GIFT OF 
 
INCOME TAX LAW AND ACCOUNTING 
 
THE MACMILLAN COMPANY 
 
 NEW YORK BOSTON CHICAGO DALLAS 
 ATLANTA SAN FRANCISCO 
 
 MACMILLAN & CO., LIMITED 
 
 LONDON BOMBAY CALCUTTA 
 MELBOURNE 
 
 THE MACMILLAN CO. OF CANADA, LTD. 
 
 TORONTO 
 
INCOME TAX 
 
 LAW AND ACCOUNTING 
 1918 
 
 BEING 
 
 A PRACTICAL APPLICATION OF THE PROVISIONS OF THE FEDERAL 
 
 INCOME TAX ACT OF SEPTEMBER 8, 1916, AS AMENDED; 
 
 THE WAR INCOME TAX AND THE WAR EXCESS 
 
 PROFITS TAX LAWS OF OCTOBER 3, 191?; AND 
 
 CONTAINING 
 
 THE CORPORATION CAPITAL STOCK TAX LAW AND RULINGS THERE- 
 ON; FEDERAL ESTATE TAX, EXCISE AND MISCELLANEOUS 
 WAR TAXES; AND THE NEW YORK STATE INCOME 
 TAX STATUTE APPLICABLE TO MANUFACTUR- 
 ING AND MERCANTILE CORPORATIONS 
 
 
 BY 
 GODFREY N. NELSON ^ j 
 
 MEMBER OF THE NEW YORK BAR 
 CERTIFIED PUBLIC ACCOUNTANT, STATE OF NEW YORK 
 
 SECOND EDITION 
 
 fork 
 
 THE MACMILLAN COMPANY 
 1918 
 
 All rights reserved 
 
COPYRIGHT, 1917 
 BY GODFREY N. NELSON 
 
 COPYRIGHT, 1918 
 
 BY THE MACMILLAN COMPANY 
 Set up and electrotyped. Published January, 1918 
 
 i jr <K cui^vs 
 
 
 
 
PREFACE TO SECOND EDITION 
 
 The numerous commendatory reports upon the first edition 
 of this book and the requests, by those who used it, for one 
 covering the new laws, have impelled the author to write the 
 present revised and enlarged edition. By reason of the ma- 
 terial amendments of the Income Tax Act of September 8, 1916, 
 and the enactment of the War Income and the War Excess 
 Profits Taxes, contained in the War Revenue Bill of October 3, 
 1917, all of which are treated herein, have necessitated the re- 
 writing of the greater part of the book so that the present edi- 
 tion is, practically, an entirely new work. The original scheme 
 of arrangement, however, has been largely adhered to with the 
 view of making the book a practical guide to those required to 
 prepared returns either for themselves or others. 
 
 All Treasury Decisions issued to date, bearing upon the 
 Excess Profits Tax Law, have been incorporated herein either 
 in the text or in foot-notes. From time to time additional deci- 
 sions and regulations will be issued by the Treasury Depart- 
 ment "as occasion demands," copies of which may be obtained 
 upon application to the local collectors or to the Commissioner 
 of Internal Revenue at Washington. Many problems arising 
 under the Excess Profits Tax Law will not be ruled upon by the 
 Department until applications for rulings are formally pre- 
 sented. In the absence of specific rulings the writer has sug- 
 gested interpretations of the law, particularly with respect to 
 methods of computing invested capital. In such matters as 
 the writer has ventured his construction of the law the sugges- 
 tions contained herein should be used in conjunction with the 
 decisions and regulations that will be promulgated by the De- 
 partment. The Department should be consulted freely and 
 unhesitatingly and questions of importance should be sub- 
 mitted for special rulings. Such questions form the basis of 
 decisions and rulings and the solution of your problems may 
 help many others who encounter the same difficulties. 
 
 Time has not permitted the rewriting of some paragraphs 
 
 38C2S3 
 
VI PREFACE 
 
 affected by very recent decisions but notes have been appended 
 in connection therewith in order to apprise the reader of the 
 latest rulings, and the text of such decisions have been added 
 to Chapter V on the Excess Profits Tax. 
 
 Professional contact with the officials and officers of Internal 
 Revenue of the Treasury Department at Washington, including 
 the Commissioner, himself, and with such members of the Ad- 
 visory Board as the writer has had the pleasure of meeting, has 
 impressed him with their profound and unanimous desire to 
 grant to the taxpayer every right and fair concession possible 
 to be drawn from a most liberal interpretation of the law that 
 will ensure an equitable administration of it. With this sig- 
 nificant assurance, not inconsistent with a positive duty, the tax- 
 payer should dismiss from his mind that sense of antagonism 
 that so often exists toward tax departments of the Government, 
 and should seek to cooperate with them for the procurement of 
 the necessary revenue of which the present extraordinary taxes 
 are expected to contribute a vital part. 
 
 The writer wishes to express his gratitude to those of his 
 friends who by suggestions and helpful recommendations and 
 counsel have made possible the treatment of a variety of prob- 
 lems that will present themselves under the new laws; he also 
 takes occasion to express his grateful acknowledgment of the 
 helpfulness of the Income and War Tax Services of the Cor- 
 poration Trust Company, which contain the rulings and deci- 
 sions of the Treasury Department upon these laws. 
 
 On account of the difficulty of arrangement, the subjects are 
 not coordinately grouped. The index, however, has been made 
 especially copious in order to afford a ready reference to the 
 subject of inquiry. 
 
 GODFREY N. NELSON. 
 
 52 Broadway, New York City, 
 January 2, 1918. 
 
PREFACE TO FIRST EDITION 
 
 Since the enactment of the Corporation Excise Tax of 1909, 
 and the Federal Income Tax Law, applicable to both individuals 
 and corporations, effective March i, 1913, the writer has pre- 
 pared, and advised with regard to, many income tax returns of 
 corporations and individuals. The preparation of returns al- 
 most invariably necessitated the analysis and subdivision of 
 book accounts as commonly kept in order to conform them to 
 the classification prescribed by these laws. To obviate the 
 necessity of analyzing and rearranging accounts and to facili- 
 tate the preparation of returns was the first thought that ac- 
 tuated the writing of this book. To make it more helpful there 
 have been included rulings of the Treasury Department and 
 court decisions on the most important items of income and 
 expenses. 
 
 The writer makes no pretense at having produced a law book 
 and at no time had that aim in view. This is intended merely 
 to serve the purpose of a practical guide to those who, either 
 for themselves or others, are called upon to prepare returns. 
 Statements contained herein are predicated: first, upon the 
 Income Tax Law enacted September 8, 1916, which was retro- 
 active and took effect as of January i, 1916; second, upon rul- 
 ings by the Treasury Department thereon; and third, upon 
 such rulings and court decisions under the Excise Tax of 1909 
 and the Income Tax Law of 1913, which are consistent and not 
 in conflict with the requirements of the present law. 
 
 An expression of gratitude is due to various officials and 
 officers of Internal Revenue of the Treasury Department at 
 Washington and New York for the courtesies shown to the 
 writer in matters submitted to them, but this acknowledgment 
 should not be construed as an endorsement by them of the 
 contents of this book. The writer also acknowledges the help- 
 fulness of the Income Tax Service of the Corporation Trust 
 Company, the index to which was especially useful as a ready 
 
VU1 PREFACE 
 
 reference to Treasury Decisions. Mention should also be made 
 of Mr. Henry Campbell Black's treatise on the law of "Income 
 Taxation" under Federal and State laws, to which the writer 
 has referred. 
 
 The arrangement of subjects is not co-ordinate throughout, 
 but the order of the statute and the returns of net income have 
 been followed as nearly as practicable. 
 
 GODFREY N. NELSON. 
 
 52 Broadway, New York City, 
 December i6th, 1916. 
 
TABLE OF CONTENTS 
 
 I. INCOME TAX AS APPLIED TO INDIVIDUALS 
 
 PAGE 
 I. General Provisions of Law: Income Tax War Income Tax 
 
 War Excess Profits Tax When Effective i 
 
 II. Income Tax (Act of Sept. 8, 1916): Who is subject to Income 
 Tax Division of Tax Normal Additional Dividends 
 Exemptions 2 
 
 HI. War Income Tax (Act of Oct. 3, 1917): Who is subject to War 
 Income Tax Division of Tax Normal Additional Div- 
 idends Exemptions 3 
 
 IV. Income and War Income Taxes: Exemptions Combined Nor- 
 mal Taxes Combined Additional Taxes Examples of 
 Computing Normal Taxes Examples of Computing Normal 
 and Additional Taxes Table of Normal and Additional 
 Taxes on Incomes of $2,000 to $3,000,000 4~n 
 
 V. Returns of Individuals: Combined Return Who is Required to 
 make return Return Form Return by Husband and Wife 
 Fiduciaries Agent Private Banks Citizen residing abroad 
 To whom Return is made Verification Returns by persons 
 in Military Service Due date of filing Extension of Time 
 Penalty for Failure to file Return False Return When In- 
 ternal Revenue Officer may prepare Return Due date of 
 Payment Penalty, delayed Payment *Claims for Refund 
 of Taxes Advance Instalment Payments Forms of Pay- 
 ment Porto Rico, Philippines 11-19 
 
 VI. Income of Individuals: Income Defined Undivided Surplus of 
 Corporations Dividends, Life Insurance Policies Principal, 
 Life Insurance Policies Accident Insurance Damages, In- 
 juries Dividends Dividends earned prior to March i, 1913 
 Stock Dividends Payable in Securities Paid out of Reserves 
 Purchases and Sales of Stock Exchange of Stock Stock 
 received in Reorganization Sale of Stock Rights Scrip 
 Dividends Dividends Received from Foreign Corporations 
 Return of Capital, not Income Profits of Limited Partner- 
 ships Salaries, when Returnable Salary paid by Stock 
 Salary received of Exempt Corporation Living Quarters, 
 
X TABLE OF CONTENTS 
 
 PAGE 
 
 part of Compensation Board, Lodging, etc., in lieu of Cash 
 Bonuses Salesmen's Commissions Professional Fees, when 
 Returnable Clergymen Compensation of Trustees Profit 
 on Sales of Capital Assets Profit or Loss on Securities ac- 
 quired prior to March i, 1913 Profit Defined Sales of Real 
 Estate Cost of Property Appreciation not Income 
 Promissory Notes Gifts, Legacies Income of Estates 
 Heirs and Legatees Legacies, Vested Interest Profit re- 
 turnable by Legatee Trust Estate undistributed for Period of 
 Years Insurance Agents Rentals Received Interest, Gov- 
 ernment Obligations Political Subdivision Contractor 
 Working for State Liberty Bonds, 3^% 4% Income and 
 Expenses of Government Employees Rates of Exchange 
 Foreign Investments Interest, Bank Account Pensions 
 Alimony License required by Collectors of Foreign Income 
 Foreign Income, Non-Resident Aliens Record Owner not 
 
 Actual Owner of Stock 19-48 
 
 VII. Farms and Farmers: "Farms and Farmers," Defined Income 
 from Farms Prepaid Farm Expenses Shares Expenses 
 Losses Live Stock Farm Machinery Depreciation 
 
 Books of Account Farm maintained only for Recreation 48-50 
 
 VIII. Deductions Allowed Individuals: Exemptions Single Married 
 Heads of Families Salaries Exempt Dividends Creditable 
 Tax Withheld Necessary Business Expenses Interest 
 Deductible Interest Incurred in Purchase of Liberty Bonds 
 Accrued Interest on Bonds Purchased Charities Taxes 
 Local Assessments Water Rates Pensions Premium, 
 Fidelity Bonds Loss Defined Loss not in Business or Trade 
 Losses, more than one Trade In Trade Defined Bad 
 Debts Depreciation Stocks and Bonds Depletion, Oil and 
 Gas Wells Mines Improvements Restoring Property 
 Replaced Buildings Condemned Buildings Damage Suits, 
 Judgments Insurance Reserve Funds Insurance Premiums 
 Commissions, Real Estate Campaign Expenses Expense, 
 Nontaxable Income Assessment of Stocks Taxes paid by 
 Tenant Life Insurance Premiums Inheritance Tax Taxes 
 on Bank Stock Si~S9 
 
 II. WITHHOLDING TAX 
 
 Amended Law Nonresident Alien Individuals Nonresident 
 Foreign Corporations Dividends to Nonresident Alien Com- 
 
TABLE OF CONTENTS XI 
 
 PAGE 
 
 panics Tax Exempt Clause Exemption Returns of Taxes 
 Withheld Indemnity of Withholding Party Release of Taxes 
 Withheld Information at Source Interest on Bonds Aliens, 
 Permanent Residents Temporary Residence in the United 
 States Residence, defined Visiting Alien Wife Assumes 
 Nationality of Husband Stock Dividends, Nonresident 
 Corporations 60-67 
 
 HI. INCOME TAX AS APPLIED TO PARTNERSHIPS 
 
 IX. General Partnerships: Partnerships taxable Individually only 
 Returns Fiscal Year Dividends Received by Partnerships 
 Method of Accounting Income, when Accrued Premiums 
 Life Insurance Policies Credits on Individual Returns of 
 
 Partners Partnership Expenses 68-70 
 
 X. Limited Partnerships: Special Partners Profits of Limited 
 
 Partnerships 70-71 
 
 IV. INCOME TAXES APPLICABLE TO CORPORATIONS 
 
 XI. General Provisions: Domestic Corporations Foreign Corpora- 
 tions Rates Exemptions Foreign Income Excess Profits 
 
 Tax Undistributed Surplus Tax Dividends 72-75 
 
 XH. Returns of Corporations: Form of Return Return of Domestic 
 Corporation Foreign Corporation Due Date When last 
 Day falls on Sunday or Holiday Signatures and Oath of 
 Officers When Tax Payable Delayed Payment, Penalty- 
 Fiscal Year Designating Fiscal Year Apportioning Income 
 1917 When Tax Payable Under Fiscal Year Extension of 
 Time Failure to File False or Fraudulent Return Refusal 
 or Neglect to File Return by Department Second Assess- 
 ment Recovery of Payment Publicity Corporation In- 
 completely Organized Existing Corporations Corporations 
 Maintaining Foreign Branches Holding Companies Sub- 
 sidiary Companies Receivers, Trustees, Assignees Corpo- 
 rations Organized During Tax Year Corporation in Liq- 
 uidation Liability of Dissolved Corporation Interstate 
 Commerce Corporations Foreign Corporations Represented 
 
 by Agents Having Branches in U. S 75-84 
 
 XHL Exempt Organizations: List of all Classes of Corporations and 
 Organizations Exempt Required to Withhold Exempt For- 
 eign Organizations Not Organized for Profit Corporations 
 
Xll TABLE OF CONTENTS 
 
 PAGE 
 Controlled by Exempt Organizations Organized for Profit 
 
 Water Company 84-89 
 
 XIV. Income of Corporations: Net Income Gross Income: Manufac- 
 turing Corporations Mercantile Miscellaneous Contract- 
 ing All Sources Insurance Companies Banks Mutual 
 Companies Dividends Profit, Sales of Capital Assets Ac- 
 quired Prior to March i, 1913 Interest, Sinking Funds As- 
 sessment of Paid-up Capital Stock Exchange of Stocks and 
 Bonds, Reorganization, Real Estate Development Corpora- 
 tion When Cost includes Carrying Charges Instalment 
 
 Business Timber Lands, Stumpage 89-100 
 
 XV. Deductions Allowed Corporations: Expenses Losses When 
 Deductible Property Acquired Prior to March i, 1913 De- 
 preciation Depletion, Oil and Gas Wells, Mines Mainte- 
 nance, defined Renewals Improvements Bad Debts 
 Reserve for Bad Debts Reserve, Insurance Companies 
 Contingent Reserve Suspense Sinking Fund Discounts on 
 Sales Interest, Limitation Interest incurred in Purchase of 
 Liberty Bonds (4%) Interest on Indebtedness Secured by 
 Collateral Interest, Preferred Stock Bonds of Corporations 
 Amortization of Discount on Bonds Premiums on Bonds 
 Purchased Loss in Retirement of Bonds at Premium Dis- 
 count on Bonds Life Insurance Premiums Paid by Corpora- 
 tion Taxes Local Benefits Taxes paid by Tenant Salaries 
 of National Guardsmen Pensions Salesmen's Expenses 
 Service Connections, Water Company Payments to Govern- 
 ment Defalcations Organization Expenses Campaign Ex- 
 penses Insurance Companies Assessment Insurance Com- 
 panies Deductions Allowed Foreign Corporations 100-115 
 
 V. WAR EXCESS PROFITS TAX 
 
 War Measure Administration Who is Subject to Tax 
 Exempt Organizations Principle of Tax Deductions Ex- 
 emptions Incidence of Tax Duration Old Tax Repealed 
 Rates of Taxes Where Capital is Employed Rate of Tax- 
 Nominal Capital Taxable Year Prewar Period Returns of 
 Citizens Resident Aliens Domestic Corporations Returns 
 of Nonresident Aliens and Foreign Corporations Returns of 
 Domestic Partnership Returns of Foreign Partnerships 
 Due date of filing Returns Taxes, Partnerships Inequity in 
 case of Foreign Partnerships Returns of Net Income for 
 
TABLE OF CONTENTS Xlll 
 
 PAGE 
 
 Prewar Period and Taxable Year of Corporations Limited 
 Partnerships Net Income for Prewar Period and Taxable 
 Year of Individuals and Partnerships Occupation, Salary 
 Land Owner Income Mines, Oil Wells, Timber Lands In- 
 come from Investments Invested Capital of Taxable Year 
 Exclusions from Invested Capital Invested Capital of Part- 
 nership or Corporation Value of Tangible Property, Partner- 
 ships or Corporations Patents, Copyrights, Partnership or 
 Corporation Invested Capital of Individuals Invested Cap- 
 ital of Foreign Corporation or Partnership or Nonresident 
 Alien Liberty Bonds Invested Capital of Corporations and 
 Partnerships Invested Capital, Books of Account Where 
 Invested Capital cannot be Determined Partial Change of 
 Ownership Reorganized or New Corporation Good Will, 
 Trade-marks, Franchises Reserve Accounts, Reserve Funds 
 Deductions to Citizens, Domestic Corporations and Partner- 
 ships Deductions to Foreign Corporations and Partnerships, 
 Nonresident Aliens Corporation or Partnership not in 
 Existence and Individual not in Trade in Prewar Period 
 Where Business Yielded no Net Income or Comparatively 
 Low Net Income Subnormal Profits How to Obtain Benefit 
 of Deduction Based on Income of Representative Concerns 
 Salaries of Partners When Deductible Wages of Members 
 of Farmer's Family not Deductible Administration of Law 
 Application of Law to Real and Nominal Capital Revalua- 
 tion of Property Notes on Items Contained in Examples of 
 Computing Invested Capital: Cash on Hand and in Banks 
 Accounts Receivable Bills Receivable Stock on Hand 
 Investments, Plant and Machinery Furniture and Fixtures 
 Land Buildings Deferred Assets, Prepayments Liabilities 
 Accounts Payable Bills Payable Accrued Liabilities 
 Bonds Payable Dividends Declared Reserve for Amortiza- 
 tion of Bonds Reserve for Contingencies Reserve for 
 Equalizing Dividends Capital Stock Surplus Invested 
 Capital Suggestions in Connection with the Valuation of 
 Assets for Purposes of Invested Capital: Organization Ex- 
 penses Subscriptions to Capital Stock Treasury Stock 
 Unexecuted Contracts Patents Trade-marks Franchise 
 Patterns and Designs Plates and Dies Treasury Decisions 
 under the Excess Profits Tax: Inventories of Merchandise, 
 etc., and Securities held by Dealers Tangible and Intangible 
 Property Defined Salary Allowance to Partnerships and In- 
 
XIV TABLE OF CONTENTS 
 
 PAGE 
 
 dividuals Profits Derived by Partners from Partnerships 
 Interest on Loans by Partners Return, Prewar Period 
 Bonds as Invested Capital Limitation of Value of Property 
 as at Jan. i, 1914 116-174 
 
 VI. DEPRECIATION 
 
 Depreciation Deductible from Income Methods of Computing 
 Depreciation Reserve for Depreciation Diverting Reserves 
 Rates of Depreciation Buildings Building Repairs 
 Additions Betterments Additions to Leased Property 
 Buildings Erected by Tenants Furniture and Fixtures 
 Dwellings Farm Buildings Depletion of Mines Leased 
 Mines on Royalty Depletion of Oil and Gas Wells Leased 
 Oil and Gas Territory Machinery Boilers, Engines Re- 
 pairs, Replacements Shafting Tools Miscellaneous Equip- 
 ment Laundry Equipment Copyrights Auto Trucks 
 Horses Stable Equipment Good Will Investments 
 Stocks and Bonds Theatrical Costumes Trade-marks 
 Brands, Stock on Hand Munitions Works, War Materials- 
 Ships Various Trades and Businesses based on Allowances in 
 England: Boots; Brewers; Collieries; Dyers; Engineers; 
 Hosiery; Lace Making; Looms; Newspaper and Printing; 
 Sewing Machines; Tramways; Weaving 175-195 
 
 VH. BOOKKEEPING SUGGESTIONS 
 
 Preparation of Income Tax Returns of Corporations: Method of 
 Bookkeeping Books of Account Best Guide to Income 
 Examination of Books by Internal Revenue Officers Ac- 
 cruals Prepayments Distribution of Accounts Sales Re- 
 turn Sales Allowances Discounts Allowed Discounts Re- 
 ceived Rebates Freight on Sales Freight on Purchases 
 Inventories Rentals Royalties Interest Received Inter- 
 est Paid Debenture Bonds Dividends Received Income 
 from Sundry Sources Labor, Wages and Commissions 
 Fuel, Light, Power, etc. Repairs, Ordinary and Incidental 
 Salaries of Officers Sundry Expense Accounts Customs, 
 Duties Loss by Fire Sales of Capital Assets Depreciation 
 Depletion Ledger Entry of Depletion of Property Taxes 
 Capital Stock Interest bearing Indebtedness Merchandise 
 Account Profit ad Loss Account Dividends Declared 
 
TABLE OF CONTENTS XV 
 
 PAGE 
 
 Reconciliation of Return with Books of Account Manufac- 
 turing Corporations Operating Cost-System Inventory 
 Equivalent Materials and Supplies Used 196-218 
 
 APPENDIX A. Federal Income Tax Law Enacted September 8, 1916, as 
 amended by the Acts of March 3, 1917, and October 3, 
 1917 219-248 
 
 APPENDIX B. War Revenue Law Enacted October 3, 1917 249-284 
 
 APPENDIX C. Federal Corporation Capital Stock Tax Law Enacted 
 
 September 8, 1916 285-304 
 
 APPENDIX D. Special Excise Tax on Corporations Enacted August 5, 
 
 1909 (Repealed by Act of October 3, 1913) 305-311 
 
 APPENDIX E. Extracts From Federal Income Tax Law Relating to 
 Corporations, Enacted October 3, 1913 (Repealed by 
 Act of September 8, 1916) 312-319 
 
 APPENDIX F. Table of Additional Taxes (Surtaxes) Imposed Upon 
 
 Individuals by Income Tax of 1913 320 
 
 APPENDIX G. New York State Income Tax on Manufacturing and 
 
 Mercantile Corporations, Enacted June 4, 1917 . . .321-330 
 
 TABLE OF CASES 331 
 
 INDEX 333 
 
INTRODUCTION 
 
 A just and fair application of income tax laws presents many 
 difficult problems. 
 
 It is unreasonable to expect that an income tax statute, or 
 Law and even regulations thereon, could work equitably as 
 Practice. applied to all cases; what proves to be fairness in 
 one case may result in hardship in another. 
 
 Income taxation in the United States as a permanency 
 is of comparatively new development. The Department in 
 charge of its administration has proved itself eminently ef- 
 ficient. The present staff and regime, however, are inadequate 
 to provide for a system of hearings and of passing upon ques- 
 tions of practice and procedure in cases requiring rulings. 
 
 A thoroughly successful and equitable administration of the 
 law cannot be attained until there is provided some local board 
 or tribunal to pass upon propositions in which a technical ap- 
 plication of the law or regulations would work injustice to the 
 taxpayer. This is accomplished in Great Britain through the 
 aid of "District" or "General" Commissioners who pass upon 
 questions of procedure and accounting. 
 
 It is noteworthy that writers on the English Income Tax 
 emphasize the flexibility of the practice as compared with the 
 law. Mr. William Sanders, in the second edition of "The Prac- 
 tice and Law of Income Tax" (1916) states: "An outstanding 
 feature of the Income Tax is that the practice is much more 
 liberal than the law." Again, he says: "The law of Income 
 Tax is, in many respects, harsh and inequitable, but much of 
 the prevailing hardship may be mitigated by an application 
 of the practice in its existent broadness. It should, however, 
 be taken as a general principle in connection with the adminis- 
 tration of the tax, that practically all desired and accepted 
 points of equity which clash with the law, are never offered 
 to the public but have to be demanded." Mr. W. E. Snelling 
 in the second edition of his "Excess Profits Duty" states: "It 
 
XV111 INTRODUCTION 
 
 is hardly too much to suggest that, in important respects in 
 this connection, the Act necessarily does little more than indi- 
 cate the general direction which should be followed in the com- 
 putation of taxable excess. Within limits, the Legislature in- 
 vites applications for the modification of general rules which 
 peculiar circumstances render inequitable. The discretionary 
 powers accorded to the taxing authority are similarly note- 
 worthy." 
 
 As in England, there cannot be a fair and equitable adminis- 
 tration of income taxes in the United States, without the exer- 
 cise of a reasonable degree of liberality in the practice by those 
 under whose authority the law is administered. Until such 
 time as local boards will have been established (the necessity 
 for which now appears imperative) application for special 
 rulings should be made to the Commissioner of Internal Revenue 
 either at Washington, D. C., or through the local collector. 
 
 The Secretary of the Treasury has just announced the ap- 
 pointment of a "Commission of Nine Advisers" to interpret 
 the Excess Profits Tax Law, which Commission, it is intimated, 
 will also have judicial functions. This is a step in the right 
 direction and it is hoped that further provision will be made 
 throughout the States for a system of hearings upon questions 
 that have already been propounded in connection with war tax 
 measures. 
 
TERMS USED HEREIN 
 
 AS DEFINED BY INCOME TAX LAWS, DECISIONS AND RUL- 
 INGS THEREUNDER, OR AS CONSTRUED FROM THEIR 
 ORDINARY USAGE 
 
 ABATEMENT is a claim for allowance or refund of taxes. 
 
 "ACCRUAL BASIS" refers to method of account keeping and 
 manner of making return. A return prepared on that basis 
 includes income and expenses accrued as well as those 
 received and disbursed. 
 
 ADDITIONAL TAXES OR SURTAXES are the graduated or progres- 
 sive taxes imposed upon individuals by the Acts of Sep- 
 tember 8, 1916, and October 3, 1917, designated as the 
 Income Tax and War Income Taxes, in addition to the 
 Normal Tax imposed thereby. In effect, the Excess 
 Profits Taxes on individuals and corporations, are also 
 additional taxes based upon income. 
 
 ADDITIONS, BETTERMENTS AND IMPROVEMENTS are items of 
 expense that add to the value of property, i. e., capital ex- 
 penditures. 
 
 ALIEN. An alien is a citizen or subject of a country other than 
 the United States. (See "Resident Alien" and "Non- 
 resident Alien. ") 
 
 AMORTIZATION refers to the redemption of a liability, as the 
 amortization of bonds; or the reduction of an asset by 
 means of a sinking fund or otherwise. 
 
 ASSET, refers to property such as stock-in-trade, cash, accounts 
 receivable, land, buildings, machinery, tools, stocks, bonds, 
 good will, and so on. Some of these are limited or excluded 
 as invested capital. 
 
 AVERAGE PREWAR PROFIT refers to the amount deductible in 
 ascertaining the sum subject to the Excess Profits Tax; 
 it is based upon profits earned during the designated prewar 
 years, 1911, 1912 and 1913, and, by limitation of law, the 
 rate cannot exceed 9 per cent, or be less than 7 per cent, of 
 capital invested for the taxable year. 
 
XX DEFINITIONS OF TERMS 
 
 BAD DEBTS are accounts or .bills receivable that are uncollectible, 
 or only partly recoverable and bad debts as to the uncol- 
 lectible part. 
 
 BALANCE SHEET is a statement of assets and liabilities as at a 
 particular time. 
 
 BONDED INDEBTEDNESS is a corporate obligation secured by a 
 bond. 
 
 BONUS refers either to additional compensation paid for serv- 
 ices rendered or to a gratuity. The circumstances of each 
 case will determine its treatment for income tax purposes. 
 
 CAPITAL EMPLOYED is denned as the entire capital paid in by 
 stockholders, plus so much of the accumulated surplus 
 as is not in excess of the needs of the business, but excludes 
 any borrowed capital or indebtedness. 
 
 CAPITAL INVESTED or INVESTED CAPITAL cannot be briefly de- 
 fined. (See page 128.) 
 
 CORPORATION, under the Income Tax Acts, includes joint-stock 
 companies or associations and insurance companies. 
 
 DEDUCTIONS are the items of expense, losses sustained and al- 
 lowances by law permitted to be deducted from income 
 or profit in ascertaining the taxable amount; also, exemp- 
 tions to which the taxpayer is entitled by provision of law. 
 
 DEPLETION is the reduction in value of natural resources de- 
 ductible in the ascertainment of net income. 
 
 DEPRECIATION is the shrinkage in value of tangible property 
 occasioned by use, deterioration, wear and tear, etc. 
 
 DIVIDEND is a sum distributed or ordered to be distributed 
 among the stockholders of a corporation out of its earnings; 
 the term is used to denote the entire amount distributed 
 or ordered to be distributed, as well as the portion received 
 or receivable by a stockholder. 
 
 DOMESTIC CORPORATION is one "created under the laws of the 
 United States, or of any State, Territory or District 
 thereof." (Section 200, Excess Profits Tax Law.) 
 
 EXCESS PROFITS TAX is a tax imposed upon corporations, part- 
 nerships and individuals in addition to the Income Tax 
 and War Income Tax. 
 
 EXEMPT ORGANIZATIONS are only those that are, by classes, 
 specifically enumerated in the law. 
 
DEFINITIONS OF TERMS XXI 
 
 FISCAL YEAR is the annual period for which a corporation or 
 partnership makes its accounting, usually fixed, respec- 
 tively, by the by-laws or articles of copartnership. In the 
 case of an individual, with respect to returns under present 
 income tax laws, it can only be the calendar year. 
 
 FOREIGN CORPORATION is one created under the law of any 
 possession of the United States other than a State, Terri- 
 tory or District thereof, or of any foreign country or gov- 
 ernment. (Section 200, Excess Profits Tax Law.) 
 
 GOOD WILL is the value that attaches to a business beyond its 
 tangible property, by reason of reputation or location. 
 Under the Excess Profits Tax good will may, where it was 
 purchased for cash or property, be a part of the "capital 
 invested" with limitation as to amount. 
 
 GROSS INCOME OR GROSS PROFIT is usually the excess of pro- 
 ceeds of sale of commodities dealt in over the cost of goods 
 sold, plus income from other sources, without any deduc- 
 tion in respect of administration or distribution expenses. 
 
 HEAD OF FAMILY is held to be "a person who actually supports 
 and maintains one or more individuals who are closely 
 connected with him by blood relationship, relationship by 
 marriage or by adoption and whose right to exercise family 
 control and provide for these dependent individuals is 
 based upon some moral or legal obligation." (T. D. 2427). 
 
 "INFORMATION AT SOURCE" refers to returns to be made in 
 place of withholding at source as heretofore. Except in 
 respect of payments to nonresident alien individuals and 
 nonresident alien corporations, and payments of interest 
 to citizens and resident aliens on obligations containing a 
 tax free covenant clause, taxes need not now be withheld 
 at the source of payment. 
 
 " IN TRADE," as defined by the Treasury Department, is synony- 
 mous with business, employment, regular occupation. 
 
 LIABILITY is an obligation or indebtedness. 
 
 LIMITED PARTNERSHIP is a partnership that has one or more 
 "special partners" whose liability is limited; it is formed 
 by complying with State laws providing therefor. In the 
 application of income tax laws it is treated as a corpo- 
 ration. 
 
XX11 DEFINITIONS OF TERMS 
 
 NET INCOME, NET PROFIT or NET EARNINGS is the excess of 
 gross income or gross profit over and above the sum of de- 
 ductible expenses and losses allowed by law as deductions. 
 As applied to foreign corporations or partnerships or a 
 non-resident alien individual, it refers only to net income 
 received from sources within the United States. 
 
 NONRESIDENT ALIEN is a citizen or subject of a country other 
 than the United States whose domicile is without the 
 United States. 
 
 NORMAL TAXES, in the case of individuals, are the flat rates 01 
 taxes computed on the net income, less dividends of cor- 
 porations whose net income is subject to tax, tax withheld 
 at the source and personal exemptions. In the case of 
 corporations, the normal taxes are those imposed upon 
 the entire net income as determined by provision of law. 
 For the purpose of normal tax no exemption is allowed to 
 corporations. All normal taxes are flat rates not pro- 
 gressive. 
 
 OCCUPATION, as used in the Excess Profits Tax, by ruling of the 
 Treasury Department, includes employment, compensated 
 for by a salary. Persons receiving a salary are subject to 
 the flat rate of the Excess Profits Tax. 
 
 PARTNERSHIP is not defined in either of the present Income Tax 
 Acts. In a liberal sense, it is the relation which exists 
 "between persons carrying on a business in common with 
 a view of profit." (See pages 68 to 71.) 
 
 PREWAR PERIOD, as used in the Excess Profits Tax, refers to 
 years 1911, 1912 and 1913 or such of these years, during 
 the whole of which, a corporation or copartnership was 
 in existence or an individual was engaged in trade or 
 business. 
 
 PROFIT AND Loss ACCOUNT is a statement of the profit or loss 
 of an undertaking for a given period of time. 
 
 RATES, refer to rates or percentages of taxes. 
 
 REG. (Treasury Regulation) refers to rules and regulations pre- 
 scribed by the Treasury Department. 
 
 REORGANIZATION is "A term applied to the formation of a new 
 corporation by the creditors and shareholders of a corpora- 
 tion which is in financial difficulties, for the purpose of 
 
DEFINITIONS OF TERMS XX111 
 
 purchasing the company's works and other property, after 
 the foreclosure of a mortgage or judicial sale." (34 Cyc. 
 
 1336.) 
 
 RESERVE denotes an amount set aside from profits for a par- 
 ticular purpose or to meet contingencies. (See Reserve 
 Account and Reserve Fund.) 
 
 RESERVE ACCOUNT represents an amount charged to Profit and 
 Loss (deducted from profit) in determining the true or net 
 profit. Comparatively, such an account is a fictitious 
 reserve in that it is usually a reduction of the book value 
 of the asset (property account) to which it relates. (See 
 "Reserve for Depreciation.") 
 
 RESERVE FUND represents an amount set aside from profits and 
 segregated in the assets or set apart from other assets; for 
 example, cash deposited in a separate bank account or 
 invested in outside securities. Comparatively, a reserve 
 fund is a real reserve in that it is actually set apart from 
 other property. 
 
 RESERVE FOR DEPRECIATION is an account that represents the 
 amount of depreciation of property deducted from profits. 
 It is a fictitious reserve in that it is merely the measures by 
 which the asset account (property account) has been re- 
 duced by depreciation charged off. 
 
 "RESIDENCE" or "PLACE OF RESIDENCE" is one's permanent 
 home or domicile as distinguished from lodging or tem- 
 porary abode. 
 
 RESIDENT ALIEN is a citizen or subject of a country other than 
 the United States whose domicile is within the United 
 States. 
 
 "RETURN" is a report of net income prepared in the form pre- 
 scribed by law. 
 
 SALARY refers to compensation paid for services rendered; the 
 amount is fixed hi advance, at a sum certain, for a definite 
 period of time. 
 
 SURPLUS or SURPLUS PROFITS is the excess of assets over and 
 above the sum of liabilities and capital. It may or may 
 not include reserves, according to the nature of them. 
 
 SURTAXES or SUPERTAXES are the taxes imposed upon in- 
 dividuals under the Acts of September 8, 1916, and Oc- 
 
XXIV DEFINITIONS OF TERMS 
 
 tober 3, 1917, in addition to the normal tax. (See "Ad- 
 ditional Taxes.") 
 
 TAX FREE COVENANT CLAUSE is a contract or provision in a 
 bond by which the obligor agrees to pay the tax on the 
 income from such bond or part thereof imposed upon the 
 obligee, whereby the obligor agrees to reimburse the ob- 
 ligee therefor. 
 
 T. D. (Treasury Decision) designates a ruling under, or inter- 
 pretation of, the law by the Treasury Department, which 
 has the effect of law. 
 
 TRADE and BUSINESS, under the Excess Profits Tax, include 
 professions and occupations. 
 
 UNDIVIDED PROFITS of a corporation refer to the difference be- 
 tween the net earnings and dividends paid or declared 
 therefrom. 
 
 UNITED STATES "means only the States, the Territories of 
 Alaska and Hawaii and the District of Columbia." (Sec- 
 tion 200, Excess Profits Tax.) 
 
 WITHHOLDING AT SOURCE refers to the deduction of the normal 
 tax by the payer of income and paying the same to the 
 Government officials authorized to receive the same. 
 
 WITHHOLDING AGENT is one who is required to withhold the 
 normal tax from the income of another of which he has the 
 custody or disposal. 
 
INCOME TAX LAW AND ACCOUNTING 
 
CHAPTER I 
 TAXES APPLICABLE TO INDIVIDUALS 
 
 I. GENERAL PROVISIONS OF LAW 
 
 The Federal Income Tax Law, enacted September 8, 1916, 
 as amended, by Act of October 3, 1917, comprises Income 
 the present Income Tax Law. Tax 
 
 In addition to the present income taxes, the Act of October 3, 
 1917, imposes upon citizens and residents of the United States 
 a War Income Tax which is computed upon the War In- 
 same net income as that upon which the Income come Tax. 
 Tax is levied, but with different amounts of exemptions, an ad- 
 ditional normal tax, and at different rates of surtaxes. 
 
 The Act of October 3, 1917, provides, also, for WarEx- 
 the imposition of a War Excess Profits Tax upon net cess Profits 
 income, less a deduction. (See page 116.) 
 
 All of the aforementioned taxes are applicable to income of the 
 entire year 1917; the amendments to the Income Tax Law of 
 September 8, 1916, the War Income Tax and the When 
 War Excess Profits Tax, enacted October 3, 1917, Effective, 
 are retroactive and effective as of January i, 1917. 
 
 II. INCOME TAX (ACT OF SEPTEMBER 8, 1916) 
 
 Every citizen of the United States, irrespective of his place 
 of residence, at home or abroad, and every resident of the 
 United States, shall pay the tax upon his entire net Who is 
 income received from all sources, in the preceding j^me ** 
 calendar year; and every nonresident alien shall pay Tax. 
 the tax upon his entire net income received from all sources 
 within the United States; less the credits and exemptions to 
 which such persons shall, respectively, be entitled under the law. 
 
_ x , INCOME TAX LAW AND ACCOUNTING 
 
 The tax on the income of individuals is composed of two 
 Division of parts, designated the "normal tax" and the "ad- 
 
 Tax. 
 
 Normal 
 Tax. 
 
 Dividends. 
 
 ditional tax," or "surtax." 
 
 The normal tax imposes the fixed annual rate of 
 2 per cent, upon the entire net income of individuals, 
 except, 
 
 1. Income derived from dividends on the capital stock or 
 
 net earnings of corporations, joint-stock companies 
 or associations, or insurance companies, on which 
 the normal tax is paid by such companies or associations; 
 
 2. The personal exemption of $3,000 per annum to an un- 
 married person and $1,000 additional to a head of a family, 1 or 
 Personal to a marr i e d man with a wife living with him, or to 
 Exemp- a married woman with a husband living with her, 
 tions. provided, however, that only one $4,000 shall be 
 allowed to both husband and wife from their aggregate income. 
 (A nonresident alien is not allowed a personal exemption) ; 
 
 3. An additional exemption of $200 to the head of a family 
 (allowable only to one parent of the same family) for each de- 
 pendent child under the age of eighteen years, or if incapable 
 of self-support by reason of being mentally or physically defec- 
 tive regardless of age. 
 
 The additional tax is imposed upon all net income of the in- 
 dividual, including that received as dividends on capital stock 
 Additional or from net earnings of corporations, joint-stock 
 Tax. companies or associations, or insurance companies, 
 
 in excess of $20,000, upon the progressive scale, as follows: 
 
 On amounts in excess of: 
 
 $20,000 and not in excess of $40,000 i per cent. 
 
 60,000 2 
 
 80,000 3 
 
 100,000 4 
 
 150,000 5 
 
 200,000 6 
 
 250,000 7 
 
 300,000 8 
 
 a person who actually supports and maintains 
 
 40,000 
 
 60,000 
 
 80,000 
 100,000 
 150,000 
 200,000 
 250,000 
 1 A head of a family is 
 
 one or more individuals who are closely connected with him by blood rela- 
 tionship, by marriage or by adoption, and whose rights to exercise family 
 control and provide for these dependent individuals is based upon some 
 moral or legal obligation." T. D. 2427. 
 
TAXES APPLICABLE TO INDIVIDUALS 3 
 
 $300,000 and not in excess of 500,000 9 per cent. 
 
 500,000 " 
 
 1,500,000 "2,000,000 12 ' 
 
 2,000,000 I 3 " " 
 
 III. WAR INCOME TAX (ACT OF OCTOBER 3, 1917) 
 
 Every citizen of the United States, irrespective of his place 
 of residence, at home or abroad, and every resident of the 
 United States, shall pay the tax upon his net in- Who is 
 come received from all sources in the preceding ^^. J ^ to 
 calendar year, less the credits and exemptions to come Tax. 
 which such person shall, by law, be entitled. 
 
 The War Income Tax law is not applicable to nonresident 
 aliens. 
 
 The War Income Tax, as in the case of the Income Tax, is 
 divided into two parts, the normal and the addi- Division 
 tional tax. of Tax. 
 
 The normal war income tax is fixed at the flat rate of 2 per 
 cent, upon the entire net income of individuals, Normal 
 except: Tax. 
 
 1. Income derived from dividends on the capital stock or 
 net earnings or corporations, joint-stock companies _.. .. 
 
 or associations, or insurance companies, on which 
 the normal tax is paid by such companies or associations; 
 
 2. The personal exemption of $1,000 per annum to the un- 
 married person and $2,000 to the head of a family or to a mar- 
 ried man with a wife living with him, or to a married Personal 
 woman with a husband living with her; provided, Exemp- 
 however, that only one deduction of $2,000 shall be tions - 
 allowed to both husband and wife from their aggregate incomes; 
 
 3. An additional exemption of $200 to the head of a family 
 (allowable only to one parent of the same family) for each de- 
 pendent child under the age of eighteen years, or if incapable 
 of self-support, because mentally or physically defective. 
 
 The additional tax under the War Income Tax Law is im- 
 posed against the entire net income of individuals, Additional 
 including that received as dividends on capital stock Tax - 
 or from net earnings of corporations, joint-stock companies 
 
4 INCOME TAX LAW AND ACCOUNTING 
 
 or associations, or insurance companies, in excess of $5,000 
 upon a graduated scale, as follows: 
 
 On amounts in excess of: 
 
 $5,000 and not in excess of $7,500 i per cent. 
 
 7,500 " " " " " 10,000 2 " " 
 
 10,000 " " " " " 12,500 3 " " 
 
 12,500 " " " " " 15,000 4 " " 
 
 15,000 " " " " " 
 
 20,000 ' 40,000 7 ' 
 
 40,000 " " " " " 60,000 10 " " 
 
 60,000 " " " " " 80,000 14 " " 
 
 80,000 " " " " " 100,000 18 " " 
 
 IOO,OOO " " " " " I5O,OOO 22 " " 
 
 150,000 " " " " " 200,000 25 " " 
 
 200,000 " " " " " 250,000 3 " " 
 
 " " 300,000 34 " " 
 
 " " 500,000 37 " " 
 
 " " 750,000 40 " " 
 
 750,000 " " " "1,000,000 45 " " 
 
 In excess of $1,000,000 50 " " 
 
 IV. INCOME TAX AND WAR INCOME TAXES 
 
 COMBINED RATES AND EXAMPLES OF THEIR APPLICATION TO 
 
 INCOMES 
 
 Under the combined administration of both Acts, herein- 
 Exemp- before mentioned, all persons will receive credit 
 tions. f or the exemptions to which they are, respectively, 
 
 entitled under each Act, as follows: 
 
 Act of Act of 
 
 Sept. 8, Oct. 3, 
 
 1916 1917 
 
 Unmarried person $3,000.00 $1,000.00 
 
 Married person or head of family 4,000 . oo 2,000 . oo 
 
 The normal tax under each of the Acts is 2 per cent., making 
 Combined a total normal tax of 4 per cent, upon the entire 
 Normal net income, less the respective exemptions, and, 
 Taxes. under the combined administration of both Acts 
 the normal taxes are, in the case of, 
 
TAXES APPLICABLE TO INDIVIDUALS 5 
 
 Unmarried persons: 
 
 Two per cent, on amounts in excess of $1,000 and not in 
 excess of $3,000. 
 
 Four per cent, on amounts in excess of $3,000. 
 Married persons or heads of families: 
 
 Two per cent, on amounts in excess of $2,000 and not in excess 
 of $4,000. 
 
 Four per cent, on amounts in excess of $4,000. 
 
 The combined additional taxes under both Acts Combined 
 are as follows: Additional 
 
 laxes. 
 
 Act of Act of Total 
 
 Sept. 8, Oct. 3, Rates 
 
 1916 1917 
 
 Per Cent. Per Cent. Per Cent. 
 
 On amounts in excess 
 
 of: 
 
 
 
 
 $5,000 and not in e; 
 
 xcess of $7,500 
 
 none 
 
 I 
 
 i 
 
 
 
 none 
 
 2 
 
 2 
 
 10,000 " " " 
 
 " " 12,500 
 
 none 
 
 3 
 
 3 
 
 12,500 " " " 
 
 " " 15,000 
 
 none 
 
 4 
 
 4 
 
 15,000 " " " 
 
 " " 20,000 
 
 none 
 
 5 
 
 5 
 
 20,000 " " " 
 
 " " 40,000 
 
 i 
 
 7 
 
 8 
 
 40,000 " " " 
 
 " " 60,000 
 
 2 
 
 10 
 
 12 
 
 60,000 " " " 
 
 " " 80,000 
 
 3 
 
 14 
 
 17 
 
 80,000 " " " 
 
 " " 100,000 
 
 4 
 
 18 
 
 22 
 
 100,000 " " " 
 
 " " 150,000 
 
 5 
 
 22 
 
 27 
 
 150,000 " " " 
 
 " " 200,000 
 
 6 
 
 25 
 
 31 
 
 200,000 " " " 
 
 " " 250,000 
 
 7 
 
 30 
 
 37 
 
 250,000 " " " 
 
 " " 300,000 
 
 8 
 
 34 
 
 42 
 
 300,000 " " " 
 
 " " 500,000 
 
 9 
 
 37 
 
 46 
 
 500,000 " " " 
 
 " " 750,000 
 
 10 
 
 40 
 
 So 
 
 750,000 " " " 
 
 " " 1,000,000 
 
 10 
 
 45 
 
 55 
 
 1,000,000 " " " 
 
 " " 1,500,000 
 
 ii 
 
 50 
 
 61 
 
 1,500,000 " " " 
 
 " " 2,000,000 
 
 12 
 
 50 
 
 62 
 
 2,000,000 . . 
 
 
 M 
 
 j?o 
 
 6j 
 
 The following examples illustrate the method of computing 
 the normal and additional taxes imposed by the Income Tax, 
 as amended, and the War Income Tax, enacted respectively, 
 September 8, 1916, and October 3, 1917. 
 
