par value of preferred stock plus amount actually paid in on shares issued without par or nominal value. It is therefore held that corporations whose shares of stock are issued without par value has a "paid up capital stock" within meaning of law, equal to the amount paid up in for such stock, and it will be authorized to compute its interest deduction in accordance with the rules set out in the law for corporations having the "paid up capital stock" being in such cases the actual paid in capital for which snares are issued. (Acting Commissioner G. E. Fletcher, January 13th, 1916.) Cemetery Companies: Operated exclusively for mutual benefit of members are exempt. Cemetery Companies operating for profit are lia- ble to tax. (Art. 9, Reg. 33.) Maturity of Coupons Require Certificate of Ownership: A certifi- cate of ownership should be filed for each maturity of coupons. (Deputy Commissioner L. F. Speer, December 7, 1914.) Endorsement Not Required, on Back of Certificates: The person first receiving coupons or interest orders for collections is no longer required to endorse same, as provided in T. D. 1887. (Deputy Commis- sioner L. F. Speer, September 18, 1914.) Certificate, Address on: Banks should exercise care in securing full post office address on certificates. When no street address is given, this office will assume it not necessary, and certificates will not be returned .for correction. Certificates Executed by Domestic Corporations, Exempt Organiza- tions, etc., to accompany coupons filed with debtor: If owners of bonds or corporations, stock companies, associations, or insurance companies organized in the United States, no matter how created, are either taxable or exempt from taxation, debtor not required to withhold or deduct tax upon income derived in case of interest on registered bonds, provided coupons from such bonds shall be accompanied by certificates of owner- ship which shall be filed with the debtor represented for payment. Said certificate should be made on revised Form 1001, signed in name of organization (stating place of business), by some principal officer of said corporation, duly authorized to sign same, which must be properly dated. (Art. 45, Reg. 33.) Debtor Must Obtain Certificate of Ownership or Deduct Tax: Ownership certificates must be obtained by the debtor corporations and withholding agents in all cases as required by the regulations. (Letter No. 1242 to collectors.) Tax on Domestic Bonds, etc., Will Not be Deducted if Certificate of Exemption Filed: Under act of September 8, 1916, no tax is to be with- held at source from income of non-resident alien, firms, corporations, joint stock companies, insurance companies, not engaged in business nor having any place of business within the United States. The income of such non-resident alien associations, etc., subject to withholding provision is that derived from interest on bonds, mortgages, deeds of trust, or similar obligations of domestic or resident debtors, regardless of amount. Including and from and after September 9, 1916, and to and includ- ing December 31, 1916, normal tax should be withheld from such income at the rate of one per cent (1%) on amount thereof. Including and from and after January 1, 1917, normal income tax to be withheld at the rate of two (2%) per cent. To enable debtors to distinguish between non-resident alien cor- porations, etc., which have no place of business within the United States, and those that have, Form 1086 is provided for this purpose. (T. D. 2374.) Ownership Certificates for Non-Resident Alien Firms to be Used With Coupons Detached From Bonds of Domestic Corporations, etc.: Certificate 1004 should be used with coupons detached from bonds or other obligations of domestic corporations owned by non-resident alien individuals or fiduciaries, is revised to include firms and organizations, TREASURY DECISIONS 103 and certificate Form 1004, revised November 22, 1916, is provided for use of non-resident alien individuals, firms, organizations, etc., for pur- pose of declaring ownership of bonds of domestic organizations and to be attached to interest coupons when presented for payment. (T. D. 2399.) Certificates to be Executed: By foreign exempt organizations, when presenting for payment coupons detached from bonds issued by domestic corporations, should have attached thereonto certificate Form 1004, re- vised, modified to show corporate ownership and stamped, "exempt organization." Certificates for Which Substitution is Made to be Forwarded to Washington Each Month: Certificates of owners for which collecting agency certificates are substituted must be forwarded to commissioner of internal revenue at Washington, D. C., by collecting agent not later than the 20th day of month succeeding that in which cpupons were re- ceived for collection. (T. D. 1903.) Certificates of Ownership are not required to accompany interest orders or checks in payments of interest on fully registered bonds owned by residents, but claim for exemption must be filed or tax will be de- ducted: Certificates of ownership not required to accompany interest orders on payment of interest on fully registered bonds, as information as to ownership of bonds will be furnished by debtor organization on monthly list returned, Form 1012, but claims for exemption must be filed with debtor or tax must be withheld. (T. D. 1974.) In case of interest payments on bonds registered as to both principal and interest, debtors shall deduct normal tax from accruing interest on all such bonds before sending orders with checks to owners, unless there shall be filed with said debtor T. D. 1974 (or fiscal agent through whom said interest is customarily paid) (Art. 41, Reg. 33) at least five days before due date of said interest, not later than 30 days prior to March 1st. (Art. 41, Reg. 33.) The prescribed certificates claiming exemption, T. D. 1974, from liability for said taxes as herein provided, executed: (a) By a citizen or resident of the United States, the bona-fide owner of registered obligations, who may claim exemptions under Para- graph (C) Section (2) of income tax law. (b) By corporations, joint stock companies, associations, or insurance companies, etc., organized in the United States, which are taxable or exempt from taxation as provided in Paragraph (G) Subdivision (A) of the Act. (Art. 41, Reg. 33.) Certificates Filed by Domestic Owners of Record Disclosing Actual Ownership to Be Filed Monthly: Debtor corporations governed as to withholding by facts as to actual ownership disclosed by certificates. All certificates filed with debtor corporation for the purpose of dis- closing actual ownership of stock shall be forwarded to collector of internal revenues for its district on or before the 20th day of the month next succeeding the month during which said certificates were received. (T. D. 2382.) Substitute Certificates, Entered on Monthly List Returns: All sub- stitute certificates that are received by debtors or withholding agents will be considered same as certificates of owners, and in entering same in making monthly returns, debtors or withholding agents will enter name and address of collecting agent, and number of substitute cer- tificates in lieu of original certificate containing name and address of owners of bonds. (Art. 51, Reg. 33.) Certificates Claiming Full Exemption Need Not Be Listed, but Must Be Filed With Collector at Usual Time: Until further ruling on the subject, no list return is required to be made of certificates of ownership accompanying coupons filed with debtor or withholding agent when owners of bonds are not subject to having normal tax withheld at source, but all such certificates of ownership shall be forwarded by debtor or 104 TREASURY DECISIONS witholding agent to Collector of Internal Revenue for the district on or before the 20th day of month succeeding that in which said certifi- cates of ownership were received. (Art. 56, Reg. 33.) Certificates of ownership in which exemption claimed to extent of amount of payments need not be 'listed, and if only this class of cer- tificates are received during the preceding month, no return is required. However, such certificates should be forwarded to the proper Collector of Internal Revenue with a letter of transmittal. (T. D. 2135.) Fiduciaries Having Control of More Than One Estate or Trust: Wherever fiduciaries have custody and control of more than one estate or trusts having assets of bonds of corporations, etc., of the same issue, they may adopt certificate Form 1015 and 1019, revised, by chang- ing the words "Estate or trusts" in lines one, two and three of said form to the plural. In such cases, notation should be made on back of certificate show- ing each estate or trust: (a) Name of the Estate or Trust, (b) Amount of Bonds, (c) Amount of Interest. (T. D. 1987.) Ownership Certificates To Be Used by Non-Resident Alien Fidu- ciaries. Form 1004, revised, is provided for the use of non-resident alien individuals, firms, organizations and fiduciaries, for the purpose of declaring ownership of bonds of domestic corporations, etc., and to be attached to interest coupons detached from such bonds when presenting for payment. (T. D. 2399.) Alien Non-Resident Partnerships to File Ownership Certificates: Form 1040, Revised, November 22nd, 1916, is provided for use of non- resident alien organizations for the purpose of declaring ownership of bonds of domestic corporations, etc., and to be attached to interest coupons detached from such bonds when making presentation for pay- ment. (T. D. 2329.) Partnerships, Foreign, Having Place of Business in the United States, Must File Certificate of Ownership to Prevent Deduction at Source on Interest on Corporate Bonds, Etc.: To claim exemption from withholding of the normal tax at the source on their income from sources within the United States a certificate (Form 1086) must be filed. Until such certificate shall be printed, certificates 101, Revised, and 1063 should be used. Scrip: Scrip certificates issued by a corporation to its stockholders in lieu of dividends bearing interest and redeemable at a specified time not longer than one year from date of issue, are not corporate obliga- tions similar to bonds, mortgages, bonds, mortgages, etc., and not sub- ject to withholding except when amount payable to an individual exceeds $3,000 in any calendar year. Payment in scrip equivalent to cash. (T. D. 2090, as amended by T. D. 2152.) Investment Certificates: Issued by corporation for term of years are corporate obligations within meaning of income tax law. (T. D. 2090.) Return Certificates Are to Be Filed: When withholding agent is authorized by debtor corporation, he may file with collector of his dis- trict required returns and certificates, in which case assessment of tax withheld by him will be made in that district. If no authority be given, such reports, etc., will be furnished by debtor corporation to collector of its