6 INCOME TAX LAW AND ACCOUNTING 
 
 EXAMPLE OF COMPUTING THE NORMAL TAX OF AN UNMARRIED PERSON 
 WITH A NET ANNUAL INCOME OF $5,000 
 
 Net Taxable Income $5,000 . oo 
 
 Personal exemption 1,000.00 
 
 Subject to Normal Tax $4,000.00 
 
 As follows: 
 
 2% of (amount over $1,000 and not over 
 
 $3,000) $2,000 $40.00 
 
 4% of (amount over $3,000 and not over 
 
 $5,000) $2,000 80.00 
 
 Amount subject 
 to tax . $4,000 
 
 Total Tax $ 120.00 
 
 Or, otherwise stated: 
 
 2% of ($5,000 less exemption of $3,000) $2,000. ..... $40.00 
 
 2% of ($5,000 less exemption of $1,000) $4,000 80.00 
 
 Total Tax.. $ 120.00 
 
 EXAMPLE OF COMPUTING THE NORMAL TAX OF A MARRIED PERSON WITH 
 A NET ANNUAL INCOME OF $5,000 
 
 Net Taxable Income $5,000 . oo 
 
 Personal exemption 2,000 . oo 
 
 Subject to Normal Tax $3,000 . oo 
 
 As follows: 
 
 2% of (amount over $2,000 and not over 
 
 $4,000) $2,000 $40.00 
 
 4% of (amount over $4,000 and not over 
 
 $5,000) $1,000 40.00 
 
 Amount subject to 
 tax. . . .$3,000 
 
 Total Tax $ 80.00 
 
 Or otherwise stated: 
 
 2% of ($5,000 less exemption of $4,000) $1,000 $20.00 
 
 2% of ($5,000 less exemption of $2,000) $3,000 $60.00 
 
 Total Tax.. $ 80.00 
 
TAXES APPLICABLE TO INDIVIDUALS 7 
 
 EXAMPLE OF COMPUTING NORMAL AND ADDITIONAL TAXES OF AN UNMARRIED 
 PERSON WITH A NET ANNUAL INCOME OF $25,000 
 
 Net Taxable Income $25,000 . oo 
 
 Normal Tax: 
 
 2% of (amount in excess of $1,000 and not in 
 
 excess of $3,000) $2,000 $ 40 . oo 
 
 4% of (amount in excess of $3,000 and not in 
 
 excess of $25,000) $22,000 880.00 
 
 Subject to Normal 
 
 Tax $24,000 
 
 Normal Tax $ 920.00 
 
 Or, otherwise stated: 
 
 2% of ($25,000 less exemption of $3,000) $22,000 . . $440.00 
 2% of ($25,000 less exemption of $1,000) $24,000 . . 480.00 
 Normal Tax $920.00 
 
 ADDITIONAL TAX (COMBINED) 
 
 On amount in excess of: 
 
 $5,000 and not in excess of $7,500 = $2,500 @ i%, $25.00 
 7,500 " " " " " 10,000 = 2,500 @ 2%, 50.00 
 10,000 " " " " " 12,500 = 2,500 @ 3%, 75.00 
 12,500 " " " " " 15,000 = 2,500 @ 4%, 100.00 
 15,000 " " " " " 20,000 = 5,000 @ 5%, 250.00 
 20,000 " " " " " 25,000 = 5,000 @ 8%, 400.00 
 
 Additional or Surtax $ 900 . oo 
 
 Total Tax $ 1,820.00 
 
 EXAMPLE OF COMPUTING NORMAL AND ADDITIONAL TAXES OF A MARRIED 
 PERSON WITH A NET ANNUAL INCOME OF $50,000 
 
 Net Taxable Income $50,000 . oo 
 
 Normal Tax: 
 2% of (amount in excess of $2,000 and not in 
 
 excess of $4,000) $2,000 $ 40.00 
 
 4% of (amount in excess of $4,000 and not in 
 
 excess of $50,000) $46,000 1,840 . oo 
 
 Subject to Normal 
 
 Tax $48,000 
 
8 INCOME TAX LAW AND ACCOUNTING 
 
 Normal Tax $ 1,880 . oo 
 
 Or, otherwise stated : 
 
 2% of ($50,000 less exemption of $4,000) $46,000. . $ 920.00 
 
 2% of ($50,000 less exemption of $2,000) $48,000. . 960.00 
 
 Normal Tax $1,880.00 
 
 ADDITIONAL TAX (COMBINED) 
 
 On amount in excess of: 
 
 $5,000 and not in excess of $7,500 = $2,500 i%, $25.00 
 
 7,500 " " " " " 10,000 = 2,500 2%, 50.00 
 
 10,000 " " " " "12,500= 2,500 3%, 75.00 
 
 12,500 " " " " " 15,000 = 2,500 4%, 100.00 
 
 15,000 " " " " " 20,000 = 5,000 @ 5%, 250.00 
 
 20,000 " " " " "40,000 = 20,000 8%, 1,600.00 
 
 40,000 " " " " " 50,000 = 10,000 @ 12%, 1,200.00 
 
 Amount subject to surtax $45,000 
 
 Additional or Surtax $ 3,300.00 
 
 Total Tax $ 5,180.00 
 
 EXAMPLE OF COMPUTING NORMAL AND ADDITIONAL TAXES WHERE INCOME 
 INCLUDES TAX-EXEMPT INTEREST AND DIVIDENDS OF CORPORATIONS 
 
 Assuming a married man, living with his wife, and having three children 
 under the age of eighteen years, with an income for the year 1917 of : 
 
 Salary $25,000 . oo 
 
 Interest on tax exempt bonds (U. S. and Municipal) 2,500 . oo 
 
 Dividends of corporations 15,000 . oo 
 
 Interest on mortgages 5,ooo . oo 
 
 Total Income $47,500 . oo 
 
 Excess Profits Tax creditable: 1 
 
 Salary $25,000.00 
 
 Exemption 6,000.00 
 
 Tax, 8 per cent, of $19,000.00 1,520.00 
 
 Total Income less credit of Excess Profits Tax $45,980 . oo 
 
 Computed as follows: 
 
 1 For method of computing excess profits tax, see page 142. 
 
TAXES APPLICABLE TO INDIVIDUALS 9 
 
 NORMAL TAX 
 
 Total Income less Excess Profits Tax $45,980.00 
 
 Less items not taxable: 
 
 Interest on Government Bonds $2,500.00 
 
 Dividends of Corporations 15,000.00 17,500.00 
 
 Amount taxable, subject to exemptions $28,480.00 
 
 Exemptions: 
 
 Exempt under War Income Tax $2,000.00 
 
 For 3 children 600.00 2,600.00 
 
 Amount subject to Normal Taxes $25,880.00 
 
 As follows: 
 
 2% of amount over $2,600 
 
 and not over $4,600 $2,000.00 $40.00 
 
 4% of amount over $4,600 
 
 and not over $28,480 23,880.00 _ 955.20 
 
 Subject to Normal Tax $25,880.00 
 
 Normal Tax $995 . 20 
 
 Or, otherwise stated: 
 
 2% of ($28,480 less exemption 
 
 of $4,600) $23,880.00 $477-6o 
 
 2% of ($28,480 less exemption 
 
 of $2,600) 25,880.00 517.60 
 
 Normal Tax $995 20 
 
 ADDITIONAL TAX (COMBINED) 
 
 Total Income less credit of Excess Profits Tax $45,980.00 
 
 Less Interest on U. S. Gov't and Municipal Bonds 
 
 (Exempt) l 2,500 . oo 
 
 Balance $43,480.00 
 
 Taxable as follows: On amount in excess of: 
 $5,000 and not in excess of $7,500 = $2,500 i%, $25 .00 
 7,500 " " " " " 10,000 = 2,500 @ 2%, 50.00 
 10,000 " " " " " 12,500= 2,500 3%, 75.00 
 12,500 " " " " "15,000= 2,500 4%, 100.00 
 15,000 " " " " " 20,000 = 5,000 @ 5%, 250.00 
 20,000 " " " " " 40,000 = 20,000 @ 8%, 1,600.00 
 
 40,000 " " " " "43,480= 3, 4 80@ 12%, 417.60 
 
 Amount subject to surtax $38,480 
 
 Additional or Surtax $2,517 . 60 
 
 Total Normal and Additional Taxes $3,512 . 80 
 
 1 This item represents income from municipal and U. S. Government 
 bonds. As to deducibility of interest on Liberty Loan bonds, see page 41. 
 
10 
 
 INCOME TAX LAW AND ACCOUNTING 
 
 TABLE OF NORMAL AND ADDITIONAL TAXES IMPOSED BY THE INCOME TAX 
 AND WAR INCOME TAX LAWS UPON NET INCOME OF MARRIED PERSONS 
 OR HEADS OF FAMILIES, ON AMOUNTS AS FOLLOWS : 
 
 Amount 
 
 of 
 Income 
 
 Combined Normal 
 
 Taxes Imposed 
 
 by Income and 
 
 War Income Tax 
 
 Laws less Personal 
 
 Exemptions 
 
 Combined Addi- 
 tional Taxes 
 Imposed by 
 Income and War 
 Income Tax Laws 
 
 Total Combined Normal and 
 Additional Taxes 
 
 A mount Per cent 
 
 $2,000 
 j OOO 
 
 , . . None 
 20 oo 
 
 . . None 
 None 
 
 . .None. . . . 
 20 . oo . 
 
 oo 
 
 .67 
 
 A OOO 
 
 AQ OO 
 
 None 
 
 40 oo 
 
 I OO 
 
 e OOO 
 
 80.00 
 
 . None 
 
 80.00. 
 
 1 . 60 
 
 6 ooo 
 
 1 2O OO . . . 
 
 10.00 
 
 130.00. 
 
 .... 2.17 
 
 7 OOO 
 
 1 60 oo 
 
 20 oo . . 
 
 180.00. 
 
 2 <C7 
 
 8 ooo 
 
 200.00 
 
 35.00. . 
 
 23C..OO. 
 
 .... 2 . 94 
 
 O OOO 
 
 24O OO 
 
 ">C, .OO. . 
 
 20 5 .OO. 
 
 .3.28 
 
 IO OOO 
 
 280 oo 
 
 7? oo . 
 
 3SC..OO. 
 
 . 3. ">< 
 
 I<C OOO 
 
 480 oo 
 
 250 oo 
 
 730 oo 
 
 4 87 
 
 20 ooo 
 
 680 oo. . . . 
 
 500.00 
 
 1, 180.00. 
 
 . s -QO 
 
 oe ooo 
 
 880 oo 
 
 QOO OO. . . . 
 
 1,780.00. 
 
 . 7.12 
 
 20,000 
 
 1,080.00 
 
 I,3OO.OO 
 
 2,380 . oo . 
 
 .... 7 . 94 
 
 
 i 280 oo 
 
 I 7OO OO 
 
 2 080 OO 
 
 8 51 
 
 OO> UWVJ 
 
 
 2 IOO OO 
 
 3r8o OO 
 
 8 CK 
 
 A? OOO 
 
 i 680 oo 
 
 2 7OO OO . 
 
 4,380.00. 
 
 . 0-73 
 
 50,000 
 
 1,880.00 
 
 3,300.00 
 2 QOO OO 
 
 5,180.00. 
 
 r 080 OO 
 
 ... .10.36 
 10 87 
 
 OO> ( -*~"-' 
 
 60 ooo 
 
 2 280 OO 
 
 4 SOO OO. . 
 
 6,780.00. 
 
 
 6^ ooo 
 
 2 480 OO 
 
 f 2 CO OO 
 
 7,830.00. 
 
 . . 12 .CX 
 
 
 2 680 OO 
 
 6 200 oo 
 
 8,880.00. 
 
 12.68 
 
 /<J,U_KJ 
 
 7;,ooo. . 
 
 2,880.00 
 
 7,050.00 
 
 9,930 . oo . 
 
 ... .13.24 
 
 80 ooo 
 
 3 080 OO 
 
 7 OOO OO . 
 
 10,980.00. 
 
 . .13.72 
 
 
 3280 oo 
 
 O OOO OO 
 
 12,280.00. 
 
 . . 14.4^ 
 
 oo ooo 
 
 ? 4.80 oo 
 
 10,100.00 
 
 13,580 oo. 
 
 ... .15.09 
 
 95,000 
 
 IOO OOO 
 
 3,680.00 
 3,880 oo 
 
 11,200.00 
 12,300.00 
 
 14,880.00. 
 16,180.00. 
 
 ....15.66 
 
 16.18 
 
 I2C. OOO 
 
 4 880 OO 
 
 
 23,930.00. 
 
 . . . .19.15 
 
 
 c 880 oo 
 
 2< 8OO OO 
 
 31 680 oo 
 
 . ... 21 . 12 
 
 I7S.OOO. . 
 
 6,880.00. . 
 
 33,550.00. . 
 
 40,430.00. 
 
 ..23.10 
 
RETURNS OF INDIVIDUALS II 
 
 Combined Addi- Total Combined Normal and 
 
 Additional Taxes 
 
 Income Tax Laws 
 
 Amount Per cent 
 
 $200,000 7,880.00 41,300.00 49,180.00 24.59 
 
 250,000 9,880.00 59,800.00 69,680.00 27.87 
 
 300,000 11,880.00 80,800.00 92,680.00 30-89 
 
 350,000 13,880.00 103,800.00 117,680.00 33.62 
 
 400,000 15,880.00 126,800.00 142,680.00 35- 6 7 
 
 450,000 17,880.00 149,800.00 167,680.00 37-26 
 
 500,000 19,880.00 172,800.00 192,680.00 38.53 
 
 600,000 23,880.00 222,800.00 246,680.00 41.11 
 
 700,000 27,880.00 272,800.00 300,680.00 42-95 
 
 800,000 31,880.00 325,300.00 357,180.00 44.65 
 
 900,000 35,880.00 380,300.00 416,180.00 46.24 
 
 1,000,000 39,880.00 435,300.00 475,180.00 47-52 
 
 2,000,000 79,880.00 1,050,300.00 1,130,180.00 56. 5 1 
 
 3,000,000 119,880.00 1,680,300.00 1,800,180.00 60.00 
 
 NOTE. The amounts of Excess Profits Tax Assessments are deductible 
 from the net income before computing the Income and War Income Taxes 
 shown above. (See page 142.) 
 
 V. RETURNS OF INDIVIDUALS 
 
 In the administration of the Income Tax Law, enacted 
 September 8, 1916, as amended, and the War In- Combined 
 come Tax Law, enacted October 3, 1917, the require- Return. 
 ments of these laws will be combined in one form of return. 
 
 Every person, a citizen or resident of the United States, hav- 
 ing received from all sources, a net income during the calendar 
 
 year 1017, and every calendar year thereafter, in WhoisRe- 
 t f i auired to 
 
 the case of: an unmarried person, $1,000 or more; Make 
 
 a married person or head of a family, $2,000 or Return, 
 more; will be required to make, execute and file a return of net 
 income. l 
 
 A "return" is the statement or report of income Return 
 upon which the Government basis the tax assess- Fonn. 
 ment. 
 
 1 Individuals are not permitted to file returns for any period other the 
 calendar year. 
 
12 INCOME TAX LAW AND ACCOUNTING 
 
 There is no obligation upon the part of the Government to 
 seek out those who are taxable or to send the necessary blanks 
 No Obliga- to those of whom returns are required. It is in- 
 tion Upon cumbent upon each individual to obtain the blank 
 ment^' from the Collector of his district or from the Corn- 
 Send Out missioner of Internal Revenue, Washington, D. C., 
 Blanks. jf ne j s required, under the law, to file a return. 
 
 Income of the husband and wife, if not living apart, may be 
 returned in one report. 
 
 Return by If the aggregate income of both husband and 
 Husband wife is $2,000 or more for the calendar year a return 
 and wife. Q f ^eir combined incomes or separate returns of 
 their respective incomes must be made. When separate returns 
 are made the exemption may be prorated by agreement between 
 them but the aggregate exemption deducted shall not exceed 
 
 $2,000. 
 
 Where the income of husband and wife exceeds $5,000 per 
 annum, they should make separate returns because the addi- 
 tional or surtax is computed on the separate income of each 
 individual. 
 
 The regulations of the department requiring the incomes 
 of husband and wife to be combined and authorizing the 
 aggregate exemption of ($4,000) $2,000 from such com- 
 bined income are applicable for the purpose of the normal 
 tax only. The additional, or surtax, imposed by the act 
 will be computed on the basis of the separate income of each 
 individual; that is, on the amount of each individual's in- 
 come in excess of the minimum amounts upon which the 
 surtax at the graduated rate is to be calculated. (T. D. 
 2090.) 
 
 The separate incomes of husband and wife should not be 
 combined in a return of income for the purpose of assessing 
 the additional or surtax. (T. D. 2137.) 
 
 All persons and corporations acting in a fiduciary capacity, 
 such as guardians, trustees, executors, administrators, receivers, 
 Returns conservators, must make and render a return of net 
 by Fi- income of the person, trust or estate for whom or 
 duciaries. which they act ( Form IO4I> Revised) and are sub- 
 ject to all the provisions in regard thereto that apply to in- 
 
RETURNS OF INDIVIDUALS 13 
 
 dividuals. Where there is more than one person or corporation 
 acting in a fiduciary capacity, the return of one is sufficient, 
 provided that such return is a complete report upon all income 
 received. 
 
 The fiduciary should only account for income received through 
 him except where he acts as agent or attorney in fact for the 
 beneficiary. 
 
 As each such fiduciary acts solely in behalf of the ben- 
 eficiaries of the trust, the annual return required in such 
 cases has reference only to the income accruing and payable 
 through said fiduciary, and not to the income of the ben- 
 eficiary derived from other sources. If, however, such 
 fiduciary is legally authorized to act for such beneficiary as 
 agent or attorney in fact, he may in such case also make for 
 the beneficiary the personal annual return (Form 1040) 
 required by law. (Art. 72, Reg. 33.) 
 
 Unless the beneficiary is under some disability which 
 requires the fiduciary to act, the beneficiary will make his 
 own return and account for the tax upon his entire net 
 income. (T. D. 2090.) 
 
 An executor or administrator is required to make a return 
 of the income received by the decedent for the period from 
 the first day of January to the date of the decedent's death. 
 (Form 1040 Revised.) 
 
 A person acting under a power of attorney is not construed 
 to be a fiduciary and is not required to render return of receipts 
 and disbursements in his representative capacity. Agent 
 Should he, however, have title to property, from ^ C def 
 which there is income, irrespective of actual owner- Power of 
 ship, he must make return of such income. A prop- Attorney, 
 erty owner cannot conceal his income by assigning it to a repre- 
 sentative for the purpose of escaping the tax. Where there is a 
 transfer of vested interest in property the transferee must in- 
 clude in his return not only such part of income as has been paid 
 to the principal but the undistributed portion as well. 
 
 If, by reason of illness, absence or nonresidence, a person is 
 unable to render a return in due time, then the return may be 
 made by an agent having knowledge of the affairs Return by 
 of such person whose return he makes. Such agent Agent. 
 
14 INCOME TAX LAW AND ACCOUNTING 
 
 is subject to all penalties provided for erroneous, false or fraudu- 
 lent returns. 
 
 When by reason of minority, absence, sickness, or other 
 disability the individual is unable to make his own return, 
 the same shall be made by his guardian or duly authorized 
 agent. (Art. 17, Reg. 33.) 
 
 Private banks, distributing their income according to invest- 
 ment of members and exercising corporate form of organization, 
 Returns of should make returns in the same form as corpora- 
 Private tions. The income received by the members of 
 such private bank, is not subject to the normal tax 
 in the returns of net income of the member. 
 
 Private banks which have the form of corporate or- 
 ganizations, elect officers and a board of managers, have a 
 distinctive name, a fixed situs, and distribute their net 
 earnings upon the basis of the amount of capital invested 
 by the members or owners, are held to be associations 
 within the meaning of the Federal income tax law, and in 
 their organized capacity should make returns of annual net 
 income and pay any income tax thereby shown to be due. 
 
 The holders of the stock or the owners of the bank will be 
 exempt from the normal tax to the extent of the dividends 
 or earnings which they receive from such private banks as 
 make returns in their organized capacity and pay income 
 tax in accordance therewith. . . . (T. D. 2137.) 
 
 The foregoing is true, also, in the case of income from 
 private banks which are recognized as associations for income 
 tax purposes. 
 
 In the case of private banks which have the form of 
 corporations and which are held to be associations within 
 the meaning of the Federal income tax law, it is not the 
 purpose of this office to assess the income tax against such 
 banking associations and then also against the individual 
 members of the association. 
 
 Income which the members of the association receive 
 from the bank because of their investments therein will be 
 considered dividends. . . . (T. D. 2152.) 
 
 A banking firm doing business as a partnership (not limited) 
 and which has not a formal corporate organization or that of 
 
RETURNS OF INDIVIDUALS 15 
 
 an association is not required to make returns of net income 
 except under the War Excess Profits Tax. The members of 
 the partnership will include in their respective individual re- 
 turns the income received from the partnership. 
 
 A bank owned by one person is not construed to be an asso- 
 ciation under the income tax law and is not required to make 
 returns of net income such as are required of corporations and 
 associations. The income of such bank would be included in 
 the return of the individual owner together with income from 
 all other sources of such person. 
 
 The fact that an American citizen resides abroad and pays 
 an income tax to the country wherein he resides, does not ex- 
 cuse him from paying an income tax in the United Citizens 
 States. He is required to make a return of all his j^jj^ 
 income to the Collector in the district of his legal Must Make 
 residence or principal place of business in the United Return. 
 States. If a citizen, residing abroad, has no residence or place 
 of business in the United States, his return should be made 
 to the Collector of Internal Revenue, Baltimore, Maryland, 
 which is the collection district of Washington, D. C. 
 
 A true and accurate return of net income must be filed with 
 the Collector of Internal Revenue for the district in which the 
 person has his legal residence or principal place of TO Whom 
 business, or if there be no legal residence or place Return is 
 of business in the United States, then with the Col- Made * 
 lector of Internal Revenue, Baltimore, Maryland. 
 
 Every return is required to be verified by the oath Verifica- 
 of the party rendering it. tion - 
 
 For the purpose of verification of returns of income by 
 persons in the Naval and Military service of the United 
 States, any officer in the Naval or Military Serv- Verifica- 
 ice of the United States, within or without the tion of 
 United States, who is authorized to administer p|jjj 
 oaths under the provisions of Section 4, Act of Naval or 
 July 27, 1892, 27 Stat. 2 7 8, -providing for the ad- Military 
 ministration of oaths, for the purpose of Military Service, 
 justice and administration or under the provisions of Act 
 of March 4, 1917, Public 391, page 4, providing for ad- 
 ministration of oaths for the purpose of Naval justice and 
 
1 6 INCOME TAX LAW AND ACCOUNTING 
 
 administration, is hereby empowered and authorized to 
 take the acknowledgment of such persons making returns 
 of income. 
 
 In all such cases the certifying officer shall place under his 
 name the official designation under which he acts. (T. D. 
 2534.) 
 
 The return for the year ending December 31, 1917, must be 
 filed on or before March 1,1918, and the return for each calendar 
 Due Date year thereafter must be filed on or before March ist, 
 of Filing. nex t succeeding such calendar year. 
 
 In case of inability, occasioned by sickness or business, to 
 file a return in due time (March i) application for extension of 
 Extension time should be made in writing to the Collector, 
 pjjj 1 j|_ to on or before the day on which the return becomes 
 turn. due, for an extension of time; such extended time 
 
 cannot exceed thirty days from March ist, except that the 
 Commissioner of Internal Revenue (Washington) has authority 
 to grant a further reasonable extension of time, in meritorious 
 cases, to persons traveling or residing abroad. 
 
 Failure to file returns may be due to one of two reasons, or 
 both: delinquency or refusal. In case of mere delinquency, 
 Penalty where there is no wilful intent to violate the law, 
 r ra5 aure il: seems that the Collector may accept offers in 
 Return. compromise in lieu of specific penalties imposed by 
 the law. Where, however, there is a refusal or wilful intent to 
 violate the law, an offer of compromise will not be accepted in 
 lieu of the specific penalty. 
 
 Any person that refuses or neglects to make a return of an- 
 nual net income, who is subject to a tax by provision of law, 
 is liable, under the law, to a penalty of not less than $20 nor 
 more than $1,000. 
 
 In case of failure to make and file a return within the time 
 prescribed by law or by the Collector, the Commissioner of 
 Internal Revenue will add to the tax a penalty of 50 per cent, 
 of its amount except that, when a return is made voluntarily 
 and without notice from the Collector after the due time and 
 it is shown that the failure to file it was due to a reasonable 
 cause and not to willful neglect, no such addition will be made 
 to the tax. 
 
RETURNS OF INDIVIDUALS 17 
 
 In case a false or fraudulent return is made wilfully, the 
 Commissioner of Internal Revenue will add to False 
 the tax a penalty of 100 per cent, of the amount 
 thereof. 
 
 The law further declares that any individual required there- 
 under to make, render, sign or verify any return who makes 
 any false or fraudulent return or statement with intent to de- 
 feat or evade an assessment will be guilty of a misdemeanor 
 and subject to a fine not exceeding $2,000 or imprisonment for 
 a period not exceeding one year, or both, in the discretion of 
 the court, together with costs of the prosecution. 
 
 In cases of refusal or neglect to make a return, or in case of 
 an erroneous, false, or fraudulent return having been made, 
 the Commissioner of Internal Revenue has the when In- 
 right to make a return in behalf of the party tax- ternal 
 able at any time within three years after said return officers 6 
 is due or has been made, and the assessment made May Pre- 
 by the Commissioner in such case shall be payable pare Re- 
 by such person, or persons, immediately upon * 
 notification of the amount of such assessment. 
 
 The Commissioner of Internal Revenue is required, on or 
 before the first day of June of each year, to notify all taxable 
 persons of the amount that they have been as- Due Date 
 sessed. The tax becomes payable on the isth day of of Payment 
 June. After ten days' notice by the Collector, there e?ayed 
 will be added to the unpaid taxes interest at the Payment 
 rate of i per cent, per month from the time that of Tax - 
 the tax becomes due and an additional penalty of 5 per cent, 
 of the amount of the tax. 
 
 Claims for refund of taxes after assessment has been fixed, 
 should be made on Form 46, to which should be claims for 
 attached the receipt for taxes paid sought to be Refund of 
 recovered. 
 
 Claims for abatement of taxes or penalties must be made 
 on Form 47. Each of these claims must be supported by the 
 affidavit of party aggrieved, and by affidavit of the Collector 
 or Deputy Collector of the district hi which the claim is 
 made. 
 
 The present income tax law provides that claims for the re- 
 
1 8 INCOME TAX LAW AND ACCOUNTING 
 
 fund of taxes paid under the Excise Act of August 5, 1909, and 
 Claims for the Income Tax Act of October 3, 1913, which have 
 Refund. been rejected by reason of the statute of limitation 
 in existence prior to September 8, 1916, may be reopened, pro- 
 vided that such claims for refund involve a review of the return 
 on which the claim is made. This question was ruled upon in 
 T. D. 2396, dated November i, 1916, containing a letter written 
 to the Collector of Internal Revenue, Los Angeles, California, 
 as follows: 
 
 "This office is in receipt of your letter of the 26th ultimo, 
 asking for a ruling as to whether, under section 14, para- 
 graph A, of the act of September 8, 1916, claims for refund 
 which have once been rejected by the commissioner because 
 of the statute of limitation in existence at that time may be 
 reopened. The portion of section 14 referred to is in the 
 following words: 
 
 1(1 Provided, That upon the examination of any return of 
 income made pursuant to this title, the act of August 5, 
 1909, . . . and the act of October 3, 1913 ... if it shall 
 appear that amounts of tax have been paid in excess of 
 those properly due, the taxpayer shall be permitted to 
 present a claim for refund thereof notwithstanding the 
 provisions of section 3228.' 
 
 "This office is of the opinion that claims can now be made 
 for refund under that provision. 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." 
 
 By amendment of the Act of September 8, 1916, it is provided 
 that advance payments of income and war income taxes will 
 Advance be accepted either in whole of an estimated amount 
 Payments* ^ assessment or m instalments, in consideration 
 of Taxes, of which, an allowance not in excess of 3 per cent, 
 will be credited on account of taxes so paid. 
 
 On the instalment basis of payments not more than four 
 payments will be accepted, each of them at least one-fourth 
 of the estimated total tax and the payments must be made of 
 such amounts, respectively, within thirty days, two months, 
 and four months after the close of the taxable year and the 
 
RETURNS OF INDIVIDUALS 19 
 
 fourth payment on or before the due date of the full payment, 
 June 1 5th. Where the return is made for the calendar year 
 the respective payments would become due as follows: 
 
 At least % before January 31, 
 " " % " February 28, 
 " " K " April 30, 
 
 Balance on or " June 15. 
 
 Any amount overpaid will be refunded as a tax erroneously 
 collected. 
 
 Failure to pay the instalments in due time will work a for- 
 feiture of any benefit for advances made. All penalties under 
 existing law for failure to make payments when due are made 
 applicable to any failure to pay the tax at the time or times 
 required under the instalment plan of payment. 
 
 Uncertified cheques will be accepted in payment of income 
 and excess profits taxes under regulations to be made by the 
 Commissioner of Internal Revenue. If a cheque Forms of 
 should not be paid by the bank on which it is drawn Payment, 
 the person by whom the cheque was tendered will be liable for 
 the payment, penalties and additions as if the cheque had not 
 been tendered. 
 
 Certificates of indebtedness of the United States issued under 
 the Act of April 24, 1917, or of any subsequent Act will be ac- 
 cepted at par plus accrued interest in payment of income and 
 excess profits taxes. 
 
 By provision of Section 5 of the War Revenue Bill of Oc- 
 tober 3, 1917, the War Income Tax is not applicable to Porto 
 Rico and the Philippines. The Legislatures of both p rto Rico 
 of these possessions are given the power to amend, Philip- 
 alter, modify or repeal the income tax laws in force P mes * 
 at these places respectively. 
 
 VI. INCOME OF INDIVIDUALS 
 
 Income, for the purpose of the tax, comprehends revenue 
 and income from all sources, as follows: gains, profits, salaries 
 and wages received, including income from pro- Income 
 fessions, vocations, business, trade, commerce, Defined. 
 sales, dealings in or use of real and personal property, rents, 
 interest, dividends, securities, transactions of any business for 
 
20 INCOME TAX LAW AND ACCOUNTING 
 
 gain or profit and income derived from any other source what- 
 soever, in whatever form paid. 
 
 Although the law provides that the taxable income of an 
 individual shall include the share to which he would be entitled 
 Undivided a s stockholder or otherwise of the gains and profits, 
 c?ora- f if divided or distributed, whether divided or dis- 
 tion. tributed or not, of all corporations, joint-stock com- 
 
 panies or associations, or insurance companies, yet it does not 
 impose upon the stockholder the duty of ascertaining his share 
 of an undistributed surplus. 
 
 Where a surplus is accumulated beyond the reasonable needs 
 of the business, such unreasonable accumulation shall be prima 
 facie evidence of a fraudulent purpose to escape the tax. 
 
 But the fact that the gains and profits are in any case 
 permitted to accumulate and become surplus shall not be 
 construed as evidence of a purpose to escape the said tax in 
 such case unless the Secretary of the Treasury shall certify 
 that in his opinion such accumulation is unreasonable for 
 the purposes of the business. When requested by the Com- 
 missioner of Internal Revenue, or any district collector of 
 internal revenue, such corporation, joint-stock company or 
 association, or insurance company shall forward to him a 
 correct statement of such gains and profits and the names 
 and addresses of the individuals or shareholders who would 
 be entitled to the same if divided or distributed. (Sec- 
 tion 3, Act of September 8, 1916.) 
 
 Dividends received from a life insurance company on a 
 Dividends, policy that has not matured are not taxable as in- 
 ^tJ?I come, whether paid by cash or deducted from cur- 
 
 surance 
 
 Policies. rent premiums. 
 
 Dividends received on a paid-up policy, however, should be 
 treated the same as stock dividends, free from the normal tax 
 and only taxable when the person receiving the same has an 
 annual income in excess of $5,000, whereupon it is subject to 
 additional or surtaxes under the War Income Tax Law (Act of 
 October 3, 1917) and in excess of $20,000, when it is subject to 
 surtaxes under the Income Tax Law (Act of September 8, 1916). 
 
 The amount paid under a life insurance, endowment, or 
 annuity contract is not income when returned to the person 
 making the contract, either upon the maturity or sur- 
 
INCOME OF INDIVIDUALS . 21 
 
 render of the contract; but the amount by which the 
 sum received exceeds the sum paid and coming Annuities, 
 into the hands of the person making the contract and pay- 
 ment is income. (T. D. 2090 as amended by T. D. 2152.) 
 
 Proceeds of life insurance policies paid upon Principal 
 the death of the insured are not taxable to the sm^e 
 beneficiary. Policies. 
 
 Money received by an injured person under an accident 
 policy of insurance is, for income tax purposes, Accident 
 deemed to be income. 1 Payment to a beneficiary, Insurance, 
 however, of the proceeds of an accident insurance policy, upon 
 death of the insured, is not taxable as income. (T. D. 2135.) 
 
 Amounts received from a railroad company as reimburse- 
 ment for expenses occasioned by an accident, are Damages, 
 not considered income subject to tax. (T. D. 2135.) Injuries. 
 
 Amounts received, however, in compromise or settlement of 
 an action for "pain and suffering" is held to be such income as is 
 taxable, as, "gains or profits and income derived from any source 
 whatever." Amounts so received are considered in their nature 
 similar to those received by the insured under a policy of acci- 
 dent insurance by reason of an accident sustained. (T. D. 2 135.) 
 
 Dividends are defined in the Act of October 3, 1917, as any 
 distribution made or ordered to be made by a corporation out 
 of its earnings accrued since March i, 1913, whether D . .^ d 
 payable in cash or stocks. Under this definition 
 the declaration of a dividend alone is sufficient to create an 
 obligation on the part of the stockholder to include his share 
 thereof in his return, but the Department has consistently held 
 that dividends should be entered in the annual return of the 
 recipient for the year in which such payments were received. 
 
 In so-called "close corporations" it is not unusual to credit 
 to the account of the respective stockholders the share of profits 
 to which each is entitled without formal declaration. Such 
 credit is equivalent to a declaration and makes the stockholder 
 accountable for the full amount of such credit whether with- 
 drawn or not. 
 
 Corporations are required to pay the tax of 2 per cent, under 
 
 1 An amount received by an employee in settlement of a claim for in- 
 juries sustained, pursuant to accident compensation laws of a state, has been 
 held to be taxable income. 
 
22 INCOME TAX LAW AND ACCOUNTING 
 
 the Act of Sept. 8, 1916, and 4 per cent, by Act of Oct. 3, 1917, 
 on their entire net income except as to deduction of the War 
 Excess Profits Tax. Hence, a dividend received by a stock- 
 holder has already been subjected to the normal tax rates and 
 the shareholder receives the same free of such taxes. Dividends 
 are, however, subject to the additional or surtaxes of both Acts 
 (Sept. 8, 1916, and Oct. 3, 1917). It follows, therefore, that 
 where the net income of a stockholder exceeds $20,000, divi- 
 dends are taxable under the Act of 1916 and net income in ef- 
 cess of $5,000 subjects dividends to surtaxes under the Act of 
 1917. An income of $5,000 or less, consisting wholly of dividends, 
 is not taxable; but the recipient must make a return if such in- 
 come exceeds the amount of exemption to which he is entitled. 
 
 Under the Act of September 8, 1916, dividends paid out of 
 surplus accumulated prior to March i, 1913 (incidence of the 
 Dividends individual income tax) were not taxable to the 
 PrTr 6 ? individual. In connection therewith the Internal 
 March 1, Revenue Department ruled that a corporation, to 
 1913. make such dividends free of tax to the stockholder 
 
 should specifically inform the stockholder that the dividends 
 were declared and paid out of such surplus and profits and re- 
 quired that entry be made upon the books of the corporation 
 showing from what surplus the dividends were paid; without 
 such segregation and notice the dividends were construed to 
 have been paid out of current earnings. The stockholder was 
 not justified in omitting the dividends from his return unless 
 he had received from the paying corporation a statement specif- 
 ically declaring that the dividend, or part thereof, had been paid 
 out of undivided profits accumulated prior to March i, 1913. 
 
 By Act of October 3, 1917 [Section 31 (b)] dividends distrib- 
 uted during the year 1917 and thereafter will be deemed to 
 have been paid from the most recently earned profits or surplus 
 and will be taxed to the recipient at the rates existing by law 
 for the years in which the profits or surplus were accumulated. 
 But this limitation will not apply to any distribution made 
 prior to August 6, 1917, out of undivided earnings accrued 
 prior to March i, 1913. For example: A dividend declared at 
 any time prior to August 6, 1917, payable out of surplus profits 
 accumulated prior to March i, 1913, is free of the surtax to the 
 
INCOME OF INDIVIDUALS 23 
 
 stockholder. A dividend declared at any time during the year 
 1917 or thereafter (except that declared prior to August 6, 1917, 
 specifically out of profits earned prior to March i, 1913, ante) 
 is deemed to have been declared out of the earnings of the cur- 
 rent year. If the earnings of the current year were less than 
 the amount of the dividend, then the remainder out of the 
 earnings of the previous year, and so on. Assuming an extreme 
 case: A corporation on September 30, 1917, had a surplus of 
 $150,000 accumulated during periods, as follows: 
 
 Prior to March i, 1913 $50,000.00 
 
 March i, 1913, to December 31, 1915 20,000.00 
 
 January i, 1916, to December 31, 1916 30,000.00 
 
 January i, 1917, to September 30, 1917 50,000.00 
 
 On September 30, 1917, the corporation declared a dividend 
 aggregating $120,000; then 50,000/1 2o,oooths or 5/i2ths of 
 such dividend is subject to rates of taxes imposed by the Act 
 of October 3, 1917^ 3/i2ths or i/4th at the rates prescribed by 
 Act of September 8, 1916 ; 2 2/12 ths or i/6th at the rates exacted 
 under the Act of March i, I9i3 3 ; and the remainder of 2/i2ths 
 or i /6th, deemed to have been declared from the surplus ac- 
 cumulated prior to March i, 1913, bears no tax. 
 
 Dividends declared payable in stock of the declarant cor- 
 poration are subject to the same rates of taxes as are imposed 
 in the case of cash dividends, and will be considered Stock 
 income to the amount of earnings so distributed Dividends. 
 [Section 31 (a)], and not, as heretofore, to the amount of "cash 
 value" thereof. 
 
 Dividends declared payable in securities should be stated in 
 the return of the stockholder at the amount of earnings or 
 profits distributed. The amount of earnings dis- Dividends 
 tributed is determined by the amount charged to payltS^in 
 surplus account on the books of the declarant cor- Securities, 
 poration. For example, dividends declared payable in Anglo- 
 French bonds at 95, will be returnable by the recipient, for 
 
 1 Income and War Income Surtaxes, page 5. 
 
 2 For rates see page 2. 
 
 3 For rates see Appendix, page 320. 
 
 4 A dividend declared out of capitalized good will is not a distribution of 
 profits of the corporation and the recipient need not report same as income 
 until the stock is sold by him; then, however, the proceeds of sale are sub- 
 ject to both normal and additional taxes. 
 
24 INCOME TAX LAW AND ACCOUNTING 
 
 income tax purposes, at the aggregate amount of such bonds 
 received, computed at $95 on each $100 of the par value thereof. 
 Dividends Under date of April 10, 1917, the Department 
 of S Re- Ut issue d a letter to collectors and Internal Revenue 
 serves for agents from which the following are extracts: 
 
 tion De- "The ' second' paragraph under Sec. 12 of Title i 
 pletion. of the Act of September 8, 1916, authorizes corpora- 
 tions, joint-stock companies, etc., in making their returns 
 of annual net income, to deduct from gross income 
 
 "'all losses actually sustained and charged off within the 
 year . . . including a reasonable allowance for the ex- 
 haustion, wear and tear of property, arising out of its use or 
 employment in the business or trade' 
 "and in the case of oil and gas wells and mines, a reasonable 
 allowance for depletion of natural deposits. 
 
 "The essential requirements of this provision are that 
 the amount deductible on account of depreciation and 
 depletion shall be charged off and shall be reasonable al- 
 lowances that is, an amount sufficient to make good the 
 loss due to these causes. The phrase 'charged off' con- 
 templates that the 'reasonable allowance' deducted from 
 gross income on account of depreciation or depletion, shall 
 be credited to appropriate reserve accounts and carried as a 
 liability against the assets, to the end that when the total 
 of these credits equals the capital investment account, no 
 further deductions on these accounts will be allowed. 
 
 "While the presumption is that amounts credited to these 
 accounts will be used to make good the loss sustained, either 
 through a renewal or replacement of the property or a 
 return of capital, there is no requirement of law that the 
 funds represented by these reserve liabilities shall be held 
 intact or remain idle against the day when they may be 
 used in making good the depreciation of the property with 
 respect to which the deduction is claimed, or in restoring 
 the capital invested in the depleted assets. 
 
 "The conversion of the depreciation reserve into tangible 
 assets will not constitute such a diversion as would deny 
 the corporation the right of deduction, provided in all 
 cases, that the deduction claimed in the return is a reason- 
 able allowance, that is, a fair measure of the loss due to 
 1 exhaustion, wear and tear of property, growing out of its 
 use' and is charged off or so entered upon the books as to 
 
INCOME OF INDIVIDUALS 25 
 
 constitute a liability against the assets with respect to which 
 the depreciation deduction is claimed." 
 
 The only principle upon which depreciation may be deducted 
 from income is by reason of deterioration or wear and tear hav- 
 ing occurred in the property depreciated. Such having taken 
 place the property must be assumed to have decreased in value, 
 and to record that reduction in value an offset to the property 
 account is shown by a reserve for such reduction, namely, a 
 reserve account. Hence, the reserve, appearing upon the credit 
 side of a double entry ledger, is not offset by any property among 
 the assets except the particular property which it qualifies, and, 
 as to that, it is a modification of the book value. 
 
 The concession that "The conversion of the depreciation 
 reserve into tangible assets will not constitute such a diversion 
 as would deny the corporation the right of deduction, pro- 
 vided ..." the deduction is fair, must be predicated upon 
 an understanding that the reserve exists apart from the account 
 that it qualifies. Such so-called reserve merely "negatives" 
 the property account to which it relates and any different ac- 
 ceptance of it will lead to a misapplication of the reserve. A 
 reserve which exists merely as a modification of a property 
 account, and, in effect, is a reduction of the book value thereof, 
 is not such an entity as is convertible "into tangible assets" 
 but merely indicates a reduced value of property already a 
 part of the corporation's assets. If it were otherwise, the cor- 
 poration could purchase stocks, bonds or anything else, charge 
 the cost thereof to the reserve for depreciation and thereby 
 reduce the reserve, and, at the same time, create a fund that 
 would not appear upon the books of account. Without question 
 such use of a so-called reserve for depreciation would be an 
 evasion of law and a distortion of facts. 
 
 On October 10, 1917, the Department issued T. D. 2540, in 
 the form of a letter to collectors of Internal Revenue to the 
 effect that dividends paid out of reserves for depreciation are 
 taxable as income to the stockholder and are not a return of 
 principal, as follows: 
 
 "To Collectors of Internal Revenue: 
 "Referring to the practice of certain corporations of 
 declaring dividends out of reserves set aside to meet de- 
 
26 INCOME TAX LAW AND ACCOUNTING 
 
 preciation and depletion of property, and of advising stock- 
 holders that such dividends represent a distribution of 
 capital assets, your attention is directed to the ruling made 
 herein as follows: 
 
 "All such dividends received by stockholders declared 
 out of such reserves accumulated subsequent to March i, 
 1913, constitute income to the stockholder under the Act 
 of September 8, 1916, and most be accounted for in returns 
 of net income. 
 
 "A stockholder's investment is in the stock of a corpora- 
 tion. If he disposes of his stock for more than its fair 
 market value on March i, 1913, or its cost if acquired since 
 that date, the profit realized must be returned as income; 
 if he disposes of it at a loss, the loss sustained is deductible 
 from gross income within the limits of the taxing act. In 
 computing the profit or loss sustained there must be taken 
 into account dividends paid from reserves accumulated 
 prior to March i, 1913, which were not returned as income 
 for the year in which received, under the provisions of the 
 Act of September 8, 1916. 
 
 " All rulings in conflict herewith are hereby revoked. 
 
 " DANIEL C. ROPER, 
 "Commissioner of Internal Revenue" 
 
 A reserve for depreciation should not be used for any purpose 
 except as an offset to the property account that it qualifies or 
 for charges of renewals and replacements. If an investment 
 fund is created for purposes of renewals the amount set aside 
 or reinvested is merely a conversion of one form of asset into 
 another and bears no relation to the reserve account except to 
 furnish available means with which to make replacements. 
 There can be no objection to paying a dividend with the in- 
 vested fund, but a dividend cannot be declared out of a reserve 
 for depreciation because the so-called reserve is not surplus 
 of the corporation. 
 
 Where stock of the same company is frequently bought 
 Purchases and sold and the cost of the particular stock sold 
 
 a J^,, Sa J es , is not ascertainable, the cost should be deter- 
 
 of Stock of . , , . . ' , , ~ , 
 
 Same mined by the cost of that first purchased remaining 
 
 Issue. unsold. 
 
 "This office acknowledges the receipt of a copy of a letter 
 
INCOME OF INDIVIDUALS 27 
 
 received by you under date of February 8, 1916, wherein 
 your correspondent requests to be advised how the amount 
 of profit to be returned for Federal Income Tax purposes 
 should be computed in cases where various parcels of stock 
 of the same issue are bought and sold at different dates. 
 In reply you are advised that the office holds that whenever 
 possible, the shares sold shall be identified by the number 
 of the certificates covering them. When stock is sold, and 
 its identity cannot be determined, it should be charged 
 against the stock first purchased and remaining unsold. 
 If the purchase occurred on or after March i, 1913, the 
 entire amount of difference should be returned." (Letter 
 to the Corporation Trust Company, signed by Commis- 
 sioner W. H. Osborn, and dated February 26, 1916.) 
 
 Where a corporation is formed for the purpose of taking over 
 the assets of an existing corporation which issues to the stock- 
 holders of the old company capital stock (of the Exchange 
 new company) in exchange for the old at the same of Stock, 
 par value, no income accrues to the old corporation notwith- 
 standing that the actual value of the stock of the old company 
 is admittedly worth at least double the par value; no taxable 
 income accrues to the stockholders until they sell their holdings 
 in the new company. 
 
 "This office is in receipt of your letter of the yth instant, 
 in which you submit certain inquiries with respect to the 
 following proposition: 
 
 "A domestic corporation having an authorized capital 
 stock of $750,000, in 1910, acquired certain properties 
 representing an investment of its entire issued capital stock 
 of $525,000. This is the present total issue of the Company. 
 
 "It is now proposed, for certain internal and other rea- 
 sons, to incorporate a new company with an authorized 
 capital stock of $750,000, being the same capital stock as the 
 first company. The new company to take over the real 
 property of the first company and issue in exchange for such 
 real properties $525,000 of the capital stock of the second 
 company. 
 
 "The capital stock of the second company thus issued 
 would be distributed among the stockholders of the first 
 company, through the medium of Trustees or otherwise, 
 share for share, in exchange for their holdings in the first 
 
28 INCOME TAX LAW AND ACCOUNTING 
 
 company, which would then be surrendered. This would 
 leave the stockholders of the first company with a share of 
 stock in the second company for every share they held in the 
 first company. 
 
 "The first company, after this transfer had been com- 
 pleted, would be dissolved. 
 
 "Since the incorporation of the first company, in 1910, 
 however, the real property owned by it, has shown con- 
 siderable increase in value and the shares of the first com- 
 pany are now worth at least double par. 
 
 "In reply to your several inquiries, you are informed that 
 the shares of stock authorized and issued, being the same as 
 to both corporations, and there appearing to be no con- 
 sideration to the first company for its assets, other than the 
 $525,000 par value of the second company's stock, an amount 
 exactly equal to the par value of the first company's stock 
 out-standing, no profit taxable, under the income tax law 
 would accrue to the first company as the result of this trans- 
 action, it being understood that the stock of the second com- 
 pany would be distributed upon even terms to the stock- 
 holders of the first company in exchange for the stock of such 
 first company held by them, which stock so taken up would 
 be cancelled. The exchange of stock, that is the issuance of 
 stock by the second corporation for the stock of the first 
 corporation, share for share, of like par value, would not 
 constitute a stock dividend, and an exchange on the basis 
 indicated would not result in any taxable income to the 
 stockholder of the first company receiving in exchange for 
 their former holdings the stock of the second company. 
 The stock, both authorized and issued, being in both cases 
 of like par value and being predicated upon exactly the 
 same assets, the transaction constitutes a deal by which the 
 second company takes over the assets of the first company, 
 giving therefor its stock of a par value exactly equal to the 
 par value of the stock of the first company outstanding, 
 thus placing in the hands of the stockholders the same 
 number of shares of the second company and same par 
 value as that which they theretofore held in the first com- 
 pany, the stock in both cases being supported by the same 
 assets. Hence the transaction resulted in no gains, profits 
 
INCOME OF INDIVIDUALS 29 
 
 or income to either the first corporation or its stockholders. 
 If, as you say, the stock of the first company at the time of 
 this transaction, was worth ' double par,' the stock of the 
 second company being supported by identically the same 
 assets, is presumably of the same value and the exchange 
 of the new stock for the old, results in no income subject to 
 tax. It is simply an exchange of assets of like character and 
 like value. 
 