district, where in such case assessment will be made. (Art. 38, Reg. 33.) Ownership Certificates: For the purpose of collecting tax, the source shall be withholding agent, and paying agent in the United Stales, who shall deduct same, and withhold, and no other bank, trust company, etc., taking coupons of interest orders for collection shall with- hold tax thereon where such coupons are accompanied by certificates of TREASURY DECISIONS 105 ownership signed by owners of bonds, upon which interest had matured. (Art. 39, Reg. 33.) Certificates of Ownership Not Filed, First Bank, Etc., Receiving Coupons for Collection, Deducts Tax, Using Its Own Certificate: Where coupons or interest orders are not accompanied by certificates, as here- tofore prescribed, collecting agency receiving the coupons for collection or otherwise shall deduct and withhold tax, and shall attach to coupons its own certificate, revised Form 1002, giving name and address of owner or person presenting such coupon if owner is not known, with a description of the coupons or interest orders; also setting forth that they are withholding tax upon you. (Art. 52, Reg. 33.) Limitation on Claims for Refunding: "All claims for the refunding 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 accepted or in any manner vrongfully collected, must be presented to the Commissioner of In- ternal Revenue within two years next after the cause of action accrued: Provided, that claims which accrued prior to June 6, 1872, may be pre- sented to the Commissioner at any time within one year from the said date. But nothing in this section shall be construed to revive any right of action which was already barred by any statute on that date." (Section 3228, Rev. St.) See Mail & Newspaper Transportation Company et al. v. Anderson, Collector, 234 Federal 590, April 11, 1916. Defendant in Suit to Recover Back Taxes: A suit to recover back taxes cannot be maintained against a successor to the collector to whom the taxes were paid, except in his individual capacity. The remedy lies either in an action against the collector who actually re- ceived the taxes or in an action against the United States. (Duncan I. Roberts v. John Z. Lowe, Jr., Collector for the Southern District of New York. Rendered in U. S. District Court for Southern District of N. Y., November 14, 1916.) (T. D. 2394.) Statute of Limitations, Bar Removed From Certain Claims for Refund: This office is of the opinion that claims can now be made for refund under Section 14 P. A., Act of September 8, 1916, which have once been rejected by the Commissioner because of the statute of limi- tation in existence at the time. Claims rejected can also be reopened 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.) Social Clubs: Operated for pleasure and other non-profitable pur- poses, having no net income inuring to benefit of any individual, are ex- empt from requirements of Federal Income Tax Law. Club May Register as an Exempt Organization: All clubs are not exempt from provisions of income tax law, even though not operated for profit. A Club desiring to register as an exempt organization should file with Commissioner of Internal Revenue a copy of its charter, or affidavit by its Officers setting forth its nature, so that determination can be made whether it is exempt under provisions of Paragraph G of Income Tax Law. (T. D. 2090.) Interest on Collateral Subject to Sale or Hypothecation in Business: Interest paid on indebtedness, wholly secured by collateral, the subject of sale in ordinary business of such corporation, is deductible to the full amount of such interest paid. This contemplates that entire inter- est received on collateral securing such indebtedness shall be included in gross income returns. (Art. 150, Reg. 33.) Shares Without Par Value; Computation of Deductible Interest on Indebtedness: In case of shares of stock issued without par value, the amount of capital actually received and for which such shares are issued is the paid-up capital stock. Hence it follows that the interest which a corporation whose stock 106 TREASURY DECISIONS is issued without par value may allowably deduct from gross income amount of interest actually paid within the year on an amount of bonded or other indebtedness not in excess of the sum of one-half of interest- bearing indebtedness outstanding at the close of the year, plus the entire amount of the paid-up capital stock that is, the amount of capital paid up and represented by the shares issued. And in the case of capital stock issued with par value, so in the case of stock issued without par value, the amount of "paid-up capital stock," for the purpose of the act, cannot be increased except as new capital paid in and for which addi- tional shares are issued. In cases wherein shares of stock are issued without par value, such stock is obviously common stock. If it should occur that such shares are issued as a bonus, in connec- tion with shares of preferred stock, which latter must necessarily have a par or nominal value, and the entire capital paid in represented by par value preferred stock, and in that case "paid-up capital stock," for all the purposes of the income tax law will be par value of preferred stock. If both common and preferred stock are issued for cash or other equivalent consideration, the "paid-up capital stock," within meaning of law, will be par value of preferred stock plus amount actually paid in on shares issued without par or nominal value. It