 II 
 
 "It may be stated, however, that if the stockholders in 
 the new company shall hereafter sell their stock, they will 
 be required to account for as taxable income, any amount 
 which they may receive for the same in excess of the cost 
 to them of the stock of the first company, if such stock was 
 acquired subsequent to March i, 1913, or any amount which 
 they may receive in excess of the fair market value or price 
 of the stock of the first company if same was acquired prior 
 to March i, 1913. In other words, the cost to the stock- 
 holders of the old company's stock or its fair market price 
 or value as of March i, 1913, as the case may be, will be 
 the basis for computing any gains or losses to the stock- 
 holders that may result from the sale of their present hold- 
 ings of the new company's stock." (Letter to the Corpora- 
 tion Trust Company, signed by Acting Commissioner 
 David A. Gates, and dated March 8, 1917.) 
 
 The exchange of capital stock of a corporation for the capital 
 stock of another corporation, where one is formed for the pur- 
 pose of taking over the other, resulting in an in- Additional 
 creased capitalization and yielding to the stock- Stock Re- 
 holders of the reorganized company a larger amount ^e ived m 
 of stock at the par value, renders such increase ganization 
 taxable as income, both to the selling corporation Deemed 
 and the recipient shareholders. Income. 
 
 "The present holding of this office is that in all cases 
 wherein a corporation sells and transfers its assets to an- 
 other corporation, the amount received by the selling cor- 
 poration in excess of the cost of the property sold will be 
 considered income to such selling corporation, and, for the 
 purpose of the tax, may be prorated over the number of 
 
30 INCOME TAX LAW AND ACCOUNTING 
 
 years the property was held prior to the date of its sale, and 
 the amount to be returned for the year in which the sale was 
 made for the purpose of the tax is the amount apportioned 
 to the years subsequent to January i, 1909. 
 
 "If the shares of stock received by the selling corpora- 
 tion are distributed by it to its stockholders, the amount 
 so distributed in excess of the stock held by them in the 
 original corporation will be considered income to such stock- 
 holders and, for the purpose of the supertax, should be 
 returned by them when the net income (inclusive of such 
 dividends) of such individuals, for any one year, is in excess 
 of $20,000. (After January i, 1917, also subject to the 
 War Income Tax in excess of $5,000.) 
 
 "The selling corporation being taxable on the excess 
 of the stock received over the cost of the assets sold, the 
 individuals receiving the excess in the form of stock of the 
 purchasing company will not be required to return their 
 respective shares of such excess for the purpose of the nor- 
 mal tax." (Extract from letter to A. C. Kahn, New York, 
 N. Y., signed by Commissioner W. H. Osborn, and dated 
 September 9, 1916.) 
 
 Sale of Sales of "rights" to subscribe to capital stock, 
 
 Stock accruing to stockholders in the case of new issues, 
 
 Rights. are d eemec i t De income. 
 
 "The income tax law levies the tax upon income accruing 
 from all sources and under these circumstances, it is held 
 by this office that income accruing to an individual who 
 holds stock in a corporation by reason of the sale of his 
 rights to subscribe to new stock in the corporation is such 
 an item of income as should be included in his return of 
 annual net income for the assessment of the tax." (Extract 
 from a letter signed by Deputy Commissioner L. F. Speer 
 and dated February 27, 1915.) 
 
 Dividends received in the form of scrip should be reported 
 as income at the face value thereof. In the event that the same 
 Scrip is not paid upon maturity, or should in the meantime 
 
 Dividends, become worthless, it may be deducted from the return 
 of the year in which it turns out to be uncollectible. 
 
 Dividends received from foreign corporations, not subject 
 
INCOME OF INDIVIDUALS 31 
 
 to the income tax in the United States, are not free from normal 
 taxes and may not be deducted as such in the return Dividends 
 of the recipient. If, however, the business of such Received 
 foreign corporation is confined to the United States j^J 
 and it pays income taxes on its net income the Corpora- 
 dividends paid by it should be treated the same as tion ' 
 dividends paid by a domestic corporation. 
 
 Dividends declared and paid by a foreign corporation 
 which derives its entire income from business done wholly 
 within the United States and pays, under the provisions of 
 the Federal Income Tax Law, a tax upon its net income, 
 should be treated in the same manner as dividends from 
 domestic corporations. (T. D. 2090.) 
 
 Dividends may only be declared out of profits and surplus 
 earnings except where the corporation is being dissolved or 
 liquidated, in which case the olividend is a return Return of 
 of capital to the stockholder. Dividends issued by Capital not 
 a liquidated corporation up to the amount of cost Income ' 
 of the stock to the shareholder is not taxable under the income 
 tax; any amount in excess of the cost thereof, however, is in- 
 come and, hence, is taxable. 
 
 Limited partnerships, for the purpose of income taxation, 
 are treated as corporations. Hence, income distributed by 
 such partnerships to their members, of which the Profits of 
 partnership has made return on the same form p^Jngr- 
 (blank) as required of corporations, is free of normal ships, 
 taxes to the recipient. 
 
 The profits of limited partnerships making returns in the 
 same manner as corporations make returns will be treated 
 the same as dividends of corporations and will be returned 
 in the returns of individuals in the same manner as are 
 dividends upon the stock of corporations; that is to say, 
 the dividends received from such limited partnerships will 
 not be subject to the normal tax in the hands of the members 
 of the partnership receiving the same. (T. D. 2137.) 
 
 Salaries are not required to be reported as in- wJ^Re. 
 come until actually received. tumable. 
 
 "An amount of salary which was earned during the year 
 
32 INCOME TAX LAW AND ACCOUNTING 
 
 1914 (1915) and was not received until some date subse- 
 quent to December 3ist of that year, need not be returned 
 as income for the year in which earned, but should be re- 
 turned for the year in which received if the person receiving 
 the same is a taxable person required to render a return." 
 (Extract from letter to Gary, Piper and Hall, signed by L. F. 
 Speer and dated March i, 1915.) 
 
 In the absence of a ruling under the amended law, it seems 
 plausible that a salary paid in the capital stock of a corpora- 
 Salary tion is taxable to the recipient at the amount of 
 Paid by salary received and not at the "cash value" of the 
 Stock. stock, as heretofore. If the stock so issued, is of 
 the original issue of the corporation, it must be paid for at par 
 and so reported by the recipient. Should the stock be issued 
 from so-called "treasury stock" (fully paid on the records of 
 the corporation) at a price less than the par value, it would 
 seem reasonable that the recipient should report as income the 
 amount of salary of which the stock was payment. When he 
 disposes of the stock the amount realized in excess of the amount 
 of salary reported will be income for the year in which the 
 stock was sold. 
 
 Salaries Salaries received by employees of organizations 
 
 Received exempt under the income tax law are subject to the 
 empt Cor- tax and should be reported in the return of the 
 porations. employee. (T. D. 2090.) 
 
 Living When an individual is furnished living quarters 
 
 Par^f fS * n Edition to sa l arv > tne rental value of such living 
 Compen- quarters is regarded as compensation subject to the 
 sation. income tax. (T. D. 2090.) 
 
 Board, lodging or other consideration received in lieu of 
 rental is considered income equal in amount to the in- 
 Board, debtedness in payment of which it is received, and 
 Lodging, should be included in any return of annual net income 
 Lieu of i ts recipient is required to render under the provisions 
 Cash. of the income tax law. (T. D. 2135.) 
 
 Bonuses received from employers in the nature of addi- 
 _ tional compensation, and not as gratuities, are 
 
 taxable as income of the recipient. (See page 108.) 
 
INCOME OF INDIVIDUALS 33 
 
 Commissions paid to salesmen are deductible ex- Salesmen's 
 penses of the payer and should be reported as in- c . ommis " 
 come in the return of the recipient. (T. D. 2090.) 
 
 Fees for professional services need not be re- When Pro- 
 turned as income until received. Promissory notes, /g^are 
 however, received in payment of such fees shall be Returnable, 
 deemed to be income received. 
 
 "This office holds that money due for professional serv- 
 ices of lawyers, physicians and the like should be entered on 
 the annual return for the year in which such payments were 
 received." (Extract from letter to Beekman, Menken and 
 Griscom, signed by Commissioner W. H. Osborn and 
 Dated February 18, 1915.) 
 
 Fees received by clergymen, in addition to salary compen- 
 sation, for any form of service, are construed to ni 
 
 , , . J Clergymen, 
 
 be taxable income. 
 
 Easter offerings, and fees received by clergymen for 
 funerals, masses, marriages, baptisms, etc., are considered 
 income subject to tax under the provisions of the income 
 tax law of October 3, 1913. Christmas gifts, however, are 
 not considered income within the meaning of the law and 
 should not be included in a return. (T. D. 2090.) 
 
 Compensation received by a trustee covering a period of 
 years and not paid or reported as income until maturity of 
 trust, has been held to be returnable in the year Compensa- 
 received and deductions therefrom may not be tion of 
 prorated over the years of the trusteeship. Only Trustee - 
 deductions applicable to the year income is returned are al- 
 lowable. (T. D. 2135.) 
 
 Profit on the sale of capital assets is returnable as income. 
 The profit on sales of capital assets acquired prior to March i, 
 1913, is the excess of the selling price over the fair Profit on 
 market price or value of such property as of March i, capital 
 1913. In the case of property acquired since that Assets, 
 date the profit is the selling price in excess of the cost. If the 
 capital asset is one on which depreciation has been charged off, 
 such depreciation should be taken into consideration in deter- 
 mining the profit or loss. For example, a machine purchased 
 on January i, 1914, for $1,000 on which depreciation had been 
 
34 INCOME TAX LAW AND ACCOUNTING 
 
 charged off at the rate of 10 per cent, per annum for years 1914 
 and 1915, and which was sold on January i, 1916, for $850, 
 would show a profit of $50, derived as follows: 
 
 Selling price $850.00 
 
 Cost $1,000 . oo 
 
 Less depreciation charged off, 20% (2 years @ 10%) 200 . oo 
 
 Cost, less depreciation 800.00 
 
 Profit $ 50 . oo 
 
 The law makes no mention of depreciation charged off prior 
 to the time of sale, nor has there been any ruling on the ques- 
 tion. From an accounting point of view, however, there is 
 only one logical conclusion in the matter of ascertaining the 
 profit or loss and that is to deduct whatever depreciation had 
 previously been charged off. If repairs had been charged against 
 the reserve for depreciation then the cost of such repairs would 
 be a reduction of the depreciation deducted from the cost of 
 the machine in determining amount of profit on the sale. As- 
 suming in the above example that repairs and renewals costing 
 $25 had been charged to the reserve for depreciation, the re- 
 sult would be as follows: 
 
 Selling price $850. oo 
 
 Cost $1,000.00 
 
 Deduct: 
 
 Depreciation charged off, (20%) $200.00 
 
 Less, repairs charged to depreciation .... 25 . oo 
 
 175-00 
 
 Cost, less unused depreciation 825 .00 
 
 The date of the adoption of the income tax amendment to 
 the Constitution was March i, 1913. In order that taxpayers 
 Computing should not pay a tax upon accrued profits on, or 
 Losson* enhanced values of property, which had theretofore 
 Property been acquired, and, also, for the purpose of pre- 
 Acquired venting the deduction of losses that had been sus- 
 Marchl tained on property then held, the law provides 
 1913. that for the purpose of ascertaining the profit or 
 
 loss on property acquired prior to March i, 1913, such property 
 
INCOME OF INDIVIDUALS 35 
 
 shall be valued at the market price or value on March i, 
 
 In determining the fair market price or value for the purpose 
 of ascertaining the profit or loss on the sale of stock or bonds 
 acquired prior to March i, 1913, where such stocks Fair Mar- 
 or bonds are dealt in on the exchange, it has been orValu^of 
 stated by the Commissioner of Internal Revenue Securities. 
 in a letter to the Corporation Trust Co., dated November 21, 
 1916, that such fair market price would be the average price 
 at which such securities sold on March i, 1913, and not the 
 price at which they sold at any particular time of the day. 
 The acceptability of market quotations is, nevertheless, con- 
 ditioned upon the same being the "fair market price or value." 
 The price or value of property should be determined upon all 
 the relevant facts governing the particular case. 
 
 Application of the prescribed method of computing the profit 
 or loss on property acquired prior to March i, 1913, sometimes 
 produces a most unreasonable and unsound result, profit or 
 For example, stock was purchased in 1912, at par Loss Se- 
 value, $100 per share; on March i, 1913, the market ^J^red 
 value thereof was $60 per share; and in 1916 the Pn 0r to 
 stock was sold at $95 per share. An income tax March 1, 
 return for the year 1916, reflecting these facts, 
 would show a profit of the difference between the market price 
 on March i, 1913, $60, and the selling price, $95, namely, $35 
 per share. This phantom profit never existed except for in- 
 come tax purposes. There was actually a sustained loss of $5 
 per share. Applying the same state of facts to a fiduciary or 
 trustee, who, in 1916 was accounting in Court to the benefi- 
 ciaries, such trustee, would, in his accounts submitted to Court, 
 show a loss of $5 per share, and at the same time would show 
 by such account an expenditure for income taxes on a profit of 
 $35 per share of stock that was actually sold at a loss. The 
 fallacy of the method in the circumstances described, is so ap- 
 parent that no Court could reasonably enforce it. It is sug- 
 gested, when a situation arises, such as the one pointed out, 
 that all the facts of the particular case be placed before the 
 Commissioner of Internal Revenue with a request for a special 
 ruling thereon. 
 
36 INCOME TAX LAW AND ACCOUNTING 
 
 Profit, for income tax purposes, has been defined as the dif- 
 Profit ference between the selling price and the cost, where 
 
 Defined. the selling price is more than the cost. (T. D. 2090.) 
 Sales of The rulings as to what constitutes returnable 
 
 Real profit on sales of real estate by corporations are also 
 
 Estate. applicable to individuals. (See page 94.) 
 
 The cost of property acquired subsequent to the incidence 
 
 of the tax (March i, 1913), will be the actual price paid for 
 
 Cost of it, together with the expense incident to the procure- 
 
 Property. ment of the property in the first instance and its sale 
 
 thereafter, and the cost of improvement or development if 
 
 any. (T. D. 2005.) 
 
 An increase in the book value of assets to conform with ap- 
 Apprecia- praisal values, or for other purposes, does not render 
 tion not such increase taxable as income. (See also "In- 
 Income. vestments, stock and bonds," page 187.) 
 
 The following is an extract from a letter to Collectors of In- 
 ternal Revenue, dated August 14, 1914. 
 
 Returnable and taxable income is that actually realized 
 during the year, that is, that which is evidenced by the 
 receipt of cash or its equivalent. Until any appreciation 
 taken up on the books has been so realized, it will not be 
 required to be returned as income. Hence, in the prepara- 
 tion of returns and in the examination of books for the 
 purpose of verifying the same, mere book entries of apprecia- 
 tion in the value of capital assets will be disregarded. 
 
 It should be understood, however, that in the event of 
 the sale of the assets, the increase in whose value has been 
 taken up on 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; that is to say, in the case of a sale, book values will 
 be ignored save and except as such book values represent 
 the actual cost of the properties. 
 
 Where income is computed on the basis of actual receipts 
 and disbursements, a promissory note is deemed payment of 
 Promissory an account and is returnable as income. In the 
 Notes. event that such note is not paid, it is deductible 
 as a loss when actually ascertained to be worthless. 
 
INCOME OF INDIVIDUALS 37 
 
 Property acquired by gift is not taxable, but the income 
 accruing therefrom after receipt of such gift is income and 
 subject to the tax. Property acquired by gift and Property 
 thereafter sold at an advance of the value when j,y ( GJff 
 gift was received, yields a profit of the difference Legacies, 
 between the selling price and such value, that is taxable as 
 income. If such property was acquired prior to March i, 1913, 
 then the profit will be the difference between the selling price 
 and the fair market value as at March i, 1913. 
 
 "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 income 
 to their estates." This is true also of income from Received 
 any kind of property held in trust, including that b ? Estates, 
 on accumulated income held 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." In such cases, except where the beneficiary 
 makes the return, the executor, administrator or trustee shall 
 make a return and be assessed on such income, less the exemp- 
 tion allowed to the estate during administration. 
 
 Where the beneficiaries receive the incomes from an es- 
 tate, the respective shares to be distributed shall income to 
 be the amounts returnable and subject to the Heirs and 
 tax. Legatees. 
 
 The general policy of the law and rule of interpretation 
 require that legacies in all cases, unless clearly inconsistent 
 with the intention of the testator, should be held Legacies, 
 to be vested rather than contingent. Where there Vested 
 is a vested interest the income from such interest, Interest, 
 whether distributed or not, is subject to the tax; and when 
 in the hands of fiduciaries they are required to account for 
 and pay the tax thereon. (T. D. 2090.) 
 
 In a case where a beneficiary sells securities at a price in 
 excess of that at which such securities were appraised at the 
 time of settlement of the estate, the increment p^et 
 constitutes a profit which is returnable as income Returnable 
 by the beneficiary. byLegatee. 
 
 It has been ruled in a case where it was impracticable for the 
 
38 INCOME TAX LAW AND ACCOUNTING 
 
 executors to determine the net income and distributive share 
 Trust Es- of the beneficiaries of a trust estate for over three 
 
 ^v ^ n ? is ~ years after the death of the testator that the execu- 
 
 tnbuted . _. , 
 
 for Period tors ma y make fiduciary returns for the years 1913 
 
 of Years. to 1916, inclusive (if the interest of the beneficiary 
 requires return to be made), and need not include the total 
 amount in a return for the year 1916. Amended returns of the 
 beneficiaries would be required if the distributive shares, added 
 to income already returned in the years affected, would be 
 subject to the additional or surtax. 
 
 "This office is in receipt of your letter, March 13, 1917, 
 in which you advise that a resident of New York died in 
 September, 1913, leaving a will by which he devised and 
 bequeathed three-fourths of his estate to his three sons 
 absolutely and one-fourth to a trust company in trust to 
 pay the income therefrom to a daughter during her life, 
 remainder to her issue; that it was impracticable for the 
 executors to complete distribution of the estate or deter- 
 mine the amount of net income until 1916, when an ac- 
 count was prepared showing the net income accruing to each 
 beneficiary during the last three months of 1913 and during 
 the years 1914 and 1915, and that a large part of the accu- 
 mulated income was distributed in 1916. You ask if this 
 office will permit the daughter (beneficiary under the 
 trust) to amend her returns for 1913, 1914 and 1915 and 
 include in each the amount of income accrued to her and 
 to which she was entitled in the year for which the return 
 was made but which was not actually determined or re- 
 ceived by her until 1916, or whether she will be required to 
 include the total amount received in her return of income for 
 1916. You state that if the income so distributed be spread 
 over the years 1913 to 1915, inclusive, that the amount dis- 
 tributed for any one of these years will be less than $20,000 
 but that taken together the amount would exceed $20,000. 
 From the foregoing statement, it would appear that the 
 facts of the case bring it within the prescription of the 
 Treasury Decision 1943 and that, although the beneficiaries 
 were determined, not until 1916, did the settlement of the 
 estate reach the stage where the respective interests in the 
 income derived from the estate were determinable. The 
 executors should make a fiduciary return for each of the 
 
INCOME OF INDIVIDUALS 39 
 
 years 1913, 1914, 1915 and 1916, reciting therein the re- 
 spective beneficiaries and their interests, if the interest of 
 any beneficiary subject to withholding of normal tax by the 
 fiduciary, was $3,000 or over, and for 1916 if the amount 
 paid or payable to any beneficiary from the amount shown 
 on line 3, page i of the return, Form 1041, was $3,000 or 
 over. In all cases when the amounts so distributed for each 
 of the years 1913 to 1916, inclusive, added to other income of 
 the beneficiaries, would make the income of such benefi- 
 ciaries subject to the additional tax, said beneficiaries 
 should make amended returns and include therein the 
 amount received for the years noted. If all tax for which 
 the beneficiaries are liable shall have been paid, amended 
 returns will not be required for the years 1913 to 1915, 
 inclusive. For the year 1916, return must be made when 
 the interest of a beneficiary is $3,000 or over, even though 
 there is no tax liability, and for this reason amended returns 
 should be made for the year 1916." (Letter to the Cor- 
 poration Trust Company, signed by Acting Commissioner 
 David A. Gates, and dated March 24, 1917.) 
 
 It has been held that commissions received on renewal pre- 
 miums are taxable income in the year received by the agent. 
 (Edwards v. Keith, 224 Fed. 585. Affirmed, United Insurance 
 States Circuit Court of Appeals, 2d Circuit, 231 Agents. 
 Fed. no.) 
 
 A premium on a policy of insurance on the life of an insurance 
 agent received by him on account or in payment of commis- 
 sions due him, in lieu of cash, is deemed to be income to the 
 amount of premiums so received. 
 
 Ordinarily, rent should be included in the return of the 
 landlord for the year in which it is received, regardless of when 
 it accrued or became due. If the accounts of the Rentals 
 landlord are kept upon the accrual method, i. e., Received, 
 charging the tenant with the amount of rent on the due date 
 thereof, and crediting the same to Income from Rents, then 
 the return may be made on that basis. Items so charged that 
 are found to be uncollectible, may be deducted as bad debts 
 for the period in which the same prove to be uncollectible. 
 
 Interest upon the obligations of a State, or any political sub- 
 division thereof, or upon the obligations of the United States 
 
40 INCOME TAX LAW AND ACCOUNTING 
 
 Interest on or its possessions, or securities issued under the 
 m^t" 1 " provisions of the Federal Farm Loan Act of July 17, 
 Obligations I 9 1 ^, are exempt, by law, from the income tax ex- 
 not Tax- cept as to obligations issued by the United States 
 after September i, 1917, which are exempt "only 
 if and to the extent provided in the act authorizing the issue 
 thereof." 
 
 Under the Act of 1913, which contained the same language 
 Political as the present law with respect to the exemption of 
 sion " "interest upon the obligations of a State or any 
 Denned. political subdivision thereof" it was ruled that: 
 
 . . . Special assessment districts created under the laws 
 of the several States for public purposes, such as the im- 
 provement of streets and public highways, the provision for 
 sewerage, gas and light, and the reclamation, drainage or 
 irrigation of bodies of land within such special assessment 
 districts when such districts are for public use, are political 
 subdivisions of the State within the meaning of the above 
 proviso. 
 
 It is held that the term "political subdivision" includes 
 special assessment districts or divisions of a State created 
 by the proper authority of the State acting within its con- 
 stitutional powers and under its general laws, for the pur- 
 pose of carrying out a portion of those functions of the 
 State which by long usage and inherent necessities of gov- 
 ernment have always been regarded as public. 
 
 Levee and school districts, when lawfully created under 
 the authority of the State and which are authorized by the 
 laws of the State to levy a tax to meet the obligations of 
 such districts, are also held to be political subdivisions of a 
 State within the meaning of the Income Tax Law. 
 
 The income derived from interest upon the obligations 
 of all such public districts shall, therefore, be excluded in 
 computing net income for the income tax. (T. D. 1946.) 
 An individual who enters into a contract with a State, 
 or any political subdivision thereof, for the construction of a 
 Contractor public highway, is held not to be an officer or em- 
 Work for Pl vee f tne sa id State or a political subdivision 
 State not thereof, and, therefore, the amounts received by 
 Exempt. him from the State or a political subdivision thereof, 
 under the terms of the contract, are not exempt from tax 
 
INCOME OF INDIVIDUALS 41 
 
 under the provisions of the Federal income tax law, and 
 should be included in any return of annual net income he 
 may be required to render. (T. D. 2152.) 
 
 The first issue of "Liberty Loan" bonds, authorized by act 
 of Congress approved April 24, 1917, " 15/30 Year 3^2% Gold 
 Bonds," are exempt both as to principal and interest interest 
 from all taxation, except estate and inheritance taxes Liberty 
 imposed by authority of the United States or its Bonds 
 possessions, or by any State or local taxing authority. 
 
 The second issue of "Liberty Loan" bonds, authorized by 
 act of Congress approved September 24, 1917, "10/25 Year 
 4% Convertible Gold Bonds" are wholly exempt Interest 
 as to the normal tax under the Act of September 8, j^mls^ 
 1916, but as to the additional income taxes (sur- 4%. 
 taxes) and excess-profits taxes and war-profits taxes only to 
 the amount of interest on bonds and certificates, the principal 
 of which does not exceed in the aggregate $5,000, owned by 
 any individual, partnership or corporation. 
 
 It has been ruled that each member of a family is entitled to 
 the exemption of interest on bonds aggregating, in principal, 
 $5,000, as per the following telegraphic inquiry and reply: 
 
 "Please answer by wire at once if possible our telegram 
 October second, as follows: 'If husband, wife and minor 
 children each hold new Liberty fours and make joint in- 
 come tax return will each member of such family be tax 
 exempt as to $5,000 bonds each. Wire answer today if 
 possible.'" (Answer) "Husband and wife each owning in 
 own right Liberty Loan Bonds and certificates not exceed- 
 ing five thousand dollars each entitled to exemption pro- 
 vided by Section Seven B, Loan Act. Minor children hav- 
 ing separate estates each entitled to same exemption." 
 (Telegram to Commissioner of Internal Revenue from Lee, 
 Higginson & Co., Boston, Mass., and the reply thereto, 
 signed by Acting Secretary of the Treasury, O. T. Crosby, 
 and dated October 8, 1917.) 
 
 The following Treasury Decisions have been issued for the 
 guidance of Government officers and employees as Income and 
 
 to what constitutes income and deductible expenses; E^P 611868 
 
 , .. 'of Govern- 
 
 when per diem charges m lieu of subsistence may be men t Em- 
 charged, ployees. 
 
42 INCOME TAX LAW AND ACCOUNTING 
 
 Quarters: Commutation of quarters and the money 
 equivalent of quarters furnished in kind shall be returned 
 as income. 
 
 When quarters are furnished in kind, of a less number of 
 rooms than the number allowed by law, the money equiv- 
 alent only of the number of rooms actually assigned shall 
 be returned as income. When quarters are furnished in 
 kind, of a greater number of rooms than the number al- 
 lowed by law, it is to be assumed that the excess number 
 is assigned for the convenience of the Government, and the 
 money equivalent only of the number of rooms allowed 
 by law shall be returned as income. 
 
 Heat and light: Amounts received by, or paid for, an 
 officer for heat and light shall be returned as income. 
 
 This includes the money equivalent, as fixed by the 
 Government, of heat and light furnished to an officer oc- 
 cupying public quarters. 
 
 Mileage: The difference between the amount received as 
 mileage and the amount of actual necessary expenses 
 incurred on a journey shall be returned as income. 
 
 Mileage, as such, is not gain, profit, or income to the 
 officer, as he is required to pay his actual expenses while 
 traveling under mileage orders. The gain, profit, or income 
 is the difference between the amount received as mileage 
 and the amount properly expended by the officer while 
 traveling; and this difference, only, should be returned as 
 income. 
 
 The actual expenses to be deducted by the individual 
 before ascertaining his gain, profit, or income on account 
 of mileage are the expenses for which reimbursement would 
 be made by the Government if he had traveled on an actual 
 expense basis instead of a mileage basis. 
 
 Reimbursement for actual expenses: Amounts paid by 
 the Government in the nature of reimbursement for sub- 
 sistence and other items of actual expenses incurred while 
 absent on business for the Government are not required to 
 be returned as income. 
 
 Per diem allowances in lieu of subsistence while traveling 
 under orders: The difference between the amount received 
 as a per diem allowance and the amount of actual necessary 
 expenses incurred on a journey shall be returned as income. 
 (T. D. 2079.) 
 
 Reference is made to Mim. 1078, dated August 27, 1914, 
 
INCOME OF INDIVIDUALS 43 
 
 requiring revenue agents and inspectors paid from the 
 appropriations " Collecting the Income Tax" to modify 
 their Forms 132 for August, 1914, and thereafter to report 
 "headquarters" instead of "legal residence," the "head- 
 quarters" being the home the actual domicile of the 
 officer. 
 
 There has been so much confusion resulting, and so many 
 officers have attempted to change their homes for the 
 purpose of enabling them to receive per diem in lieu of sub- 
 sistence, that it is found to be necessary to issue the follow- 
 ing instructions as supplemental to the mimeograph above 
 cited. 
 
 The Act of August i, 1914, provides that heads of execu- 
 tive departments may prescribe within limits per diem in 
 lieu of subsistence to persons traveling on duty away from 
 their designated posts of duty when not otherwise fixed by 
 law. 
 
 The Comptroller of the Treasury has ruled that head- 
 quarters may be established as the designated posts of duty 
 of the agents and inspectors whose per diem in lieu of sub- 
 sistence is not fixed by law that is, they will be con- 
 sidered as in a travel status when on duty away from their 
 headquarters. 
 
 With the Comptroller's ruling in view, the headquarters 
 of the officers referred to have been fixed at their homes. 
 
 When a particular place has been reported by an agent or 
 inspector as his home when commissioned, he cannot there- 
 after report his home or headquarters elsewhere for the 
 purpose of claiming per diem in lieu of subsistence, without 
 first obtaining the permission of the Commissioner of Inter- 
 nal Revenue. This does not mean that a home may be 
 established elsewhere than the place originally reported as 
 headquarters and per diem in lieu of subsistence claimed 
 when within the confines of the new or most recent home, as 
 that would be a perversion of the law and the regulations 
 made to carry the law into effect. In other words, when a 
 particular place is reported as home, such place will con- 
 tinue as a home until actual domicile is taken up elsewhere, 
 and when that is done or contemplated being done, the 
 Commissioner should be fully advised of the change or 
 proposed change, the reason therefor set forth in full and 
 permission requested to report the new abode as "head- 
 quarters" on Form 132. If the Commissioner approves, a 
 
44 INCOME TAX LAW AND ACCOUNTING 
 
 new commission will issue, and, if he does not approve, the 
 agent or inspector, as the case may be, will not charge 
 per diem in lieu of subsistence when he is at or within the 
 confines of his home as at first reported or his actual home 
 established thereafter, as under no circumstances can per 
 diem in lieu of subsistence be paid when such agent or 
 inspector is at or within the confines of his actual home. 
 (T. D. 2124.) 
 
 Income on foreign investments accrued abroad to an Amer- 
 Rates of ican citizen, placed to his credit but not remitted, 
 Foreiei?In- mav ^ e reported as income at the rate of exchange 
 vestments, prevailing at the time that such income was credited 
 abroad. 
 
 "This office acknowledges receipt of your letter of 
 January 4, 1916, wherein you cite the case of a resident 
 American citizen who had accruing to him from time to 
 time income from foreign investments which was not re- 
 mitted to the United States but was placed to his credit in 
 different foreign countries, and request to be advised 
 whether in computing income tax liability it will be proper 
 to use the rates of exchange prevailing at the time the 
 amounts were credited abroad. 
 
 "In reply you are advised that, in the case cited, it will 
 be proper for the individual to return each item of income 
 at the rate of exchange which prevailed on the date it was 
 credited to his account." (Letter to Herbert M. Teets, 
 New York, N. Y., signed by Deputy Commissioner L. F. 
 Speer, and dated January n, 1916.) 
 
 This practice would be inadvisable, however, in the case of 
 foreign branches of American concerns. Under the present 
 abnormally high rates of exchange it would be unwise to charge 
 a branch office with the profit reported by it at the current 
 rates. The simplest method, and probably the easiest of ad- 
 justment, is to adopt a fixed rate of exchange for each branch 
 or foreign country by which rate all credits and charges to 
 branch accounts are made. As funds are transmitted to the 
 United States adjustment is made as between the assumed 
 rate and the rate paid. The fairness of this method is obvious, 
 in that it does not reflect in the books of account radical fluc- 
 tuations in exchange, and, from a bookkeeping point of view, 
 
INCOME OF INDIVIDUALS 45 
 
 renders the reconciliation of main and branch office accounts 
 comparatively simple. 
 
 Interest on bank balances is returnable in the Interest on 
 year credited by the bank. Amount. 
 
 (Interest on bank deposits or on certificates of deposit) 
 whether paid or accrued and unpaid, must be included in 
 the annual income return of the person entitled to receive 
 such interest, whether on open account or on the certificate 
 of deposit. (Art. 67, Reg. 33.) 
 
 Oftentimes interest is not all credited within the calendar 
 year to which it applies. There is no obligation on the part 
 of the taxpayer to accrue the uncredited portion unless his 
 return is made on the accrual basis. 
 
 Pensions received from the United States Govern- p . 
 ment are subject to the income tax. (T. D. 2090.) 
 
 According to Treasury Decision 2090, payments of alimony 
 are regarded as personal expenses of the payer and the recipient 
 is required to report the same as income. This Alimony 
 resulted in a double tax, in that the payment was notln- 
 not deductible by the payer and yet the recipient come - 
 paid an income tax thereon. The United States Supreme 
 Court, in an unreported case, has held that alimony is not in- 
 come and is, therefore, not subject to an income tax. 
 
 The principles governing the payment and receipt of alimony 
 are also true in a case where the husband and wife, under an 
 agreement of separation, live apart and where the husband, 
 pursuant to such agreement, pays the wife a fixed annual sum. 
 If the wife is required under the law to make a return, she is 
 not required to include therein the amounts received from her 
 husband under such agreement. 
 
 All individuals, partnerships and corporations making a 
 business of collecting foreign payments of interest or dividends 
 by means of coupons, cheques or bills of exchange, License 
 are required to obtain a license from the Commis- Required 
 sioner of Internal Revenue and are subject to such Jjg^f" 
 regulations in the conduct of their business as the Foreign 
 Commissioner may prescribe. Violation of the Income, 
 provision of law in respect of the requirement of a license to do 
 
46 INCOME TAX LAW AND ACCOUNTING 
 
 such business is punishable as a misdemeanor, and for each 
 offense subjects the offender to a fine of $5,000 or imprison- 
 ment for one year, or both, in the discretion of the court. [Law, 
 Section 9 (d).] 
 
 Foreign Income from foreign investments such as dividends 
 
 Income of on s t O ck of foreign corporations received by non- 
 resident resident aliens is not taxable and is not required to be 
 Aliens. included in a return of net income. 
 
 Where capital stock of a domestic corporation is registered 
 Record m t ^ ie name ^ a citizen of, or resident alien in, the 
 Owner not United States, or a domestic firm or corporation, 
 Actual but the actual owner of such stock is a nonresident 
 Stock* a ^ en ^dividual, firm or corporation, it is necessary 
 Non-resi- that the owner of record disclose to the Commissioner 
 dent O f Internal Revenue the name and address of the ac- 
 
 tual owner by filling out and filing with the Col- 
 lector of Internal Revenue form No. 1087, revised. 
 
 The intent and purpose of this regulation is to provide 
 only in respect of making return for and payment of tax on 
 dividend income accruing to nonresident aliens. 
 
 Such dividends on stock of domestic corporations or 
 resident alien corporations are held, prima facie, to be in- 
 come to the record owner of the stock and such record 
 owner will be liable for the income tax, normal or additional, 
 according to his or its individual or corporate status, unless 
 a disclosure of actual ownership is made to the Commis- 
 sioner of Internal Revenue which shall show who the 
 actual owner is and his address, and that the record owner is 
 not the actual owner. This showing shall be made upon the 
 form herein provided. 
 
 When the record owner of such stock is a nonresident 
 alien corporation, etc., not having an office or place of 
 business in the United States, the debtor corporation will 
 withhold the normal income tax and pay the same to the 
 proper officer of the United States authorized to receive it 
 in manner and form provided for withholding and ac- 
 counting for tax withheld. 
 
 In all cases where the actual owner is a nonresident alien 
 individual or corporation and the record owner is an in- 
 dividual, firm, or corporation in the United States, citizen. 
 
INCOME OF INDIVIDUALS 47 
 
 or resident alien, and the aforesaid showing of actual owner- 
 ship is made, the record owner will be held, for income tax 
 purposes, to have the receipt, custody, control and dis- 
 posal of the dividend income and will be required to make 
 return for the actual owner and pay the tax found by such 
 return to be due. Where the actual owner is a nonresident 
 alien corporation return will be made regardless of the 
 amount of dividend and the normal income tax will be 
 paid; and when the actual owner is a nonresident alien 
 individual a return shall be made whenever the amount of 
 dividend is $3,000 or over; and when the net amount 
 thereof exceeds $20,000 said custodian shall also pay the 
 additional tax on such income. The return for nonresident 
 alien corporations shall be made on Income Tax Form 
 1031 (1030 for insurance companies), and return for non- 
 resident alien individuals shall be made on Income Tax 
 Form 1040. 
 
 When it shall appear from the disclosure herein pro- 
 vided for that the actual owner is a nonresident alien 
 partnership all certificates making such disclosure shall be 
 transmitted to the collector for the information of the Com- 
 missioner of Internal Revenue, but no return will be made 
 for such partnership and no amount will be retained from 
 such income by the representative of such partnership in 
 the United States unless and until said representative shall 
 be so instructed by the Commissioner of Internal Revenue. 
 
 The term " corporations " as used above covers corpora- 
 tions, joint-stock companies or associations, and insurance 
 companies. The term " nonresident alien corporations" 
 covers all corporations, joint-stock companies or associa- 
 tions, and insurance companies organized, authorized, or 
 existing under the laws of a foreign country and having no 
 office or place of business in the United States; the term 
 "resident alien corporations," such foreign organizations 
 as have an office or place of business in the United States. 
 (Extract from T. D. 2401.) 
 
 As stated in T. D. 2401 (ante), a stockholder of record is, 
 prima facie, held to be the actual owner, and accountable for 
 taxes thereon. Where the actual owner is a citizen or resident 
 of the United States the record owner is not required to file 
 any certificate nor is he obliged to include dividends on stock 
 so held in his personal return. Upon inquiry, in such case, 
 
48 INCOME TAX LAW AND ACCOUNTING 
 
 the record owner must show conclusively that he is not the 
 
 actual owner. 
 
 "This office has before it your letter of October 25, 1916, 
 wherein you refer to T. D. 2382 (amended by T. D. 2401) 
 and request to be advised what form of certificate, if any, 
 should be executed by a record owner of domestic stock, the 
 actual owner of which is a citizen or resident of the United 
 States. In reply you are advised that, under the Federal 
 Income Tax Law of October 3, 1913, the withholding pro- 
 visions of which, in so far as they relate to the taxibility 
 of dividends on domestic stocks when paid to citizens or 
 residents of the United States, are the same as those set 
 forth in the Income Tax Law of September 8, 1916, it was 
 not found necessary that a certificate should be filed by a 
 record owner of stock when the actual owner was a citizen 
 or resident of the United States, and no such certificate 
 was required, and, therefore, none will be required under 
 the provisions of the act of September 8, 1916. The pri- 
 mary purpose of the certificate provided by Treasury 
 Decision 2382 is to assist in securing a proper administra- 
 tion of the provision of the Act of September 8, 1916, which 
 makes dividends on domestic stocks subject to income tax, 
 and to withholding of normal tax at the source, when paid 
 to a foreign company, corporation, joint-stock company or 
 association or insurance company having no office or place 
 of business in the United States. 
 
 "The record owner of stocks is not required to include 
 in his or its own income tax return any amount of dividends 
 received on stocks that actually belong to another, but if a 
 question should be raised as to why dividends on stocks 
 recorded in the name of an individual, firm or corporation 
 are not included in the record owner's income tax return, 
 such owner will be required to show conclusively that the 
 actual ownership of the stocks rested with another." (Let- 
 ter to Lee, Higginson & Company, Boston, signed by Com- 
 missioner W. H. Osborn, and dated November 21, 1916.) 
 
 VII. FARMS AND FARMERS 
 
 "The term 'farm' as herein used embraces the farm in the 
 Farms and ordinary accepted sense, plantations, ranches, stock 
 Farmers farms, dairy farms, poultry farms, fruit farms, truck 
 Defined. farms and all lands used for similar purposes; and for 
 the purposes of this decision all persons who cultivate, operate 
 
FARMS AND FARMERS 49 
 
 or manage farms for gain or profit, either as owners or tenants, 
 are designated as 'farmers.' 
 
 "All gains, profits, and income derived from the sale or ex- 
 change of farm products, whether produced on a income 
 farm or purchased and resold by a farmer, shall be from 
 included in the return of income for the year in Farms - 
 which the products were actually marketed and sold; and 
 
 "All allowable deductions, including the legitimate expenses 
 incident to the production of that year or future years, may 
 be claimed in the return of income for the tax year pj. epai( j 
 in which the right to such deductions shall arise, Farm 
 although the products to which such expenses and Expenses 
 deductions are incidental may not have been sold e uc e * 
 or exchanged for money; or a money equivalent, during the 
 year for which the return is rendered. 
 
 "Rents received in crop shares shall likewise be returned as 
 of the year in which the crop shares are reduced Farming 
 to money or a money equivalent, and on Shares. 
 
 "Allowable deductions, likewise, shall be claimed in the 
 return of income for the tax year to which they Farm Ex- 
 apply, although expenses and deductions may be S en f|L S j De ~ 
 incident to products which remained unsold at the end m Year 
 of the year for which the deductions are claimed. Paid. 
 
 "When farm products are held for favorable Loss in 
 market prices, no deduction on account of shrink- ue * 
 age in weight or physical value, or losses by reason Products 
 of such shrinkage or deterioration in storage, shall Held for 
 be allowed. 1 Advance. 
 
 "Cost of stock purchased for resale is an allowable deduc- 
 tion under the item of expense, but money expended for stock 
 for breeding purposes is regarded as capital in- Liye Stock 
 vested, and amounts so expended do not consti- Purchased, 
 tute allowable deductions except as hereinafter stated. 
 
 "Where stock has been purchased for any purpose, and 
 afterwards dies from disease or injury, or is killed Loss by 
 by order of the authorities of a State, or the United J^Stock 
 States, and the cost thereof has not been claimed Deductible. 
 
 *By ruling (T. D. 2609) of Dec. 19, 1917, inventories may be valued at 
 cost or at cost or market, whichever is the lower. (See page 167.) 
 
50 INCOME TAX LAW AND ACCOUNTING 
 
 as an item of expense, the actual purchase price of such 
 stock, less any depreciation which may have been previously 
 claimed, may be deducted as a loss. Property destroyed by 
 order of the authorities of a State, or of the United States, 
 may, in a like manner, be claimed as a loss. 
 
 "But if reimbursement is made by a State or the United 
 Receipts States, in whole or in part, on account of stock killed 
 demned or P r P ert y destroyed, the amount received shall 
 Live Stock, be reported as income for the year in which re- 
 imbursement is made. 
 
 Farm Ma- "The cost of farm machinery, is not an allow- 
 chinery not able deduction as an item of expense, but the cost 
 Deductible. o f or di nar y tools may be included under this item. 
 
 "Under the sixth deduction enumerated in Paragraph 'B,' 
 providing for 'a reasonable allowance for the exhaustion, wear, 
 Deprecia- and tear of property arising out of its use or em- 
 
 tion Al- ployment' . , there may be claimed a reason- 
 lowed on ^ / ' '. . . 
 Farm able allowance for depreciation on farm buildings 
 
 Property. (other than a dwelling occupied by the owner), 
 farm machinery, and other physical property, including stock 
 purchased for breeding purposes; but no claim for depreciation 
 on stock raised or purchased for resale will be allowed. 
 
 "Fanners who keep books, according to some approved 
 Fanners* method of accounting, which clearly show the net 
 Books of income, may prepare their returns from such books, 
 Account. although the method of accounting may not be 
 strictly in accordance with the provisions of this decision. 
 
 "A person cultivating or operating a farm, for recreation 
 or pleasure, on a basis other than the recognized principles of 
 Farm commercial farming, the result of which is a con- 
 
 Main- tinual loss from year to year, is not regarded as a 
 Onl^or farmer. In such cases, if the expenses incurred in 
 Recrea- connection with the farm are in excess of the re- 
 tion. ceipts therefrom, the entire receipts from sale of 
 
 products may be ignored in rendering a return of income; and 
 the expenses incurred being regarded as personal expenses will 
 not constitute allowable deductions in the return of income 
 derived from other sources." (T. D. 2153.) 
 
DEDUCTIONS ALLOWED INDIVIDUALS 51 
 
 VIII. DEDUCTIONS ALLOWED INDIVIDUALS 
 The specific or personal exemptions, deductible Personal 
 under the Act of September 8, 1916, and the Act Exemp- 
 of October 3, 1917, are as follows: tions. 
 
 Act of Act of 
 1916 1917 
 
 To unmarried persons $3,000 $1,000 
 
 To married persons or heads of families 4,000 2,000 
 
 To heads of families for each dependent child under the 
 age of 1 8 years or if incapable of self-support be- 
 cause mentally or physically defective; allowed 
 
 only to one parent of the same family 200 200 
 
 To guardians and trustees for each ward or cestui que 
 trust, if 
 
 Unmarried 3,000 1,000 
 
 Married 4,000 2,000 
 
 To estates of deceased persons (citizens and residents) 
 during period of administration where income is 
 
 not distributed 3,000 1,000 
 
 By amendment of law a nonresident alien receives no per- 
 sonal exemption. 
 
 The single or married status of a person at the single or 
 close of the year determines the amount of the Married 
 personal exemption. Status. 
 
 Salaries of the following are exempt from income Salaries 
 tax : Exempt. 
 
 President of the United States during the term for which 
 he has been elected; 
 
 Judges of the Supreme Court and inferior courts of the United 
 States now in office; 
 
 Officers and employees of a State, or any political subdivision 
 thereof, 1 but not when paid by the United States Government. 
 
 For the purpose of computing the normal taxes (2 per cent, 
 under the Act of 1916 and 2 per cent, under the Act of 1917) 
 the amount of dividends received upon stock or Dividends 
 from net earnings of corporations or associations, Creditable, 
 which are themselves taxable upon their net income, are de- 
 ductible from the total net income from all sources; that is to 
 1 Income received by such persons from other sources is subject to tax 
 and must be reported. 
 
52 INCOME TAX LAW AND ACCOUNTING 
 
 say, such dividends or earnings are only subject to additional 
 or surtaxes. 
 
 Tax With- The amount of normal taxes withheld at the 
 held source of payment are deductible in the return of 
 
 Creditable. tne individual entitled to credit therefor. 
 A citizen or resident of the United States in computing his 
 
 Necessary net income is allowed as deductions from gross 
 
 Business n i 
 
 Expenses inc o me > all necessary expenses paid in carrying on 
 
 Deductible, his business or trade. Personal, living, or family 
 expenses are not deductible. [Law, Section 5 (a) First.] 
 
 All interest paid within the year on the indebtedness of the 
 Interest taxpayer, except that incurred for the purchase of 
 Deductible, obligations or securities the interest upon which is 
 exempt from income taxes. [Law, Section 5 (a) Second.] 
 
 Interest paid within the year on indebtedness incurred in 
 Interest the purchase of 4 per cent. Liberty Bonds (Second 
 Pur U ? Cd ^ I ssue ) * s deductible in computing net income sub- 
 of Liberty j ect to income, war income and excess profits taxes. 
 4's. (T. D. 2541.) 
 
 The amount of accrued interest paid by a purchaser of bonds 
 to the seller should be deducted from interest received upon the 
 Accrued bonds after they were purchased. That is to say, the 
 o^Bonds bondholder should only account as income for the 
 Purchased, interest received by him in excess of the accrued in- 
 terest paid to the vendor. The amount of interest paid to the 
 vendor will be accounted for as income received by him. 
 
 Contributions or gifts actually made within the year to 
 charitable institutions existing as corporations or associations 
 Contribu- an d organized and operated exclusively for religious, 
 tions to charitable, scientific or educational purposes, or 
 Charities. to soc i e ties for the prevention of cruelty to children 
 or animals, are deductible to an amount not in excess of 15 per 
 cent, of the taxpayer's taxable income exclusive of the amount 
 of contributions to such charities. l Contributions or gifts that 
 inure to the benefit of any private stockholder or individual are 
 not deductible. 
 
 All taxes are deductible except income and excess profits 
 
 1 This deduction may only be made by individuals; the provision of law 
 is not applicable to corporations. 
 
DEDUCTIONS ALLOWED INDIVIDUALS 53 
 
 taxes paid, and assessments for local benefits. Excess profits 
 tax assessments are deductible, however, as a credit T 
 in computing the amount subject to income taxes. 
 The effect of this provision in respect of the excess profits tax 
 where the return is based on receipts and disbursements is 
 even more favorable to the taxpayer than the deduction of 
 "taxes paid" under the old law, because the taxpayer receives 
 the benefit of the deduction in the period upon which the tax 
 is computed, instead of, in the return for the period in which 
 the tax was paid, as heretofore. [Law, Section 5 (a) Third.] 
 
 Taxes paid in the nature of local benefits, such as grading, 
 paving, sidewalks, sewerage, etc., are not deductible. Local As- 
 These are deemed to be capital expenditures on y^^^ ts 
 the theory that the improvement increases the ductible. 
 value of the property affected thereby. 
 
 Water rates on business or rented property may be deducted 
 as "necessary expenses." They should not be Water 
 deducted as taxes. Rates- 
 
 Payments by an employer to the family of a deceased person, 
 in the form of a gratuity, are not deductible from p ension 
 the return of the employer; on the other hand, it 
 is not required that the amount of such payments shall be in- 
 cluded in the return of the payee. 
 
 Where the monthly salary of an officer or employee is 
 paid for a limited period after his death to his widow in 
 recognition of the services rendered by her husband, no 
 services being rendered by the widow, it is held that such 
 payment is a gratuity and exempt from taxation under the 
 Income Tax Law. Such a payment would not, however, 
 be an allowable deduction as an expense of carrying on 
 business in the return of the person, firm, or corporation 
 paying same. (T. D. 2090.) 
 
 Where an employee pays the cost of a fidelity Premium 
 bond incident to his employment, he may deduct on Fidelity 
 the cost thereof. 
 
 Losses sustained during the year which are not compensated 
 for by insurance or otherwise, including those 
 arising from fires, storm, shipwreck, or other casualty 
 are deductible. 
 
54 INCOME TAX LAW AND ACCOUNTING 
 
 Loss to be deductible must be an absolute loss, not a 
 speculative or fluctuating valuation of continuing invest- 
 ment, but must be an actual loss, actually sustained and 
 ascertained during the tax year for which the deduction is 
 sought to be made; it must be determined and ascertained 
 upon an actual, a completed, a closed transaction. (T. D. 
 2005.) 
 
 A loss is none the less actual because an individual can 
 not divest himself of the possession of worthless stock by sale, 
 but that condition alone does not give the loss in question 
 such a character as appears to the department to have 
 been contemplated by the Income Tax Law. 1 (T. D. 2135.) 
 
 By rulings of the Treasury Department, loss has been de- 
 nned as the difference between the selling price and the cost, 
 LossDe- where the selling price is less than the cost. In 
 fined, cases where the property was acquired prior to 
 
 March i, 1913, however, the measure of "cost" is the market 
 value as of that time. (See page 34.) 
 
 Under the old income tax law (1913) the deduction of losses 
 sustained outside of the taxpayer's business or trade were not 
 Losses not deductible. He was required to account for profits 
 in Business and income from all sources, but was prohibited 
 or Trade. f rom deducting any losses not incurred in trade. 
 The amended law, however, provides that in "any transaction 
 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" are 
 deductible. It has been held by the Treasury Department that 
 losses not sustained "in trade" may only be deducted "to an 
 amount not exceeding the profits derived from similar trans- 
 actions." This provision would apply to stock speculations, 
 real estate operations and any speculative venture which is 
 not embraced in the ordinary business or trade of the taxpayer. 
 [Law, Section 5 (a) Fifth.] 
 
 Losses in Where a person is engaged in more than one 
 One Trade trade or business the loss sustained in one is de- 
 om UC In- le ductible from the profit of the other; but the per- 
 come of son must be actually engaged in the businesses or 
 Another. trades. 
 
 1 This ruling does not apply to dealers in securities. See page 167. 
 
DEDUCTIONS ALLOWED INDIVIDUALS 55 
 
 A person must have more than one business in the sense 
 of being engaged in more than one trade, and may deduct 
 losses incurred in all of them, provided that in each trade 
 it can be clearly shown that he is actually a dealer, 
 or trader, or manufacturer, or whatever the occupation 
 may be. 
 
 Neither the investment by an individual of money in 
 the stock of a company nor the employment by the com- 
 pany of his services in any official capacity can serve to 
 make the business in which the company was engaged a 
 matter of his individual trade. (T. D. 2135.) 
 
 "'In trade' is synonymous with business. In Trade 
 
 " Business " has been denned as Defined. 
 
 "That which occupies and engages the time, attention 
 and labor of any one for the purpose of livelihood, profit or 
 improvement; that which is his personal concern or inter- 
 est; employment, regular occupation, but it is not necessary 
 that it should be his sole occupation or employment. 
 
 "The doing of a single act incidentally or of necessity, not 
 pertaining to the particular business of the person doing the 
 same, will not be considered engaging in or carrying on the 
 business." (T. D. 1989.) 
 
 Debts due to the taxpayer actually ascertained to be worth- 
 less and charged off within the year, are deductible. Bad Debts 
 (See "Bad Debts," page 213.) Deductible. 
 
 A reasonable allowance for the exhaustion, wear Deprecia- 
 and tear of property, arising out of its use or em- tion De- 
 ployment in the business or trade, is deductible. ductible. 
 
 In order to render depreciation deductible it must be entered 
 in the books of account in such way that it effects a reduction 
 of the asset account to which it is applicable. This may be 
 accomplished by establishing a Reserve for Depreciation Ac- 
 count or by actual reduction of the asset account itself. The 
 preferable method is to create a reserve account, except, per- 
 haps, with respect to properties that are replaced often. 
 
 When the depreciation deducted equals the cost of property 
 depreciated, or in case of a purchase prior to March i, 1913, 
 the fair market value as of that date, then no further de- 
 duction will be allowed. (See Chapter VI, on Depreciation, 
 page 175.) 
 
56 INCOME TAX LAW AND ACCOUNTING 
 
 The depreciation referred to in the Income Tax Law does 
 Deprecia- not re l ate to evidence of a right or interest in prop- 
 tion. erty and hence, any shrinkage in the value of bonds, 
 
 Stocks stocks, and like securities, due to fluctuations in 
 Bonds. tne j r mar k e t value, is not deductible in a return of 
 income as depreciation or loss. 1 (T. D. 2005.) 
 
 "In the case of oil and gas wells a reasonable allowance 
 for actual reduction in flow and production to be ascer- 
 Pepletion tained not by the flush flow, but by the settled 
 Oil and production or regular flow" is a deductible item. 
 Gas Wells. When such allowance, however, aggregates the 
 capital originally invested, or in case of purchase prior to 
 March i, 1913, the fair market value as of that date, 
 then no further allowance for depletion will be de- 
 ductible. 
 
 A reasonable allowance for depletion of mines is deductible, 
 not to exceed, however, the market value in the mine of the 
 Depletion product thereof, which has been moved and sold 
 of Mines, during the year for which the return and computa- 
 tion are made. As in the case of oil and gas wells, no further 
 allowance for depletion will be allowed when the aggregate 
 thereof equals the capital originally invested, except that in 
 case the property was acquired prior to March i, 1913, then 
 no deduction will be allowed in excess of the fair market value 
 of the property as of that date. 
 
 Improve- No deduction is allowed for any amount paid out 
 ments not for new buildings, permanent improvements, or bet- 
 Deductible, terments made to increase the value of its property. 
 
 No deduction is allowed for amounts expended to restore 
 Restoring property or for making good the exhaustion thereof 
 Not P De^ ^ or w ^ich an allowance is or has been made. (See 
 ductible. page 183.) 
 
 A loss sustained by the voluntary removal of a building, 
 Replaced for the purpose of erecting one more modern, is not 
 Buildings, deductible from a return of net income, but such 
 loss may be added to the cost of the new building. 
 
 Where a dilapidated building is taken down by order of a 
 building department of the Government, acting under au- 
 
 1 A dealer in securities, however, may inventory the same at cost or al 
 cost or market price, whichever is the lower. (T. D. 2609.) 
 
DEDUCTIONS ALLOWED INDIVIDUALS 57 
 
 thority of a statute, because such building is a Buildings 
 menace to public safety, the owner thereof for the Taken 
 loss sustained might under some circumstances, be en- order of 
 titled to a deduction of the difference between the Govera- 
 cost of the building (exclusive of land) and a reason- ment. 
 able allowance for depreciation for the years of its existence. 1 
 
 The test as to the deductibility of an amount paid in com- 
 promise or settlement of a claim, or cause of action, for per- 
 sonal injuries is, whether the liability was incurred Damage 
 "in trade." A payment in settlement of a suit Suits, 
 for injuries caused by a delivery truck of a corpora- Judg 111611 *- 
 tion or individual used "in trade" would be deductible, whereas, 
 damages paid for injuries caused by the private automobile 
 of an individual would not be deductible. 
 
 A reserve or fund set aside by either an individual Insurance 
 or corporation for insurance purposes is not a de- ^^not * 
 ductible item. But an actual loss sustained and Deductible, 
 charged to such reserve or fund may be deducted. 
 
 Fire insurance premiums on a rented dwell- 
 ing, not occupied by the owner, are deductible. Premiums. 
 
 Commission paid to a real estate agent for col- Commis- 
 lecting rents and management of property is an Et* eal 
 allowable deduction. Agent. 
 
 Contributions to the campaign expenses of a Political 
 political party have been held not to be deductible Campaign 
 from income. Expenses. 
 
 Any expenses which may be incurred in con- Expense 
 nection with the procurement of nontaxable income, NoQ. 0001 " 1 
 are not deductible items. Taxable 
 
 Income. 
 
 Expenses incurred in earning income which is not sub- 
 ject to tax under the income tax law do not constitute 
 allowable deductions in computing net income from 
 other sources which are taxable under the law. (T. D. 
 2I37-) 
 
 It is not unusual for insolvent corporations in the course 
 of reorganization to assess the stockholders a fixed sum for 
 
 1 Make application for special ruling, supported by affidavit stating the 
 circumstances of the case, amount of loss, and how computed. 
 
58 INCOME TAX LAW AND ACCOUNTING 
 
 Assess- eacn share of stock held, the proceeds of which 
 ment of are used in the reestablishment of the defunct 
 Stock. company. Payments of such assessments by stock- 
 holders may not be stated as expenses incurred; they are in- 
 vestments of capital and do not constitute allowable de- 
 ductions. 
 
 Taxes paid by a tenant to a landlord may be treated as 
 Taxes Paid rent paid and are deductible as an expense of doing 
 by Tenant, business. (T. D. 2090.) 
 
 Life In- -Life insurance premiums paid by the insured 
 
 surance do not constitute allowable deductions under the 
 Premiums. i ncome tax law. (T. D. 2090.) 
 
 Collateral inheritance taxes levied under the laws of the 
 State of New York are not such taxes as are deductible in 
 Inheritance computing the income tax of an estate or a bene- 
 Tax - ficiary. Such taxes are deemed to be a charge 
 
 against the corpus of the estate and not against the income 
 thereof. 
 
 Tax assessments against its stockholders, paid by a bank for 
 their account, are not deductible from the return of the bank. 
 Taxes on Such taxes are, however, deductible by the stock- 
 Stock Paid holder but must be included in the stockholder's 
 by Bank. re turn as income. The amount so included in the 
 return, should be stated as dividends received, on the income side, 
 and under deductions as taxes paid. 
 
 Taxes assessed against the stockholders of a bank and 
 paid by the bank in behalf of the stockholders do not con- 
 stitute an allowable deduction from the gross income of the 
 bank, but do constitute an allowable deduction in the 
 return of the individual. If such individual is subject . . ., 
 the amount of taxes so paid should be included in his 
 return as income, the said amount being considered as an 
 additional dividend to the amount of the taxes paid. (T. D. 
 2I35-) 
 
 Where there has been a change of ownership of stock sub- 
 ject to such tax assessment during a taxable year, it has been 
 ruled that the owner thereof at the time that the assessment 
 becomes payable is the party who is entitled to the deduction. 
 
DEDUCTIONS ALLOWED INDIVIDUALS 59 
 
 Customs duties paid during the year are proper deductions 
 from an income tax return and may be treated as taxes paid, 
 or in the case of a taxpayer being engaged in the Customs 
 business of importing it may be added to the cost Duties, 
 of the merchandise. 
 
 In case of an erroneous or illegal assessment and collection, 
 the taxpayer should appeal l at once to the Commissioner of 
 Protest. Internal Revenue. If the Commissioner fails to 
 Limita- f res P nc ^ witnm six months after such appeal is 
 tions. made, suit for recovery may be brought; but whether 
 
 or not he responds, suit must be brought within two years after 
 the action arose (date of assessment). In order to maintain 
 such action it must be shown that payment was made under 
 protest l and" duress or coercion. No particular form of pro- 
 test is required, and to constitute duress or coercion, the mere 
 receipt of a notice containing a threat to exercise the power 
 possessed by the Government or its agent against the person 
 or property of the taxpayer is sufficient. The taxpayer has 
 no means of relief except by payment. 
 
 1 Copies of appeal and protest should be retained by the taxpayer to be 
 used as matter of proof in Court of Claims. 
 
CHAPTER II 
 WITHHOLDING TAX 
 
 The provisions of the Act of September 8, 1916, requiring the 
 withholding of normal tax at the source of payment were ma- 
 Amended terially amended by the Act of October 3, 1917. 
 Law. Under the present law withholding is not required 
 
 except as follows: 
 
 (i) All persons, partnerships, corporations, joint-stock com- 
 panies, associations or insurance companies, in whatever ca- 
 Nonresi- pacity acting, as lessees, mortgagors, trustees, 
 dent Alien executors, administrators, receiver, or employers 
 Individuals and all O ffi cers an( j employees of the United States, 
 having the custody, disposal or payment of interest, rent, 
 salaries, premiums, compensation or other fixed or determinable 
 annual or periodical gains, profits or income of 
 
 Nonresident alien individuals, 
 
 except income derived from dividends or net earnings of cor- 
 porations which are taxable upon their net income, are required 
 to deduct and withhold the normal tax of 2 per cent, thereon 
 (Law, Section 9 [b]); such withholding is required regardless 
 of amount of income. 
 
 (A nonresident alien is entitled to no personal exemption 
 under present law, and no deductions except by making and 
 filing a true and accurate return of income received from sources 
 within the United States, by February ist.) 
 Income of ( 2 ) The normal taxes of 6 per cent. (2 per cent. 
 Nonresi- under Act of 1916 and 4 per cent, under Act of 
 Foreign I 9 I 7) must be deducted and withheld from in- 
 Corpora- comes derived from sources within the United 
 tions. States by: 
 
 Nonresident foreign corporations not engaged in business or 
 trade within the United States and having no office or place 
 of business therein, 
 
 from interest upon bonds and mortgages or deeds of trust or 
 
 60 
 
WITHHOLDING TAX 6 1 
 
 similar obligations of domestic or resident corporations, asso- 
 ciations and insurance companies. 
 
 Section 13 (e) purports to include in the foregoing provision 
 "nonresident alien firms, copartnerships and companies" but 
 the tax subject to be withheld is limited to the normal tax on 
 corporations in the following language: " shall be made ap- 
 plicable to the tax imposed by subdivision (a) of section ten." 
 By reason of this defect in the law, the Commissioner of In- 
 ternal Revenue has directed that there shall be no withholding 
 against any form of income of foreign copartnerships, as indi- 
 cated in the following ruling: 
 
 "With reference to your telegram of October 15, 1917, 
 and office reply of October 16, 1917, you are now advised 
 that under the provisions of the Federal Income Tax Law of 
 September 8, 1916, as amended by the War Revenue Act of 
 October 3, 1917, no form of income derived from sources 
 within the United States by a foreign co-partnership having 
 no office or place of business in the United States is subject 
 to the withholding of normal income tax at the source. 
 Therefore, the Southern Pacific Company is not required to 
 withhold normal income tax from any amount of interest 
 paid on its bonds to such foreign co-partnership." (Letter 
 to Gordon M. Buck, General Counsel, Southern Pacific 
 Company, signed by Commissioner Daniel C. Roper, and 
 dated October 26, 1917.) 
 
 (Nonresident foreign corporations are entitled to no specific 
 exemption, and no deductions unless returns are filed by Feb- 
 ruary I St.) 
 
 (3) The normal tax of 2 per cent, shall be de- Dividends 
 ducted and withheld from incomes derived from res i(j en t 
 
 sources within the United States by: Alien 
 
 Companies. 
 
 Nonresident alien companies, corporations, associations and in- 
 surance companies not engaged in business or trade within 
 the United States and having no office or place of business 
 therein, 
 
 from dividends upon the capital stock or from the earnings of 
 
62 INCOME TAX LAW AND ACCOUNTING 
 
 domestic or resident corporations, associations or insurance 
 companies. [Law, Section 13 (f).] 
 
 " Corporation is to pay dividend to non-resident alien 
 corporations not engaged in business or trade within the 
 United States and not having any offices or places of busi- 
 ness therein. Shall paying corporation deduct two per 
 cent or shall it deduct six per cent leaving foreign corpora- 
 tions to make returns on which credit for dividends for 
 extra four per cent may be shown and then claim refund of 
 extra four per cent? Please telegraph decision our ex- 
 pense." (Answer) " Domestic corporation paying dividend 
 to foreign corporation having no office or place of business 
 in United States should withhold two per cent only." 
 (Telegram from the Corporation Trust Company to Com- 
 missioner Daniel C. Roper and his reply thereto dated 
 October 29, 1917.) 
 
 (4) The normal tax of 2 per cent shall be deducted and with- 
 held from payments of interest upon bonds and mortgages, 
 Tax Ex- deeds of trust or other similar obligations of cor- 
 empt porations, joint-stock companies or associations 
 
 Clause. or i nsurance 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 . . . 
 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." 
 
 This provision of withholding is applicable to all interest 
 payments on bonds and mortgages or deeds of trust of corpora- 
 tions containing the so-called " tax-free covenant" whereby 
 the corporation agrees to pay the interest without deduction 
 of tax. It applies to such interest whether the same is payable 
 annually or at shorter or longer intervals and regardless of 
 amounts, and is applicable to citizens, and residents of the 
 United States and nonresident alien individuals. [Law, Sec- 
 tion 9 (c)J 
 
 Section 3 of the War Income Tax provides that the war in- 
 come normal tax of 2 per cent, shall not be withheld until on 
 
WITHHOLDING TAX 63 
 
 and after January i, 1918, and that thereafter only one 2 per 
 cent, normal tax shall be withheld. The effect of this is that 
 the obligor will pay 2 per cent, normal tax on all interest ex- 
 cept where an exemption certificate is filed, and the obligee 
 (Bondholder) receives credit for the 2 per cent, paid at the 
 source and pays the additional taxes himself. 
 
 As already observed nonresident alien individuals are en- 
 titled to no exemption. Individual citizens and residents of 
 the United States may obtain the benefit of exemp- Exemp- 
 tion by filing with the withholding agent, on or tion - 
 before February ist, a signed notice thereof in writing. [Law, 
 Section 9 (c).] 
 
 Those required under the law to withhold taxes at the source 
 of payment are required to make returns thereof Returns of 
 on or before March ist and to pay the amount Taxes 
 withheld to the Collector on or before June isth. WSMttdd. 
 
 Those required to withhold taxes are made personally lia- 
 ble for the amount of the same, and they are, by Responsi- 
 law, indemnified against all persons, corporations, bility and 
 partnerships, associations and insurance com- Q ^ yj-fa. ^ 
 panics for deductions from income required to be holding 
 made. Party. 
 
 All taxes heretofore withheld on income of citizens or resi- 
 dents, except from interest on bonds containing a R e i ease O f 
 " tax-free covenant" clause, by amendment of the Taxes 
 Act of September 8, 1916, have been released and Withheld, 
 directed to be repaid to those entitled thereto. 
 
 By amendment of the provisions of Act of September 8, 
 1916, with regard to withholding the normal tax at the source, 
 on payments of income to citizens and residents inf nna- 
 of the United States, such withholding is no longer tion at 
 required except as to income from bonds containing Source - 
 the so-called " tax-free covenant" clause. There has been 
 substituted in place of withholding in such cases a system of 
 " Information at the Source," whereby it is required that all 
 payments to taxable persons, partnerships or corporations dur- 
 ing any taxable year, aggregating $800 or more for such year, 
 must be reported to the Collector of Internal Revenue. Such 
 return should be made for the calendar or fiscal year, as re- 
 
64 INCOME TAX LAW AND ACCOUNTING 
 
 quired in respect of the income tax return, and should be filed 
 at the same time. 
 
 "Information at the Source" is required in all cases where 
 payments of rents, salaries and wages, commissions, interest, 
 or any other fixed or determinable gains, profits and income 
 aggregating $800 or more are made to a taxable person, partner- 
 ship, corporation, or association. (Law, Section 28.) 
 
 It has been held that such return must be made irrespective 
 of the basis upon which wages are computed and will include 
 wages paid at piece-work rates. 
 
 " Receipt is acknowledged of your letter dated Octo- 
 ber 15, 1917, requesting that you be advised whether the 
 provisions of Section 28 added to the Act of September 8, 
 1916, by Section 1211, Act of October 3, 1917, apply to em- 
 ployers of workmen paid by the hour or by the piece, stating 
 in this connection as follows: 
 
 "'One of our clients employs some three thousand work- 
 men who are almost all on piece work on an hourly basis 
 and a large number of them will be paid more than $800 
 during the year. Their wages, however, are not fixed as 
 would be a weekly or monthly salary, payments to them 
 being variable from week to week and even from day to 
 day.' 
 
 (Answer) "In reply you are advised that in accordance 
 with the provisions of the law as stated in the Section 
 referred to above each person, corporation, partnership, 
 etc., is authorized and required to render a true and accu- 
 rate return to the Commissioner of Internal Revenue setting 
 forth the amount of salary or compensation and the name 
 and address of each employee who is paid $800 or more 
 during the year 1917, and subsequent tax years. The 
 liability for such return attaches in all cases of payments of 
 salary or compensation amounting to $800 or more during 
 the year, without regard to the basis of payment or the 
 period during the year in which it was earned and for which 
 it was paid." (Letter to Palmer and Series, New York, 
 N. Y., signed by Commissioner Daniel C. Roper and dated 
 October 25, 1917.) 
 
 The required reports must state the name and address of 
 recipient, and the total amount of payments. 
 
WITHHOLDING TAX 65 
 
 Returns are required of "Information at the Source" of all 
 payments of interest on bonds and mortgages or deeds of trust 
 or similar obligations of corporations, regardless interest 
 of amounts. This does not apply to obligations on Bonds, 
 of the United States Government. 
 
 Items of interest on bonds of foreign countries and dividends 
 from stock of foreign corporations, not payable in the United 
 States, collected by persons, partnerships or corporations as a 
 matter of business are also required to be reported regardless 
 of amounts. 
 
 Under the Act of 1913 it was provided that an alien who 
 desired to establish himself as a permanent resident of the 
 United States and thereby obtain the benefit of Aliens 
 withholding on the basis of a "resident" could Permanent 
 declare himself by filing a certificate with the with- Residents, 
 holding agent. 
 
 Aliens coming to the United States with the intention 
 of becoming residents thereof within the meaning and 
 intent of the income tax statute, may establish that fact 
 and have the privilege of resident aliens under the statute 
 by filing with withholding agents a certificate in the follow- 
 ing form (Form 1078) under oath, and which certificate 
 shall be filed by said withholding agents with Collectors of 
 Internal Revenue as justification for withholding on the 
 basis of "residence" in the United States. (T. D. 2242.) 
 
 Under the amended law the income of nonresident aliens is 
 subject to withholding. No doubt the privilege afforded aliens 
 under the Act of 1913 will now be extended to them under the 
 present law. In this connection it should be noted that such 
 declaration by the alien subjects him to the War Income and 
 the War Excess Profits Taxes upon his entire net income. 
 
 An alien, temporarily residing in the United States or em- 
 ployed therein for a definite time, who has the Temporary 
 intention of leaving upon the termination of his 
 employment or mission, is deemed not to be a resi- States, 
 dent of the United States for purposes of the income tax. 
 
 "Residence" has been defined to be: 
 
 That place where a man has his true, fixed and per- 
 
66 INCOME TAX LAW AND ACCOUNTING 
 
 Residence manent home and principal establishment, and to 
 Defined. which, whenever he is absent, he has the intention of 
 returning; and indicates permanency of occupation as 
 distinct from lodging or boarding or temporary occupation. 
 For the purposes of the income tax, it is held that 
 where for business purposes or otherwise, an alien is per- 
 manently located in the United States; has there his prin- 
 cipal business establishment and is there permanently 
 occupied or employed, even though his domicile may be 
 without the United States, he will be held to be within the 
 definition of 
 
 Every person residing in the United States, though not a 
 citizen thereof. . . . (T. D. 2242.) 
 
 An alien who resides in the United States temporarily, or 
 Visiting who comes here only temporarily for employment, 
 Alien. w jth the view of returning upon its completion, is 
 
 a nonresident alien. 
 
 For the purposes of the Income Tax, it is held that . . . 
 aliens who are physically present in the United States, but 
 only temporarily resident or employed therein (as for a 
 reason or other similarly definite term, and with the ex- 
 pectation and intention of leaving the United States upon 
 the termination of the employment or accomplishment of 
 the purpose which necessitated presence in the United 
 States,) are within the class of 
 
 "Persons residing elsewhere ..." (T. D. 2242.) 
 
 The income of an American woman who marries a foreigner 
 Wife As- is subject to the same laws as are applicable to 
 SJ 11 ^ 68 t- t her husband and if he is a nonresident alien the 
 of Hus- wife's income in the United States is subject to 
 band. withholding. 
 
 An American woman who marries a foreigner takes the 
 nationality of her husband. . . . (T. D. 2090.) 
 
 The Internal Revenue Bureau does not prescribe any par- 
 Withhold- ticular method whereby the normal tax on stock 
 Nonresi- dividends paid to nonresident alien corporations 
 dent Alien shall be withheld, leaving the adjustment thereof 
 Corpora- to be made between the debtor corporation and 
 Dividend the recipient of the dividends. 
 
WITHHOLDING TAX 67 
 
 "This office has before it your letter of March 17, 1917, 
 relative to the withholding of normal tax upon a stock 
 dividend paid by a domestic corporation to a nonresident 
 alien corporation, joint-stock company, association or 
 insurance company. In reply you are advised that while 
 the Federal Income Tax Law of September 8, 1916 (Sec- 
 tion i3-f), specifically provides that dividends paid to non- 
 resident alien corporations, joint-stock companies, asso- 
 ciation or insurance companies having no office or place of 
 business in the United States are subject to 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 in stock or scrip is one for adjustment between the 
 debtor corporation and the recipient of the dividend. In 
 view of the fact that the domestic corporation will be held 
 liable for normal tax at the rate of two per cent, on any 
 dividend paid on stock registered in the name of, and 
 actually owned by, a foreign corporation, joint-stock com- 
 pany, etc., having 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 scrip, the debtor corpora- 
 tion may protect its own interests by requiring the foreign 
 stockholder to deposit with it, prior to the payment of the 
 dividend, an amount equal to the tax the former will be 
 required to pay to the Federal Government; or the resolu- 
 tion providing for the dividend may be so drawn as to 
 permit the debtor corporation, in the case of a dividend 
 paid to a nonresident alien corporation shareholder, to 
 deduct from the surplus from which the dividend is to be 
 paid, and retain in its treasury, an amount sufficient to 
 meet the withholding requirements and issue stock and 
 scrip in payment of the balance due on the stock held by 
 such a shareholder. In short, 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." (Letter to Carter, Ledyard and Milburn, New 
 York City, signed by Deputy Commissioner L. F. Speer, 
 and dated April 10, 1917.) 
 
CHAPTER III 
 INCOME TAX AS APPLIED TO PARTNERSHIPS 
 
 IX. GENERAL PARTNERSHIPS 
 
 Persons conducting business in partnership are liable for 
 Partners income taxes and war income taxes only in their 
 ?ndivklu- individual capacity. Under the Excess Profits 
 ally Only. Tax Law, however, partnerships are liable as sep- 
 arate entities the same as are corporations. (See page 120.) 
 
 Partnerships are not required to make returns of net income 
 unless especially ordered to do so by the Commissioner of In- 
 Returns ternal Revenue or any district collector. Where 
 required, the returns shall be prepared on Form 
 1065, calling for the gross income, deductions and credits, and 
 the names and addresses of the individuals who would be en- 
 titled to the net income, if distributed. 
 
 The individual members of the partnership are required to 
 include in their returns their prorata share of the earnings of 
 partnerships as shown by the books of account, whether such 
 earnings were distributed or not. 
 
 A partnership, when required to make a return, has the 
 Fiscal privilege of making the same for its own fiscal year 
 
 Year. fa e same as a corporation. 
 
 In case the fiscal year ends during a calendar year for which 
 there is a rate of tax different from the rate for the preceding 
 calendar year (for example, 1917 and 1916) the rate for the pre- 
 ceding calendar year will 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; the rate for the calendar year during which 
 such fiscal year ends will apply to the remainder. For example: 
 
 If the fiscal year of a partnership ends on June 30, 1917, 
 that proportion thereof (>) which falls within the year 1916 
 should be included as income of the individual partner in his 
 
INCOME TAX AS APPLIED TO PARTNERSHIPS 69 
 
 personal return for the year 1916; and the proportion that 
 falls within the calendar year 1917 should be reported by the 
 individual as a part of the earnings of the calendar year 1917 
 and be subject to the rates of taxes applicable to that calendar 
 year. In other words, the income of a fiscal year should be so 
 prorated between the calendar years that the partners' returns 
 will reflect the income of the partnership for each calendar year 
 and respectively be subject to the different rates of taxes. 1 
 
 Partnership earnings must include dividends on the capital 
 stock of corporations, joint-stock companies, or associations, 
 or insurance companies owned by the partnership, Dividends 
 except that in the case of nonresident aliens divi- ^y ?art- d 
 dends received from sources without the United nerships. 
 States should not be included. 
 
 A partnership has the same privilege of making returns upon a 
 basis other than that of receipts and disbursements M e thod of 
 as is accorded to corporations and individuals, so Account- 
 long as the method employed correctly reflects "* 
 the income of the partnership. (See "Accrual Basis," page 197.) 
 
 "It is held that the income from a partnership accrues 
 to the individual partner at the time his distributive interest 
 is determined and reducible to possession. In income 
 the returns of income made by individuals for the When 
 calendar year, therefore, there should be included Accrued, 
 such income accruing from the business of partnerships for 
 their business years as may have been definitely ascertained 
 by means of a book balance, whether distributed or not. In 
 other words, members of partnerships are required to make 
 returns of income like other individuals for the calendar year, 
 and should include in their returns the net proceeds of their 
 interest in partnership profits ascertained at the end of the 
 business year falling within the calendar year for which the 
 individual return is being rendered." (T. D. 2090.) 
 
 1 The Bureau of Internal Revenue has stated "If the partnership ends its 
 fiscal year on some day during the calendar year (other than Dec. 31) your 
 distributive share of its earnings or profits ascertained at that time should 
 be reported." That is inadvisable because when an increase in rates of 
 taxes occurs, the increase offsets earnings of a prior period. Partners so 
 affected should file amended returns for the pro rata part of income earned 
 by partnership to Dec. 31, 1916. 
 
70 INCOME TAX LAW AND ACCOUNTING 
 
 Premiums on policies of insurance on the lives of partners 
 in favor of a partnership, commonly called "part- Premiums 
 nership insurance" are not deductible from income nLife 
 of either the partnership or individual partners. Policies. 
 (See page 107.) 
 
 From the net distributive interests reported by the partners 
 "there shall be excluded their proportionate shares received 
 Credits on from interest on the obligations of a State or any 
 Returns^f P ou * tical or taxing subdivision thereof, and upon 
 Partners, 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 possession, and that, for the purpose of 
 computing the normal tax there shall be allowed a credit . . . 
 for their proportionate share of the profits derived from divi- 
 dends." [Law, Section 8 (d).J 
 
 Partner- None of the expenses of a partnership shall be 
 
 ship Ex- deducted from the return of net income of an in- 
 penses. dividual. 
 
 X. LIMITED PARTNERSHIP 
 
 In the administration of the income tax law it has been ruled 
 that a limited partnership, with respect to its income, is sub- 
 Limited J ect to tne provisions of law applicable to corpora- 
 Partner- tions; that is to say, a limited partnership must 
 ship. make its return on the blank provided for corpora- 
 
 tions (Form 1031, Revised), and must pay the normal tax as 
 shown thereby. 
 
 A limited partnership is one having one or more "special 
 partners" whose liability is limited to the amount invested. 
 It is created by complying with the State laws providing for 
 that form of partnership. The usual requirements are that 
 such partnership file certain certificates stating: the name of 
 firm under which the limited partnership is to be conducted, 
 its principal place of business, the general nature of the business 
 intended to be transacted, the names of all general and special 
 partners and their respective residences, the names of the special 
 
INCOME TAX AS APPLIED TO PARTNERSHIPS 71 
 
 partners and the amount of capital contributed by each of 
 them, and the time that such partnership shall commence and 
 terminate. 
 
 A limited partnership can only be created by complying with 
 requirements of the statute of the State under which it is 
 created. 
 
 The profits of limited partnerships making returns in 
 the same manner as corporations make returns will be 
 treated the same as dividends of corporations and profits 
 will be returned in the returns of individuals in Limited 
 the same manner as are dividends upon the stock Partner- 
 of corporations; that is to say, the dividends re- shlps - 
 ceived from such limited partnerships will not be subject to 
 the normal tax in the hands of the members of the partner- 
 ship receiving the same. (T. D. 2137.) 
 
CHAPTER IV 
 TAXES APPLICABLE TO CORPORATIONS 
 
 XL GENERAL PROVISIONS 
 
 The Federal income tax is levied, assessed, collected, and 
 Income of P a id annually upon the total net income from 
 Corpora- all sources, received in the preceding calendar 
 ganized in or ^ sca ^ y ear by every corporation, joint-stock 
 United company or association, or insurance company, 
 States. organized in the United States. 
 
 The tax is paid annually by every corporation, joint-stock 
 company or association, or insurance company organized under 
 Income of the laws of any foreign country, upon the total 
 Corpora- ne ^ mcome received from all sources within the 
 tions. United States in the preceding year, "including 
 
 interest on bonds, notes or other interest-bearing obligations of 
 residents, corporate or otherwise, and including the income de- 
 rived from dividends on capital stock or from net earnings of resi- 
 dent corporations, joint-stock companies or associations, or insur- 
 ance companies whose net income is taxable under this title." l 
 
 The tax of 2 per cent, under the Act of September 8, 1917, 
 remains effective. In addition there is imposed a normal tax 
 R of 4 per cent, under the Act of October 3, 1917, 
 
 designated the "War Income Tax," making a total 
 tax of 6 per cent, upon the entire net income of corporations 
 effective from January i, 1917. 
 
 Dividends received by domestic corporations are not subject 
 to the war income tax of 4 per cent. The tax of 2 per cent, 
 however, under the Act of 1916 is still applicable to dividends. 
 
 The following extract from a summary of the War Revenue 
 Bill contained in the Congressional Record of October 16, 1917, 
 explains the reason for the greater normal taxes imposed on 
 
 income of foreign governments received in the United States is not 
 taxable. 
 
TAXES APPLICABLE TO CORPORATIONS 73 
 
 corporations (6 per cent.) as compared with those imposed 
 upon individuals (4 per cent.) : 
 
 In addition to the flat 2 per cent, corporation tax imposed 
 by the Act of September 8, 1916, this act (War Income 
 Tax) imposes another tax of 4 per cent., making the total 
 tax upon such corporations 6 per cent. This is higher than 
 the flat 4 per cent, total normal tax upon individuals. The 
 reason for this difference is that the individual pays sur- 
 taxes upon all his income in excess of $5,000, while the cor- 
 poration is allowed to retain for use in the business any 
 necessary amount of its net income, thus avoiding the pay- 
 ment of any surtaxes upon the amount so retained. This 
 gives them the advantage over the individual of being able 
 to use in their business as capital income that has not paid 
 the income surtaxes, while the individual or partnership 
 can not do so. 
 
 There is no specific exemption to corporations specific 
 either under the Income Tax Law of September 8, Exemp- 
 1917, or the War Income Tax Law of October 3, 1917. *** 
 
 A domestic corporation is taxable upon its entire net in- 
 come regardless of where such income was derived. A domestic 
 corporation, for example, maintaining only a nom- Foreign 
 inal office in the United States, and obtaining all Income 
 of its profits from foreign countries, is, neverthe- Taxable - 
 less, taxable upon its entire net income, the same as a citizen 
 residing in a foreign country. 
 
 The Excess Profits Tax, enacted as a part of the War Revenue 
 Bill of October 3, 1917, imposes upon trades and businesses, 
 occupations and professions a flat tax of 8 per cent., Excess 
 less an exemption, in cases where only a nominal Profits 
 or not more than a nominal capital is employed, ^ ax * 
 and graduated rates of taxes, less a deduction for prewar profits 
 and an exemption, in cases where actual capital is employed. 
 (See Chapter V, pages 116 to 174.) 
 
 The undistributed surplus of corporations has not hereto- 
 fore been subject to any additional or surtax as has undistri- 
 been that of undivided profits of partnerships and in- buted Sur- 
 dividuals. As a result of this disparity corporations P lus Tax> 
 have been permitted to accumulate surpluses which have es- 
 caped the additional taxes to which that of other forms of 
 
74 INCOME TAX LAW AND ACCOUNTING 
 
 enterprise have been subjected. For the purpose of correcting 
 this inequality and with the view of coercing corporations to 
 distribute their earnings, there was incorporated in the amend- 
 ments to the Act of September 8, 1916 (enacted October 3, 
 1917), a provision for a tax upon the undistributed profits of 
 corporations. [Section 10 of Part II, paragraph (b).] 
 
 This tax will affect only the undistributed surplus earned 
 after January i, 1917. Under the Act of September 8, 1916, 
 an unreasonably large surplus could be made subject to 
 the additional tax applicable to individuals, where the Secre- 
 tary of the Treasury certified that in his opinion the accumu- 
 lated surplus was unreasonable for the purposes of the business. 
 That section of the law (Section 3) states that gains or profits 
 accumulated beyond the reasonable needs of the business will 
 be prima facie evidence of a fraudulent purpose to escape the 
 tax; in mitigation of this language, however, it declares that 
 the mere existence of a large surplus will not in itself be evi- 
 dence of a purpose to escape the tax unless the Secretary of 
 the Treasury shall certify such to be his opinion. There appear 
 to be no cases on record where this provision of existing law 
 has been exercised, and, it is highly unlikely that it would be 
 enforced except in a case of unconscionable evasion. 
 
 The undistributed surplus tax is only operative in respect 
 of the net income of the corporation remaining undistributed 
 six months after the close of the calendar or fiscal year, exclusive 
 of the amount of any income taxes paid within the year. Furth- 
 ermore, it exempts any part of such income that has been ac- 
 tually invested in or is employed in the business or retained 
 for employment in the reasonable needs of the business, or is 
 invested in obligations of the United States issued after Sep- 
 tember i, 1917. 
 
 How far-reaching this tax will prove to be is a matter of con- 
 jecture. That it will be a revenue producer is problematical. 
 The enforcement of the spirit of the law will be difficult. Re- 
 gardless of the amount of earnings remaining undistributed at 
 the end of six months after the fiscal or calendar year, if the 
 corporation has no available funds (cash) out of which to pay 
 dividends the earnings are actually invested and employed in 
 the business, the corporation cannot consistently be ordered 
 
RETURNS OF CORPORATIONS 75 
 
 to convert its property into cash with which to pay dividends. 
 It is reasonable to assume, also, that an amount of cash on 
 hand not in excess of its current obligations is "retained for 
 employment" and is "reasonably required" in the business. 1 
 
 The rate of tax is ten (10) per cent, upon the amount remain- 
 ing undistributed six months after the end of the calendar or 
 fiscal year of the net income of corporations earned during the 
 year as appears by their income tax returns, after deducting 
 income taxes paid within the year. In the event that the De- 
 partment should find that any part of the amount retained out 
 of surplus is not required for employment in the business or is 
 not reasonably required therein, a tax of fifteen (15) per cent, 
 would be imposed and collected. 
 
 The double tax upon dividends received by corporations, 
 under the Act of September 8, 1916, is still effective. The 
 
 War Revenue Bill proposed by the Senate (not .... . , . 
 
 Dividends, 
 accepted by the House) contained an amendment 
 
 of the Act of 1916 correcting this defect, but, in the Bill drawn 
 by the Joint Conference Committee of , the Senate and the 
 House, which ultimately passed, the amendment was omitted. 
 By provision of the War Income Tax Law, enacted October 3, 
 1917, dividends received by corporations are not taxable 
 thereon. Hence, in a consideration of the combined income 
 and war income taxes, dividends received by corporations are 
 subject to the normal tax of 2 per cent, and free from the war 
 income tax of 4 per cent. 
 
 It will follow, therefore, that the net income of corporations 
 subject to the tax of 2 per cent, will be credited with the amount 
 of dividends received from corporations taxed upon their net 
 income in ascertaining the amount upon which the 4 per cent, 
 tax will be assessed. 
 
 XII. RETURNS OF CORPORATIONS 
 
 All corporations, domestic and foreign, are required to make 
 returns on Form 1031, Revised, except insurance Form of 
 companies, whose returns are made on Form 1030, Return. 
 Revised. 
 
 1 Earnings used for the purchase of preferred stock or bonds for cancella- 
 tion are "retained for employment" in the business and not taxable as 
 undistributed surplus. 
 
76 INCOME TAX LAW AND ACCOUNTING 
 
 The return of a domestic corporation shall be made to the 
 Return of Collector of the district in which is located its prin- 
 Corpora- c *P a * ^ ce > or wnere its books of account and other 
 tion. data are kept, from which the return is prepared. 
 
 In the case of a foreign corporation, the return should be 
 filed with the collector of the district in which is located its 
 Return of principal place of business in the United States, 
 Corpora- or ^ ^ ^ as no P rmc ip a l place of business, office or 
 tion. agency within the United States, then with the 
 
 Collector of Internal Revenue at Baltimore, Maryland. 
 
 All returns shall be filed with the Collector on or before the 
 ist day of March of each year unless the fiscal year of the cor- 
 Due Date poration has been designated in the manner pre- 
 of Return, scribed, in which case the return must be filed 
 within sixty days after the close of such designated fiscal 
 year. 
 
 When the due date of filing a return, March ist, or where 
 an extension has been obtained, the last day of such extended 
 When Last time, falls on Sunday or a legal holiday, the last 
 Filing Day due date will be the day next following such Sunday 
 Sunday or or ^ e & a ^ nou day. I n case the return is transmitted 
 Legal by mail it should be posted in ample time to reach 
 
 Holiday. the Collector's office "under ordinary handling of 
 the mails, on or before the date on which the return is thus 
 made due in the office of the Collector." 
 
 "The return shall be sworn to by the President, Vice-presi- 
 Execution dent or other principal officer, and by the Treasurer 
 of Returns. O r Assistant Treasurer." 
 
 Corporations making returns on the basis of the calendar 
 year will be notified of the amount of their assessments on 
 When Tax or before the first day of June of each year and 
 Payable. the amount of said assessment shall be paid on 
 or before the fifteenth day of June. 
 
 To any sum or sums due and unpaid after ten days' notice 
 and demand thereof by the Collector, there shall be added 
 Delayed interest at the rate of i per cent, per month upon 
 Payment said tax from the time the same became due, and 
 Penalty. a f ur ther penalty of 5 per cent, on the amount of 
 the tax unpaid. 
 
RETURNS OF CORPORATIONS 77 
 
 A corporation whose fiscal year is not the calendar year, 
 may make its return on the basis of its fiscal year Returns 
 by complying with prescribed requirements. The * r Fis al 
 designated fiscal year must end on the last day Corpora- 
 of some month. The corporation shall give notice tion. 
 to the Collector of the district in which its principal office is 
 located, at any time not less than 30 days prior to Designat- 
 March ist of the year in which its return would ing Fiscal 
 be filed if made upon the basis of the calendar Year - 
 year. Although not required under the law, it is advisa- 
 ble to obtain the consent of the Collector before proceed- 
 ing to file returns for any period other than the calendar 
 year. 
 
 Illustration: The fiscal year of a corporation ends on June 
 3oth. It has made its returns, say, for the year 1916 based 
 on the calendar year (January ist to December 3ist, 1916). 
 In order (December ist, 1917) to obtain permission to make 
 its return on the basis of its fiscal year (June 3oth) it must 
 serve notice on the Collector not later than 30 days prior to 
 March ist, 1918 (on or before January 29th, 1918). Its return 
 for six months ended June 3oth, 1917, must be filed on or be- 
 fore March ist, 1918, and the return for year ending June 3oth, 
 1918, must be filed within sixty days thereafter (on or before 
 August 29th, 1918). From that time on its annual returns 
 will be made for each year ending June 3oth, which re- 
 turn must be filed within 60 days, i. e., on or before August 
 29th. 
 
 A corporation that has designated its own fiscal year shall 
 pay a tax on the proportion of the total net income returned 
 for the fiscal year ending prior to December 31, Apportion- 
 1917, which the period between January i, 1917, ing Income 
 and the end of such fiscal year bears to the whole for 1917 - 
 of such fiscal year; that is to say, a corporation, the fiscal year 
 of which ends on November 30, 1917, shall pay a tax (under 
 the old law) on 1/12 of its net income of said fiscal year (for 
 the month of December, 1916) and on 11/12 of said income 
 (for period from January i to November 30, 1917), under the 
 new and old laws. 
 
 The tax under the designated fiscal year becomes due and 
 
78 INCOME TAX LAW AND ACCOUNTING 
 
 payable 105 days after the last due date upon which it is 
 Fiscal Year required to file the return, which, in the illustration 
 When Tax cited, would be December i2th of the same year 
 Payable. that the return is made> 
 
 Section 3176 of the revised statute provides that: "If the 
 failure to file a return or list is due to sickness or absence, the 
 Extension collector may allow such further time, not exceeding 
 File im thirty days, for making and filing the return or 
 Return. list as he deems proper." Application for such 
 extension should be made to the Collector on or before the first 
 day of March. 
 
 Section 14 (c) provides, further, "That the Commissioner 
 of Internal Revenue shall have authority, in the case of either 
 corporations or individuals, to grant a reasonable extension of 
 time in meritorious cases, as he may deem proper." 
 
 In case of failure to file a return within the time prescribed 
 by law or by the Collector, the Commissioner of Internal Reve- 
 Failure to nue sna ^ ac ^ 5 per cent, of the amount of the 
 File Return tax. When a return is voluntarily, and without 
 Penalty. no tice from the Collector, filed after the due time, 
 and it is shown that the failure to file the return was due to a 
 reasonable cause and not to wilful neglect, no such addition 
 shall be made to the tax. 
 
 In case a false or fraudulent return is wilfully made, the 
 Commissioner of Internal Revenue shall add to the tax 100 per 
 False or cent, of its amount. Section 3176 of the revised 
 Return 11611 * statutes further provides that "The amount so 
 Penalty. added to any tax shall be collected at the same 
 time and in the same manner and as part of the tax unless the 
 tax has been paid before the discovery of the neglect, falsity, 
 or fraud, in which case the amount so added shall be collected 
 in the same manner as the tax." 
 
 Section 18 of the Income Tax Law further states that "Any 
 individual or any officer of any corporation, joint-stock com- 
 pany 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 assessment required by this title to be made shall 
 be guilty of a misdemeanor, and shall be fined not exceeding 
 
RETURNS OF CORPORATIONS 79 
 
 $2,000 or be imprisoned not exceeding one year, or both, in 
 the discretion of the court, with the costs of prosecution." 
 
 Section 14 (c) contains the provision that "If any of the 
 corporations, joint-stock companies or associations, or insurance 
 companies aforesaid shall refuse or neglect to Refusal or 
 make a return at the time or times hereinbefore 2r 6 ^! ect to 
 specified in each year, or shall render a false or Return 
 fraudulent return, such corporation, joint-stock Penalty, 
 company or association, or insurance company shall be liable 
 to a penalty of not exceeding $10,000." 
 