is, therefore, held that a corporation whose shares of stock are issued without par value has a "paid-up capital stock" within the mean- ing of the law equal to the amount paid in for such stock, and will be authorized to compute its interest deduction in accordance with the rules set out in law for corporations having a paid-up capital stock, being actually paid-in capital for which shares are issued. (Commissioner J. D. Fletcher, dated January 13, 1916.) Collateral the subject of sale, refers to physical or tangible property bound for the performance of certain covenants or payment of certain obligations, and which physical or tangible property is the "subject of sale in the ordinary business of the corporation" owning the same. Where such corporation is, as a matter of its ordinary business, engaged in buying and selling, or dealing in such property, the interest actually paid within the year on indebtedness, wholly secured by such collateral may be allowably deducted from gross income as an expense of doing business without regard to the limit of deductible interest as otherwise provided by statute. The corporation, etc., must be organized and oper- ated for the purpose of buying and selling and dealing in the particular kind of property which becomes the collateral in question, and the par- ticular property pledged for the debt upon which interest is paid must be the "subject of sale in the ordinary business of the corporation." Real estate mortgaged, and property of corporations organized for and en- gaged in the business of buying, selling and dealing in real estate; ware- house receipts representing property the subject of sale in the ordinary business of the corporation owning the same, and which warehouse receipts are pledged as collateral for such corporation's debts are exam- ples where the interest paid will be deductible as a "business expense" and not subject to the statutory limitations as to interest deductions. (T. D. 2090.) Limitation: No Three- Year Limitation to Right of Gov- ernment to Collect Taxes by Suit or Otherwise: United States vs. Grand Rapids & Indiana Railway U. S. Dist. Court, Western District of Michi- gan, February 25th, 1915: In this case the court held that the three- year clause of special excise tax law is not a limitation upon the right of the Government to sue for unpaid taxes, but, at most, is a limitation of the right of collecting officers to make assessments and enforce pay- ment by ordinary summary statutory proceedings. It follows, therefore, that when additional tax is found to be due for a period antedating the three-year limit, an assessment is not a neces- TREASURY DECISIONS 107 sary condition precedent to collect the tax, as the amount of tax may be collected by suit. Waiver of Three- Year Limitation: While the Government is fully authorized to recover such taxes by suit, this office prefers that collec- tions should be made in ordinary statutory methods, that is as a result of formal assessment. In order that this may be done, corporations should be requested to make amended returns, or to execute waivers in such form as to waive the three-year statutory limitations as to time within which assessment may be made, and the corporation should be informed that, in executing this waiver, they forfeit none of their rights under the law or assume liability to no penalty that might not be en- forced against them in the absence of such waiver. The corporation should also be given to understand that execution of the waiver is, in fact, to their advantage, in that it has the effect to eliminate the neces- sity, on the part of the Government, to recover taxes paid by suit. If however, the corporation against which additional tax liability is dis- covered, will formally accept finding of the examining officer and agree voluntarily to pay to collector of internal revenue amount of tax found to be due, amended returns or waivers need not be required. (Letter No. 1192 to Collectors.) Taxes Wrongfully Collected, Suits for Recovery: "No suit shall be maintained in any court for the recovery of any internal tax alleged to have been erroneously or illegally collected, or of any sum alleged to have been excessive or in any manner wrongfully 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 col- lected, until appeal shall have been duly made to Commissioner of Internal Revenue, according to provisions of law in that regard, and the regulations of the Secretary of the Treasury established in pur- suance 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 date shall be revived by this section." (Sec. 3227, Rev. St.) Taxes, Limitation as to Suits of Wrongfully Collected: "No suit or proceeding for 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 main- tained in any court unless the same is brought within two years next after the cause of action accrued: Provided, that actions for such claims accrued prior to June 6, 1872, may be brought within one year from said date; and that where any such claim was pending before the commissioner, as provided in the preceding section, an action thereon may be brought within one year after such decision and not later. But no right of action which was already barred by any statute on the said date shall be revived by this section." (Sec. 3227, Revised Statutes.) Commissions are properly deductible from corpus of estate, they should not be included in fiduciary return on Form 1041, revised, as allowable deductions against interest of beneficiaries. If on the other hand commissions should be deducted from income of estate distrib- utable among beneficiaries amount should be entered on Form 1041 (revised), legitimate and necessary expense deductible from income of estate. Salaries, Commissions and Profit Sharing: Commissions paid sales- men are income and should be accounted for in return, when indefinite, as to time of accrual not subject to withholding. (T. D. 2090.) Salaries paid on a straight basis for services at source. If, however, to pay therefrom his own travel or legitimate expenses incident to busi- ness of his employment, the income accruing to him is not subject to withholding, the amount not being fixed or determinable. (T. D. 2135.) 