 In cases of refusal or neglect to make return, and in cases 
 of erroneous, false or fraudulent returns, the Commissioner 
 of Internal Revenue shall, upon the discovery Return by 
 
 thereof, at any time within three years after such Commis- 
 '. . J , i * At i. sioner of 
 
 return is due, make a return upon information ob- internal 
 
 tained as provided- for by existing law. The as- Revenue, 
 sessment, based upon a return so made, shall become due 
 and payable immediately upon notification of the amount 
 thereof. 
 
 "When a second assessment is made in case of any list, 
 statement, or return, which in the opinion of the Second 
 collector or deputy collector was false or fraudu- Assess- 
 lent, or contained any understatement or under- ment. 
 valuation, no tax collected under such assessment shall be 
 recovered by any suit unless it is proved that the said list, 
 statement, or return was not false nor fraudulent Recovery 
 and did not contain any understatement or un- of Amount 
 dervaluation ; but this section shall not apply to Paid- 
 statements or returns made or to be made in good faith un- 
 der the laws of the United States regarding annual depreci- 
 ation of oil or gas wells and mines." (Section 3225, Revised 
 Statutes.) 
 
 The contents of returns of net income constitute a public 
 record, open to inspection "only upon the order Publicity 
 of the President under rules and regulations pre- of Returns, 
 scribed by the Secretary of the Treasury and approved by the 
 President." 
 
 A corporation which has not been completely organized, 
 
80 INCOME TAX LAW AND ACCOUNTING 
 
 that is to say, has not accepted the charter granted to it, and 
 Corpora- has transacted no business should report such 
 completely ^ acts to tne Collector and will then be relieved 
 Organized, of the necessity of making a return as a corporation 
 until its organization has been completed. (T. D. 2152.) 
 All Exist- The fact that a corporation has received no 
 Nations mcome * s no exc use for failure to make return. 
 Must Make The duty to make a return depends upon cor- 
 Returas. porate existence and not upon receipt of income. 
 
 In the event that it should not be possible for a corporation 
 to obtain from its foreign branches the necessary data from 
 Returns of which to make a complete and accurate report, it 
 Corpora- is advisable to prepare and file a tentative return 
 Maintain- snowm g> in so far as obtainable, the income from all 
 ing Foreign operations of such company, to which should be 
 Branches, attached a memorandum to the effect that, by reason 
 of inability to obtain the necessary information in due time the 
 income reported does not include income from all sources. 
 Such report should be marked "Tentative Return." When 
 the necessary data is received an amended return, so marked, 
 should be filed, and the assessment will then be fixed thereon. 
 
 Collectors of Internal Revenue are permitted to accept tenta- 
 tive returns in cases other than that mentioned above (foreign 
 branches) where true returns cannot be rendered in due time 
 or within the extended time as provided by law. The practice, 
 however, should only be resorted to when it is unavoidable. 
 
 "In a case wherein a holding company actually takes up 
 each month on its books its proportionate share of the 
 Returns of earnings of the underlying companies, such holding 
 Holding company will be required to include in its gross 
 Companies, income the amounts thus taken up regardless of the 
 fact that the same may not have been actually paid to it in 
 cash. The fact that the underlying companies credit to the 
 holding company the amount of earnings to which it is 
 entitled on the basis of the stock it holds, together with 
 the fact that the holding company takes up on its books 
 the amount thus credited, renders it incumbent upon the 
 holding company to return these amounts as income, re- 
 gardless of the fact that the underlying companies needed 
 
RETURNS OF CORPORATIONS 8 1 
 
 these earnings and used them in making extensions and 
 improvements and in furtherance of their business. Ex- 
 penditures for such extensions and improvements being 
 chargeable to the property account of the subsidiary com- 
 panies are not deductible from the gross income and will 
 therefore not have the effect to reduce the earnings to their 
 respective shares of which the stockholders are entitled." 
 (Supplement to Black on Income Taxes.) 
 
 The existence of a corporation is sufficient to compel the 
 rendering of a return of net income. The fact that a subsidiary 
 company has had no income and no expenses does Returns of 
 not excuse it from making a return. In case there ^^ ary 
 has been neither income nor expenses, the return panics, 
 should specifically state such facts. 
 
 It is quite usual for a subsidiary company to keep its books 
 and maintain its principal office at a place other than where 
 its operations are conducted. In such case, as where the sub- 
 sidiary company's office is maintained in the place where the 
 holding company has its office, the return should be made in 
 the district of the place where its books of account are 
 kept. 
 
 It is customary for subsidiary companies to transmit to the 
 parent company all of its earnings after deducting its expenses. 
 Such income received by the parent company is construed to 
 be dividends by the subsidiary company, subject to tax in the 
 return of the parent company, as well as in the return of the 
 subsidiary. 
 
 Receivers and trustees in bankruptcy, and assignees, who 
 are operating the property or business of corporations that 
 are subject to the income tax must make returns Receivers, 
 of net income for such corporations. Corpora- Trustees, 
 tions in the hands of receivers, trustees or con- Assig 11668 - 
 servators are subject to the income tax and must make 
 returns. 
 
 A corporation organized during the tax year should make 
 a return as at the end of the calendar year unless Corpora- 
 a fiscal year other than the calendar year has been g^ed*" 
 designated. (Art. 84, Reg. 33.) (See "Returns During 
 for Fiscal Year of Corporation," page 77.) Tax Year. 
 
82 INCOME TAX LAW AND ACCOUNTING 
 
 A corporation that has done no business since its organiza- 
 tion, must, nevertheless, make a return as at the end of the 
 calendar year unless it has complied with requirements of law 
 as to designating a fiscal year other than the calendar year. 
 (T. D. 2090.) 
 
 Return of The following is a reply to an inquiry of the Cor- 
 th>n P in a ~ poration Trust Co., on the question of responsi- 
 Liquida- bility for payment of income taxes due under a 
 tion. final return by a liquidating corporation : 
 
 "In reply you are informed, that under the regulations 
 of this office, at the time a corporation dissolves or liqui- 
 dates, it is required to make what is termed a final return, 
 and if such return shows a net income for that portion of the 
 year during which the corporation was in business, the 
 proper officers of the corporation should retain sufficient 
 funds out of which to pay the income tax assessable on 
 the basis of the income so returned. If the funds for this 
 purpose are not retained, this office will look primarily to 
 the officers of the corporation for the payment of the tax 
 shown to be due, and should they fail to pay the tax, the 
 Government will look to the stockholders for its pay- 
 ment." Dated March 22, 1917; signed by Acting Com- 
 missioner David A. Gates. 
 
 Liability of it has been ruled that a corporation, dissolved 
 Corpora- ^ n ^ ne vear I 9 I ^> prior to the enactment of the 
 tion after War Revenue Bill (October 3, 1917), is liable for 
 Dissolu- taxes thereunder, 
 tion. 
 
 "This office has had reason to review the decision con- 
 tained in that letter and now holds, in accordance with 
 the decision of the United States Circuit Court of Ap- 
 peals in the case of Nicholas F. Brady, et al., executors, v. 
 Charles W. Anderson, Collector, reported in Volume 240, 
 Fed. Rep., p. 665, that a corporation which was dissolved 
 during the year 1917 prior to the approval of the Act of 
 October 3, 1917, is subject to the taxes imposed by that 
 Act. In the case cited, suit was brought by the executors 
 against the Collector of Internal Revenue to recover taxes 
 assessed and paid by the executors under protest upon 
 
RETURNS OF CORPORATIONS 83 
 
 income received by Nicholas F. Brady during his lifetime 
 before the income tax act of October 3, 1913, was passed. 
 Mr. Brady died July 22, 1913; and his executors, in accord- 
 ance with the requirements of law made a return of in- 
 come received by him between March i, the effective 
 date of the Act and July 22, 1913, the date of his death. 
 It was contended by the representative of the taxpayer 
 that income which had been received by the taxpayer who 
 died prior to the passage of the Act was not subject to 
 tax under its provision, but the Court held that: 'The 
 effect of making the Act retroactive is, in our opinion, to 
 apply it to Brady exactly as if it had been enacted March i, 
 1913.' Applying this holding of the Court to the case of 
 a domestic corporation which was dissolved prior to the 
 enactment of the Act of October 3, 1917, the conclusion 
 is reached that such corporation is subject to the tax im- 
 posed by the Act of October 3, 1917, and therefore in 
 accordance with the provisions of such Act, for the reason 
 that it is retroactive and in force and effect as of and 
 from the first day of January, 1917, and applies to any and 
 all corporations making returns or having a taxable in- 
 come during the taxable period of 1917, it should file a 
 return in accordance with the provisions of the Act of 
 October 3, 1917, and pay the taxes imposed by such Act." 
 (Extract from Letter to Joseph and Alvin T. Sapinsky, 
 New York, N. Y., signed by Commissioner Daniel C. Roper, 
 and dated November 17, 1917.) 
 
 It has been held that corporations required to keep their 
 books according to a uniform system of accounting prescribed 
 by the Interstate Commerce Commission, may Returns 
 supply the information called for by Form 1031 ^^mei* e 
 "by classes rather than giving the items in detail, Corpora- 
 classifying the income and expenditures in the tions. 
 same manner as is required as to these items by the Interstate 
 Commerce Commission." 
 
 "In reply to your request that the railway companies 
 which you represent be permitted to file a schedule of the 
 deductions allowed under the law in conformity with the 
 Uniform System of Accounts ordered by the Public Service 
 Commission, instead of the division indicated by the return, 
 
84 INCOME TAX LAW AND ACCOUNTING 
 
 you are informed that the division indicated in the sup- 
 plementary statement forming a part of the return is 
 merely suggestive. This office desires information, as far 
 as possible, in detail, as to what items go to make up the 
 general expenses. 
 
 "If this information is sufficiently given in detail in the 
 schedule of deductions allowed under the law in conformity 
 with the Uniform System of Accounts ordered by the 
 Public Service Commission, this office has no objection to 
 such a statement being attached to the return. 
 
 "It should be understood, however, that this permission 
 does not carry with it a ruling that all of the items included 
 in such schedule will be held to be allowable deductions 
 from gross income for the purposes of the income tax." 
 (A letter to James L. Quackenbush, of New York, signed 
 by Commissioner W. H. Osborn, and dated January 6, 
 
 Foreign corporations represented in the United States by 
 Foreign agents, or those maintaining branch offices therein, 
 Corpora- must make returns of total net income received 
 resented horn all sources within the United States. (T. D. 
 by Agents. 2137.) 
 
 It has been held that a foreign corporation represented by 
 an agent in the United States for the solicitation of orders who 
 has only a mailing address and where the merchandise sold 
 is shipped direct to the customer, such representation con- 
 stitutes doing business in this country and subjects the foreign 
 corporation to an income tax. (T. D. 2161.) 
 
 A foreign corporation having several branch offices in 
 Foreign the United States should designate one of such 
 tion P ha a "in Branches as its principal office and should also 
 Branches 12 designate the proper officers to make the required 
 in U. S. return. (Art. 83, Reg. 33.) 
 
 XIII. EXEMPT ORGANIZATIONS 
 
 The following classes of corporations and organizations are 
 exempt from requirements of the income tax law except the 
 withholding of tax at the source, in cases where it is required 
 
EXEMPT ORGANIZATIONS 85 
 
 under the Act of October 3, 1917, and reporting and paying 
 
 the same to the Government. 
 
 First Labor, agricultural or horticultural organization; 
 
 Second Mutual savings bank not having a capital stock repre- 
 sented 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 depend- 
 ents; 
 
 Fourth Domestic building and loan association and cooperative 
 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 stock- 
 holder or individual; 
 
 Eighth Civic league or organization not organized for profit 
 but operated exclusively for the promotion of social wel- 
 fare; 
 
 Ninth Club organized and operated exclusively for pleasure, 
 recreation, 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 insur- 
 ance company, mutual ditch or irrigation company, mu- 
 tual or cooperative telephone company; or like organiza- 
 tion of a purely local character; the income of which 
 consists solely of assessments, dues, and fees collected 
 from members for the sole purpose of meeting its ex- 
 penses; 
 
86 INCOME TAX LAW AND ACCOUNTING 
 
 Eleventh Farmers', fruit growers', or like association, or- 
 ganized 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 the 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 as- 
 sociations as provided in section twenty-six of the Act 
 approved July seventeenth, nineteen hundred and sixteen, 
 entitled "An act to provide capital for agricultural de- 
 velopment, to create standard forms of investment based 
 upon farm mortgage, to equalize rates of interest upon 
 farms loans, to furnish a market for United States bonds, 
 to create Government depositaries 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. 
 
 Under the language of the Income Tax Law of 1913, it was 
 held that exempt corporations and organizations were exempt from 
 Exempt all provisions of the law. Under the law, enacted 
 Corpora- September 8, 1916, it was ruled by the Commis- 
 quired^to sioner of Internal Revenue that the fourteen dif- 
 Withhold ferent kinds of exempt corporations and organiza- 
 Tax - tions named in the law are relieved only of the tax 
 
 on their income, and " that said corporations and organizations 
 are required to answer under all the other provisions of the 
 statute as to withholding and making returns of tax withheld." 
 Under the Act of October 3, 1917, this ruling will only be ap- 
 plicable to income payable to nonresident alien individuals, 
 foreign corporations and partnerships, and in respect of in- 
 terest on corporate obligations containing a tax-free covenant 
 clause. 
 
EXEMPT ORGANIZATIONS 87 
 
 In all cases where there is a question of doubt as to whether 
 an organization is or is not exempt, it is recom- Organiza- 
 mended that a special ruling be obtained from on l tf ^ 
 the Commissioner of Internal Revenue. The ap- as to Ex- 
 plication for such ruling should be accompanied emption. 
 by an affidavit stating: 
 
 (a) The purpose and nature of the organization 
 
 (b) The source of its income 
 
 (c) The disposition of its income 
 
 (d) Whether or not any of its net income will inure to the 
 
 benefit of any private stockholder or individual. 
 It has been ruled that foreign as well as domestic Exempt 
 corporations and organizations, of the classes organiza- 
 enumerated in the exempt list, are included therein, tions. 
 
 "Receipt is acknowledged of your letter of November 17, 
 1916, and in reply you are advised that the Federal Income 
 Tax Law of September 8, 1916, provides that every or- 
 ganization enumerated in Section II of that statute is 
 exempt from Federal Income Tax on its net earnings, 
 profits or income, and the office holds that the provisions 
 apply whether the organization be domestic or foreign. 
 In a case where a foreign organization desires to be held 
 exempt from Federal Income Tax, and a doubt exists as to 
 whether or not it comes within the class of organizations 
 enumerated in Section II, it will be required to file a copy 
 of its charter and by-laws, and an affidavit executed by its 
 principal officer showing the disposition made of such in- 
 come as it receives, and stating specifically, whether or not 
 any of the income so received inures to the benefit of any 
 individual stockholder. The question of whether or not 
 the office will hold the organization to be ' exempt' will 
 be determined by the facts shown in its charter, by-laws 
 and affidavit. ' ' (Letter to the Corporation Trust Company, 
 signed by Commissioner W. H. Osborn, and dated Decem- 
 ber 6, 1916.) 
 
 A so-called "close corporation," which usually consists of 
 members of a family, is not such corporation as is Close Cor- 
 exempt from the requirements of the income tax poration. 
 law. 
 
88 INCOME TAX LAW AND ACCOUNTING 
 
 A corporation formed as a family affair to hold property 
 together and not to sacrifice in selling does not come within 
 the class of corporations specifically enumerated as exempt 
 from the requirements of the Federal Income Tax Law, and 
 is required to make a return of annual net income showing 
 therein all income arising and accruing to it from all sources 
 and to pay any income tax shown by such return to be due. 
 (T. D. 2137.) 
 
 The fact that a corporation or association was not organized 
 for profit is immaterial in determining whether or not such 
 Corpora- corporation or association must make returns of net 
 Organized mcome - All corporations, joint-stock companies 
 for Profit, or associations and insurance companies, unless 
 specifically mentioned in the law as exempt, must make returns. 
 
 The tax imposed by the Federal income tax law is not 
 imposed only upon such corporations as are organized and 
 operated for profit. Any corporation, joint-stock company, 
 or association, and any insurance company, no matter how 
 created or organized or what the purposes of its organization 
 may be, unless it comes within the class of organizations 
 specifically enumerated in the act as exempt, will be re- 
 quired to make returns of annual net income and pay in- 
 come tax upon the net income which arises and accrues to 
 it during the year. 
 
 A corporation is not exempt simply and only because it is 
 primarily not organized and operated for profit. If income 
 within the meaning of the law arises and accrues to a cor- 
 poration which is not organized and operated for profit, 
 such income will be subject to the tax imposed by this act. 
 
 It is therefore held that commercial men's associa- 
 tions, . . . and like organizations come within the re^ 
 quirements of the law. (T. D. 2152.) 
 
 The fact that all the stock of a nonexempt corporation is 
 owned and controlled by an association, exempt under the 
 Corpora- law, does not relieve such corporation of making 
 tionsCon- returns. The liability of a corporation to report 
 Exempt anc ^ P a y tne i nc o me tax is not contingent upon 
 Organiza- the ownership of its stock but upon the character 
 tions. O f the organization, which latter alone determines 
 
 whether or not it is exempt. 
 
EXEMPT ORGANIZATIONS 89 
 
 A stock corporation all of whose stock is owned by a 
 "corporation or association organized and operated exclu- 
 sively for religious, charitable, scientific or educational 
 purposes, no part of whose net income inures to the bene- 
 fit of any member, stockholder, or individual," is required 
 under the provisions of the Federal Income Tax Law to 
 make a return of annual net income and pay income 
 tax. 
 
 The fact that all of the stock of the corporation, except 
 shares qualifying the directors, is owned by a corporation 
 which itself comes within the class specifically enumerated 
 as exempt, does not relieve the first-named corporation 
 from liability under the Income Tax Law. The liability of a 
 corporation to the requirements of the Federal income tax 
 law is not contingent upon the ownership of its stock. 
 (T. D. 2137.) 
 
 Treasury Department rulings indicate that organizations oper- 
 ated for profit, regardless of the character of their pursuits, are 
 subject to the income tax and must make returns. Organiza- 
 Specific rulings to this effect have been made with operated 
 respect to agricultural and horticultural organiza- for Profit, 
 tions (T. D. 2090) and cooperative dairies. (T. D. 1996.) 
 
 In Union Hollywood Water Co. v. John P. Coster, Water 
 Collector (238 Fed. 329), it was held that: nT**** 
 
 The fact that plaintiff was a public utilities cor- Exempt, 
 poration which, under the laws of the State, was not the owner 
 of the property but merely intrusted with the use thereof which 
 it must devote to the public, does not entitle it to more favor- 
 able treatment than other corporations, it being a corporation 
 organized for profit, having a capital stock represented by 
 shares, and the Act making no exceptions in favor of public 
 utilities. 
 
 XIV. INCOME or CORPORATIONS 
 
 The term "net income" as used in the income tax law with 
 respect to corporations, may be defined as the Net 
 "gross income" less deductions allowed by law. Income. 
 
 Gross income of manufacturing companies shall con- 
 
QO INCOME TAX LAW AND ACCOUNTING 
 
 sist of the total sales of manufactured goods during the 
 Gross year covered by the return, increased or decreased 
 
 Income by th e g a j n or i oss as shown by the inventories of 
 turSg a( finished and unfinished products, raw material, etc., 
 Corpora- at the beginning and end of the year. To this amount 
 tions. should be added the income, gains, or profits from all 
 
 other sources as shown by the books of account. (Art. 104, 
 Reg. 33.) (See Manufacturing Corporation Operating Cost- 
 system, page 216.) 
 
 Gross income of mercantile companies shall include the 
 total merchandise sales during the year, increased or de- 
 Gross creased by the gain or loss as shown by the inven- 
 Mercantile tor * es ^ mercnan dise at the beginning and end of 
 Corpora- 1 & ^ e vear ^ or wmcn the return is made; to this 
 tions. amount should be added the income, gains, or 
 profits derived from all other sources as shown by the books 
 of account. (Art. 105, Reg. 33.) 
 
 Gross income of miscellaneous corporations consists of 
 the total revenue derived from the operation and man- 
 Gross agement of the business and property of the corpora- 
 Income tion making the return, together with all amounts of 
 income, including the income, gains, or profits from 
 Corpora- a ^ th er sources, as shown by the books of account, 
 tions. (Art. 106, Reg. 33.) 
 
 In the case of a large contracting company, which has 
 
 numerous uncompleted contracts which probably, in some 
 
 Gross cases, run for periods of several years, there does not 
 
 ^ lcome appear to be any objection to such corporation pre- 
 
 in^Cor-' paring its return in such manner that its gross income 
 
 porations. will be arrived at on the basis of completed work 
 
 that is to say, on jobs which have been finally completed 
 
 and payments made during the year in which the return 
 
 is made. If the gross income is arrived at in this method, 
 
 the deductions from gross income should be limited to the 
 
 expenditures made on account of such completed contracts. 
 
 (T. D. 2161.) 
 
 It will be noted from these definitions that the gross 
 
 income embraces not only the operating revenues, but also 
 
 Gross income, gains, or profits from all other sources, such 
 
 Income as rentals, royalties, interest, and dividends from 
 
 From All stock owned in other corporations . . ., also profits 
 
 Sources. ma de from the sale of assets, investments, etc. 
 
 (Art. 107, Reg. 33.) 
 
INCOME OF CORPORATIONS 9 1 
 
 Gross income of insurance companies consists of the total 
 revenue derived from the operation of the business, includ- 
 ing income, gains, or profits from all other sources, Q ross JQ. 
 as shown by the entries on the books of account come In- 
 within the calendar or fiscal year for which the re- surance 
 turn is made, except as modified by the express Companies, 
 exemptions of the articles which apply to mutual fire, mutual 
 marine, and life insurance companies. (Art. 97, Reg. 33.) 
 
 Gross income of banks and other financial institutions 
 consists of the total revenue derived from the operation of 
 the business, including income, gains, or profits Gross 
 from all other sources, as shown by the entries on Income 
 the books of account, within the calendar or fiscal of Banks, 
 year for which the return is made. (Art. 96, Reg. 33.) 
 
 Mutual associations or companies, such as, fire, employers' 
 liability, workmen's compensation, casualty insurance com- 
 panies, that require their members to make premium deposits to 
 provide for losses and expenses, are not required Mutual 
 to return as income any portion of the premium Companies, 
 deposits returned to policyholders. Income from all other 
 sources, however, including that received from its members 
 as premium deposits, retained by the companies for purposes 
 other than the payment of losses and expenses and reinsurance 
 reserves, is returnable as income. 
 
 Dividends may be declared payable in cash or the equivalent 
 of cash. Where dividends are declared payable in securities 
 of another corporation or of a foreign government, Dividends 
 the value placed upon such securities should be Payable in 
 the fair cash market value thereof as at the time Securities, 
 the dividend is declared. 
 
 Profit or income from the sale of capital assets Profit on 
 is subject to the income tax and must be included capital 
 in the return of corporations. Assets. 
 
 For the purpose of ascertaining the gain derived from the 
 sale or other disposition of property, real, personal Sales of 
 or mixed, acquired before March i, 1913, the fair Property 
 market price or value of such property as of March i, pjjj^o 
 1913, shall be the basis for determining the amount March 1st, 
 of such gain derived. 
 
92 INCOME TAX LAW AND ACCOUNTING 
 
 For method of computing profit or loss on properties acquired 
 prior to March i, 1913, see page 34. 
 
 Interest on Interest received on sinking funds or from any 
 Sinking investment of reserve funds, shall be accounted 
 Funds. for as i ncome . 
 
 In cases wherein corporations set aside and place in a 
 sinking fund under the control of trustees their own bonds 
 or the bonds of other corporations which they may own, 
 it is held that the fund thus set aside by the corporation is 
 an asset of the corporation, and any increment to that 
 fund as a result of investments made by the trustees having 
 the same in charge is income to the corporation and should 
 be so included and accounted for in its returns of annual net 
 income. 
 
 If the trustees have invested the amount of the sinking 
 fund reserve or any portion of it in the bonds of the corpora- 
 tion and such corporation pays to the trustees the interest 
 on these bonds, such corporation will be permitted to de- 
 duct such interest from its gross income, provided the 
 amount of the interest thus paid, plus the interest on any 
 other outstanding indebtedness which it may have, does 
 not exceed the limit fixed by the law, and provided further 
 that the interest paid to the trustees, together with all 
 other earnings on investments of the sinking fund made by 
 the trustees, is included in the income of the corporation. 
 (T. D. 2161.) 
 
 Where a corporation sustains a deficit (impairment of capital) 
 Assess- at the close of a year, which the stockholders pro- 
 ment of pose to make good by voluntary contribution, 
 Capita? suc k contribution or assessment is not income to 
 Stock Not the corporation. In a letter to Dorman & Dana, 
 Income. New York, dated February 21, 1916, Commis- 
 sioner W. H. Osborn expressed himself as follows: 
 
 "It is therefore the present opinion of this office that the 
 amounts paid by the stockholders pursuant to this so-called 
 voluntary assessment, are to all intents and purposes, if not 
 in fact, additional payments for the stock which they hold, 
 that is to say, such payments are simply an addition to the 
 capital stock of the company. Since amounts paid for or on 
 account of capital stock issued do not constitute income 
 
INCOME OF CORPORATIONS 93 
 
 within the meaning of the Federal income tax law, it is held 
 that these payments represent voluntary assessments upon 
 the stock held by the individual stockholders and do not 
 constitute income to be returned for the purpose of the 
 income tax." 
 
 According to the following ruling by the De- Exchange 
 partment in the case of an exchange of stocks ^ Bo n ^ s 
 and bonds for an interest in property, the value in Reor- 
 of the securities received in excess of the cost of fj^ tion * 
 the property relinquished, constitutes taxable in- Transac- 
 
 come. tion De- 
 
 fined. 
 
 "Replying to your letter of the 28th ultimo, you are 
 informed (i) That in a case wherein an investment com- 
 pany purchases one-third interest in a telephone company 
 paying therefor $40,000, the telephone company being 
 reorganized, and as a result of the reorganization the in- 
 vestment company surrenders whatever certificates of 
 ownership it has in the old company and receives in return 
 $40,000 par value of bonds and $40,000 par value of stock 
 of the reorganized company, the bonds having a ready 
 market value of par and the stock at 50% of par, it will be 
 held that this constitutes a closed and complete transaction 
 in that the old stock has been disposed of for a readily 
 determinable value, namely, $40,000 actual value of bonds, 
 and $20,000 actual value of stock. Hence the investment 
 company at this point has realized on its original invest- 
 ment a profit of $20,000 which will be returned as income of 
 the year in which the transaction was closed. (2) After 
 the foregoing transaction, if the investment company sells 
 the bonds for $40,000 and retains the stock which is reason- 
 ably worth $20,000, it will be held that so far as this par- 
 ticular transaction is concerned, no income has been realized 
 and none will be realized until the stock retained has been 
 sold or disposed of for a price or value greater than the 
 $20,000 returnable as income under the first transaction. 
 (3) If the $20,000 of stock is traded for bonds in another 
 corporation worth $20,000, no taxable income will result 
 from this transaction as it is held to be an exchange of 
 assets of a different form but of equal value. (4) In the 
 sale or disposition of capital assets, a closed and completed 
 transaction is held to be one in which an asset is disposed of 
 
94 INCOME TAX LAW AND ACCOUNTING 
 
 for cash or for assets other than cash, at a fixed or deter- 
 mined value, that is, for cash or its equivalent in value at 
 the time the transaction is consummated. If the assets 
 are exchanged for other assets of a like character, and no 
 account is taken of compensatory value, it will be held that 
 such a transaction constitutes merely a change in the form 
 of assets, and the investment will be considered a con- 
 tinuing one, no profit or loss to be taken into account until 
 the assets are disposed of for cash or its equivalent on the 
 basis thereinbefore indicated." (Letter to F. B. Mac- 
 Kinnon, Washington, D. C., signed by Acting Commis- 
 sioner David A. Gates and dated August 3, 1917.) 
 
 The amount received by a corporation for the original 
 issue and sale of its capital stock is held to be the capital 
 Premium f *-he corporation. In cases where the stock, as 
 Sale of originally issued, is sold at a price greater or less 
 Capital than the par value, neither the premium nor the 
 Stock. discount will be taken into account in determin- 
 ing the net income of the corporation for the year in which 
 the stock is sold. This is purely a capital transaction and 
 the income is neither increased nor decreased by reason of the 
 sale, per se, of the stock at a price greater or less than its 
 par value. (T. D. 2090.) 
 
 A real estate development corporation, ordinarily, does not 
 realize a profit until the property or properties of such corn- 
 Income of pany have been developed. During the time of 
 Real Es- such development certain carrying charges are in- 
 vdopment currec ^> as interest, taxes, insurance, etc. Inasmuch 
 Corpora- as it would work an injustice to compel such com- 
 tion. pany to deduct carrying charges as current expenses 
 
 during the period of development, when the property derives 
 no profit, it has been ruled that all such carrying charges may 
 be added to the cost of the property. During the time of de- 
 velopment the income from the sale of lots, or parcels, may 
 be deducted from the total cost of land, including the initial 
 cost plus carrying charges and the corporation will return no 
 profit until the amount of sales, or contracts of sales, exceed 
 the prime cost of property plus carrying charges. 
 
 In the case of a contract of sale of land on the instalment 
 plan of payments by a development company, the gross amount 
 
INCOME OF CORPORATIONS 95 
 
 to be paid by the instalment purchaser is deemed income and 
 is returnable, for income tax purposes in the year that the con- 
 tract of sale is made. Should the purchaser default in payment, 
 the amount of such default may be deducted as a loss sustained 
 by reason thereof. l 
 
 The cost of property acquired subsequent to the in- 
 cidence of the tax will be the actual price paid for it, to- 
 gether with the expense incident to the procurement of the 
 property in the first instance and its sale thereafter, and the 
 cost of improvements or developments, if any. (T. D. 2005.) 
 T. D. 2005 is not intended to be so construed that carrying 
 charges, if they consist of such expenditures as constitute 
 allowable deductions from gross income, are to be added 
 to the cost of the property if there is a gross income from 
 which such charges as constitute allowable deductions may 
 be deducted. It is intended, however, that in the case of a 
 holding or developing company, which has not yet reached 
 the stage of having any income of consequence resulting 
 from its corporate operations, the carrying charges or other 
 excess over the incidental income received may be added to 
 and made a part of the cost of the property. (T. D. 2137.) 
 
 Regardless of the form or manner of payment, such payment, 
 received in a sale of real estate, is subject to income tax at the 
 time the sale and transfer are made; that is to say, the vendor 
 corporation accepting in payment, promissory notes, mort- 
 gages or a contract providing for instalment payments, must 
 report the profit on the transaction in the returns for the year in 
 which the transaction was consummated. Default in payment 
 is deductible in the return for the year that the default occurs. 
 For income tax purposes, where there is an actual sale 
 and transfer, profit will be considered as realized even 
 though payment is to be made in instalments, as notes for 
 deferred payments are secured by the title to the property, 
 and presumably bear interest and are held to be worth, in 
 cash, their face value. (T. D. 2090.) 
 
 1 Where the improvements have been paid for, and the cost per lot is 
 determinable, the pro rata part of profit on instalments received may be 
 returned for each year, less the necessary expenses. For example, a lot plus 
 improvements cost $250; instalment contract of sale is for $500; collections 
 received in the year, $100; then the profit is 50%, and $50, less necessary 
 expenses, is the returnable net income. 
 
96 INCOME TAX LAW AND ACCOUNTING 
 
 In determining the amount of income to be accounted for 
 on this basis the corporation will consider mortgages, 
 mortgage notes, or any other credits received in payment of 
 the property as though they were cash, and if it should 
 occur that the purchaser of any of the property should 
 later default in payment the corporation will be entitled to 
 take credit as a loss for the amount of loss actually sus- 
 tained by reason of the default. (T. D. 2137.) 
 
 In case of default on instalment payments there may be 
 charged off as bad debts the amount of such unpaid in- 
 stallments less the salvage value of the real estate re- 
 possessed. (T. D. 2090.) 
 
 A very complete discussion of the question of cost of real 
 When Cost estate, dealing with carrying charges, assessments 
 of Property for local benefits, etc., is contained in a letter to 
 Crying the Corporation Trust Co., signed by Commis- 
 Charges, sioner W. H. Osborn, dated December 22, 1914, 
 etc - as follows: 
 
 "This office is in receipt of your letter of the i9th instant, 
 in which, referring to Treasury Decision No. 200$ [cost of 
 property purchased prior to the incidence of the special 
 excise tax (January i, 1909), or the incidence of the income 
 tax (March i, 1913), will be the actual price paid for the 
 property, including the expense incident to the procurement 
 of the property in the first instance and its sale thereafter, 
 together with carrying charges of interest, insurance and 
 taxes actually paid prior to the incidence of tax (special 
 assessments, if any 'actually paid' as 'local benefits' in 
 connection with real estate) ; provided that where, up to the 
 incidence of the tax the expenses of carrying property has 
 exceeded the income from it, the difference between the 
 expense of carrying and the income from the property shall 
 be added to the purchase price and the sum thus ascer- 
 tained shall be the cost of the property; and provided fur- 
 ther, that in the case of property purchased prior to the 
 incidence of the tax and sale thereof subject to the incidence 
 of the tax, there shall be excluded from consideration in 
 ascertaining cost any items of income, expense, interest 
 and taxes previously taken into account in preparing a 
 return of annual net income. (T. D. 2005.) "] You submit, 
 for a ruling of this office, the following inquiries: 
 
INCOME OF CORPORATIONS 97 
 
 "i. Is the matter in parentheses, beginning in line 6 of 
 the paragraph, intended to mean that ' special assessments, 
 if any, actually paid as local benefits in connection with real 
 estate ' may be added to the original cost of the property if 
 such assessments are paid prior to the incidence of the 
 tax?" 
 
 "2. May the assessments be added to the original cost 
 of the property if they are paid subsequent to the incidence 
 of the tax?" 
 
 "3. Reading the paragraph referred to from line i to the 
 semi-colon in line 8, it appears that all carrying charges 
 may be deducted. This, of course, is modified by the 
 proviso beginning in line 8 and ending in line 12, which 
 provides that if the expense of carrying the property has 
 exceeded the income, the difference between the expense 
 and the income shall be added to the purchase price, 
 and the sum thus ascertained shall be the cost of the 
 property. 
 
 "In reply, you are informed that special assessments, if 
 any, actually paid as local benefits in connection with real 
 estate are held to be expenditures which add to the value 
 of the property and should be capitalized, whether such 
 expenditures were made prior to, or subsequent to, the 
 incidence of the tax; that is to say, such expenditures, no 
 matter when paid, become, in effect, a part of the cost of 
 the property. This answers your first and second inquiry. 
 
 "Replying to your third inquiry, you are informed that 
 all carrying charges in excess of the income which may 
 have been received prior to the sale of the property may be 
 included as a part of the cost of such property, and the 
 cost thus determined will be excluded from the gross pro- 
 ceeds of the sale when the property is sold, and the excess of 
 such cost will be returned as income. 
 
 "This ruling is based upon the presumption that the 
 corporation is doing business, and, having income as a 
 result of the business done must use such income to offset, in 
 as far as it will do so, the expenses necessary to the opera- 
 tion and maintenance of the business. 
 
 "If the carrying charges are less than the income, such 
 carrying charges, unless they be for improvements and 
 betterments, will not be added to and made part of the 
 cost of the property, but will be deducted from the gross 
 income received, in which case it would appear that the 
 
98 INCOME TAX LAW AND ACCOUNTING 
 
 return of the corporation would show a net income subject 
 to tax. 
 
 "The Treasury Decision referred to is not intended to be 
 so construed that the carrying charges, if they consist of 
 such expenditures as constitute allowable deductions from 
 gross income, are to be added to the cost of the property, 
 if there is a gross income from which such charges as con- 
 stitute allowable deductions may be deducted. It is in- 
 tended, however, that in the case of a holding or developing 
 company which has not yet reached the stage of having 
 any income of consequence resulting from its corporate 
 operations, the excess of the carrying charges over the 
 incidental income received may be added to and made a 
 part of the cost of the property. 
 
 " As a general proposition, involving the acquirement and 
 holding of property for further sale, which property was 
 acquired prior to the incidence of the tax and from which 
 property there is but a nominal income, insufficient to 
 meet the carrying charges, it would be 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 
 the date of the incidence of the tax. The result thus 
 shown will be the cost of the property, or the amount 
 to be excluded from the proceeds when sale is made." 
 
 Corporations and individuals selling merchandise on the 
 instalment plan, or on " lease contracts," l should make 
 Income their returns of gross income on the basis of the 
 Businesses S 1 " 088 amount of contracts of sales made during the 
 Generally, year. In other words, the gross amount to be paid 
 by the customer under a contract for the sale or "leasing" of 
 merchandise is construed to be the amount on which the gross 
 profit is computed for income tax purposes. Uncollectable ac- 
 counts, less salvage value of goods returned, if any, may be 
 charged at the end of the year as bad debts. This principle is 
 
 1 Where returns are made only of cash receipts, the proportion of profit 
 on each instalment received may be returned as income. For example a 
 piano sold for $400, cost $300, the gross profit is 25%. If $100 was collected 
 in the year, 25% of $100, less operating expenses, would be returnable. 
 This method is not feasable in a large business. 
 
INCOME OF CORPORATIONS QQ 
 
 applicable to all kinds of instalment businesses, making returns 
 on the accrual basis. 
 
 The question of computing the profit or loss from the sale 
 of timber is always a difficult one. As in the case of other prop- 
 erties acquired prior to March i, 1913, the fair Profit or 
 market price or value of the timber should be deter- i? s ^ 
 mined as of that date. At best, such values must Lumber 
 be more or less estimated, except when a bona fide Stumpage. 
 offer of purchase for cash or its equivalent had been received 
 at or near March i, 1913. 
 
 A letter dated March 3, 1917, signed by Deputy Commis- 
 sioner L. F. Speer, published by the Corporation Trust Co., 
 outlines with marked degree of clearness, considering the com- 
 plexity of the subject, a method by which to compute the profit 
 or loss on the sale of timber and lumber, as follows: 
 
 "In compliance with your request of the ist instant, you 
 are advised that the following information is furnished you 
 in regard to the preparation of your returns of annual net 
 income under the provisions of the Act of September 8, 
 1916, as far as the calculation of the value of standing timber 
 as of March i, 1913, is concerned, and it also represents the 
 regulations of this office in regard to allowances to be de- 
 ducted from gross income for the value of stumpage: 
 Corporations owning timber land and logging off the timber 
 and manufacturing it into lumber, will, if the timber was 
 acquired prior to March i, 1913, be permitted to exclude 
 from gross income either through a deduction from gross 
 receipts or through a charge into the cost of manufacturing 
 the timber into lumber, an amount equivalent to the fair 
 market price or value of the standing timber as of March i, 
 1913. In order to secure the benefit of this deduction such 
 corporations must set up on their books as of March i, 
 1913, the fair market price en bloc, of all the timber then 
 owned by them, and then by dividing this en bloc value by 
 the estimated number of feet (board measure) in the entire 
 timber holdings, the per unit value or price as of March i, 
 1913, will be ascertained, which per unit price or value will 
 be the basis for measuring the amount which may be added 
 to the cost of manufacture, or deducted from gross income, 
 until the en bloc value of the entire holdings as of March i, 
 1913, shall have been extinguished, after which no further 
 
100 INCOME TAX LAW AND ACCOUNTING 
 
 deduction on this account shall be allowed. The same rule 
 will apply in the case of timber or timber lands purchased 
 subsequent to March i, 1913, the only difference being that 
 actual cost, that is the gross purchase price, shall, in making 
 the computation, be substituted for en bloc price or value as 
 of that date. If the entire market price or value of both 
 timber and lands, as of March i, 1913, or the entire cost, 
 if acquired subsequent to that date, is extinguished through 
 a deduction from gross income for timber used, or through a 
 per unit charge to cost of manufacturing lumber, then the 
 entire amount realized from the logged-off lands or for other 
 salvage, will be returned as income of the year in which such 
 lands are sold or disposed of. If the timber or timber 
 lands are sold en bloc, the gain or loss will be ascertained on 
 the basis of the difference between the fair market price or 
 cost and the selling price, accordingly as the property was 
 acquired prior or subsequent to March i, 1913. The fair 
 market price or value of timber or timber lands, as of 
 March i, 1913, is the price at which the property in its 
 then condition and with the circumstances then surrounding 
 it, could have been sold, for cash or its equivalent. This 
 value must not be speculative, but must be determined 
 without taking into account any prospective profits that 
 may result from the manufacture of the timber into lumber. 
 It must be, as the law contemplates, a fair market value, 
 and, once determined, must be set up on the books, and, as 
 the measure of a stumpage deduction for income tax pur- 
 poses must remain constant and cannot be increased. The 
 value so set up as of March i, 1913, will be subject to the 
 approval of the Commissioner of Internal Revenue. You 
 are also informed that this office is not prepared to express 
 an opinion at the present time as to what stumpage value 
 would constitute a fair value of short leaf North Carolina 
 pine as of March i, 1913, and in regard to your further 
 request you are informed that the ruling contained in the 
 above regulation will refer equally as well to the years 1913, 
 1914 and 1915, with the exception that the cost of the tim- 
 ber shall be the governing basis instead of its value as of 
 March i, 1913." 
 
 DEDUCTIONS ALLOWED CORPORATIONS 
 "All the ordinary and necessary expenses paid within the 
 
DEDUCTIONS ALLOWED ' CORPORATIONS IOI 
 
 year in the maintenance and operation of its business and 
 properties" are deductible from gross income of 
 corporations. 
 
 All losses actually sustained and charged off within the 
 year, not compensated for by insurance or other- Losses De- 
 wise, are deductible items. ductible. 
 
 The deduction for losses must be losses actually sustained 
 during the year and not compensated by insurance or 
 otherwise. It must be based upon the difference between 
 the cost value and salvage value of property or assets, 
 including in the latter value such amount, if any, as has, 
 in the current or previous years, been set aside and deducted 
 from gross income by way of depreciation. (Art. 124, 
 
 Reg. 33-) 
 
 Deductions for losses should be confined to losses ac- 
 tually sustained and charged off during the year, and not 
 compensated by insurance or otherwise. (Art. 158, Reg. 33.) 
 
 Losses not compensated by insurance must be Loss De- 
 deducted from the return of net income for the ductib .l e 
 year in which the loss was sustained. This ruling year Sus- 
 has been upheld by the courts and is strictly enforced, tained. 
 
 For the purpose of computing the profit or loss p^gf or 
 from the sale of property of a corporation, acquired Loss on 
 prior to the incidence of the law, March i, 1913, P r P rt y 
 such properties shall be valued as of that time Before 
 at the fair market price thereof. This applies to March 1, 
 both real and personal property. 1913> 
 
 A reasonable allowance for the exhaustion, wear and tear 
 of physical properties of a corporation arising out of its use 
 or employment in the business or trade is deductible Deprecia- 
 in the year that such depreciation is sustained, tion De- 
 The amount deducted must be actually charged ducti l e - 
 off upon the books of the corporation. (See "Depreciation," 
 page 175.) Depletion 
 
 (This deduction is considered in Chapter VI, on of Oil and 
 Depreciation, page 181.) Gas WeUs * 
 
 Under the Act of September 8, 1916, the provision of the 
 Income Tax Act of 1913, limiting the charge for depletion of 
 

 
 Iv^2 INCOME T/X -LAW AND ACCOUNTING 
 
 mines to " 5 per cent, of the gross value at the mine Depletion 
 of the output for the year" has been repealed, and of Mines, 
 there has been substituted the provision that a reasonable 
 allowance for depletion thereof will be permitted, "not to ex- 
 ceed 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" under rules and regulations to 
 be prescribed by the Secretary of the Treasury. 
 
 Inasmuch as the operating conditions of mines are so ma- 
 terially different, the rate of depletion should be computed 
 on a basis that will provide for the particular requirements of 
 each case. 
 
 In Grand Rapids & Indiana Railway Co. v. Doyle, Collector 
 Mainten- (United States District Court for the Western 
 ance De- District of Michigan, Southern Division l ) mainten- 
 fined * ance was defined as follows: 
 
 "Maintenance means the unkeep or preserving of the 
 condition of the property to be operated and does not mean 
 additions to the equipment, additions to the property, or 
 improvements of former condition of the road." 
 
 As a general proposition the cost of renewals in like kind 
 and quality may be charged off as expense. Where the re- 
 Renewals. newa l> however, is also an improvement, as, for 
 Improve- example, replacing a wooden bridge with a steel 
 ments. bridge, wooden doors with steel doors, a motor 
 of twenty horse-power by one of fifty horse-power, the excess 
 cost would not be allowable as a deduction. (T. D. 2210.) 
 
 The income tax law does not provide specifically, with re- 
 spect to corporations, for the deduction of bad debts or un- 
 B d D bt cou<ec tible accounts. The officers of the Treasury 
 Department; however, having the administration of 
 the law in charge, have ruled that the same may be deducted 
 as losses. (See also page 213.) 
 
 To provide for doubtful and anticipated bad debts, by es- 
 Reserves tablishing a reserve for that purpose, has always 
 for Bad been considered good accounting practice, but such 
 Debts. reserve is not deductible from an income tax re- 
 turn. Accounts receivable, to be deductible from income, 
 
 1 T. D. 2210. 
 
DEDUCTIONS ALLOWED CORPORATIONS 103 
 
 must actually have been ascertained to be worthless. Besides, 
 an account, to be deductible, must be actually written off in 
 the period for which it is deducted. 
 
 Amounts added to reserve funds of insurance Reserve 
 companies, as required by law, are deductible from Q^^^ 
 a return of net income. panics. 
 
 Reserves set aside for contingencies, or so-called "secret 
 reserves" are not deductible from returns of an- Contingent 
 nual net income. Charging capital expenditures and Secret 
 to operating expenses is specifically prohibited. Reserves. 
 
 Items held in suspense, pending an event, are Suspense 
 not deductible from income for income tax purposes. Items. 
 
 Amounts set aside out of profits, or reinvested, for the pur- 
 pose of redeeming outstanding bonds payable, are sinking 
 not deductible from taxable income. The redemp- Fund Re- 
 tion of bonds is a capital expenditure. serves. 
 
 Discounts on sales of commodities dealt in are only deduct- 
 ible to the amount actually allowed to customers. Reserve for 
 A reserve for cash discounts, the establishment of Discounts 
 which is approved by modern accounting, being on Sales - 
 anticipatory and not actual, is not deductible from income. 
 
 A corporation is allowed as a deduction interest paid within 
 the year on such an amount of indebtedness as Interest 
 does not exceed the sum of: Deductible. 
 
 (a) The entire amount of the paid-up capital stock out- 
 
 standing 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 out- 
 
 standing. 
 
 This subject is more fully dealt with on page 202. 
 
 Under the Income Tax Law, as amended by the Interest 
 War Revenue Act, interest paid within the year on ^JJ^" 1 
 indebtedness incurred for the purchase of Liberty O f Liberty 
 4 per cent, bonds may be deducted in computing 4's. 
 net income subject to income surtaxes and excess-profits taxes. 
 In case of corporations this is subject to the limitations im- 
 posed by the income tax law on the amount of indebtedness, 
 interest on which may be deducted. (T. D. 2541.) 
 
IO4 INCOME TAX LAW AND ACCOUNTING 
 
 The interest paid during the year on indebtedness wholly 
 secured by collateral, the subject of sale in the ordinary business 
 Interest on of a corporation, joint-stock company or associa- 
 Indebted- tion, is deductible as an expense of doing business. 
 curecTby Collateral, which may be the subject of sale in the 
 Collateral, ordinary business of a company, refers to commod- 
 etc - ities in which the company deals. Real estate, in 
 
 this sense, could only be the subject of sale in the case of a 
 corporation engaged in the buying and selling of real estate. 
 This applies to both tangible and intangible property secured 
 by collateral, but limits the amount of indebtedness on which 
 the interest may be computed to the actual value of such prop- 
 erty collateral. 
 