108 TREASURY DECISIONS A person receiving a salary in excess of $4,000 and in addition a commission of 1 per cent on all sales, exact amount due on account of commissions not being determinable until February of following year in which commissions were earned, at which time both his salary and commission are paid to him for preceding year, should return such income in the year in which such payment is made. Where employee is paid a two years' salary on condition that he surrender contract of employment, such sum should be reported in return, and if sum exceeds $3,000, normal tax should be deducted and withheld therefrom, subject to authorized exemption claimed. (T. D. 2090.) Where a part of compensation is in form of salary payable monthly, and part in form of bonus and not determined on or after January 1st, of the year following in which services were rendered, two parts of any one year's compensation cannot be considered together for the purpose of withholding tax in making returns; but the fixed salary of one year should be considered with the bonus received on or after January 1st, of that year. (T. D. 2135.) Salaries paid on a straight basis for services at source. If, how- ever, per diem salary is paid and employee is required by terms of employment to pay therefrom his own travel and legitimate expenses incident to business of his employment, the income accruing to him is not subject to withholding, the amount not being fixed or determinable. (T. D. 2135.) Commissions Paid Salesmen in Relation to Withholding Its Source: Where an individual works on a straight commission basis and in the earning of his commissions incurs, and personally pays traveling and other necessary expenses, such as show-rooms, hire of sub-agents, or additional help, etc., the amount paid to him as commissions are not subject to withholding of normal tax at the source as such amounts do not represent net incomes. The amount paid to an individual working on a commission basis who incurs and pays no necessary business expenses in the earning of his commission is held to be net income, and as such, is subject to withholding of the normal tax at the source if the aggregate amount paid during any one year exceeds $3,000 unless the certificate claim- ing exemption is filed, and then only upon the amount paid in excess of the exemption claimed. (L. F. Speer, January 12th, 1917.) Income of Contracting Companies: In the case of a large con- tracting company, having numerous uncompleted contracts which run for periods of several years, there does not appear to be any objec- tion to such corporation preparing its return in such manner that its gross income will be arrived on basis of completed work, that is, on jobs finally completed and payments made during year in which return is made. If gross income is arrived at in this method, deductions from gross income should be limited to expenditures made on account of such completed contracts (T. D. 2161.) Steamship Companies Foreign: Expenses of: General expenses, such as coal, ship stores, etc., of foreign steamship companies shall be prorated as provided in the act for interest deductions in case of foreign corporations. (Art. 116, Reg. 33.) Compromises: The Commissioner of Internal Revenue, with the advice and consent of the Secretary of the Treasury, may compromise any civil or criminal case arising under the Internal Revenue Laws instead of commencing suit thereon; and, with the advice and consent of the Secretary and recommendation of the Attorney-General, he may compromise any such case after suit thereon has been commenced. Whenever a compromise is made in any case there shall be placed on file in the office of the commissioner, the opinion of the solicitor of internal revenue, or of the officer acting as such with his reasons there- for, with a statement of the amount of tax assessed, the amount of TREASURY DECISIONS 109 additional tax or penalty imposed by law in consequence of neglect or delinquency of person against whom the tax is assessed and the amount actually paid in accordance with the terms of the compromise (Sec. 2239, Rev. St.) Corporations Constitutionality of Act of October 3rd, 1913, Was Attacked on Ground of Alleged Retroactive Features: The Supreme Court upheld the constitutionality of the act. Constitutionality: of the Act of October 3rd, 1913, was atacked be- cause of its discriminating features in exempting certain classes of cor- porations. The Supreme Court upheld the constitutionality of the Act. Constitutionality of the Act of October 3rd, 1913. Brushaber vs. Union Pacific Railroad Co. 240 U. S. 1. (January 24th, 1916.) As a stockholder of Union Pacific Railroad Company, appellant filed a bill to enjoin the corporation from complying with the income tax provision of act of October 3rd, 1913. The contentions of the appellant were that this part of the statute were repugnant with the 5th and 6th amendment to the constitution. Court held that as far as the retroactiveness of the statute was con- cerned, that question was closed, for in Stockdale vs. Insurance Com- panies, 20 Wall 323, 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 new statute, although the measure of it was governed by the income of the past year, could not be doubted, much less can it be doubted that it could impose such a tax upon the income of the current year, though part of that year had elapsed when the statute was passed. The joint resolution of 1864 imposed a tax of 5 per cent upon all income of the previous year, although no one tax on it had already been paid, and no one doubted the validity of the tax or attempted to resist it." (2nd) The appellant's next principal contention was it was uncon- stitutional because the act exempted organizations such as labor, agri- cultural, or horticultural associations, mutual savings banks, etc.; the argument being that as the amendment authorizes a tax on incomes, "from whatever source derived," by implication, it executed the powers to make these exemptions, but this is only a form of expressing the erroneous contention as to the meaning of the amendment which has been disposed of. The court concluded, after considering the various minor conten- tions, by saying, "In fact, comprehensively, all contentions relied upon, aside from the erroneous construction of the amendment, which we have previously disposed of, we cannot escape the conclusion that they all rest upon the mistaken theory, that although there be differences between the subject tax to differently tax them transcend the limits of taxation and amounts to a want of due process, and that where 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 to correct what is assumed to be mistaken or unwise observance by the legislative authority of its lawful powers, even although there be no semblance of warrant in the consti- tution for so doing. Affirmed. Surplus, Undivided, Corporations: Individuals are subject to the additional tax on incomes derived from gains and profits of cor- porations whether distributed or not: Sub-division 2, of paragraph a, Income Tax Law of October 3rd, 1913, imposes no duty on the taxpayer to ascertain the distributive interest in the undivided surplus of cor- porations for the purpose of making return of the amount in addition to the amount of dividends declared on the stock, unless the Secretary of the Treasury has certified that in his opinion, such accumulation is unreasonable for the purpose of the business. (T. D. 2135.) Income Defined, Corporation Stock Dividends paid from net 110 TREASURY DECISIONS earnings or of surplus undivided profits of corporations, joint stock companies or associations, insurance companies, are held to be equivalent of cash and constitute taxable income, under the same conditions as cash dividends. (T. D. 2274.) Stock Dividends, Calculation of "Cash Value": The cash value of stock dividends paid from the net earnings and established surplus or undivided profits of a corporation is determined by the amount of earnings, profit or surplus distributed, and that the valuation at which the stock is distributed in payment of the dividend the terms amount to be included in the recipient's personal return. That is in the case where a corporation issues one thousand shares of stock, par value of $100, and distributes 500 additional shares in payment of a dividend declared from net earnings, profits or surplus amounting to $50,000, one holding ten shares of the original stock and receives five shares of the new stock as his pro rata share of the dividends, should, on account of their receipt, include $500 in his personal return. Partnerships (Limited), Held to Be Corporations, and in their organ- ized capacity are subject to income tax as corporations. (Art. 886, Reg. 33.) Partnerships, limited, held to be associations within the meaning of the income tax law will use Form 1031 in making their returns. (T. D. 2137.) Promissory Notes of Corporations: Promissory note not exceed- ing one year in time is not similar to bonds, mortgages, etc., and not subject to withholding except when amount of interest to any one individual exceeds $3,000, or when interest thereon is payable to non- resident alien, in which case tax should be withheld regardless of amount of payment. (T. D. 2090.) Corporations, Obligations of Defined: Corporate obligations simi- lar to bonds, mortgages, deeds of trusts, etc., for income tax purposes, held to be those obligations which, though not bond mortgages or deeds of trusts, are similar in form in being extended beyond time of ordinary commercial paper. Interest payments on ordinary commer- cial paper payable to individuals subject to withholding at source only when payment to any one individual exceeds $3,000 within taxable year. On all other obligations payable to individuals payments are subject to withholding regardless of amount. (T. D. 2090.) Foreign Corporations Not Having Place of Business in the United States or Doing Business Therein: When record owner of domestic corporate stock is non-resident alien, corporation, etc., not having any place of business or engaged in business in the United States, debtor cor- poration will withhold normal tax and pay same to authorized collector. Term "Corporations" as used above covers corporations, joint stock companies, associations, and insurance companies. The term "non-resi- dent alien corporations" covers all corporations, joint stock companies, or associations and insurance companies organized, authorized or existing under laws of foreign country, having no place of business in the United States; the term "resident alien corporations," such foreign organizations as have office or place of business in the United States. (T. D. 2401.) Exemptions, Method of Claiming by Corporations, Etc.: If such items are presented by corporations, joint-stock companies or associa- tions and insurance companies, organized in the United States, the for- mer certificate heretofore prescribed for such organizations, (Form 1001) shall be used and in such instances no tax shall be deducted. (Art. 60 Reg. 33.) Corporation Defined. "Corporations" or "Corporation" as used in these regulations, shall be construed to include all corporations, joint- stock companies or associations, and all insurance companies coming within the terms of law, and all such other organizations hereinafter re- ferred to as "corporations." (Art. 78 Reg. 33.) TREASURY DECISIONS 111 It is immaterial how corporations are created or organized. The terms "joint-stock companies," or "associations" shall include asso- ciates, real estate trusts, or by whatever name known, which carry on or do business in an organized capacity, whether organized under, and pursuant to state laws, trust agreement, declaration of trust, or other- wise, the income of which is distributed or distributable among the members or shareholders on basis of capital stock which they hold, or where there is no capital stock, on basis of proportionate share of capi- tal which each has invested in business or property or organization, all of which joint stock companies or associations, shall in their organ- ized capacity be subject to tax imposed by this act. (Art. 79 Reg. 33.) Corporation Unless Specifically Exempt Shall File a Return: Every corporation not specifically exempt shall make return of annual net income required by law, whether it have income liable to tax or not, or whether it shall be subordinate or controlled by another corporation. (Art. 80 Reg. 33.) Tax imposed by income tax law is not imposed only on corpora- tions organized and operated for profit. Any corporation, no matter how created, organized, or what its purpose may be, unless it comes in class of organizations specifically enumerated, will be required to make return of annual income. It is therefore held that commercial men's associations and like or- ganizations come within the requirements of law. (T. D. 2152.) Corporation Subsidiaries: Under provisions of Income Tax Law, every corporation, regardless of its relation to other corporations is held to be a distinct and separate entity. (T. D. 2137.) In case of parent corporation owning practically all the stock of subsidiary company, it is held each is a distinct entity and each must return a separate return and pay tax upon income as shown by return. It is not sufficient for purpose of income tax law that parent com- pany report gross income of subsidiaries and deduct from such gross income expenses of such subsidiaries. Net earnings turned over by sub- sidiary to parent company are dividends within the meaning of the law, and as such dividends are not deductible from gross income, parent company must pay income tax on its net income notwithstanding the fact that earnings out of which dividends have been paid has been sub- ject to tax as against subsidiary company. (T. D. 2137.) Corporations maintained for the purpose of protecting brands, trade marks and trade names are subject to return. If such subsidiary companies have no income, earnings or expenses of operation, and earnings accrue directly to parent company, that fact must be clearly set out in return of subsidiary. If, however, subsidiary concerns are mere partnership or branches of parent company and not incorporated organizations, then no re- turn need be filed. The parent company must include in their return earnings and expenses of such branch. (T. D. 2161.) If subsidiary company of any parent corporation making a return in any particular district have principal place of business in same dis- trict, collector of that district should list such corporations in his Form 632. If subsidiary companies keep separate books of account and have principal accounting office in other districts, return of such corpora- tions will be made to Internal Revenue Collector for district in which they have principal offices. (T. D. 2137.) Corporations Closed: A corporation formed as a family affair to hold property together does not come within the class of organizations specifically enumerated as exempt from making return. (T. D. 2137.) Corporations Owned by Exempt Organizations: A corporation whose stock is owned "by an association organized and operated exclu- sively for religious, charitable, scientific or educational purposes, no part 112 TREASURY DECISIONS of whose net income inures to benefit of any member, stockholder or in- dividual," required to make return of annual income. The fact that stock of corporation, except shares qualifying direc- tors, is owned by corporation which itself comes within the class of ex- empt organizations, does not relieve first named corporation Irom liabil- ity under Income Taw Law. Liability of a corporation not contingent