 In the case of Anderson v. Forty-two Broadway Co. (209 
 Fed. 991 and 213 Fed. 777, reversed by U. S. Sup. Ct., Oct., 
 1915) (T. D. 2261), it was held under the Corporation Excise 
 Tax, that a real estate company owning and operating an 
 office building, under mortgage, could not deduct the interest 
 paid on such mortgage as a general expense, under item 4 (a) 
 (Form 1031) but only in item 6 (a), which made it subject to 
 the limitation of law as to deductibility of interest. For limita- 
 tion of deductible interest under present law see page 204. 
 
 Interest on any form or class of capital stock is not deductible 
 Interest on ^ rom an mcome tax return. The fact that pre- 
 Pref erred f erred stock is "guaranteed" or cumulative as to 
 Stock. interest, does not make it deductible. 
 
 Interest paid on outstanding bonds payable of a corporation 
 Interest on is a deductible item. Where bonds are held by 
 Corpora- trustees, however, for the benefit of the issuing 
 tion. corporation, interest paid thereon is not deductible. 
 
 In the case of a corporation selling its own bonds at a 
 discount, the amount of the discount should be prorated 
 Amortiza- over ^ e u *fe f ^ e Don cls and the proportionate 
 tion of Dis- part of such discount applicable to each year during 
 count on the life of the bonds, constitutes an allowable deduc- 
 Bonds. t j on f rom the gj-oss income of such year. The deduc- 
 tion from gross income in the case of twenty year bonds, 
 would be one-twentieth of the aggregate amount of the 
 discount on the bonds sold. (T. D. 2137.) 
 
DEDUCTIONS ALLOWED CORPORATIONS 105 
 
 Where, however, bonds were sold at a discount prior to the 
 incidence of the income tax law, and such discount had been 
 charged off on the books of the corporation, then such dis- 
 count or any part thereof, shall not again be deducted from 
 the gross income. 
 
 In cases where bonds are purchased at a premium, such 
 premium may be prorated over the remaining life of Premium 
 the bonds, so that only the redemption value thereof on Bonds 
 appears upon the books when the bonds mature. Purchased. 
 
 The general principles as to the deductibility Lo ss in 
 of premium paid in the retirement of corporate Retirement 
 bonds are as follows : of Bonds ' 
 
 In the case of bonds sold by the corporation at par and re- 
 deemed at a premium, the premium paid is deductible as a 
 loss (i). 
 
 If the bonds were sold by the corporation at a discount and 
 the discount had been charged off and deducted from income 
 then the premium (purchase price in excess of par) may be 
 deducted. [Any part of the discount, however, that had been 
 charged off prior to the incidence of the Excise Tax (January i, 
 1909), is not again deductible from income.] (2). 
 
 If the discount had been prorated over a period of years and 
 at the time of redemption all the discount had not been charged 
 off, then the difference between the purchase price and the 
 selling price plus the discount charged off may be deducted. (3) 
 
 If the bonds were sold at a premium and the premium had 
 been reported as a profit in an income tax return, then the pre- 
 mium paid in the redemption would be deductible as a loss (4) . 
 
 Example (i): 
 
 Bonds redeemed (purchased) at $1,050 . oo 
 
 Sold at 1,000 . oo 
 
 Would permit of a deductible loss of $ 50 . oo 
 
 Example (2): 
 
 Bonds purchased at $1,050 . oo 
 
 Sold at $ 900.00 
 
 Plus discount charged to Profit and Loss Account.. 100.00 
 
 Par Value 
 
 Would result in a deductible loss of , 
 
106 INCOME TAX LAW AND ACCOUNTING 
 
 Example (3) : 
 
 Bonds purchased at $1,050.00 
 
 Sold at $ 900.00 
 
 Plus discount prorated and charged to Profit and 
 
 Loss Account . . 80 . oo 
 
 Selling price plus prorated discount 980 . oo 
 
 Would permit of a deductible loss of $ 70.00 
 
 Example (4): 
 
 Bonds purchased at $1,050 . oo 
 
 Sold at $1,100 . oo 
 
 Less premium credited to Profit and Loss Account 
 
 and returned as income 100.00 
 
 $1,000 oo 
 
 Would permit of a deductible loss of $ 50.00 
 
 In Baldwin Locomotive Works v. McCoach (221 Fed. 59) 
 it was held that discount allowed in the sale of bonds of the 
 Discount issuing corporation is not an expense of the cor- 
 on Bonds, poration until the tune of maturity of the bonds 
 and, therefore, should be apportioned or prorated over the 
 period of existence of the bonds. 
 
 In the case of a corporation selling its own bonds at a 
 discount the amount of the discount should be prorated over 
 the life of the bonds and the proportionate part of such 
 discount applicable to each year during the life of the bonds, 
 constitutes an allowable deduction from the gross income of 
 such year. The deduction from gross income in the case of 
 twenty-year bonds would be one-twentieth of the aggregate 
 amount of the discount on the bonds sold. (T. D. 2137.) 
 
 Where the discount on the sale of bonds had been charged 
 Discount off on the books of account prior to the incidence 
 Char 0n <l S of the Excise Tax (January i, 1909) such discount 
 off Prior to cannot be deducted from the taxable income of a 
 1909. subsequent year. 
 
 Discount on bonds issued prior to the year 1909, if such 
 discount was charged against the income of the year in 
 which the bonds were sold, is held not to be deductible from 
 
DEDUCTIONS ALLOWED CORPORATIONS 107 
 
 the income of subsequent years, for the reason that the 
 charging off prior to January i, 1909, of the entire amount 
 of the discount constitutes a closed transaction, and such 
 transaction cannot be reopened for the purpose of reducing 
 the taxable income of a corporation by deducting there- 
 from an aliquot part of the discount. (T. D. 2137.) 
 
 By amendment of Treasury Department rulings and by 
 Act of October 3, 1917, premiums paid on policies of insurance 
 on the lives of partners in favor of a partnership, Premiums 
 or on the lives of officers or employees in favor Life In- 
 of corporations are not now deductible as expenses. pJJUgJg 
 Hereafter, such premiums may only be deducted Corpora- 
 from the gross proceeds of the policy, when re- tions - 
 ceived, the balance being returnable as income. 
 
 In cases where deductions have heretofore been made, the 
 total premiums paid may only be deducted from the proceeds 
 of the policy to the extent that premiums have not already 
 been deducted. For example: 
 
 Amount received from insurance company upon policy $10,000.00 
 
 Total premiums paid $8,000 . oo 
 
 Less, premiums deducted from income tax returns 500 . oo 
 
 7,500.00 
 
 Returnable as income $ 2,500 . oo 
 
 The following Treasury Decision, issued August 30, 1917, 
 with respect to corporations, is also applicable to partnerships: 
 
 "To Collectors of Internal Revenue: 
 
 "Treasury Decision 2090 in so far as it authorized cor- 
 porations to deduct from gross income the annual premiums 
 paid on policies insuring the lives of officers or employees 
 in favor of such corporations, is hereby modified to the 
 extent that instead of the corporations, carrying such 
 insurance, being permitted to deduct from gross income of 
 the year, in which paid, the amount of the annual premium 
 payments, they will hereafter be permitted to deduct from 
 the gross proceeds, when received, of any policies of which 
 the corporations are the beneficiaries, the entire amount of 
 the premiums paid during the term of the policies, less any 
 
108 INCOME TAX LAW AND ACCOUNTING 
 
 premium payments which, under the former ruling, have 
 been deducted from gross income in any return of annual 
 net income, and the net proceeds of the policies, thus ascer- 
 tained, will be returned as taxable income of the year in 
 which received." 
 
 W. H. OSBORN, 
 Commissioner of Internal Revenue. 
 
 The test of deductibility of bonuses, as gathered from several 
 rulings by the Department, seems to rest upon the question of 
 contractual relation of employer and employee. ^ 
 It is not essential that there should be an express 
 contract for extra compensation; one that is implied by the 
 relations of the parties is sufficient to establish the right of 
 deduction. Additional compensation, for example, paid to 
 employees as extra compensation for services rendered, is a 
 proper deduction from gross income of the employer. A gra- 
 tuity or gift, however, for which no service has been rendered, 
 such as Christmas gifts or voluntary contributions, is not de- 
 ductible. But a payment by an employer to the employee, 
 irrespective of when made, during the holiday or any other 
 season of the year, in consideration of services rendered, as 
 extra compensation, is deductible in the return of the employer. 
 Such compensation, inclusive of the regular wages and the 
 bonus, must be a reasonable compensation for the service 
 rendered. A bonus paid, by reason of a prosperous season, is 
 a distribution of profits and not deductible. 
 
 Many concerns have adopted the policy of paying to their 
 employees, at regular intervals, sums in addition to their fixed 
 wages or salaries. In such cases the employees have become 
 accustomed to receiving the additional remuneration, look 
 forward to and reasonably consider it as a part of their com- 
 pensation. Such payments are deductible as expenses. 
 
 This subject is comprehensively dealt with in a letter of 
 instructions to Collectors issued by the Office of the Commis- 
 sioner of Internal Revenue in January, 1916, as follows: 
 
 "In order to establish uniformity and to facilitate the 
 work of the internal revenue officers who are engaged in the 
 examination of books for the verification of the returns of 
 
DEDUCTIONS ALLOWED CORPORATIONS 1 09 
 
 annual net income made pursuant to the requirements of 
 the Federal income tax law, you are informed that in all 
 cases wherein special payments, often designated as bonuses, 
 are made to officers or employees of corporations pursuant 
 to a contract, express or implied, as additional compensa- 
 tion for services rendered, which payments, when added to 
 the stipulated salaries, do not exceed a reasonable com- 
 pensation for the services rendered, such payments may be 
 regarded as a part of the wage or hire of the officer or em- 
 ployee, and, as such may allowably be deducted from gross 
 income as a business expense. 
 
 "A long-time practice, regularly employed, of paying to 
 employees certain sums in addition to the stipulated salaries, 
 constitutes a condition, if not a contract, under which the 
 employees may reasonably expect, for the greater or better 
 service which they render, additional pay, and if, in fact, 
 such payments are made as additional compensation for 
 services actually rendered, and if such payments, when 
 added to the stipulated salaries, do not exceed a reasonable 
 compensation, such payments, or bonuses may be treated 
 as an 'ordinary and necessary expense of operation/ and, 
 as such, deducted from gross income. 
 
 "This ruling contemplates that such payments are condi- 
 tioned upon the services rendered by the employees and not 
 upon the earnings of the corporation. If it should appear 
 that the additional or special payments are dependent upon 
 the earnings of the company, rather than upon the services 
 rendered, or if such payments are made only occasionally, 
 and then, at the option of the corporation as a sort of thank 
 offering because of a prosperous year, and not in pursuance 
 of a fixed policy or practice, or any contract, express or 
 implied, it will be held that such payments are gratuities 
 and, as such, are not properly deductible from gross income. 
 
 "This ruling is not intended to authorize in any case the 
 deduction from gross income of amounts paid to employees 
 or others as ' Christmas gifts/ even though it has been the 
 practice of the corporation to make such gifts. These are 
 held to be voluntary contributions or donations, and, as 
 such, are not deductible. 
 
 "In determining whether or not the special payments 
 above referred to are deductible, internal revenue officers 
 will be guided by the facts as to whether or not such pay- 
 ments are made pursuant to a contract, express or implied, 
 
110 INCOME TAX LAW AND ACCOUNTING 
 
 or to a fixed policy or practice, and whether or not they 
 represent compensation for additional or more efficient 
 service rendered, and whether or not such special payments, 
 when added to the stipulated salary or wage, exceed a 
 reasonable compensation. 
 
 "Amounts paid to an officer or employee, who is a stock- 
 holder, in excess of a reasonable compensation for his 
 services, will be treated as in the nature of dividends, a 
 return upon his investment, and such amounts will not be 
 deductible." 
 
 Bonuses that are deductible in the return of the employer 
 must be included in the return of the recipient employee if he 
 is required to make a return, and a gift or gratuity that is not 
 deductible in the return of the employer need not be reported 
 in the return of the employee. Gifts are not taxable as income. 
 
 Taxes for grading of property, paving, sewerage and similar 
 Local local improvements are capital expenditures and 
 
 Benefits. no t deductible from income. 
 
 Taxes Paid Taxes paid by a corporation as tenant of rented 
 by Tenant, property should be deducted in the return as rent 
 paid. 
 
 A corporation continuing to pay the salary of an employee 
 Salaries of doing duty as a National Guardsman in the service 
 Guards^ of the United States is permitted to deduct the 
 men. salary paid to such employee in its return of annual 
 
 net income. 
 
 Amounts paid to retired employees or to their families, or 
 Pensions dependent upon them, in the nature of pen- 
 
 sions, are deductible from gross income as expenses. 
 
 It has been held that salesmen's expenses in the nature of 
 Salesmen's entertainment of customers, incurred for business 
 Expenses, purposes, are deductible items. 
 
 So-called spending or treating money actually advanced 
 by corporations to their traveling salesmen as a part of 
 selling expense of the product of such corporations is an 
 allowable deduction in a return of income by such corpora- 
 tion. There must be some showing that all the allowance 
 claimed as a deduction was actually expended for the pur- 
 pose for which the allowance was made, namely, the selling 
 of the product of the corporation in question. (T. D. 2090.) 
 
DEDUCTIONS ALLOWED CORPORATIONS III 
 
 Money received for service connections and pipe ex- 
 tensions are not permitted to be deducted from Service 
 the gross amount of the income, for they do not c .onnec- 
 come within any of the permitted classes of de- E^ 
 ductions mentioned in the statute. Moneys so O f Water 
 expended are invested in permanent improve- Company, 
 ments, which tend to enhance the rental and the market 
 value of the water system. (238 Fed. 329.) 
 
 Payments, under contract, by public utilities to State or 
 municipal governments for privileges or franchises Payments 
 
 under which such public utilities operate are nee- toG veni- 
 
 i i i i e ment by 
 
 essary expenses and properly deducted from gross Public 
 
 income. Utility. 
 
 In case of a public utility constructed, operated, or main- 
 tained under contract with any city (State), Territory, or 
 the District of Columbia, or a city where a portion of the 
 net earnings of such public utility is payable under such 
 contract to the State, Territory, etc., the amount so paid 
 may be deducted by the public utility operating under 
 such contract as an "expense of business." (T. D. 2090.) 
 
 Losses sustained by reason of defalcation or embezzlement 
 are deductible items. It has been held, however, in the case 
 of United States v. The Cleveland, Cincinnati, Defalca- 
 Chicago and St. Louis Railway Co., decided Feb- ^^" 
 ruary 23, 1916, in the U. S. District Court, Southern ment. 
 District of Ohio, that such losses shall be deductible only in 
 the year that the defalcation or embezzlement occurs. Should 
 such loss or losses not be discovered until a subsequent year 
 they would not then be deductible. "The time of discovery 
 of a loss bears no relation to the date the loss was sustained. 
 The loss was sustained when the theft occurred, although the 
 defendant did not know at the time of the depletion of its 
 assets." 
 
 The organization and incorporation expenses of new enter- 
 prises are usually charged to a separate account in the ledger. 
 Where such expenses amount to a considerable Qrganiza- 
 sum it has not been unusual to prorate the same, tion Ex- 
 as expense, over a period of years, according to the P enses - 
 
112 INCOME TAX LAW AND ACCOUNTING 
 
 judgment of the board of directors. By ruling of the Depart- 
 ment, the deduction of such "organization expenses" is now 
 prohibited. It is held that such payments are capital expendi- 
 tures of such character as not to be subject to depreciation or 
 reduction for income tax purposes. 
 
 "WASHINGTON, D. C., June n, 1917. 
 " To Collectors of Internal Revenue: 
 
 "Numerous inquiries have been made of this office with 
 respect to the treatment by corporations in their returns 
 of annual net income of what are known and commonly 
 designated as 'organization expenses' that is, attorneys' 
 and accountants' fees, together with fees paid to the State 
 authorities prior to, or coincident with, the securing of a 
 charter and the incorporation of the company. 
 
 "In the absence of a formal and definite ruling on this 
 question, there appears to have been some conflict in the 
 holdings and instructions issued by this office in regard to 
 this matter. Therefore, in order to make definite the posi- 
 tion of the bureau and to promote consistency, it is held 
 that ' organization expenses' constitute a capital invest- 
 ment, such expenses being offset by the asset value of the 
 corporate franchise, an intangible asset of a somewhat 
 permanent character and in many instances of substantial 
 value. Such expenses are very similar in character to the 
 discount at which the stock issued by the company is being 
 sold, the only effect of such expenses and discounts being 
 to reduce the amount of capital available for use and em- 
 ployment in the business of the corporation. The discount 
 at which the stock is sold is not a loss sustained within the 
 meaning of the law, and therefore not deductible. Likewise 
 'organization expenses' that is to say, expenses incident 
 to and connected with the incorporation and organization 
 of the company are not 'ordinary and necessary expenses 
 of maintenance and operation' which are the only 'ex- 
 penses' authorized by the income tax law to be deducted 
 from gross income. 
 
 "Hence, it is held that 'organization expenses' do not 
 constitute an allowable deduction from gross income of any 
 taxable year, nor do such expenses constitute a proper item 
 to be added to the cost of any physical property to be pro- 
 
DEDUCTIONS ALLOWED CORPORATIONS 113 
 
 vided for through the authorized annual allowance for 
 depreciation. 
 
 "W. H. OSBORN, 
 " Commissioner of Internal Revenue. " 
 
 By ruling of the Department it has been held that lobbying 
 expenses and campaign contributions are not de- Lobbying 
 ductible. These, at any rate, are illegal expenses ^^ 
 and would not be apt to appear upon corporate Expenses, 
 books of account. 
 
 Sums of money expended for lobbying purposes and con- 
 tributions for campaign expenses are held not to be an 
 ordinary and necessary expense in operation and main- 
 tenance of the business of a corporation, and are, therefore, 
 not deductible from gross income in arriving at the net 
 income upon which the income tax is computed. (T. D. 
 2I37-) 
 
 Additions to reserve funds of insurance companies, as re- 
 quired by law, and amounts paid on policy and Deduc- 
 annuity contracts, other than dividends, are de- gu^ice" 
 ductible from gross income. [Law, Section 12 (a) 2.] Companies. 
 
 (a) Under item 5 (a) (1916) of the return form, the 
 insurance company may take credit for all losses actually 
 sustained during the year and not compensated by in- 
 surance or otherwise, including losses resulting from the 
 sale or maturity of securities or other assets; also losses 
 from agency balances, or other accounts, charged off as 
 worthless; losses by defalcation; premium notes voided by 
 lapse, when such notes shall have been included in gross 
 income. This item will not, however, include payments on 
 policy contracts. 
 
 (b) In this item may be deducted actual losses sustained 
 within the year by reason of the depreciation of property, 
 which shall have been so entered on the books of the com- 
 pany as to constitute a liability against its assets. An 
 arbitrary depreciation deduction claimed in the return, but 
 not evidenced by book entry, can not be allowed. 
 
 (c) In this item credit will be taken for all death, dis- 
 ability, or other policy claims, including fire, accident, and 
 
1 14 INCOME TAX LAW AND ACCOUNTING 
 
 liability losses, matured endowments, annuities, payments 
 on instalment policies, surrender values, and all claims 
 actually paid under the terms of policy contracts. Salvage 
 need not be included in gross income if deducted in ascer- 
 taining the net amount paid for losses under policy con- 
 tracts. Reserves covering liabilities for losses incurred, 
 reported, resisted, adjusted or unadjusted but not paid, 
 can not be deducted from gross income under this or any 
 other item of the return. 
 
 (d) The reserve funds of insurance companies to be 
 considered in computing the deductible net addition to 
 reserve funds are held to include only the reinsurance 
 reserve and the reserve for supplementary contracts re- 
 quired by law in the case of life insurance companies, the 
 unearned premium reserves required by law in the case of 
 fire, marine, accident, liability, and other insurance com- 
 panies, and only such other reserves as are specifically re- 
 quired by the statutes of a State within which the company 
 making the return is doing business. The reserves used in 
 computing the net addition must not include the reserve on 
 any policies the premiums on which have not been ac- 
 counted for in gross income. For the purpose of this deduc- 
 tion, the net addition is the excess of the reserve at the end 
 of the year over that at the beginning of the year and may 
 be based upon the highest authorized reserve required by 
 any State in which the company making the return does 
 business. (Art. 147, Reg. 33.) 
 
 Domestic and foreign assessment insurance companies are 
 Assess- permitted to deduct from gross income amounts 
 ment In- deposited with State officers as additions to guar- 
 Com- antee or reserve funds, required by law. [Law, 
 
 panics. Section 12 (c).] 
 
 A foreign corporation is allowed to deduct: All ordinary 
 Deduc- an d necessary expenses actually paid within the 
 tions Al- United States; losses actually sustained within the 
 Foreign y ear m * ts business or trade, within the United 
 Corpora- States, not compensated for by insurance, or other- 
 tions. wise; also, reasonable allowance for depreciation 
 
 and depletion of properties within the United States. 
 
 The deductions allowed to foreign corporations as necessary 
 expenses, actual losses, depreciation and depletion, are the 
 
DEDUCTIONS ALLOWED CORPORATIONS 11$ 
 
 same as those allowed to a domestic corporation, except that 
 only such expenses, losses, depreciation, depletion, etc., as 
 occur in connection with the business of such foreign corpora- 
 tion within the United States are allowed. 
 
 The provisions with respect to permanent improvements, 
 betterments and expense of restoring property, are applicable 
 to foreign corporations. 
 
 The amount on which interest is allowed to foreign corpora- 
 tions shall not exceed such part of the entire paid-up capital 
 stock outstanding at the close of the year, and 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 income derived from all sources within and with- 
 out the United States." 
 
 Taxes paid by a foreign corporation within the United States 
 are deductible, excepting income taxes, excess profits taxes 
 and those assessed against local benefits. 
 
CHAPTER V 
 WAR EXCESS PROFITS TAX 
 
 The War Excess Profits Tax Law purports to impose a tax 
 upon income in excess of normal profits as measured by three 
 War prewar years, namely, 1911, 1912 and 1913, with 
 
 Adminis-* Imitations as to what shall constitute " normal 
 tration. profits." In its very essence, however, its name 
 is a misnomer; it is essentially not a "war excess profits tax" 
 because its effect is not limited to war or exceptional profits. 
 Enterprises that were prosperous prior to the war are never- 
 theless taxed to the same extent as are those that did not exist 
 prior to the war, brought about by reason of the fixed maximum 
 allowance in lieu of prewar income. As a matter of fact many 
 old established concerns, doing a prosperous business on a 
 comparatively small capital are discriminated against by the 
 limitation of deductions based upon capital as defined by the 
 law. The Act must be looked upon as an exigency of the Gov- 
 ernment; although in some respects inequitable, not so made 
 by design of its makers, but by reason of the multiform ramifica- 
 tions of business and capital that could not be preconceived 
 by the Legislators in the time within which the measure had to 
 be prepared and enacted in order to render it applicable to in- 
 comes of the year 1917. The Bill contains some inconsistencies, 
 which, undoubtedly, will be remedied by Congress, but the 
 remedial legislation, it is believed, cannot now be made effect- 
 ive as to returns for the year 1917. The best that can be hoped 
 for, for the present, is such alleviatory regulation as the Treasury 
 Department may have power to grant in the administration 
 of the law as it exists. No doubt there will be matters in respect 
 of which administrative regulation will be ineffectual, but, 
 from assurances of the Commissioner of Internal Revenue, 
 unofficially stated, questions arising under the law will not be 
 dealt with in a narrow way but in a broad and constructive 
 way. This refers, of course, only to matters that are not clearly 
 
WAR EXCESS PROFITS TAX 117 
 
 understandable, or questions of discrimination; matters that are 
 clear, mandatory and without ambiguity, will be rigidly enforced. 
 
 All individuals, partnerships and corporations, joint-stock 
 companies or associations and insurance companies engaged 
 in trade or business, professions or occupations in ^ is 
 the United States (except those specifically exempted Subject to 
 by law) are subject to the Excess Profits Tax upon Tax - 
 their entire net income, less the deductions to which they are 
 respectively entitled. 
 
 Nonresident aliens and nonresident foreign partnerships 
 and corporations are taxable only on income derived from 
 sources within the United States but without any exemption. 
 
 The tax is applicable to all trades and businesses of whatever 
 description, whether continuously carried on or not, except: 
 
 (a) Compensation of officers and employees of the United 
 States, or any State, Territory, or the District of Columbia, 
 or any local subdivision thereof; 
 
 (b) Organizations exempt under the Income Tax Act of 
 September 8, 1916, and individuals or partnerships coming 
 within the same description or doing the same business; 
 
 (c) Income from the business of life, health and accident 
 insurance combined in one policy issued on the weekly premium 
 payment plan. 
 
 By statutory provision the terms "trade" and "business" 
 include professions and occupations, and by ruling of the Treas- 
 ury Department, employment under a salary, is comprehended 
 in the term "occupation." 
 
 Hence, all individuals, partnerships and corporations en- 
 gaged in any trade or business, profession or occupation, in- 
 cluding persons compensated by salary, are subject to the 
 Excess Profits Tax. 
 
 The exemption of certain classes of associations from income 
 taxes and excess profits taxes applies also to individuals, part- 
 nerships and corporations carrying on the same Exempt 
 business or coming within the same description as Organiza- 
 those specifically enumerated in the Act of Sep- tions - 
 tember 8, 1916. (See page 84.) 
 
 The Excess Profits Tax is assessed upon the net income as 
 determined for income tax purposes, less a deduction of an 
 
Il8 INCOME TAX LAW AND ACCOUNTING 
 
 Principle amount for normal or prewar profits (not less than 
 
 durtion? 6 ' ^ or more t ^ lan 9 P er cent> f t ^ ie mves ted capital), 
 Exemp-* and an exemption of $3,000 to corporations and 
 tions. $6,000 to individuals and partnerships, respec- 
 
 Incidence tivdy. 
 of Tax. The tax is effective as of January i, 1917. 
 
 The Excess Profits Tax Law is contained in the War Revenue 
 Act of October 3, 1917, and is designated therein as Title II, 
 D . comprising Sections 200 to 214, inclusive. As desig- 
 nated by its title, it is a war measure but not neces- 
 sarily limited in its duration to the time that the war lasts. 
 According to the proposed War Revenue Bill passed by the 
 Senate on September 10, 1917 (not acceptable to the House), 
 it was intended that the "War Income Tax" and the "War 
 Profits Tax," contained therein, should only be additional taxes 
 upon incomes "during the present war." That provision was 
 omitted from the final draft of the measure prepared by the 
 Joint Conference Committee of the Senate and the House, and, 
 as the Act finally became law on October 3, 1917, no reference 
 was made therein to its duration. From this omission one may 
 draw the conclusion that the war taxes will remain operative 
 until after the close of the present war and so long as the Federal 
 Government requires revenue from income taxation in addition 
 to that provided for in the Federal Income Tax Law enacted 
 September 8, 1916, now effective. 
 
 The Excess Profits Tax Law of March 3, 1917, effective against 
 corporations and partnerships only, was repealed by the Act of 
 Old Tax October 3, 1917 (Section 214), and any taxes paid 
 Repealed, upon assessments made under the requirements of 
 the old law will be credited on assessments under the new law. 
 If no assessment results under the present law, or one of a lesser 
 amount than that already paid, the excess payment will be 
 refunded as a tax erroneously or illegally collected upon applica- 
 tion made, as provided herein on page 17. 
 
 The Excess Profits Tax as applied to business or trade 
 Rates of employing capital is computed on the net income 
 S^ es as shown by the income tax return in excess of 
 
 Capital is deductions (prewar allowance and exemption) at 
 Employed, rates as follows: 
 
WAR EXCESS PROFITS TAX 
 
 20 per cent, of the amount of the net income in excess of the 
 
 deduction of prewar allowance and exemption, and not in 
 
 excess of 15 per cent, of the invested capital for the taxable 
 
 year; 
 25 per cent, of the amount of the net income in excess of 15 per 
 
 cent, and not in excess of 20 per cent, of such capital; 
 35 per cent, of the amount of the net income in excess of 
 
 20 per cent, and not in excess of 25 per cent, of such 
 
 capital; 
 45 per cent, of the amount of the net income in excess of 25 per 
 
 cent, and not in excess of 33 per cent, of such capital ; and 
 60 per cent, of the amount of the net income in excess of 33 per 
 
 cent, of such capital. 
 
 The method of computation of the Excess Profits Tax rates 
 upon the net income could also be stated as follows: 
 
 Not in excess of 15 per cent, of the capital invested, less 
 the deductions of 7 per cent., 8 per cent, or 9 per cent, 
 of the invested capital (as the case may be), plus 
 $3,000 if a corporation or $6,000 if an individual or 
 
 partnership @ 20 per cent. 
 
 15 to 20 per cent, of capital invested 25 ' 
 
 20 to 25 per cent, of capital invested @ 35 ' 
 
 25 to 33 per cent, of capital invested 
 
 In excess of 33 per cent, of capital invested 
 
 Individuals, partnerships and corporations engaged in busi- 
 ness or trade, professions or occupations, having no invested 
 capital or not more than a nominal capital are Rate of 
 subject to a flat excess profits tax of 8 per cent, upon j^^ai 
 their net income less an exemption in the case of a Capital, 
 domestic corporation of $3,000, and, in the case of a domestic 
 partnership or a resident or citizen of the United States, of 
 $6,000. 
 
 By the term "taxable year" is meant the calendar year, the 
 twelve months ending December 3ist, except that in case a 
 corporation or partnership has designated its own Taxable 
 fiscal year it means such fiscal year. Inasmuch as Year - 
 the Excess Profits Tax is effective as of January i, 1917, corpo- 
 rations and partnerships using their own fiscal year must appor- 
 
120 INCOME TAX LAW AND ACCOUNTING 
 
 tion the income of period January ist to the end of the fiscal 
 year in 1917. The tax for such portion of the fiscal year falling 
 within the year 1917 will be the proportion which the time from 
 January i, 1917, to the end of the fiscal year bears to the entire 
 fiscal year. For example, if the fiscal year ends on June 30, 1917, 
 six months falling in the year 1917, the Excess Profits Tax will be 
 computed on six-twelfths or one-half of the total net income for 
 the fiscal year. In such case the exemption of $3,000 or $6,000, 
 respectively, must also be prorated in the same proportion. 
 
 By the term "prewar period" is meant the calendar years 
 1911, 1912 and 1913. If a partnership or corporation was not in 
 Prewar existence or an individual was not engaged in busi- 
 Period. ness or trade during all of these years then such of 
 them as the partnership or corporation was in existence or an 
 individual was engaged in business will comprise the "prewar 
 period." The wording of the law, namely, "as many of such 
 years during the whole of which the corporation or partnership 
 was in existence or the individual was engaged in the trade or 
 business" would indicate that a part of a year is insufficient. 
 Returns of The Excess Profits Tax returns of citizens, 
 
 resident aliens and domestic corporations, will, in 
 Resident . . . e ' 
 
 Aliens. each case, respectively, comprise a part of the annual 
 
 Domestic return of net income. 
 
 Corpora- Nonresident alien individuals and foreign corpora- 
 tions are required to file returns of income from all 
 Returns of sources within the United States regardless of amount 
 Nonresi- received and such returns will provide, as a compo- 
 and For- QS nent P art thereof, for the required data upon which the 
 eign Cor- Excess Profits Tax will be assessed. No tax is im- 
 porations. p ose d, however, if the net income is less than $3,000. 
 
 Domestic partnerships, which are not required to make re- 
 turns of net income under the Income Tax Act of September 8, 
 Returns of 1916, or the War Income Tax Law of October 3, 
 pSner- IOI ?> unless ordered so to do by the Commissioner of 
 ship. Internal Revenue, must make returns under the 
 
 Excess Profits Tax Law if their net income is $6,000 or more for 
 the taxable year. 
 
 Foreign partnerships are not required to make returns 
 unless their net income from sources within the United 
 
WAR EXCESS PROFITS TAX 121 
 
 States, during the taxable year, amounts to $3,000 Returns of 
 or more. Foreign 
 
 The requirements of the Income Tax Law as e] 
 
 to due date of filing (March ist), and as to exten- Due Date 
 sions of time, are applicable to the Excess Profits Tax. of Filing 
 
 All provisions of the Income Tax Law with respect Returns ' 
 to penalties for failure to make returns, for making p _ 
 false or fraudulent returns, etc., are made applicable 
 to the War Excess Profits Tax. 
 
 Excess Profits Taxes imposed upon partnerships xaxeg. 
 should be apportioned among the partners accord- Partner- 
 ing to their respective interests and deducted from shi P s - 
 their individual income tax returns. 
 
 Section 202 of the Excess Profits Tax Law provides that no 
 tax shall be imposed in the case of a foreign partnership the net 
 income of which is less than $3,000 during the Inequity 
 
 taxable year. By Section 211 it is required that all J? Case of 
 f ' ^ i ^ r * Foreign 
 
 foreign partnerships having a net income of $3,000 Partner- 
 
 or more for the taxable year, shall render a return ship. 
 for such year. The law does not appear to provide for an exemp- 
 tion to foreign partnerships earning and reporting an income in 
 excess of $3,000. There would be no equity in taxing a partner- 
 ship that had a net income of $3,100 and allowing another, earn- 
 ing $2,900 to go untaxed. Besides, this method is not in conso- 
 nance with the general tenor of the law. This inconsistency 
 will no doubt be remedied by legislation but whether that can be 
 accomplished to become effective for the year 1917 is problemati- 
 cal. Those affected by the inequality should inquire Returns of 
 of the Commissioner of Internal Revenue as to what Net In- 
 regulation, if any, he has been able to make in the me for 
 premises. PerioYand 
 
 The Department will require returns of net income Taxable 
 for the prewar years from which to compute and verify corpora- 
 the percentage of net income claimed as deductions tions. 
 based on invested capital. 1 
 
 1 If the taxpayer accepts the minimum percentage (7%) by which to 
 compute the deduction for the taxable year, no return of net income or of 
 invested capital for the prewar year will be required. (T. D. 2614, Dec. 20, 
 1917.) See page 172. 
 
122 INCOME TAX LAW AND ACCOUNTING 
 
 The net income of corporations for the prewar period and 
 the taxable year, shall be ascertained and returned upon the 
 bases, as follows: 
 
 For ign and 1912 l 
 
 The net income for the years 1911 and 1912 shall be returned 
 for the calendar years on the basis of requirements under the 
 Act of August 5, 1909, except that Federal income taxes paid 
 within the year shall be included. 
 
 For 1913 2 
 
 The net income for the year 1913 shall be returned for the 
 calendar year on the basis of requirements under the Act of 
 October 3, 1913, except that Federal income taxes paid within 
 the year shall be included and, except that the amounts of 
 dividends received upon the stock or from the net earnings of 
 other corporations, subject to the tax applicable to 1913, shall 
 be deducted. 
 
 For the Taxable Year 
 
 The net income for the taxable year (1917 and thereafter) 
 shall be returned on the basis of requirements under the Act 
 of September 8, 1916, as amended by the Act of October 3, 
 1917, except that the amounts of dividends received upon the 
 stock or from the earnings of other corporations, subject to 
 the income tax, shall be deducted. 
 
 In respect of the returns required for the years 1911, 1912 
 and 1913, corporations that made their returns for the calendar 
 years, can use the substance of returns that were filed for these 
 years except that Federal income taxes paid within these years 
 should not be deducted from income, and in the return for 1913 
 dividends received from taxable corporations should not be 
 included as income. 
 
 Limited partnerships will be required to make returns under 
 Limited ^he provisions of law applicable to corporations 
 Partner- and are entitled to deductions accorded to cor- 
 ships. porations. 
 
 1 The law is contained in Appendix, page 305. 
 
 2 The law is contained in Appendix, page 312. 
 
WAR EXCESS PROFITS TAX 123 
 
 The net income of partnerships and individuals shall be 
 ascertained and returned for the calendar years 1911, 1912 
 and 1913, and for the taxable year, upon the basis 
 of requirements of the Act of September 8, 1916, Net In- 
 as amended, except that dividends received upon g> me for 
 the stock or from the net earnings of corpora- Periodfand 
 tions which were taxable upon their net income, Taxable 
 shall not be included as income. Domestic part- 
 nerships will be entitled to all deductions to which 
 citizens or residents are, by law, entitled, and for- nerships. 
 eign partnerships will be entitled to the same deductions to 
 which non-resident aliens are entitled. 
 
 In Senator Simmons' explanation of the War Revenue Act 
 before the Senate, on October 2, 1917, he defined Occupation 
 and illustrated the word "occupation" as includ- Salary, 
 ing the salary of a corporate officer, in language as follows: 
 
 "I think that the president of a corporation is engaged 
 hi an occupation. We must give some meaning to the word 
 'occupation' as used in the bill. If it means no more than 
 'trade' or 'business' there would be no reason for having 
 included it in the bill. It seems to me that the Treasury 
 must construe the bill and the courts will, in my opinion, 
 sustain them, as meaning that all salaries, other than those 
 of employees of the Government, national, State, or munic- 
 ipal, are liable to this tax, whether it be the salary of the 
 president, the attorney, the doctor, or any other employee 
 of the corporation, subject, of course to the flat exemption of 
 $6,000." 
 
 The question was asked Mr. Kitchin in the House of Repre- 
 sentatives whether, in his opinion, a person who Land, 
 owns several thousand acres of land, which he owner, 
 rents, would pay an excess profits tax. Mr. Kitchin's l&come. 
 answer was: 
 
 "There is some doubt as to this, but I am inclined to 
 believe that he would pay an excess profits tax. He would 
 probably be construed as being in the business of renting 
 land." 
 
 This seems to be a logical conclusion and no doubt the De- 
 partment will so rule. Where, however, a person incidentally 
 
124 INCOME TAX LAW AND ACCOUNTING 
 
 rents a farm or parcel of land or a building, and such renting is 
 not his business or part of his business, the income therefrom 
 would not then be subject to the excess profits tax. 
 
 On the question of the application of the excess profits tax 
 to mines, oil wells and timber lands, an interesting explanation 
 Mines, Oil was made in the House of Representatives by 
 Timber Representative Kitchin bearing particularly upon 
 Lands. what constitutes profits from operations. The 
 principle enunciated can be applied to all cases where natural 
 resources are depleted or subjected to exhaustion. 
 
 11 MR. CAMPBELL of Kansas. I have a great many oil 
 wells and coal mines in my district, and the owners of the 
 property tell me that when they are taking out oil or coal 
 they are exhausting their principal, and they have won- 
 dered if the excess profits applied to them when they are 
 taking out their product and exhausting their principal. 
 
 "MR. KITCHIN. I am glad the gentleman mentioned that. 
 
 "MR. CAMPBELL of Kansas. What did the conferees con- 
 clude as to that? 
 
 "MR. KITCHIN. We did not take care of that proposition. 
 Let me say that I have had owners of oil wells and of coal 
 and zinc mines and lumbermen tell me that each day in 
 carrying on their business they are exhausting their capital 
 and ought to have a reduction in some way on their excess- 
 profits tax on this account. They are mistaken. They are 
 not exhausting their capital each day, but instead they are 
 getting their capital back each day. For instance, suppose 
 I put $100,000 into standing timber costing, say, $5 a 
 thousand feet, and erect a sawmill and cut it into lumber. 
 Every time I cut a thousand feet I charge that $5 up as 
 cost of raw material, along with the cost of labor and other 
 expenses. When I sell that thousand feet of lumber I add 
 the cost of the standing timber, labor cost, and other ex- 
 penses to the price for which sold. Five dollars of my 
 principal is returned to me with a profit on it upon the 
 sale of each thousand feet. Instead of exhausting their 
 capital daily, a part of their capital is each day being re- 
 turned to them to be again invested. 
 
 "MR. CAMPBELL of Kansas. But is it a profit? 
 
 "MR. KITCHIN. They get their capital back and the 
 profit, too. 
 
WAR EXCESS PROFITS TAX 125 
 
 " MR. CAMPBELL of Kansas. Is it a profit when they are 
 taking their capital out of the mines? 
 
 a MR. KITCHIN. For instance, a man puts $300,000 into a 
 coal mine, and the coal in the mine, say, stands him 5 cents a 
 ton. He begins to mine and sell the coal. In the price of 
 every ton he sells is included the cost of the coal in the mine, 
 the cost of labor, overhead charges, and all other expense, 
 and his profit. On every ton sold he gets back that part 
 of his capital which he invested in or paid for that ton of 
 coal at the mine. 
 
 " MR. CAMPBELL of Kansas. But suppose he has 160 
 acres of coal land, and he has mined all of that 160 acres, 
 and it is completely exhausted? 
 
 "MR. KITCHIN. He has got his entire capital back. His 
 mine is exhausted, but the capital he put into it has been 
 returned to him from time to time as he mined and sold 
 the coal. 
 
 "MR. CAMPBELL of Kansas. But is that charged to him 
 as profits. 
 
 "MR. KITCHIN. The income tax law and this bill permit 
 him to deduct the cost of that coal, in getting at his profits 
 or income that year for the purpose of the tax. He deducts 
 that, deducts the overhead charges, labor, and all other 
 expense in determining the profits or income in his business. 
 
 "MR. CAMPBELL of Kansas. Here is a man who has an 
 oil well that cost him $20,000. Every time he takes 20 
 barrels of oil out of that well he exhausts the value of his 
 investment, does he not? 
 
 "MR. KITCHIN. He exhausts that much of the oil in the 
 well and the well is worth that much less, but instead of ex- 
 hausting his capital put into it, he has had it returned to 
 him at every sale of a barrel of oil to the extent of the cost 
 to him of the oil in the well. Suppose the oil in which his 
 capital was invested cost him at the rate of 25 cents a barrel; 
 every barrel he takes out, when he sells it, he gets back 25 
 cents of his capital that he has put in. When he has ex- 
 hausted the well he has had returned to him the $20,000 in 
 the price he received for the oil. Suppose I buy standing 
 timber for $100,000 and the next day I sell it for $150,000. 
 I have sold all of it in one sale and got my capital back the 
 next day and $50,000 profit. Suppose I cut it up into 
 lumber and sell it in that way, taking a year in which to cut 
 it; each day I cut and sell I get part of my capital back. 
 
126 INCOME TAX LAW AND ACCOUNTING 
 
 When I have sold it all I have all my capital back and the 
 profits on my investment. As a matter of justice one should 
 not have a deduction on the whole amount of original capital 
 when in the nature of the business his capital is from time to 
 tune returned to him as in the case of timber, oil, and mining 
 business, and such returned capital should not be used as a 
 basis of deduction." 
 
 (Congressional Record, October 16, 1917.) 
 
 Income Income received by individuals from stocks and 
 
 From In- bonds, held as investments, is not subject to the 
 vestments. Excess p rofits Tax> 
 
 This exception in the operation of the tax has brought forth 
 a great deal of criticism. The unfairness of taxing industry 
 and allowing income from investments in securities to go un- 
 taxed was emphasized in the Senate on October 2, 1917, when 
 the present law was under consideration, in a speech by Senator 
 Wadsworth, replied to by Senator Simmons. Senator Simmons* 
 response evinces his accord in the arguments presented and 
 indicates that time did not permit of effecting changes in which 
 he himself concurred. The following extracts from the Con- 
 gressional Record of October 16, 1917, are appended merely to 
 show that in the preparation of the Bill, even those engaged in 
 its making were not permitted, by limitation of time, to cor- 
 rect inequities of which they had knowledge and to bespeak 
 impending material changes in the principles of the present 
 income and excess profits taxes. 
 
 "MR. WADSWORTH. I do "desire, however, to take this 
 opportunity to say that section 209 emphasizes very 
 clearly, I think, a grave injustice which is done by our tax 
 laws, an injustice inflicted, comparatively speaking, upon 
 the man who earns his income by his own efforts as com- 
 pared with the man who does not earn his income at all, 
 but merely sits at a desk and clips coupons or cashes div- 
 idend checks. The man who is so fortunate as to inherit an 
 invested fortune, as we all know, unless he is otherwise 
 minded, may sit in his office and clip the coupons and cash 
 the dividend checks and live upon the proceeds without 
 being of any particular use to the community. In fact, he 
 may pass his whole life as a drone. He is subject to the 
 
WAR EXCESS PROFITS TAX 127 
 
 individual income tax, and if his individual income, we will 
 say, is $10,000, he will pay according to the rates fixed 
 in this bill and according to the rates fixed in the statutes 
 which are already upon the statute books. 
 
 "Now we will take the professional man, such as the 
 physician or the dentist or the lawyer, who, by his own 
 efforts, extending over a period of years and resultant upon 
 an education which he may have earned for himself by 
 working his way through a medical school or a law school, 
 manages to reach the point in his profession where he earns 
 $10,000 a year. He pays the individual income tax on that 
 $10,000, and then this bill comes along and assesses him 
 8 per cent, on everything over $6,000 of his income in 
 addition to the individual income tax he pays, so that he 
 is penalized because he is a worker. If he had not earned 
 the $10,000 he would only pay an individual income tax; 
 but, having earned it by his own efforts, he pays more 
 tax. 
 
 "Of course I realize that this thing can not be straight- 
 ened out in a moment, and certainly my judgment upon it 
 would not be infallible, nor is it entirely certain that my 
 conclusions are clear; but let me say to the Senator from 
 North Carolina and to other Senators who have been 
 interested in this question of taxation that sooner or later 
 we must come to the point in the assessment of Federal 
 taxes against individual citizens, whether they be in the 
 form of individual income taxes or otherwise, where we 
 shall discriminate between the earned and the unearned 
 incomes. 
 
 "MR. SIMMONS. I agree with the Senator absolutely 
 in that proposition. 
 
 "MR. WADSWORTH. I called attention in the Sixty- 
 fourth Congress to the fact that in my humble judgment the 
 most glaring defect in our imposition of the individual 
 income tax was the fact that it made no distinction be- 
 tween the drone and the worker. It taxed them exactly 
 alike. This bill makes the condition infinitely worse. It 
 taxes the worker infinitely more heavily than it does the 
 drone. 
 
 "I know it is too late to cure the situation, and I realize 
 the theory on which the committee has proceeded that 
 individuals engaged in business should pay a profits tax, 
 whether we call it an excess-profits tax or a war-profit tax, 
 
128 INCOME TAX LAW AND ACCOUNTING 
 
 just as a partnership or a corporation engaged in business is 
 required to pay such a tax; but we still leave uncured and 
 uncorrected the injustice done in the income tax. 
 
 "MR. SIMMONS. I want to state to the Senator that the 
 very suggestion he is making now was made to the com- 
 mittee and received some consideration; but we considered 
 that the matter had gone too far; that the time was too 
 short for us to undertake to change the method of taxation 
 as radically as his suggestion would have required. 
 
 "MR. WADSWORTH. I can well understand that; but I 
 want to take this opportunity very briefly to emphasize that 
 situation to the Senate in the hope that next year, or per- 
 haps the year after, we will cure this situation, for it does 
 seem to me to be a grave and a gross injustice to inflict a 
 penalty upon industry and permit the drone, as I have used 
 the expression before, to escape merely by the imposition 
 of one tax." 
 
 (Congressional Record, October 16, 1917.) 
 
 By "invested capital" is meant the average invested capital 
 for the year, averaged monthly, except that the average in- 
 Invested vested capital for the taxable year is exclusive 
 Taxable * of undivided profits earned during the taxable 
 Year. year. Hence, the invested capital for the taxable 
 
 year is the invested capital as at the first day of such taxable 
 year plus any additional capital paid in during the taxable year 
 averaged monthly. 
 
 The term "invested capital" does not include stocks, bonds 
 Exclusions (other than obligations of the United States) or 
 vested 11 " other assets, the income from which is not subject 
 Capital. to the excess profits tax, nor money or other prop- 
 erty borrowed. 
 
 Liabilities may not be included as capital; for example: 
 Invested accounts payable, bills payable (notes), bonds pay- 
 Capital of able, or loans of any kind. 1 
 
 shj!?|j^" Invested capital, in the case of partnerships and 
 Corpora- corporations, includes: 
 tions. ( a ) Actual cash paid in; 
 
 1 Liabilities are a deduction from the assets (computed by limitation of 
 law as to tangible and intangible property), in determining surplus, which 
 latter, by law, is a part of invested capital. 
 
WAR EXCESS PROFITS TAX I2Q 
 
 (b) Actual cash value of tangible property paid in other 
 than cash at the time of such payment; 
 
 (c) Paid in or earned surplus and undivided profit used or 
 employed in the business, exclusive of undivided profits earned 
 during the taxable year. 
 