upon ownership of its stock. (T. D. 2137.) Corporations Operating Leased or Purchased Property: A corpo- ration which has leased its properties in consideration of a rental equiv- alent to a certain rate of dividends on its outstanding capital stock and interest on bonded indebtedness, and such rental is paid by lessee direct to stockholders and bondholders, should nevertheless make return show- ing the rental so paid as having been received by corporation. (Art. 80 Reg. 33.) Payments measured by a fixed percentage on stock of railroad corporation to lines released by another railroad on which rent is pay- able by lessee direct to stockholders, have status of rental payments. In such case to the lessee such payment is expense of operation; to the lessor, income. A contract which provides that rental shall be paid to a third party, and not party to contract, does not change character of payment, nor relieve lessor from liability to tax on such payments. The income of third party, the stockholder, is dividends on stock which he holds on lessor company. Dividends cannot be paid unless lessor has income out of which to pay them. Hence lessor company is required under law to return as income the rentals which lessee is required to pay. In paying direct to stockholders, lessee is acting agent of lessor and amount received by stockholders are in fact dividends received out of earnings of lessor. (T. D. 2090.) Such a company, operating leased or purchased lands, shall include all receipts derived therefrom, and, if bonded indebtedness of such lines have been assumed, such operating company may deduct interest there- on, not exceeding one-half of sum of its interest bearing indebtedness and its paid-up capital stock at close of year. (Art. 81, Reg. 33.) Corporations operating leased lines should not include capital stock of lessor corporations in their own statement of capital stock outstand- ing at close of year. The indebtedness of such lessor corporation should not be included in statement of debtedness of lessee unless lessee has assumed the same. (Art. 82, Reg. 33.) Corporations in Existence But Part of Year: All corporations hav- ing an existence during all or any part of a year, are required to make return. Dissolved corporations, whose fiscal year co-incides with cal- endar year will make return covering the period from January 1st, to date of dissolution, and corporations having a fiscal year other than calendar year will make returns covering period from beginning of fis- cal year to date of dissolution, and new corporations will make return for period from date of their organization to December 31st. The net income in all such cases will be ascertained in manner set out in Par- agraph (G) relating to corporations. (T. D. 2090.) Corporations Organized During Tax Year: Corporations organized during year should render a sworn return covering that portion of year during which it was engaged in business or had an income accruing to it. (Art 84, Reg. 33.) Corporation Organized But Transacting No Business Witnhi Year of Its Organization: A corporation organized and transacting no busi- ness within the calendar year of its organization, must, nevertheless, make and file a return on the basis of the calendar year unless such cor- poration designate a fiscal year other than calendar year in the man- ner and form provided for that purpose. (T. D. 2090.) Corporation Liquidating During Tax Year: Corporations going into liquidation during any tax year may at time of such liquidation pre- TREASURY DECISIONS 113 pare a "Final Return" covering income during the fractional part of the year during which they were engaged in business and immediately file same with the collector of the district in which corporation has its prin- cipal place of business. (Art. 85, Reg. 33.) Corporations Dissolving Before Time For Making Returns: Cor- poration which has continued in business to a calendar year cannot evade liability of special excise taxes imposed by Act of August 5th, 1909, Section 38, by dissolving before time when return required is to be made. (U. S. v. General Inspection & Loading Co., 192F, 223.) Under Corporation Act N. J., Section 53-55, the officers of a dis- solved corporation which were also directors, have authority to make return of its business of preceding year on which it has incurred lia- bility for special tax imposed by Act of August 5th, 1909, Section 38. Corporations Not Completely Organized: Corporations which have applied but never received charters, or corporations which have re- ceived charters but have never perfected their organizations, transact- ed no business, and have had no income from any source, may upon presentation of these facts to Collector be relieved from making return of income as long as they remain in this unorganized condition. (T. D. 2152.) Foreign Corporations: Similar tax should be levied, assessed and paid annually by corporations, joint-stock companies, or associations and insurance companies organized, authorized or existing under laws of any foreign country upon amount of income accruing from busi- ness ^transacted in the United States as that paid by domestic corpora- tions. (Art. 77, Reg. 33.) Tax on Foreign Corporations: Foreign corporations shall be sub- ject to normal tax (six) per cent, computed upon income received by such corporation from business transacted and capital invested in this country. (Art. 157, Reg. 33.) Foreign! Corporations Having Several Branches in