 Tangible property 1 paid in other than cash for stock or shares 
 in a corporation or partnership may be included as invested 
 capital at an amount not in excess of the actual value of 
 cash value thereof at the time of such payment. Tangible 
 In case such tangible property was paid in prior pjjjjjjj 
 to January i, 1914, the actual cash value of such s hips or 
 property as of January i, 1914, may be included Corpora- 
 as invested capital, but in no case shall such actual 
 cash value exceed the par value of the original stock or shares 
 specifically issued therefor. 
 
 The value at which patents and copyrights, paid for by 
 stock or shares in a corporation or partnership, may patents, 
 be stated as invested capital, shall not exceed the Copyrights, 
 actual cash value thereof at the time of such pay- 5^^" 
 ment and shall not be in excess of the par value of Corpora- 
 such stock or shares at the time of such payment. ^ on ' 
 
 Invested capital, in the case of an individual, includes: 
 
 (a) Actual cash paid into the trade or business; Invested 
 
 (b) Actual cash value of tangible property paid ^Jivid^ 
 into the trade or business, other than cash, at the uals. 
 time of such payment, except when the tangible property was 
 paid in prior to January i, 1914, the actual cash value of such 
 property on that date shall be stated as invested capital. 
 
 (c) Actual cash value of patents, copyrights, good will, trade- 
 marks, trade brands, franchises or other intangible property, 
 not to exceed the actual cash value of the tangible Invested 
 
 property bona fide paid therefor at the time of such Capital of 
 
 Foreign 
 payment. Corpora- 
 
 In the case of a foreign corporation or partner- tion or 
 ship or of a nonresident alien individual the term ^J^ 3 ^' 
 " invested capital" means the proportion of the Nonresi- 
 entire invested capital as defined in respect of dent Alien, 
 domestic corporations and partnerships and citizens or resident 
 
 1 For definition of "tangible property" see page 168. 
 
130 INCOME TAX LAW AND ACCOUNTING 
 
 aliens, which the net income from source within the United 
 States bears to the entire net income from all sources within 
 and without the United States. 
 
 Capital, surplus, or undivided profits (except undivided 
 B lbC (l ty I P r fi ts earned during the taxable year) invested 
 vested " ^ Liberty Bonds, or any other obligations of the 
 Capital of United States, by corporations and partnerships, 
 tionsand w ^ ^ e mc ^ u( ^ e( ^ ^ n invested capital for purposes 
 Partner- of computing deductions. 
 
 ships. "Investments in obligations of the United States, 
 
 including Liberty Bonds of both issues, made by a corporation 
 or partnership from capital, surplus, or undivided profits will 
 be included in invested capital for the purpose of computing 
 the deduction and rate of taxation under the Excess Profits 
 Tax Law; but undivided profits earned during the taxable year 
 can not be included in invested capital." (T. D. 2541.) 
 
 The books of account of a trade or business are prima facie the 
 best guide to the amount of capital invested, as well as to earn- 
 Invested ings, and are assumed to reflect the facts as to both. 
 Books of ^e book accounts entering into invested capital, 
 Account. however, are not conclusive as to what constitutes 
 invested capital under the Excess Profits Tax Law. The Gov- 
 ernment has the right to go back of the books of account in 
 order to verify the facts upon which the invested capital, as 
 reflected by the books of account, are predicated. The fact that 
 an asset actually exists and appears upon the ledger does not 
 necessarily make it a part of invested capital; to be so included, 
 it must conform to requirements of law as to value and manner 
 of acquirement. Conversely, assets may exist which are justly a 
 part of invested capital and yet do not appear upon the books 
 of account. The real facts and not bookkeeping facts prevail in 
 the valuation of assets for income tax purposes. (U. S. v. Guggen- 
 heim Exploration Co., 238 Fed. 231; Mitchell Bros. v. Doyle, 225 
 Fed. 437; Baldwin Locomotive Works v. McCoach, 215 Fed. 967.) 
 
 The value of capital stock of corporations as shown by "Capi- 
 tal Stock Tax Returns," where such value is based upon the 
 outstanding capital stock plus surplus, as shown by the books 
 of account, will be material but not conclusive as to invested 
 capital; where the value of capital stock is declared upon the 
 market value there is no relevancy. 
 
WAR EXCESS PROFITS TAX 13! 
 
 In the ascertainment of invested capital of corporations the 
 cost of property, tangible or intangible, is of predominant im- 
 portance. In this connection it is worthy of note that, under 
 the Excess Profits Tax Law, tangible property acquired by 
 corporations and partnerships prior to January i, 1914, shall be 
 stated at the actual value as of that date, but not in excess of 
 the par value of the stock or shares originally issued therefor; 
 whereas, in the case of individuals the value of tangible property 
 may be stated at the value as of January i, 1914, without the 
 limitation as to cost. This inhibition upon corporations and 
 partnerships (unless the Treasury Department interprets the 
 law differently) is discriminatory and inequitable. 
 
 As a matter of bookkeeping, it is not uncommon for pros- 
 perous concerns to write off capital assets or to carry them on 
 the books at only nominal values. Where this has been the 
 policy, it is suggested that the assets charged off or arbitrarily 
 written down be reestablished upon the books of account. This 
 must be done consistently and with due regard to the manner 
 in which the accounts were charged off or reduced. The amounts 
 reestablished in such accounts must be determined in strict con- 
 formity with the law prescribed as to tangible and intangible 
 property. But whether or not such assets are reestablished upon 
 the books of account they may, nevertheless, be included in 
 invested capital if the conditions as to their acquirement admit 
 them as such items as are acceptable under the law. For exam- 
 ple, good will that was actually purchased in the year 1910 for 
 say, $100,000, which has since been written off against surplus 
 may be included in the assets, provided that it was paid for in 
 cash or property; if it was paid for in stock, then at the amount 
 so paid but not in excess of 20 per cent, of the total capital stock 
 outstanding on March 3, 1917, and not in excess of the par value 
 of stock issued therefor; provided, in either case, that the good 
 will exists at the time of claiming it as invested capital and that 
 the corporation is then the owner thereof. In the case of trade- 
 marks the same principles would be applicable. It is, of course, 
 assumed that no part of the amounts written off on the accounts 
 mentioned was deducted in the ascertainment of income for tax 
 purposes. (Depreciation, or any other deduction on account of 
 good will or trade-marks, is not a deductible item.) 
 
132 INCOME TAX LAW AND ACCOUNTING 
 
 In the case of tangible property having been arbitrarily 
 written off by a corporation, the value at which such property 
 may be reestablished on the books and included in invested 
 capital shall not exceed, if paid for in cash, the actual cash paid 
 therefor; if paid for in stock, the actual cash value of such prop- 
 erty paid in for stock at the time of such payment, not in excess 
 of the par value of such stock issued therefor, and provided, in 
 either case, if property was acquired prior to January i, 1914, 
 that the cash paid or cash value is not in excess of the actual 
 cash value on January i, 1914. Any part of the cost of prop- 
 erty, so determined and limited, that has been charged off as de- 
 preciation or otherwise, and deducted from income for tax pur- 
 poses, is no longer available as an asset to the amount so 
 charged off. The depreciation charged off is evidence of a 
 decrease in the value of the property depreciated, and for pur- 
 poses of invested capital, the value has diminished by the 
 amount so charged and deducted; "you cannot both eat your 
 cake and have it." If, perchance, depreciation should have 
 been deducted in excess of actual depreciation sustained, the 
 amount deducted in excess cannot be offset except by stating 
 the amount thereof as income, which, thereby, is made subject 
 to income taxes. Where an amount is charged off in excess of 
 the cost of property, such excess, by rulings of the Department, 
 is required to be returned as income. 
 
 In a case where property was arbitrarily written off, in part or 
 in whole, but was not deducted from income tax returns, the 
 amount reinstated shall not exceed the difference between the 
 actual value of the property at the time as of which the correcting 
 entry is made and the balance at which it was carried on the 
 books at such time. For example, if property purchased in the 
 year 1905 
 
 COSt $10,0000 
 
 and on January i, 1911, there had been charged off (not deducted 
 
 from excise tax returns) $ 9,000, 
 
 it would appear upon the books on January i, 1911, at $ 1,000; 
 
 Assuming that the property on January i, 191 1, was actually worth $ 5,000, 
 the amount that may be reestablished in the account cannot exceed 
 the difference between the actual value as of that time and the 
 amount at which it was then carried on the books, namely $ 4,000 
 
WAR EXCESS PROFITS TAX 133 
 
 Furthermore, such adjustments must be made to affect the 
 invested capital of prewar years, if the property had been ac- 
 quired prior thereto or within that time, and not alone the in- 
 vested capital of taxable years. 
 
 The amount of invested capital should be based upon actual 
 values of property as at the tune the capital is computed, sub- 
 ject to limitations of law as to such values. 
 
 "Nominal capital" is not defined in the law. The term 
 is uncertain and vague. What may be nominal Nominal 
 capital in one case may be real in another. Capital. 
 
 The term may be applied, however, with a reasonable degree 
 of certainty, to particular classes of taxpayers. For example, 
 those engaged in the practice of a profession, such as lawyers, 
 doctors, dentists, teachers, architects, engineers and clergymen, 
 will, undoubtedly, be classed as employing a nominal capital 
 or not more than a nominal capital. A chemist or druggist, 
 although engaged in a profession, usually conducts a mercantile 
 business in connection therewith and employs actual capital. 
 Where such capital is merely incidental, as that required for 
 experimental purposes, the rate of tax applicable to nominal 
 capital would apply. In cases where a profession is practiced 
 only as an incident to the conduct of a mercantile or other 
 business, however, as in the case of the druggist or chemist, an 
 engineer actually engaged in construction operations and fur- 
 nishing capital in connection therewith, an architect doing a 
 building business, or any case where actual capital is employed 
 in the operation of such business, the taxpayer is subject to the 
 tax imposed on those employing more than a nominal capital. 
 Where the differentiating line is to be drawn is a difficult prob- 
 lem. Hard and fast rules are practically impossible of equitable 
 administration. 
 
 Representative Kitchin was asked a question in the House of 
 Representatives bearing upon this subject by Representative 
 Dallinger, as follows: 
 
 "MR. DALLINGER. Section 209 uses the words 'nominal 
 capital.' Suppose a family is incorporated for a small 
 amount of capital, and all they have is a trade-mark or the 
 good will of certain articles? Suppose they could sell to-day 
 that trade-mark for half a million dollars and they are only 
 
134 INCOME TAX LAW AND ACCOUNTING 
 
 incorporated for $5,000? Would that come under that 
 section? 
 
 "MR. KITCHIN. How much are they making? 
 
 "MR. DALLINGER. Suppose they are making net $100,000, 
 and are only capitalized for $5,000. 
 
 "MR. KITCHIN. I would say that that was not more than 
 a nominal capital in the case the gentleman puts, and the 
 corporation would pay under section 209." 
 
 Whether Mr. Kitchin's reply is in consonance with the law is 
 questionable, but his conclusion seems equitable. Under Sec- 
 tion 207 (a) of the law, trade-marks and good will purchased 
 prior to March 3, 1917, shall be stated at an amount not in 
 excess of 20 per cent, of the total capital stock and at a value 
 not to exceed "the actual cash value at the tune of such pur- 
 chase." On the other hand, the trade-mark or good will in the 
 case at point may not have been paid for at its "cash value" at 
 the time of its acquirement by the corporation. The corporation 
 may have been formed only as a convenience to the members of 
 the family, the stock issued, representing only relative interests 
 or a measure of proportionate interests in property apart from 
 the value of the property itself or the value of the respective 
 interests. Close corporations by reason of economy of main- 
 tenance, are not uncommonly so capitalized. It may be said, 
 therefore, that where the amount of capital stock is only nominal 
 and not representative of the actual value of the property 
 possessed by a corporation, as in the case passed upon by 
 Mr. Kitchin, either the flat rate of 8 per cent, shall be imposed, 
 or, the parties in interest may request that the corporation 
 receive the benefit of a deduction based on the returns of repre- 
 sentative corporations in a similar business, and pay the tax 
 upon the graduated rates prescribed by law as explained in the 
 next paragraph. 
 
 Where In- In cases where actual capital is employed by an 
 vested individual, partnership or a corporation, and the 
 Cannot be Secretary of the Treasury is unable satisfactorily 
 Deter- to determine the amount of invested capital, the 
 mined, deduction in lieu of normal or prewar profits shall be: 
 
 The same proportion of the net income for the taxable year, 
 which the average deduction for the calendar year of representa- 
 
WAR EXCESS PROFITS TAX 135 
 
 tive concerns in a like business without including the exemptions 
 of $6,000 and $3,000, bears to the net income received by such 
 representative concerns. For example, if in a certain line of 
 business the Treasury Department finds, from summary com- 
 putations made from returns of net income, the following facts: 
 
 Aggregate capital invested for taxable year $30,000,000 
 
 Aggregate net profit for taxable year 6,000,000 
 
 The net profit would be 20 per cent, of the invested capital. The 
 aggregate amount of deductions permitted by law, however, 
 being limited to 9 per cent, of invested capital, would be only 
 $2,700,000. 
 
 Based on these aggregate computations a concern in a similar 
 business, of which the Secretary of the Treasury is unable to 
 determine the invested capital, with a net profit of $25,000 
 would be entitled to a deduction in lieu of prewar profit of 
 $11,250, computed as follows: 
 
 $2,700,000 : $6,000,000 : : ? : $25,000 = 
 
 (2,700,000 x 25,000) -T- 6,000,000 = 11,250 
 or, on a percentage basis: 
 
 9 : 20 : : ? : 25,000 = 
 
 (9 x 25,000) -T- 20 = $11,250 
 
 In addition to the deduction of $11,250 such concern would be 
 entitled to the specific exemptions of $3,000 if a corporation, and 
 $6,000 if an individual or partnership. 
 
 The law provides that the proportions between the deductions 
 and net income in each trade or business shall be determined by 
 the Commissioner of Internal Revenue in accordance with 
 regulations prescribed by him and approved by the Secretary of 
 the Treasury. 
 
 In case of the change of ownership, the reorganization or 
 consolidation of a trade or business after March 3, 1917, if 
 50 per cent, or more of the ownership remains in partial 
 the control of the same persons, corporations, or Change of 
 partnership, or any of them, then in computing Ownership, 
 the invested capital, the assets of such business which were 
 transferred or received shall not be allowed any greater value 
 than would have been allowed in determining the invested 
 capital of the prior trade or business if there had been no trans- 
 
136 INCOME TAX LAW AND ACCOUNTING 
 
 fer, unless such assets were paid for in cash or tangible property 
 and then not to exceed the actual cash or cash value of the 
 tangible property paid therefor at the time of payment. (Law, 
 Section 208.) 
 
 Section 204 of the Excess Profits Tax Law states that a 
 business although formally organized or reorganized on or 
 Reorgan- after January 2, 1913, but which is "substantially 
 New^or- a continuation of a trade or business carried on 
 poration. prior to that date" shall be deemed to have been 
 in existence before that time, and the net income and invested 
 capital of the predecessor will be deemed to have been its net 
 income and invested capital. 
 
 The question as to what constitutes u substantially a con- 
 tinuation" is one that can only be answered by a consideration 
 of the facts of each case. These facts would include: questions 
 of continuity of parties in interest; whether the same kind of 
 business was continued; at the same location, etc. A change 
 in the amount of investment would not alter the case neces- 
 sarily, because this is only used relatively in computing the 
 percentage of prewar profit. 
 
 The question at point was discussed in the House of Repre- 
 sentatives shortly before the War Revenue Bill was voted upon 
 (October i, 1917). Representative Kitchin, Chairman of the 
 Ways and Means Committee, was explaining the terms and 
 operation of the law when Representative Cooper of Wisconsin 
 presented a concrete case of reorganization. The following is 
 taken from the Congressional Record of October 16, 1917: 
 
 " MR. COOPER of Wisconsin. The character of the Ex- 
 cess Profits Tax is somewhat difficult to ascertain from a 
 casual reading of this very complicated bill, and therefore 
 I ask this question, which has been submitted in perfect 
 good faith by a very excellent gentleman: A corporation 
 during the prewar period made an average profit of $3 ,000 a 
 year. After the war began it bought out a competitor, bor- 
 rowed $75,000 in money, and made a considerable invest- 
 ment in new buildings, and is capitalized for $i 25,000. This 
 last year its profits were $15,000. Now how do you, under 
 those circumstances, adjust the difference between the 
 prewar period and the war period? 
 
WAR EXCESS PROFITS TAX 137 
 
 "MR. KITCHEN. Does the gentleman mean that the 
 corporation was merged or reorganized during the war? 
 
 "MR. COOPER of Wisconsin. They made a new corpora- 
 tion entirely. 
 
 "MR. KITCHEN. There is a provision in the bill to take 
 care of that. Where a corporation is reorganized with prac- 
 tically the same owners it is considered, so far as the percent- 
 age of deduction is concerned, a continuance of the business. 
 
 "MR. COOPER of Wisconsin. But there are new owners 
 in it. 
 
 " MR. KITCHEN. I know, but there are also the old owners 
 in it. If the old owners succeed to the new business, then 
 they take the percentage that they had before the war, but 
 if it is discontinued altogether, if the old owners gave up 
 their business and got out, and an entirely new corporation 
 was organized since the prewar period, then it would take 
 an 8 per cent, deduction, as provided in the bill for new 
 companies or business. 
 
 "MR. GREEN of Iowa. The prewar income is no longer 
 the basis of taxation. 
 
 "MR. KITCHEN. It is no longer the basis of taxation, but 
 it is still the basis of the deduction in a much more limited 
 extent than was in the Senate amendments. There still 
 exists a differential of 7 and 9 per cent. I am going to get 
 to that and explain it as best I can. 
 
 "MR. COOPER of Wisconsin. It is exceedingly important 
 in the case of this particular corporation, because for this 
 $75,000 of new capital invested they gave notes payable 
 monthly, and it requires a profit hi order to meet those 
 notes and amortize the debt. 
 
 "MR. KITCHEN. I will say to the gentleman that if there 
 is a change of corporation, company, business, or ownership 
 altogether, then it is a new company that was not in exist- 
 ence during the prewar period, and it would take the 8 per 
 cent, deduction for the new business. That is, it would 
 have an 8 per cent, deduction upon the capital invested by 
 the new company plus a further deduction of $3,000. Then 
 the rate of taxation would apply on the income in excess of 
 the deduction. 
 
 "MR. COOPER of Wisconsin. Eight per cent, deduction 
 on the capitalization. 
 
 "MR. KITCHEN. On the invested capital, surplus, and 
 undivided profits, plus $3,000. 
 
138 INCOME TAX LAW AND ACCOUNTING 
 
 It is suggested that in cases presenting special questions 
 such as that cited, a ruling thereon be obtained from the Col- 
 lector of Internal Revenue. 
 
 An essential condition to the inclusion as invested capital 
 of good will, trade-marks, or franchise of a corporation or part- 
 Good Will, nership, or other intangible property is that bona 
 Marks f^ e P a y ment therefor must have been made in 
 Franchises, cash or tangible property and at a value not to 
 exceed the actual cash or cash value of the property paid there- 
 for at the time of payment, except: 
 
 That good will, trade-marks, trade brands, franchise of a 
 corporation or partnership, or other intangible property pur- 
 chased bona fide prior to March 3, 1917, with an interest or 
 share in a partnership or with shares of capital stock of a cor- 
 poration (issued prior to March 3, 1917) to an amount not 
 in excess of 20 per cent., on that date, of the total interests or 
 shares in the partnership or of the total outstanding capital 
 stock of the corporation, may be included in invested capital 
 but at a value not in excess of the actual cash value at the time 
 of purchase or the par value of the stock issued therefor. 
 
 The effect of the limitation upon good will, trade-marks, 
 trade brands and franchises paid for by capital stock of cor- 
 porations, as invested capital, is that the stock must have 
 been issued prior to March 3, 1917, and in good faith. (March 3, 
 1917, is the date of the enactment of the first Excess Profits 
 Tax which was repealed by Act of October 3, 1917.) Further- 
 more, such stock may be included as invested capital only up 
 to 20 per cent, of the total amount of capital stock of the cor- 
 poration. Capital stock issued since March 3, 1917, for good 
 will or intangible property, may not be included as invested 
 capital. 
 
 A clear understanding of reserve accounts, how they are created 
 Reserve and their respective functions, is quite necessary in 
 Reserve 8 ' or der to determine whether or not a particular re- 
 Funds, serve constitutes a part of the invested capital. 
 
 A reserve account, ordinarily, is established by a charge to 
 Profit and Loss Account l and a corresponding credit to the 
 
 1 In practice, the charge is first made to an account designating the 
 
WAR EXCESS PROFITS TAX 139 
 
 Reserve Account. The charge to Profit and Loss Account 
 effects a reduction of the profit for the period in which the 
 reserve is created or added to. The credit to the Reserve re- 
 mains an open balance either as a negative account (reduction 
 of a property account) or, in the nature of a reservation of 
 profits or surplus for particular or general purposes. For ex- 
 ample, the amount set aside as a reserve for depreciation is, 
 in effect, a reduction of profits and a corresponding reduction 
 of the book value of the property depreciated. The same 
 would be true of a reserve for loss on investments, reserve for 
 bad debts or for depletion of natural resources. All of these 
 reserves, in their creation or increase, result in a reduction of 
 profits and may or may not have been deducted from returns 
 of net income for tax purposes. To particularize, reserves for 
 depreciation and depletion are deductible and the reserves for 
 loss in investments and for bad debts are not deductible. In 
 the nature of them, as stated, they are all created by a reduc- 
 tion of profits, tantamount to expenses, and effect reductions 
 of surplus. On the other hand, a reserve set aside to equalize 
 dividends or a reserve for amortization of bonds payable are 
 not expenses and do not affect a reduction of profits. It may 
 be stated, therefore, as a principle, that reserves created by a 
 reduction of profits and deducted from income tax returns, do 
 not constitute invested capital. Such reserves, so called, are 
 merely reductions of the book value of property accounts to 
 which they relate. 1 
 
 Reserves for loss on investments or for bad debts, not being 
 deductible items in income tax returns, were, in all likelihood, 
 set aside only as a precautionary measure, to equalize profits, 
 for example, or for some similar reason. Such reserves, in so 
 far as they do not represent an actual reduction of the book 
 value (value at which an asset appears upon the books of ac- 
 count) of the assets to which they relate, constitute, hi the 
 author's opinion, invested capital. 
 
 nature of the charge, as Depreciation, Bad Debts, Depletion, etc. Such 
 account is then closed into Profit and Loss Account. 
 
 1 A reduction of a reserve account, where the latter is found excessive, 
 should be reported as income. 
 
140 INCOME TAX LAW AND ACCOUNTING 
 
 To illustrate: 
 
 Reserve for Depreciation. 
 Reserve for Depletion. 
 
 These are negative accounts that merely effect a reduction 
 of the book value of the property accounts which they qualify, 
 and, hence, do not constitute invested capital. 
 
 Reserve for Bad Debts. 
 
 Reserve for Loss on Investments. 
 
 Although the amounts credited to reserves of this class were 
 charged to Profit and Loss Account and, on the books of ac- 
 count, effected a reduction of profits or surplus, if they were 
 not deducted from income tax returns, they constitute, in the 
 author's opinion, invested capital to the extent that they are not 
 required to meet the purposes for which they were created. For 
 example, in the case of bad debts: 
 
 The accounts receivable according to the ledger accounts 
 
 amount to $100,000 . oo 
 
 The good and collectible accounts amount to 98,000 . oo 
 
 Balance represents bad debts $ 2,000 . oo 
 
 If there was an accumulated reserve for bad debts of $ 10,000.00 
 
 The difference would represent an amount reserved in excess of 
 
 requirements and would constitute invested capital, of. . $ 8,000.00 
 
 Reserve for Amortization of Bonds Payable. 
 Reserve for Equalizing Dividends. 
 Reserve for Working Capital. 
 
 Reserves of this category would, ordinarily, be created by a 
 charge to Surplus Account; they would not effect a reduction 
 of earnings, and, hence, could not have been deducted in the 
 ascertainment of net income for tax purposes. These reserves 
 may be considered as in the nature of surplus and as such con- 
 stitute invested capital. 
 
 A reserve fund, or more properly, a Reserve Fund Invest- 
 ment, is an investment fund created by reinvesting or setting 
 aside cash or its equivalent. The establishment of such invest- 
 
WAR EXCESS PROFITS TAX 141 
 
 ment funds does not in any way affect income tax returns. 
 Hence, reserve fund investments, such as all forms of sinking 
 funds, if represented by specially invested funds or assets, con- 
 stitute invested capital. 
 
 Citizens and residents of the United States and domestic 
 corporations and partnerships, are entitled to a Deductions 
 
 deduction in lieu of prewar income of the sum of: *? Citizens, 
 
 Residents, 
 (i) An amount equal to the same percentage Domestic 
 
 of invested capital for the taxable year Corpora- 
 
 the average amount of the annual net income of ships. 
 the trade or business during the prewar period 
 
 was 
 
 of the invested capital for the prewar period but not less 
 than 7 or more than 9 per cent, of the invested capital for the 
 taxable year, 
 
 plus 
 (2) $3,000 to corporations, 
 
 $6,000 to citizens or residents, 
 $6,000 to partnerships. 
 
 EXAMPLE 
 
 A corporation had an invested capital during the prewar 
 years of, respectively: 
 
 IQII ................................ $IOO,OOO 
 
 IQI2 ................................ 105,000 
 
 1913 ................................ I IO,OOO 
 
 3)$3IS,000 
 
 making an average capital for the prewar years of $105,000 
 
 The net incomes for the prewar years were: 
 
 I9 11 $ 10,250 
 
 1912 16,000 
 
 1913 21,000 
 
 3)$ 47,250 
 
 making an average net income for the prewar years of . .$15,750 
 
142 INCOME TAX LAW AND ACCOUNTING 
 
 The percentage of the average net income for the prewar 
 years was: 
 $15,750 4- $105,000 = .15 = 15 percent. 
 
 The average percentage being in excess of 9 per cent. 1 the 
 corporation is entitled to the maximum deduction allowed by 
 law, namely, 9 per cent. 
 
 Assuming that for the taxable year the corporation had an 
 
 Invested capital of $200,000 
 
 and a net profit of $ 40,000 
 
 it would be entitled to a deduction of 9 per cent, of 
 
 $200,000 $18,000 
 
 an exemption of 3>ooo 
 
 making a total deduction of $ 21,000 
 
 and would pay an excess profits tax on $ 19,000 
 
 EXAMPLES CORPORATION 
 
 Assuming that a business has an invested capital for the tax- 
 Method of able year of $300,000; that the net income subject 
 
 Tfunn^ere tO excess P ronts tax * s $75>> th at tne average in- 
 Capital is come for the prewar years based on the average 
 Employed, capital for the years 1911, 1912 and 1913 is 8 per 
 cent., the tax would be computed as follows: 
 
 Net Income (25 % of invested capital) $75,000.00 
 
 Deductions: 
 
 8% of $300,000 $24,000.00 
 
 Exemption 3,000.00 
 
 Total Deductions 27,000.00 
 
 Balance subject to tax $48,000.00 
 
 As follows: On amount not in excess of 
 
 15% of Capital $45,000.00 
 
 Less Deduction 27,000.00 
 
 Not in excess of 15% of Capital, 18,000.00 @ 20% $3,600.00 
 15 to 20% " " 15,000.00 " 25% 3,750.00 
 20 " 25% " " 15,000.00 " 35% 5,250.00 
 
 Taxable Amount $48,000.00 
 
 Total Tax $12,600.00 
 
 1 If the average percentage is between 7 and 9 per cent, the exact rate 
 should be used as the rate of deduction. 
 
WAR EXCESS PROFITS TAX 143 
 
 In a case where the amount of the deduction exceeds 15 per cent, 
 of the invested capital the excess is creditable under the higher rates 
 and the tax will be computed as follows: 
 
 Assuming that a corporation has an invested capital for the 
 taxable year of $30,000; a net income for the taxable year of 
 $12,000; and an average prewar profit of 9 per cent., the tax 
 would be computed as follows: 
 
 Net Income . (40% of invested capital) $12,000 . oo 
 
 Deductions: 
 
 9% of $30,000 $2,700.00 
 
 Exemption 3,000.00 
 
 Total Deduction 5>7oo . oo 
 
 Balance subject to tax $ 6,300 . oo 
 
 As follows: 
 
 Not in excess of 15% of Capital, $4,500.00 
 
 Less Deduction 5,700.00 
 
 Balance None @ 20% . . None 
 
 15 to 20% of Capital $1,500.00 
 
 Less Deduction in excess of 
 
 15% of capital (5,700 less 4,500) $1,200.00 
 
 Balance 300.00 25%$ 75.00 
 
 20 to 25% of Capital 1,500.00 " 35% 525.00 
 
 25 " 33% " " 2,400.00 " 45% 1,080.00 
 
 Over 33% " " 2,100.00 " 60% 1,260.00 
 
 Taxable Amount $6,300.00 
 
 Total Tax $ 2,940.00 
 
 EXAMPLES INDIVIDUALS AND PARTNERSHIPS 
 
 Assuming that an individual or partnership has an invested 
 capital for the taxable year of $200,000; a net income subject 
 to excess profits tax of $60,000; an average prewar income of 
 9 per cent., the tax would be computed as follows: 
 
144 INCOME TAX LAW AND ACCOUNTING 
 
 Net Income (30% of invested capital) $60,000.00 
 
 Deduction: 
 
 9% of $200,000 $18,000.00 
 
 Exemption 6,000.00 
 
 Total Deduction 24,000.00 
 
 Balance subject to tax 36,000 . oo 
 
 As follows: 
 
 On amount not in excess of 
 
 15% of capital $30,000.00 
 
 Less Deduction 24,000.00 
 
 Not in excess of 15% of Capital, 6,000.00 @ 20% $1,200.00 
 
 15 to 20% " " 10,000.00 " 25% 2,500.00 
 
 20 " 25% " " 10,000.00 " 35% 3,500.00 
 
 25 " 33% " " 10,000.00 " 45% 4,500.00 
 
 Taxable Amount $36,000.00 
 
 Total Tax $11,700.00 
 
 Where the amount of the deduction is greater than 15 per cent, 
 of the invested capital and cannot all be allowed under the first 
 rate (20 per cent.) the remaining portion may be deducted from the 
 amount taxable under the second , third, fourth or fifth rate, as the 
 case may require. 
 
 Assuming, for example, that an individual or partnership has 
 an invested capital for the taxable year of $30,000; a net income 
 for the taxable year of $12,000; an average prewar net income 
 of 9 per cent., the tax will be computed as follows: 
 
 Net Income (40% of invested capital) $12,000.00 
 
 Deduction: 
 
 9% of $30,000 $2,700.00 
 
 Exemption 6,000.00 
 
 Total Deduction $ 8,700 . oo 
 
 Balance subject to tax $ 3,300.00 
 
 As follows: 
 
 Not in excess of 15% of Capital, $4,500.00 
 
 Less Deduction 8,700.00 
 
 Balance None @ 20% . . None 
 
WAR EXCESS PROFITS TAX 145 
 
 15 to 20% of Capital $1,500.00 
 
 Less, Deduction in excess of 
 
 15% of Capital (8,700 less 
 
 4,5oo) 4,200.00 
 
 Balance None @ 25% . . None 
 
 20 to 25% of Capital $1,500.00 
 
 Less, Deduction in excess of 
 
 20% of Capital (8,700 less 
 
 6,000) 2,700 . oo 
 
 Balance None 35%.. None 
 
 2 5 to 33% of Capital $2,400.00 
 
 Less, Deduction in excess of 
 
 25% of Capital (8,700 less 
 
 7,500) 1,200.00 
 
 Balance $1,200.00 @ 45% $ 540.00 
 
 In excess of 33% of Capital. .. 2,100.00 @ 60% 1,260.00 
 
 Taxable Amount $3,300.00 
 
 Total Tax.. $ 1,800.00 
 
 EXAMPLE CORPORATIONS 
 
 Net Income $50,000 . oo 
 
 Nominal Less Exemption 3,000.00 
 
 Capital. 
 
 Subject to Tax 47,000 . oo 
 
 Tax @8% $ 3,760.00 
 
 EXAMPLE INDIVIDUALS AND PARTNERSHIPS 
 
 Net Income $50,000 . oo 
 
 Less Exemption 6,000.00 
 
 Subject to Tax 44,000.00 
 
 Tax @ 8% $ 3,520.00 
 
146 INCOME TAX LAW AND ACCOUNTING 
 
 Deductions Foreign corporations, foreign partnerships and 
 Co? ora? n nonres ident aliens are allowed the same deductions 
 tions and m lieu of normal or prewar profits as domestic 
 Partner- corporations and partnerships, citizens and residents, 
 Nonresid- ^ut are not a U we d any specific exemption of 
 ent Aliens. $6,000 or $3,000. 
 
 If a corporation or partnership was not in existence or an 
 Corpora- individual was not engaged in the trade or business 
 Partner during the whole of any one calendar year of the 
 ship not in prewar period, the deduction allowed shall be an 
 Existence amount equal to 8 per cent, of the invested capital 
 dividual * or tne taxa ^le year, plus $3,000 in the case of 
 Not in domestic corporations and $6,000 in the case of 
 Trade in domestic partnerships or citizens or residents of 
 Period. tne United States. (Law, Section 204.) 
 
 Where a corporation, partnership or individual 
 Business ^ad no net mcome during the prewar period or 
 Yielded no where the percentage of income of the invested 
 Net In- capital was low as compared with that of representa- 
 C^mpara- ti ye concerns in a like business, the corporation, 
 tivelyLow partnership or individual may, upon complaint to 
 Net In b ^ e Secretary of the Treasury obtain a deduction of: 
 normal W An amount equal to the same percentage of its 
 
 Profits. invested capital for the taxable year which the aver- 
 age deduction for such year of representative concerns in a 
 similar business is of their average invested capital for such year, 
 
 plus 
 (2) $3,000 to corporations, 
 
 $6,000 to citizens or residents, 
 
 $6,000 to partnerships. 
 
 The percentage of the representative concerns, in this case, 
 would be computed as prescribed on page 142, illustrated by 
 example, except that for this purpose the specific exemption 
 ($3,000 or $6,000) would not be deducted. 
 
 The effect of this provision is that those who were in business 
 during the prewar years and had no profit or had a low per- 
 centage of profit may file a complaint with the Secretary of the 
 Treasury and claim a deduction based on the average per- 
 
WAR EXCESS PROFITS TAX 147 
 
 centage of representative concerns in a like or similar business. 
 As to what would be a low percentage of profit is a question for 
 the complainant to determine from his knowledge of profits 
 made in the same trade or business. It would seem reasonable, 
 however, that any concern that made an average of less than 
 9 per cent, would have a right to file such complaint. 
 
 The percentage which the net income was of the invested 
 capital in each trade or business can only be fixed by the Com- 
 missioner of Internal Revenue. 
 
 The law requires that returns must be made on the basis of 
 the average percentage of profit of the respondent as outlined on 
 page 142 (illustrated by example) and that the How to 
 assessment be made thereon, but at the time of 2 bta ^i 
 filing such return a claim for abatement should be Deduction 
 filed of the amount by which the tax so assessed Based on 
 exceeds the tax computed on the basis of representa- 
 tive concerns. Inasmuch as the Department cannot tative 
 compute the average percentage of net income of Concerns, 
 representative concerns until it has received the returns from 
 which to make the computations, it will be necessary for those 
 who complain, and file claims for abatement, to assume, for 
 the purpose of deduction, the maximum percentage (9 per cent.) 
 and to prepare a return on that basis, such return to accompany 
 the claim for abatement. 
 
 Although the assessment is made on the basis of the return 
 showing the actual percentage earned (subject to provision 
 of law 7 to 9 per cent), it is provided that the amount of 
 the claim for abatement shall not be paid until the claim is de- 
 cided, except that if, in the judgment of the Commissioner of In- 
 ternal Revenue the interests of thejUnited States would be jeopar- 
 dized by the delay, he may require the claimant to furnish a bond 
 for the amount of the claim. Upon failure to furnish satisfactory 
 surety within such time as the Commissioner may prescribe the 
 full amount of the assessment will be collected at once, and, when 
 the claim has been passed upon, the amount found to be due to 
 the claimant, if any, will be refunded as a tax erroneously collected. 
 
 Undoubtedly, the Treasury Department will issue a special 
 form of claim for abatement which will be obtainable from the 
 Collectors of Internal Revenue. 1 
 
 1 If a special form is not provided Form 47 should be used. 
 
148 INCOME TAX LAW AND ACCOUNTING 
 
 The amount of tax payable before the claim for abatement is 
 decided upon, will be the lesser amount as shown to be due 
 according to the return in which the deduction is based upon 
 the average income of representative concerns; in other words, 
 the amount of the assessment, less the claim for abatement. 
 
 A strict interpretation of the provisions of the Excess Profits 
 Tax Law with reference to returns to be made by partnerships 
 Salaries of would indicate that in the matter of deductions, 
 wh^n De- partnerships are entitled only to such deductions as 
 ductible. are applicable to individuals. 1 That, also, seemed to 
 be the opinion of Congress at the time the Act was under con- 
 sideration and is confirmed by a statement by Senator Simmons, 
 Chairman of the Finance Committee of the Senate, made just 
 prior to the final vote and passage of the Act by the Senate in 
 reply to a question by Senator Calder. The question was, 
 "Why should individuals receive a larger exemption than cor- 
 porations? " Senator Simmons stated, as one of the reasons, that 
 corporations have the right to deduct salaries of officers and 
 managers, whereas, individuals and partnerships have not that 
 right. The following is an extract from the Senator's speech of 
 October 2, 1917, as contained in the Congressional Record of 
 October 16, 1917: 
 
 The Senator also inquires why we maue this differentia- 
 tion in the exemptions in favor of individuals and partner- 
 ships. We did it for the reason that the corporation has the 
 privilege, which it always exercises, of paying its officers 
 and managers salaries and deducting from the earnings of 
 the corporation the amounts so paid as a part of the ex- 
 penses of the business. In the law as it is written the mem- 
 bers of partnerships or individuals can not allow themselves 
 compensation for their personal services, so that if the 
 Senator and I were operating as a corporation we could pay 
 ourselves a salary out of the earnings of that corporation 
 and deduct it, giving in our income tax; but if we were 
 operating as partners we would not be entitled under the 
 law to pay ourselves salaries and have the amount de- 
 ducted. Such a course would be inconsistent with the 
 whole income tax scheme with reference to partnerships, 
 
 1 A salary allowance is made to partnerships and individuals by T. D. 2611 
 (Dec. 20, 1917). See page 169. 
 
WAR EXCESS PROFITS TAX 149 
 
 because a partnership does not have to pay any income tax, 
 as a corporation does. Under the law all of its earnings are 
 regarded as distributed, whether actually distributed or 
 not. Though they may be retained in the business, the 
 law, when it goes to impose the income tax upon the part- 
 ners regards the total earnings of the year as having come 
 into their hands, and requires them to give in those earnings 
 for taxation. The same is true with respect to the individ- 
 ual. The partner stands exactly in the position of the indi- 
 vidual. Neither is permitted to allow himself a salary and 
 deduct it, and if he were permitted to allow a salary for per- 
 sonal service, and deduct it in ascertaining his excess-profits 
 tax, he would have to give the amount so allowed in for in- 
 come tax, and the thing would be as broad as it is long." 
 
 Except for the last sentence of Senator Simmons* statement 
 the prohibition upon the deductibility of salaries to partners, in 
 his opinion, would be unmistakable. His concluding remark, 
 however, that inasmuch as the partners receiving salaries must 
 return them under the Excess Profits Tax Law would effect the 
 same result and make it "as broad as it is long" lends a degree 
 of favor to the view that such salaries are deductible. 
 
 Heretofore, under the Act of September 8, 1916, the Treasury 
 Department has held that salaries paid to partners were subject 
 to withholding at the source, thereby recognizing the deduc- 
 tibility of such payments. Under the Excess Profits Tax Law of 
 March 3, 1917 (now repealed), it was ruled that salaries of 
 partners, in certain cases, were deductible in determining the 
 amount of assessment of partnerships. Likewise, it has been 
 held under present law, according to a letter written by the 
 Department under date of October 19, 1917, to Daniel B. Cahn, 
 of New York, that stipulated salaries or drawings of partners, 
 regularly paid or credited pursuant to the terms of a partnership 
 agreement for services rendered, may be deducted by the part- 
 nership as an expense of doing business, provided such allow- 
 ance, salary or drawings are not excessive in amount and not 
 greater than would be paid by a corporation for similar services 
 rendered by an officer or an employee. 
 
 The following is a copy of the letter to Mr. Cahn: 
 
 "Receipt is acknowledged of your letter of October 10, 
 1917, wherein you request to be advised whether or not a 
 
150 INCOME TAX LAW AND ACCOUNTING 
 
 salary paid by a domestic partnership to one of its individ- 
 ual members can be claimed as a deduction in computing 
 the partnership's liability to tax under the provisions of the 
 War Excess Profits Tax Law of October 3, 1917. 
 
 "In reply you are advised that in a case where, under 
 the terms of a partnership agreement, an individual member 
 of the firm is regularly paid, or is allowed to draw, or has 
 placed to his individual credit, a certain stipulated amount, 
 as compensation for services rendered, that amount may be 
 deducted by the partnership as a business expense if it is 
 not excessive in amount and is no greater than what would 
 ordinarily be paid by a corporation or individual conducting 
 a business of like character to an officer or employee who 
 rendered services similar to those rendered by the partner- 
 ship member." 
 
 The position taken by the Treasury Department on this 
 question is, by far, the more equitable in effect, and one to which 
 partnerships will take no exception. The law, strictly con- 
 strued, however, would probably result in a conclusion adverse 
 to partnerships, inequitable as it would seem. 
 
 In the absence of a reversal of the ruling quoted herein in favor 
 of partnerships, they are permitted, under the circumstances 
 mentioned, to deduct salaries of partners. 1 
 
 The requirement that partnerships shall be limited in their 
 deductions to those allowed to individuals creates, in some cases, 
 an anomalous situation. For example, where a partnership of 
 three members, employing a nominal capital, earns a net profit 
 for the taxable year of $18,000, and there are no provisions for 
 salaries or regular drawings, the partnership will pay an Excess 
 Profits Tax of 8 per cent, on $18,000, less an exemption of $6,000, 
 namely, $12,000, amounting to $960, equivalent to an assessment 
 of each partner of $320. An individual, however, engaged on 
 his own account, in the same line of work or business as the 
 partnership, with the same amount of income as the individual 
 partners, would receive the same amount of exemption as the 
 partnership and would go untaxed. No doubt this problem will 
 be dealt with in the next Session of Congress. 
 
 As an economic principle, labor, not required to be paid, does 
 
 r The allowance of salaries to partners has been affirmed by T. D. 2611 
 (Dec. 20, 1917). See page 169. 
 
WAR EXCESS PROFITS TAX !$! 
 
 not diminish profits. But where a farmer employs the members 
 of his family, whether or not he is entitled by law Wages of 
 to the benefit of their labor, an equivalent deduction, Members 
 for tax purposes, should be allowed. Representa- e r 
 tive Kitchin's opinion is otherwise according to his not De- 
 statement in the House of Representatives in reply ductible. 
 to a question by Representative Reavis, as follows: (From Con- 
 gressional Record, October 16, 1917). 
 
 "MR. REAVIS. Let me suggest this condition, and it 
 doubtless prevails in the gentleman's district as it does in 
 mine: Take, for instance, the farmer who has a large family 
 following the example of the gentleman, and who employs 
 his boys upon the farm to aid him in his work. Is he en- 
 titled to a deduction for that labor, even though he does 
 not pay for it? 
 
 "MR. KITCHIN. No. 
 
 "MR. REAVIS. Then he would be paying excess-profits 
 taxes on the labor rather than on the real profits, would he 
 not? 
 
 "MR. KITCHIN. Yes, to a certain extent, because in most 
 States if the child is under 21 his labor belongs to the parent. 
 "MR. REAVIS. He is entitled to the labor? 
 "MR. KITCHIN. Yes. 
 
 "MR. REAVIS. That being true, he would pay a tax on 
 the returns with no deductions for labor. 
 
 " MR. KITCHIN. And that is one reason why I personally 
 and the House conferees were not in favor of including 
 individuals in the excess-profits tax. The owner of practi- 
 cally all the stock of the corporation could charge up his own 
 salary as officer of the corporation, and for the labor of his 
 wife and children if they performed services for it, and deduct 
 the amounts so paid or charged up as part of the operating 
 expenses from the amount of taxable income or profits, while 
 the individual in same kind of business with same capital and 
 making same profits could not have any such deduction." 
 
 Inasmuch as partnerships and individuals, for purposes of 
 the Excess Profits Tax, by T. D. 2611, may deduct reasonable 
 salaries or compensation for personal services actually rendered 
 in the conduct of business or trade, there is no doubt but that 
 the farmer may deduct an equivalent for the services of himself 
 and members of his family. 
 
152 INCOME TAX LAW AND ACCOUNTING 
 
 Unquestionably, the law will be fairly and equitably admin- 
 istered. To obtain an equitable administration, the law must 
 Administra- ^ e construed liberally and more by the "rule of 
 tionpfLaw. reason" than by its literal interpretation. An old 
 AppKcatwn doctrine holds that a statute should be interpreted 
 Real and according to the intent of the legislators. In the 
 Nominal case of an exceptional tax measure, however, such as 
 Capital. that of ^ xcess p ro fits Tax, it would be unreason- 
 able to expect that the intricacies of business and commercial 
 practice could have been foreseen and anticipated. Moreover, to 
 have contemplated the inherent difficulties and provided for de- 
 tails of administration would have required a tax volume, that, of 
 necessity, would have been technical, cumbersome and unwieldy. 
 
 To what extent an application of the "rule of reason" will be 
 justified must depend upon the facts of the particular case under 
 consideration, and must be determined with a mew to the spirit 
 of the law and the cause which actuated Congress to enact it. 
 
 Not only is it important, in an equitable administration of the 
 Act, to guard against excessive assessments, but it is equally 
 as important to prevent under-assessments, that, by reason 
 thereof, effect undue advantage either in individual or classes 
 of cases. In so far as practicable particular industries should be 
 taxed upon a uniform and consistent basis of assessment. For 
 example, a case recently brought to the writer's notice: A mining 
 property, yielding an annual net income of about $250,000, was 
 inherited by three members of a family. For the purpose of 
 establishing perpetuity of organization, a corporation was 
 formed with a nominal capital stock of $10,000 and the property 
 was conveyed to the corporation in exchange for the capital 
 stock thereof. Such corporation could probably be construed 
 to have " not more than a nominal capital." Adjoining the prop- 
 erty in question is a mine of about the same size and yield as 
 that of the close corporation's, but said property is owned by an 
 operating company having an outstanding capital stock of one 
 million dollars. To tax the close corporation on the basis of a 
 nominal capital would impose upon it an excess profits tax of 
 $19,760 upon an income of $250,000, whereas the corporation 
 operating the adjoining property, on the same income, but with 
 a capital of a million dollars, would be assessed, under the pro- 
 
WAR EXCESS PROFITS TAX 153 
 
 gressive rates, from $41,400 to $45,400. This inequality would 
 give the close corporation an unwarranted advantage over the 
 corporation with the larger capital stock. Admittedly, the 
 close corporation has only a nominal capital stock, but the 
 tangible property owned by it may be worth as much, or per- 
 haps more, than the invested capital of its neighbor with the 
 larger stock capitalization. Expediency, in cases of this kind, 
 requires that where real capital (in contradistinction to nominal 
 capital) is employed, the enterprise should be taxed upon the 
 basis of "more than a nominal capital." The deduction, in such 
 case, should be computed either upon the actual invested capital 
 (if that is properly ascertainable) or the corporation should be al- 
 lowed a deduction based upon that of representative concerns in a 
 similar trade or business, as provided for in section 210 of the Act. 
 
 The same principles can be aptly applied to businesses that are 
 not of an individualistic character. Where the average deductions 
 of "representative" concerns are inapplicable, or where there are 
 no representative concerns in a similar trade or business and where 
 neither of the prescribed methods of computing the tax (8 per 
 cent, or progressive rates) are clearly pertinent to the particular 
 case, the taxpayer should apply to the Department for a special 
 ruling upon such case. If a ruling is not obtainable in due time, 
 the taxpayer should make a return upon the basis that appears, 
 from a consideration of the requirements of law, and the facts of 
 the case, to be the most relevant of the prescribed methods. The 
 return should be accompanied by a complete and comprehensive 
 statement of all material facts upon which the Department will 
 be able to judge as to the propriety of the method employed. 
 
 The only provisions for revaluations of tangible property in 
 connection with the ascertainment of invested capital under 
 the Excess Profits Tax Law, are contained in sec- Revaluation 
 tion 207 (a) with respect to corporations and part- of Property, 
 nerships and 207 (b) as to individuals. 
 
 In the case of corporations and partnerships, tangible property 
 received in exchange for stock or shares therein may be stated 
 at the cash value, except that if the property was acquired prior 
 to January i, 1914, then at the cash value as of that date; in 
 no case, however, can such value be stated in excess of the par 
 value of the original stock or shares issued for the property. 
 
154 INCOME TAX LAW AND ACCOUNTING 
 
 Cash capital should be stated at the "actual cash paid in." 
 Construing this literally, a deficit need not be deducted from 
 capital paid in, for purposes of invested capital. 
 
 Paid in or earned surplus and undivided profits, except profits 
 earned during the taxable year, also comprise invested capital 
 under the law. The amount of surplus can best be ascertained 
 for such purpose by preparing a statement of the assets and 
 liabilities in which the assets (tangible and intangible) should 
 be stated at values in respect of limitations of law. The excess of 
 assets so valued, over the liabilities plus the capital stock, will 
 comprise the surplus. (See Example No. i, page 155.) 
 
 In the case of individuals, tangible property paid into a trade 
 or business, other than cash, should be stated at the actual 
 cash value of the property at the tune of such payment, except 
 that property paid in prior to January i, 1914, should be stated 
 at its cash value as of January i, 1914. In connection with the 
 latter provision, the value as at January i, 1914, does not appear 
 to be limited to the original value at which the property was paid 
 in as in the case of corporations. On the other hand, there is no 
 provision for the inclusion of earned surplus employed in the 
 business of the individual. This omission will, no doubt, be 
 ruled upon by the Treasury Department. 
 
 An equitable interpretation of the law will require that in- 
 dividuals shall be permitted to compute invested capital in- 
 clusive of accumulated earnings, and that construction may 
 reasonably be within the purview of the provision "the actual 
 cash value of tangible property paid into the trade or busi- 
 ness. . . ." Capital is an ever changing quantity in a com- 
 mercial business. Earnings that are allowed to remain invested 
 in a business, increase its capital. There is no legal obligation 
 on the part of an individual, conducting trade, to have any par- 
 ticular sum permanently invested as in the case of a corporation. 
 
 Tangible property paid in prior to January i, 1914, may be 
 stated at its value at that tune, but that does not provide for 
 profits earned and allowed to remain invested in the business 
 since that date. The taxpayer should obtain a ruling upon this 
 point from the Collector of his district. 1 
 
 1 Until a ruling has been made by the Department the writer suggests 
 that the individual taxpayer include in invested capital all assets that are 
 employed in the business, whether paid in or earned. 
 
WAR EXCESS PROFITS TAX 155 
 
 EXAMPLE No. i COMPUTING INVESTED CAPITAL AS AT BEGINNING OF 
 
 FISCAL YEAR 
 
 Item Balance per Invested 
 
 No. Assets Books of Account Capital 
 
 1 Cash in Office and in Banks $ 15,200.00 $ 15,200.00 
 
 2 Accounts Receivable $ 48,300.00 
 
 Reserve for 
 
 Bad Debts 1 . .. $ 2,415.00 
 Reserve for cash 
 
 discounts on 
 
 sales 1 1,200.00 3,615.00 44,685.00 
 
 Analysis of accounts: 
 
 Total $48,300.00 
 
 Uncollectible.. 800.00 
 
 Good 47,500.00 47,500.00 
 
 3 Bills Receivable (Notes) 20,500 . oo 20,500 . oo 
 
 4 Inventory of Stock on Hand 152,000 . oo 152,000 . oo 
 
 5 Investments: 
 
 Liberty Bonds, $% s * 50,000.00 
 
 " 4 s * 75,000.00 
 
 125,000.00 125,000.00 
 
 25 shares of X. Y. Z. Co., 
 
 Inc. (Common) 12,500.00 
 
 15 shares of X. Y. Z. Co., 
 Inc. (Preferred) 15,000.00 
 
 27,500.00 
 
 6 Plant and Machinery (Cost) . . . 125,000.00 
 
 Written off in excess of 
 Income Tax al- 
 lowances 25,000.00 
 
 Depreciation de- 
 ducted from In- 
 come Tax re- 
 turns and al- 
 lowed 25,000.00 50,000.00 
 
 Book Value 75,000.00 75,000.00 
 
 1 Not deducted from Income Tax Return. 
 
 2 Liberty Loan Bonds cannot comprise invested capital until after April 24, 
 1917, or September 24, 1917, the dates that the first and second issues were 
 respectively approved. 
 
156 INCOME TAX LAW AND ACCOUNTING 
 
 Cost $125,000. oo 
 
 Depreciation allowed 
 
 (Income Tax) 25,000.00 
 
 Value (Invested Capital) 100,000.00 $100,000.00 
 
 7 Furniture and Fixtures (Cost) . . 4,500.00 
 
 Written off in excess of 
 Income Tax de- 
 ductions 2,200.00 
 
 Depreciation de- 
 ducted from In- 
 come Tax re- 
 turns 2,250.00 4,450.00 
 
 Nominal Book Value 50.00 
 
 Cost 4,500.00 
 
 Depreciation deducted 
 from Income Tax returns. . 2,250.00 
 
 Value (Invested Capital) 2,250.00 2,250.00 
 
 8 Land: 
 
 Acquired for Capital Stock 
 
 (Par Value) 75,000.00 
 
 Erroneously written off to 
 effect agreement with 
 local real estate assess- 
 ment value 15,000.00 
 
 Book value 60,000.00 
 
 Cash value, January i, 1914 75,000.00 
 
 9 Buildings: 
 
 Acquired for Capital 
 Stock (Par Value) 150,000.00 
 
 Written off to 
 Reserve for De- 
 preciation in 
 excess of In- 
 come Tax Al- 
 lowances 20,000.00 
 
 Depreciation de- 
 ducted from 
 
WAR EXCESS PROFITS TAX 157 
 
 Income Tax 
 returns and 
 allowed $25,000.00 $45,000.00 
 
 Book value 105,000.00 $105,000.00 
 
 Cash value, Jan. i, 1914 140,000.00 
 
 Depreciation deducted 
 
 and allowed in Income 
 
 Tax returns since 
 
 Jan. i, 1914 15,000.00 
 
 Value (Invested Capital). . . . 125,000.00 $125,000.00 
 
 10 Good Will (Acquired in 
 exchange for Capital 
 Stock prior to March 3, 
 
 191 7) 100,000 . oo 
 
 Written off to surplus 50,000.00 50,000.00 
 
 Allowed as invested capital (not in excess 
 
 of 20% of capital stock) 80,000.00 
 
 ii Prepayments: 
 
 Prepaid Unexpired 
 
 Insurance 675 . oo 
 
 Prepaid Interest 400.00 1,075.00 1,075.00 
 
 12 Aggregate Totals $676,010.00 $743,525.00 
 
 Balance per Invested 
 
 Item Liabilities Books of Capital 
 
 No. Account Deductions 
 
 13 Accounts Payable $ 30,000 . oo $ 30,000 . oo 
 
 14 Bills Payable (Notes) 15,000.00 15,000.00 
 
 15 Accruals: 
 
 Accrued Taxes $ 1,000.00 
 
 Accrued Interest 2,500.00 
 
 3,500.00 3,500.00 
 
 16 First Mortgage Bonds Payable 100,000.00 100.000,00 
 
 17 Dividend Declared on Preferred Stock (5%). 10,000.00 10,000.00 
 
 18 Total Liabilities 158,500.00 158,500.00 
 
 19 Reserve for Amortization of Bonds 25,000.00 
 
 20 Reserve for Contingencies 10,000.00 
 
 21 Reserve for Equalization of Dividends 20,000.00 
 
158 INCOME TAX LAW AND ACCOUNTING 
 
 22 Capital Stock: 
 
 Common $200,000 . oo 
 
 Preferred 200,000 . oo 
 
 $400,000.00 
 
 23 Surplus 62,510 . oo 
 
 Totals 676,010 . oo $158,500 . oo 
 
 24 Invested Capital 585,025 .00 
 
 25 Aggregate Totals $676,010.00 $743,525.00 
 
 EXAMPLE No. 2 ALTERNATIVE METHOD (No. i) OF COMPUTING INVESTED 
 
 CAPITAL 
 
 Total Assets, as per books of account (Item 12) $676,010.00 
 
 Total Liabilities, as per books of account (Item 18) 158,500.00 
 
 Assets in excess of Liabilities as per books of account $517,510.00 
 
 Properties inadequately stated in Books of Account: Add 
 Accounts Receivable: (Item 2) 
 
 Collectible Accounts. . . $ 47,500.00 
 
 Balance, per books of account. . . . 44,685 .00 $ 2,815 .00 
 
 Plant and Machinery: (Item 6) 
 
 Value 100,000.00 
 
 Balance, per books of account .... 75,000.00 25,000.00 
 
 Furniture and Fixtures: (Item 7) 
 
 Value 2,250.00 
 
 Balance, per books of account .... 50.00 2,200.00 
 
 Land: (Item 8) 
 
 Cost (Cash Value Jan. i, 1914) . . . 75,000.00 
 Balance, per books of account 60,000 . oo 15,000 . oo 
 
 Buildings: (Item 9) 
 
 Value 125,000.00 
 
 Balance, per books of account .... 105,000 . oo 20,000 . oo 
 
 Good Will: (Item 10) 
 Allowed by law (20% of capital 
 
 stock) 80,000 . oo 
 
 Balance, per books of account .... 50,000 . oo 30,000 . oo 
 
WAR EXCESS PROFITS TAX 159 
 
 Add $95,015.00 
 
 Total 612,525.00 
 
 Disallowed for purposes of Invested Capital: Deduct 
 
 Securities excluded by law (Item 5) $27,500.00 
 
 Deduct 27,500.00 
 
 INVESTED CAPITAL (Item 24) $585,025 .00 
 
 EXAMPLE No. 3 ALTERNATIVE METHOD (No. 2) OF COMPUTING INVESTED 
 
 CAPITAL 
 
 Capital Stock Outstanding (Item No. 22) $400,000.00 
 
 Surplus, per books of account (Item 23) 62,510.00 
 
 Reserves: 
 
 Amortization of Bonds (Item 19) 25,000 . oo 
 
 For Contingencies (Item 20) 10,000 . oo 
 
 For Equalization of Dividends (Item 21) 20,000.00 
 
 Additions to Invested Capital by reason of properties being 
 inadequately stated in books of account (Items 2, 6, 7, 8, 9, 
 
 and 10, per itemized list in Example No. 2) 95,015 .00 
 
 Total 612,525.00 
 
 Deduct Securities excluded by law (Item 5) 27,500 . oo 
 
 INVESTED CAPITAL (Item 24) $585,025 . oo 
 
 NOTES ON ITEMS CONTAINED LN EXAMPLE No. i, COMPUTING 
 INVESTED CAPITAL (PAGE 155) 
 
 The inclusion of cash on hand and in banks is * tein No - * 
 conditioned upon the funds being used and employed Hand^and 
 in the business. in Banks. 
 
 Accounts receivable constitute invested capital at the total 
 amount of accounts considered good. Any accounts that have 
 been deducted from income tax returns, as uncol- j tem j^o. 2, 
 lectible, shall not be included. Suspense accounts Accounts 
 that are considered as realizable in whole or in part, Receivable, 
 and which have not been returned as bad debts for income tax 
 purposes, may be included to such an amount as they are con- 
 
l6o INCOME TAX LAW AND ACCOUNTING 
 
 sidered good and collectible. (A secret reserve decreases the in- 
 vested capital and is detrimental to the interests of the taxpayer.) 
 
 A reserve for bad debts is not deductible from income for tax 
 purposes, and, hence, need not be deducted in computing in- 
 vested capital. The same is true of a reserve for cash discounts 
 on sales. 
 
 Trade discounts, however, which are unconditional allowances 
 may be reserved and deducted from income if they were not 
 deducted from invoices rendered, but the amount thereof should, 
 in such case, be deducted from accounts receivable in computing 
 invested capital. 
 
 Notes receivable should be stated at the book value thereof. 
 Item No. 3, The qualifications in respect of bad debts, with 
 Bills Re- regard to Item 2, are also applicable to bills receiv- 
 ceivable. able 
 
 Treasury Department rulings prescribe that inventories shall 
 Item No. 4, be computed at cost. 1 The amount of inventory 
 Stock on use( j m determining the profit or loss should also 
 
 be used for purposes of invested capital. 
 
 Invest- * 6 ' Liberty Bonds and all obligations of the United 
 ments. States constitute invested capital. (Law, section 207.) 
 
 Investments in stocks and bonds of other corporations or 
 organizations, and other assets, the income from which is not 
 subject to the Excess Profits Tax, do not constitute invested 
 capital under the Act. 
 
 In the case at point, the plant and machinery cost $125,000. 
 There had been written off, and deducted and allowed from in- 
 Item No. 6, come tax returns, the sum of $25,000, and, in addi- 
 Plant and tion, a like sum had been written off but deduction 
 Machinery. of the same? for tax pur p Ose s, had been disallowed 
 
 by the Department on the ground that the same was excessive. 
 The actual value of the property is assumed to be $100,000. 
 Said amount, representing the cost, less the depreciation allowed 
 for tax purposes, is stated as available for purposes of invested 
 capital. 
 
 The English practice, as stated by Mr. W. E. Snelling, in his 
 work "Excess Profits Duty" (1916) is as follows: 
 
 1 By authority of T. D. 2609 inventories may be valued at cost or market 
 price whichever is lower. 
 
WAR EXCESS PROFITS TAX l6l 
 
 "Plant and Machinery should appear in the capital computa- 
 tion at its total capitalised cost to date, less the aggregate of 
 the Income Tax allowance to date." 
 
 Plant and machinery received hi exchange for capital stock 
 acquired prior to January i, 1914, may be stated at the cash 
 value as of that date, but such cash value shall not be in excess 
 of the amount of stock, at par, paid therefor. If depreciation 
 has been deducted thereon since that date the aggregate amount 
 of same should be deducted in determining invested capital for 
 the taxable year. Property acquired since January i, 1914, 
 may be valued at cost, less depreciation deducted thereon from 
 income tax returns. 
 
 In the event that an excessive rate of depreciation has been 
 deducted from returns of past years it may be permissible to 
 file an amended return for such years with a lesser deduction. 
 The amount shown to be due by the amended return, if accepted 
 by the Department, will be taxable at the rate applicable to the 
 year for which such amended return is made. Good and suf- 
 ficient reasons must be furnished to the Department in order 
 to effect an acceptance of the amended return. For rulings, in 
 this connection, see page 195. 
 
 Any depreciation that was deducted from returns, and written 
 off on the books of account, but which was not allowed by the 
 Department, does not necessarily reduce the value for purposes 
 of invested capital. 
 
 Depreciation that was deducted prior to the incidence of the 
 Excise and Income Taxes may or may not reduce the value of 
 property by the amount thereof. If depreciation was written 
 off, such writing off is evidence of depreciation having been 
 sustained. If, however, it becomes evident that excessive de- 
 preciation had been written off an error was made and there 
 can be no valid reason why the error should not thereafter be 
 remedied. But if such error was made since returns of income 
 have been required, amended returns for the years affected 
 should be filed and the additional tax paid. 
 
 Ordinarily, the difference between the cost of wasting prop- 
 erty and depreciation charged off indicates the value for pur- 
 poses of invested capital. Where, however, the book value has 
 been arbitrarily written down for the purpose, for example, 
 
1 62 INCOME TAX LAW AND ACCOUNTING 
 
 of creating a secret reserve, by carrying the property at a nominal 
 book value, if such deductions were not made from income tax 
 returns the actual value may be reestablished by providing 
 only for the wear and tear sustained. 
 
 In placing values upon property for capital purposes the treat- 
 ment of each case must necessarily depend upon the particular 
 circumstances attending it. The earning power or productivity 
 of property must be given due consideration as well as the sound 
 or intrinsic value of such property. 
 
 The total cost of the furniture and fixtures was $4,500. There 
 had been arbitrarily charged off to Surplus the sum of $2,200, 
 Item No 7 wn ^ c ^ had not keen deducted from tax returns; de- 
 Furniture ' preciation had been charged off and deducted from 
 and Fix- income for tax purposes aggregating 50 per cent, of 
 the total cost of the property, namely, $2,250; leav- 
 ing a nominal book value of $50. For the purpose of the illus- 
 tration it is assumed that the amount deducted from tax returns 
 (50 per cent.) represents the actual wear and tear sustained and 
 that the remaining 50 per cent, or $2,250 is the actual value of, 
 and invested capital in the property for the taxable year. No 
 cognizance need be taken of the amount arbitrarily charged off 
 ($2,200) because the same does not represent wear and tear or 
 actual loss sustained. 
 
 It is assumed that the land was acquired in exchange for 
 capital stock of the par value of $75,000. There had been er- 
 Item No. 8, roneously charged off the sum of $15,000 to effect 
 Land. an agreement of the book account with the local 
 
 real estate tax assessment. The object of showing the lesser 
 value upon the books of account had been to be able to rep- 
 resent to the local tax assessors that $60,000 was the amount 
 at which the land was carried in their books of account, and, also, 
 to have their local tax return in agreement with their accounts. 
 This reduction in the book value does not defeat the cor- 
 poration of valuing the land at its cash value on January i, 
 1914, as provided by section 207 (a) of the Excess Profits Tax 
 Law. 
 
 The buildings, as in the case of the land, were acquired in ex- 
 Item No. 9, change for capital stock of the corporation at the par 
 Buildings. va i ue o f $150,000. There had been charged off and 
 
WAR EXCESS PROFITS TAX 163 
 
 deducted for tax purposes the sum of $20,000, but as the same 
 had not been allowed by reason of being excessive, the same may 
 be disregarded in determining invested capital. An aggregate 
 sum of $25,000 had been deducted and allowed in tax returns; 
 of this amount $15,000 had been deducted since January i, 
 1914. The book value stood at $105,000. By authority of 
 section 207 (a) of the law, the buildings were re-valued as at 
 January i, 1914, at their cash value, ascertained to be $140,000; 
 deducting the depreciation of $15,000, sustained since January i, 
 1914, leaves a value for invested capital of $125,000. 
 
 The good will had been acquired in exchange for capital stock 
 at the par value of $100,000 prior to March 3,1917, and pursuant 
 to authority of law [section 207 (a) 3] is stated as item No. 10, 
 invested capital at 20 per cent, of the capital stock, Good Wiu - 
 namely, $80,000. The fact that the corporation had written off 
 50 per cent, of the account against surplus does not deprive it 
 of a full deduction of the 20 per cent, of the capital stock. The 
 same would be true if the account had been completely written 
 off, provided, of course, that the good will had not been disposed 
 of by sale or otherwise and is used in the business. For a more 
 complete discussion of "good will" and intangible property, 
 see page 138. 
 
 Prepaid expenses or deferred assets such as pre- Item No. 11, 
 paid unexpired insurance and prepaid interest, con- Assets, Pre- 
 stitute invested capital. payments. 
 
 These represent, respectively, the total assets as Item No 12> 
 they appear in the books of account and as they have Aggregate 
 been valued for purposes of invested capital. Totals. 
 
 Item No. 13, 
 
 Accounts 
 
 Payable. 
 
 All of these items (No. 13 to No. 16, inclusive) be- I*" 11 * ' 14 
 ing liabilities of the corporation, are a deduction p ay ^ble. 
 from the aggregate total of assets in determining the Item No lg 
 surplus of the business, which, by provision of law Accrued* 
 constitutes invested capital. Liabilities. 
 
 Item No. 16, 
 Bonds 
 Payable. 
 
164 INCOME TAX LAW AND ACCOUNTING 
 
 Item No. 17, A dividend becomes a liability as at the time of 
 
 Dividend j ts declaration, and, as such, is a reduction of the 
 
 surplus for purposes of invested capital. 
 
 This item needs no explanation, except that the amount 
 thereof, deducted from the totals of assets (Item 12) per books 
 Item No. 18, f account, and as computed for invested capital 
 Total Lia- * represent, respectively, the net worth as per the 
 bilities. books of account and the capital and surplus com- 
 prising the invested capital, the latter being shown in Item 24. 
 
 This reserve has been created by a charge to surplus account 
 Item No. 19, and a credit to the reserve. It was not deducted 
 
 Reserve for f rom i ncO me tax returns because the offset to it is 
 
 Amortiza- TT , . 
 
 tion of not an expense. Hence, such a reserve is equivalent 
 Bonds to surplus. 
 
 A reserve for contingencies may or may not be surplus. If, 
 in its establishment, it was deducted from earnings or profits, 
 Item No. 20, as an expense or loss, and was deducted from in- 
 Contingen- r come tax returns, it would not be surplus for pur- 
 cies. poses of invested capital. In the case at point, it 
 
 was created by a charge to and reduction of surplus account and, 
 therefore, is, itself, surplus. 
 Item No. 21, 
 Reserve for Such a reserve always constitutes a part of surplus. 
 
 Dividends. 
 
 Item No. 22, This item represents the paid in and outstanding 
 Capital capital stock of the corporation. As shown by 
 Stock. Items 8, 9 and 10, respectively, stock was issued in 
 exchange for: 
 
 Land $ 75,000.00 
 
 Buildings 150,000. oo 
 
 Good Will 100,000. oo 
 
 Total $325,000.00 
 
 The balance of $75,000 was issued for cash; and the total, 
 $400,000, deducted from the excess of assets (Item 12) over 
 the liabilities (Item 18) constitutes the surplus of the corpo- 
 ration. 
 
WAR EXCESS PROFITS TAX 165 
 
 This account represents the accumulated profits, except 
 those that were established in the reserve accounts item No. 23, 
 for specific purposes, which also constitute surplus. Surplus. 
 
 This item is the excess of : Item No. 24, 
 
 Invested 
 Item 12 (Assets) $743,525 .00 Capital. 
 
 over " 18 (Liabilities) 158,500.00 
 
 and comprises the invested capital based on values 
 for that purpose, of ......................... $585,025 . oo 
 
 The invested capital, in the example, is made up of: 
 
 Capital paid in ............................... $400,000.00 
 
 Accumulated earnings ........................ 185,025 . oo 
 
 Total ....................................... $585,025.00 
 
 To the above amount should be added the monthly average 
 of any additional capital paid in during the taxable year, but no 
 part of the earnings of the taxable year may be added to the in- 
 vested capital of such taxable year for purposes of deductions 
 under the Excess Profits Tax. 
 
 Item No. 26, These totals, respectively, agree with totals in 
 Item. 
 
 EXAMPLE No. 2 (PAGE 158) 
 
 This example presents a short alternative method of computing 
 invested capital. It is based primarily upon the book account 
 balances. To the excess of assets over liabilities, as shown by 
 the books of account, are added all items that were increased 
 by valuations placed thereon in accordance with "invested 
 capital values," and reduced by the amount of item that is 
 not recognized by law as a part of invested capital. 
 
 EXAMPLE No. 3 (PAGE 159) 
 
 Example No. 3 shows another alternative method of comput- 
 ing invested capital. This method is predicated upon the capi- 
 
'1 66 INCOME TAX LAW AND ACCOUNTING 
 
 tal stock plus surplus, as shown by the books of account, to 
 which are added and subtracted the differences between the 
 book values and values for purposes of invested capital. 
 
 SUGGESTIONS IN CONNECTION WITH THE VALUATION OF ASSETS 
 FOR PURPOSES OF INVESTED CAPITAL NOT INCLUDED^ IN 
 EXAMPLE No. i Vi 
 
 By rulings of the Treasury Department, organization expenses 
 are not deductible from income; they are held to be capital ex- 
 Organiza- penditures. (See page in). Although, from a com- 
 tion Ex- mercial viewpoint, capitalized expenses are looked 
 ies * upon with disfavor, where such expenses have been 
 paid by capital stock or out of moneys received from the original 
 sale of stock, were set up as assets, and have not been charged 
 off, it would seem proper to state them as invested capital to the 
 amount actually so paid. Such items should only consist of 
 the initial expenses incurred in connection with organizing a 
 corporation; no additions should be made thereto after the or- 
 ganization has been completed. 
 
 An unpaid subscription to capital stock, although an account 
 
 Subscrip- receivable, is not such an asset as will constitute 
 
 tions to invested capital. It is not capital paid in, in 
 
 Capital anv sense of that term, nor is it employed in the 
 
 business. 
 
 Treasury stock, in the usual acceptation of that term, denotes 
 stock that has been fully paid for in cash or property and re- 
 Treasury turned to the corporation. Inasmuch as invested 
 Stock. capital is defined by the Act as actual cash paid in, 
 
 the actual cash value of tangible property paid in other than 
 cash, and intangible property bona fide paid for by cash or tan- 
 gible property or by stock (with limitations) it must follow that 
 treasury stock, fully paid for, constitutes invested capital. This 
 conclusion is reached, not by reason of value attaching to the 
 treasury stock as an asset of the corporation, but because it 
 represents capital paid in. Stock repurchased by a corporation 
 cannot be so treated because upon its reacquirement by purchase, 
 it ceases to be paid in. 
 
 Unexecuted contracts purchased for cash, property, or stock, 
 
WAR EXCESS PROFITS TAX 167 
 
 may in some cases constitute invested capital, Unexecuted 
 subject, however, to the limitations of law prescribed Contracts. 
 by section 207 as to intangible property. 
 
 Patents. 
 These items are dealt with on page 138. 
 
 Franchise. 
 
 Assets of this class constitute invested capital to the amount 
 'of cost thereof, less the amount charged off against income, 
 provided that they are employed in the business. Patterns 
 Unused patterns, designs, plates or dies that have ^^ e 
 been discarded and play no part in the production plates and 
 of profits should not be stated as invested capital, ex- Dies. 
 cept, perhaps, at their residual value, if they have any. Assets 
 of the same general character as those under discussion should 
 be judged in respect of invested capital principally upon their 
 productivity in the business, but always limited to the cost, less 
 that part thereof which has been charged off. 
 
 TREASURY DECISIONS UNDER THE EXCESS PROFITS TAX 
 
 Stock on hand of merchandise, supplies, and work in process 
 of mercantile and manufacturing businesses, and of inventories 
 securities held by dealers, for purposes of income taxes of Mer- 
 
 and excess profits taxes, may be inventoried either: chandise, 
 
 etc., and 
 
 (a) at cost, or Securities 
 
 (b) at cost or market price whichever is lower. held by 
 Whichever method is adopted must be adhered to in Dealers - 
 subsequent years unless a change in the method is authorized by 
 the Commissioner of Internal Revenue. 
 
 This ruling is only applicable to commodities dealt in and not 
 to subjects of more or less permanent investment. T. D. 2609. 
 
 Washington, D. C, December 19, 1917. 
 To Collectors of Internal Revenue, Revenue Agents, and Others 
 Concerned: 
 
 i. For the purposes of income and excess profits tax re- 
 turns, inventories of merchandise, etc., and of securities, 
 will be subject to the following rules: 
 
 A. Inventories of supplies, raw materials, work in process 
 of production and unsold merchandise, must be taken either 
 
1 68 INCOME TAX LAW AND ACCOUNTING 
 
 (a) at cost, or (b) at cost or market price whichever is 
 lower; provided that the method adopted must be ad- 
 hered to in subsequent years unless another be authorized 
 by the Commissioner of Internal Revenue. 
 
 B. A dealer in securities who in his books of account 
 regularly inventories unsold securities on hand either (a) 
 at cost, or (b) at cost or market price whichever is lower, 
 may for purposes of income and excess profits taxes make 
 his return upon the basis upon which his accounts are 
 kept; provided that a description of the method employed 
 shall be included in or attached to the return, that all the 
 securities must be inventoried by the same method, and 
 that such method must be adhered to in subsequent years 
 unless another be authorized by the Commissioner of In- 
 ternal Revenue. 
 
 C. Gain or loss resulting from the sale or disposition of 
 assets inventoried as above must be computed as the dif- 
 ference between the inventory value and the price or value 
 at which sold or disposed of. 
 
 2. In all other cases inventories must be taken at cost 
 or at value as of March i, 1913, as the case may be. 
 
 DANIEL C. ROPER, 
 Commissioner of Internal Revenue. 
 APPROVED: 
 W. G. McAooo, 
 Secretary of the Treasury. 
 
 In many instances the construction placed by the Depart- 
 ment upon the terms " tangible property" and "intangible 
 Tangible property" will determine whether or not a par- 
 f nd *?" ticular asset constitutes invested capital. Ac- 
 Property cording to the following ruling (T. D. 2610) stocks, 
 Defined. bonds, bills and accounts receivable and notes and 
 other evidences of indebtedness are construed to be tangible 
 property. 
 
 Washington, D. C., December 20, 1917. 
 To Collectors of Internal Revenue, Revenue Agents and Others 
 Concerned: 
 
 The term " other intangible property" as used in sec- 
 tion 207 will be construed to mean property of a character 
 similar to good-will, trade-marks, and the other specific 
 kinds of property enumerated in the same clause. With 
 
WAR EXCESS PROFITS TAX 169 
 
 respect to property not clearly of such a character rulings 
 will be issued as occasion may demand to indicate whether 
 it shall be regarded as tangible or intangible. 
 
 To date, the following classes of property have been 
 construed to be tangible property within the meaning of 
 section 207: 
 Stocks, 
 Bonds, 
 
 Bills and accounts receivable, 
 Notes and other evidences of indebtedness. 
 
 DANIEL C. ROPER, 
 Commissioner of Internal Revenue. 
 APPROVED: 
 W. G. McAooo, 
 Secretary of the Treasury. 
 
 It is not clear, to the writer, why stocks and bonds, by law 
 excluded as invested capital, the income from which is not sub- 
 ject to the tax, should have been stated in the foregoing Treasury 
 Decision, unless it refers to cases where securities are dealt in 
 as a commodity, or where an original issue of capital stock is 
 paid for by securities. 
 
 It has been held by the Treasury Department that for the 
 purpose of detennining the amount of net income subject to 
 the Excess Profits Tax where actual capital is em- Salary Al- 
 ployed, partnerships and individuals will be al- p a ^g to 
 lowed to deduct a reasonable amount in lieu of a ships and 
 salary compensation, "not in excess of the salary Individuals 
 or compensation customarily paid for similar service" in a like 
 or similar trade or business. In the case of partnerships such 
 deduction in lieu of salary compensation will be allowed whether 
 or not a previous agreement therefor existed, but only to 
 March i, 1918. On and after that date such allowance, hi the 
 case of partnerships, will only be permitted where provision 
 for the same is made by partnership agreement and where the 
 salaries are actually paid to the partners. 
 
 In both cases (partnerships and individuals) the person cred- 
 ited with such salary allowance must make an individual 
 return and pay the excess profits tax at the 8 per cent. rate. 
 T. D. 2611. 
 
1 70 INCOME TAX LAW AND ACCOUNTING 
 
 Washington, D. C., December 20, 1917. 
 To Collectors of Internal Revenue, Revenue Agents and Others 
 Concerned: 
 
 1. In computing net income for purposes of the Excess 
 Profits Tax a partnership will be allowed to deduct as an 
 expense reasonable salaries or compensation paid to in- 
 dividual partners for personal services actually rendered 
 during the taxable year, if payments are made in accord- 
 ance with prior agreements and are properly recorded on 
 the books of the partnership. In no case shall the salaries 
 or compensation so deducted be in excess of the salaries 
 or compensation customarily paid for similar services under 
 like responsibilities by corporations engaged in like or 
 similar trades or businesses. 
 
 With respect to any period prior to March i, 1918, where 
 no previous agreement has been .made as to salaries or 
 compensation a similar deduction will be allowed for serv- 
 ices actually rendered. 
 
 In the case of a foreign partnership the deduction shall 
 be limited to those portions of salaries or compensation 
 which are paid for services rendered with respect to trade 
 or business carried on in the United States. 
 
 A partner in his individual capacity is, however, subject 
 to the excess profits tax, if any, at the 8 per cent rate under 
 section 209 with respect to any salary or compensation 
 from the partnership for personal services (including any 
 amounts allowed to the partnership as a deduction for the 
 period prior to March i, 1918). 
 
 2. An individual carrying on a trade or business having 
 an invested capital may designate a reasonable amount 
 as salary or compensation for personal service actually 
 rendered by him in the conduct of such trade or business. 
 In no case shall the amount so designated be in excess of 
 the salaries or compensation customarily paid for similar 
 service under like responsibilities by corporations or part- 
 nerships engaged in like or similar trades or businesses. 
 
 In the case of a non-resident alien individual, the amount 
 shall be limited to that portion of the salary or compensa- 
 tion which is for service rendered with respect to trade 
 or business carried on in the United States. 
 
 An individual is, however, subject to the excess profits 
 tax, if any, at the 8 per cent rate under section 209 with 
 respect to the amount so designated, and the balance of 
 
WAR EXCESS PROFITS TAX 17 1 
 
 the income derived from such trade or business shall be 
 subject to the graduated rates prescribed in section 201. 
 
 DANIEL C. ROPER, 
 Commissioner of Internal Revenue. 
 APPROVED: 
 W. G. McAooo, 
 Secretary of the Treasury. 
 
 By ruling of the Department (T. D. 2612) it has been held 
 that a partner, with respect to his share in the Profits de- 
 profits of a partnership, is not subject to the Ex- 
 cess Profits Tax. As stated in T. D. 2611 (ante) he f rom 
 is, however, liable individually for such tax with nerships. 
 respect to any salary compensation credited or paid to him. 
 
 Washington, D. C., December 20, 1917. 
 To Collectors of Internal Revenue, Revenue Agents and Others 
 Concerned: 
 
 A partner in his individual capacity will not be con- 
 sidered as engaged in trade or business with respect to his 
 share in the profits of the partnership, and consequently 
 will not be subject to excess profits tax thereon. He is, 
 however, subject to the excess profits tax, if any, at the 
 8 per cent, rate under section 209 with respect to any salary 
 or compensation from the partnership for personal services 
 (including any amounts allowed to the partnership as a 
 deduction for the period prior to March i, 1918). 
 
 DANIEL C. ROPER, 
 Commissioner of Internal Revenue. 
 APPROVED: 
 W. G. McAooo, 
 Secretary of the Treasury. 
 
 Interest paid by a partnership to a partner on a bona fide 
 loan to such partnership may be deducted as a interest on 
 partnership expense. Interest upon capital is not Loans by 
 deductible. T. D. 2613. Partners. 
 
 Washington, D. C., December 20, 1917. 
 To Collectors of Internal Revenue, Revenue Agents and Others 
 Concerned: 
 
 In computing net income for the purpose of the excess 
 profits tax a partnership will be allowed to deduct amounts 
 
172 INCOME TAX LAW AND ACCOUNTING 
 
 paid during the year to an individual partner as interest 
 upon any bona fide loan, but no deduction for so-called 
 interest upon capital will be recognized. 
 
 DANIEL C. ROPER, 
 Commissioner of Internal Revenue. 
 APPROVED: 
 W. G. McAooo, 
 Secretary of the Treasury. 
 
 Where an individual, partnership or corporation, engaged in 
 business during the prewar period, is content to accept the 
 Return minimum deduction of 7 per cent, upon invested 
 Prewar capital for the taxable year, it is not necessary to 
 Period. i e a re turn of net income or invested capital for 
 the prewar years. A business or trade employing no capital or 
 not more than a nominal capital, being taxed at the flat rate 
 of 8 per cent, is not required to report income or invested capital 
 for the prewar years. T. D. 2614. 
 
 Washington, D. C., December 20, 1917. 
 To Collectors of Internal Revenue, Revenue Agents and Others 
 Concerned: 
 
 For the purposes of the excess profits tax, a return of 
 information with respect to the invested capital and net 
 income for the pre-war period will not be required of a 
 corporation, partnership or individual in the following 
 cases: 
 
 (1) If the taxpayer accepts the minimum percentage, 
 viz., 7 per cent, as percentage to be used in computing the 
 deduction under section 203 ; or 
 
 (2) If the trade or business is taxable only at the 8 per 
 cent, rate under section 209. 
 
 The foregoing must not be construed as not requiring a 
 return of information as to all facts which may be necessary 
 for the ascertainment of the capital and income for the 
 taxable year whenever such a return is required by the Com- 
 missioner of Internal Revenue. 
 
 DANIEL C. ROPER, 
 Commissioner of Internal Revenue. 
 APPROVED: 
 W. G. McAooo, 
 Secretary of the Treasury. 
 
WAR EXCESS PROFITS TAX 173 
 
 INVESTED CAPITAL 
 
 No ruling has been made, as yet, upon the relationship of 
 various classes of bonds payable to invested capital. By pro- 
 hibition of law borrowed money does not constitute B on( j s as 
 invested capital. Proceeds of sales of bonds, secured Invested 
 by mortgage upon corporate property, are borrowed Ca P ital - 
 money. But all bonds are not secured by mortgage; in many 
 cases a debenture bond is nothing more than a preferred stock. 
 Will such debentures be held to be invested capital, or will pre- 
 ferred stock having the ear-marks of debentures be classed as 
 borrowed money and excluded as invested capital? A pre- 
 ferred stock, for example, that is redeemable at a definite time, 
 is cumulative as to interest, and provides for preferences as to 
 assets in the event of dissolution, in effect, is a debenture. Is 
 such stock invested capital? In the absence of a ruling to the 
 contrary the taxpayer may treat the same as invested capital. 
 In the writer's opinion certain classes of bonds are equivalent 
 to preferred capital stock, called by some other name, as, for 
 example, "debentures." Special rulings should be obtained in 
 connection therewith, from the Treasury Department based 
 upon the facts of the particular case. 
 
 Where the business of an individual or partnership is incor- 
 porated and the owner or owners receive in exchange for such 
 business both stock and bonds, the bonds so issued do not rep- 
 resent, in any sense, borrowed money. The writer ventures to 
 predict that under such circumstances, where the stockholders 
 are also the bondholders, under certain conditions of acquire- 
 ment, bonds will be held to be invested capital. If it should 
 be so ruled, no expenses in connection with such bonds should 
 be allowed as deductions from net income; the interest paid 
 thereon, for example, will then be a distribution of profits and 
 not an expense. From time to tune, as occasion demands, 
 rulings will be made upon facts submitted to the Department. 
 If no ruling has been rendered, at the time of making inquiry 
 of the collector, upon a case similar to that presented by the 
 inquirer, application for a special ruling should be made upon 
 the facts involved in such case. 
 
 Decided injustice will result unless, by regulation or new 
 
174 INCOME TAX LAW AND ACCOUNTING 
 
 legislation, provision is made for the inclusion of actual values 
 of property as invested capital. How this can be accom- 
 plished under existing law without violating its ex- Limitation 
 pressed provisions is now engaging the minds of the p r ^ * 
 Committee of Advisers at Washington. That regula- a t jan/ 1, S 
 tions will be made whereby substantial justice may 1914. 
 be obtained by those against whom a technical construction 
 of the law would result in discrimination and inequality, may 
 be assured. In order to obtain such substantial justice, how- 
 ever, it will be necessary, in many cases, to demand of the 
 Department special rulings upon the peculiar facts involved. 
 Beyond question, Congress did not contemplate penalizing con- 
 servative capitalization; the general tenor of the law indicates 
 a purpose to distribute the burden fairly and equitably. 
 
CHAPTER VI 
 
 DEPRECIATION 
 
 Depreciation is a deductible allowance in the ascertainment 
 of net income for tax purposes. It should repre- Deprecia- 
 
 sent, as nearly as possible, the actual deterioration 5 on .Pf~ 
 
 i_ i -vi r ductible 
 
 of such physical properties as are susceptible of f rom in. 
 
 wear and tear. Obsolescence is not now recognized as come. 
 
 an element of loss in computing depreciation for tax purposes, 
 
 but loss sustained on discarded machinery is deductible. 
 
 In a broad sense of the word depreciation means a reduction 
 in value and may be applied to all kinds of property. As used 
 in the income tax law, however, it is applicable only to tangible 
 property, such as is subject to wear and tear and exhaustion. 
 Hence, depreciation will be allowed as a deduction from revenue 
 only on physical properties, such as buildings, fixtures, machin- 
 ery, etc. All depreciation to be deductible must be actually 
 charged off in the books of account in the period for which 
 it is claimed. 
 
 There are several methods of computing rates Methods of 
 of depreciation, the most common of which are: Computing 
 
 1. By equal instalments. 
 
 2. On diminishing values. 
 
 The first method is ordinarily used where the property de- 
 preciated has no residual value, and the second one where the 
 property has a residual value. Charging off equal instalments 
 is most commonly employed with respect to all properties, 
 whether they have a residual value or not, and only that method 
 has as yet been suggested or approved by rulings of the Treasury 
 Department or court decision in connection with deductions 
 from income tax returns. 
 
 In a publication issued by the Federal Trade Commission 
 recently, on the subject of "Fundamentals of a Cost System 
 for Manufacturers," both methods are approved in the fol- 
 lowing language: "There are several methods of determining 
 the amount of depreciation. One is to estimate the scrap value 
 
176 INCOME TAX LAW AND ACCOUNTING 
 
 and deduct this figure from the original cost. The difference 
 is then divided by the estimated life of the machine in years, 
 and the result is the annual depreciation on that machine. 
 A modification of this method which is not quite as simple, 
 but really affords no difficulty, is after ascertaining the amount 
 to be charged off during the life of the machine, to determine 
 a percentage which, when applied to the net book value of the 
 machine, will leave only the scrap value of the machine on the 
 books at the expiration of its estimated life. 
 
 "To illustrate: If the initial cost of a machine and equipment is 
 $1,000 and the estimated scrap value is $200, with an estimated 
 life of ten years, then $800 is the amount that must be charged 
 into cost during that period, or $80 per year. To attain this re- 
 sult, by using the net value of the machine as a basis, a rate of 
 15 per cent, would be necessary, which would make the deprecia- 
 tion 15 per cent, on $1,000, or $150 the first year; 15 per cent, on 
 $850, or $127.50 the second year, etc. The advantage of this 
 method in the interest of normal costs is, that the decrease in de- 
 preciation charges is ordinarily offset by an increase in repairs." 
 
 Where reserves for depreciation are used in conjunction 
 with the "Diminishing Value Method" the amount of the 
 reserve set aside in past periods should be deducted from the 
 asset account before the depreciation is computed thereon. 
 
 The most approved method of double entry bookkeeping 
 favors the establishment of reserves for depreciation instead 
 Reserve ^ reducing the balances of the asset account in 
 for De- the ledger. This is accomplished by journal entry, 
 preciation. made eitner montn ly O r at the end of the fiscal 
 period, just prior to closing the books of account, as follows: 
 
 Depreciation $250.00 
 
 To Reserve for Depreciation of Furniture and Fixtures $250 . oo 
 
 Depreciation at 10% per annum on Furniture and Fixtures for 
 the year 1916. (Book value cost $2,500.) 
 
 The Depreciation Account is closed into Profit and Loss 
 Account and the Reserve for Depreciation, a negative account, 1 
 remains open. In the Statement of Assets and Liabilities the 
 
 1 A negative account is one that is neither an asset nor a liability; it quali- 
 fies an asset account, as, for example, Furniture and Fixtures. 
 
DEPRECIATION 177 
 
 Reserve for Depreciation is deducted from the asset account 
 and extended at the net amount, as follows: 
 
 Furniture and Fixtures $2,500.00 
 
 Less Reserve for Depreciation (10%) 250.00 
 
 $2,250.00 
 
 Although not essential, it is advisable to keep a separate 
 reserve account for each class of assets, as: Reserve for De- 
 preciation of Furniture and Fixtures, Reserve for Depreciation 
 of Machinery, Reserve for Depreciation of Buildings, etc. This 
 separation renders more accessible the amount of deduction from 
 the respective asset accounts, when preparing the balance sheet. 
 
 A Reserve for Depreciation must be kept separate and dis- 
 tinct from other reserve accounts and reserve funds. A reserve 
 fund is an amount set aside for the purpose, among Diverting 
 others, of providing an available asset (cash or Reserves, 
 readily convertible investment) for a present or future obliga- 
 tion, as a renewal of plant and machinery. The creation of 
 such fund does not incur the reduction of surplus or profit be- 
 cause it is not an expense; it is not created by a reduction of 
 revenue, but merely a conversion of profits or surplus. Hence, 
 a reserve fund set aside for amortization of bonds, or to provide 
 quick assets for any other purpose, is not a competent deduc- 
 tion in an income tax return. Nor are reserve accounts prop- 
 erly deductible except in so far as they are a reduction of the 
 value of an asset. A reserve account appearing on the liability 
 side of a balance sheet, unless represented by a specially in- 
 vested fund in the assets, is offset by all the assets in the balance 
 sheet. But a "Reserve for Depreciation" is, technically, neither 
 a reserve fund nor reserve account, because it has been charged 
 against revenue and has reduced the surplus. To be a true 
 reserve it should not reduce the revenue or surplus. There- 
 fore, a "Reserve for Depreciation" is nothing more than an 
 "allowance for depreciation" and should never be stated on 
 the liability side of a balance sheet. It is nothing more than 
 a negative account, a reduction of the book value of a par- 
 ticular asset, and should be deducted in the Statement of 
 Assets and Liabilities from the asset to which it refers. 
 
 Hence, under rulings in connection with the income tax, a 
 
178 INCOME TAX LAW AND ACCOUNTING 
 
 so-called "Reserve for Depreciation" should not be diverted to 
 any purpose except "making good the loss sustained by reason 
 of wear and tear, exhaustion * * * of the property with respect 
 to which it was claimed." 
 
 Depreciation may only be charged off up to the cost of the 
 property depreciated. Should depreciation, for any reason, 
 have been charged off in excess of such amount, then such excess 
 must be reported as income (Art. 132, Reg. 33). 
 
 The law does not prescribe rates of depreciation because 
 Rates of these depend upon the kind and class of property, 
 Deprecia- and upon the conditions under which the property is 
 tion - used. Fixing rates of depreciation is more or less 
 
 arbitrary at best. 
 
 The fairness of rates of depreciation, deducted in returns of 
 net income, are questions of fact, and not of law; that is to say, 
 such questions at issue in a court of law would, ordinarily, be 
 submitted to a jury for determination. 
 
 Technical rate fixing is a question on which there are diversi- 
 fied opinions, even amongst the best engineers. But engineers 
 have suggested rates for various classes of properties that work 
 out fairly accurately for all practical purposes. The rates men- 
 tioned herein are suggestive only. They are based upon the 
 experience of engineers and accountants. 
 
 In the case of Hyman Cohen v. John Z. Lowe, Jr., Collector 
 (234 Fed. 474), tried before a jury in the United States District 
 Buildin s 1 Court * or tlie Southern District of New York, 
 Judge Grubb stated that, in his opinion, depreciation 
 on a building should be based upon the number of years "the 
 building would remain in a condition to be habitable for the 
 uses for which it was constructed and used. . . . The annual 
 depreciation would be an amount represented by a fraction 
 having one (the tax year) for the numerator and the number 
 of years, representing the ascertained life of the building, as the 
 denominator." Hence, a building, estimated to remain hab- 
 itable and fit for the purposes for which it was erected for a term 
 of forty years, would suffer an annual depreciation of 2^2 per 
 
 1 The Department has stated (not by Treasury Decision) that it is esti- 
 mated that the probable life of a frame building is 25 years; brick building, 
 35 years, stone, steel or concrete building, 50 to 100 years. A taxpayer, 
 however, is not bound by these estimates. 
 
DEPRECIATION 179 
 
 cent. In the Cohen case, just cited, the plaintiff (owner of 
 building) claimed a depreciation of 5 per cent, for the tax year 
 (1913). The Collector of Internal Revenue allowed only 3 per 
 cent., and the plaintiff brought an action to enforce his claim of 
 5 per cent. The jury brought in a verdict that they considered 
 3 per cent, an adequate allowance. The building in question 
 was a New York apartment house. 
 
 Depreciation is allowed only on the cost of buildings and im- 
 provements, not on the land. For depreciation and other pur- 
 poses, buildings and land should be carried in separate accounts 
 in the ledger. If the separate cost of buildings, as apart from 
 the land, is not ascertainable, then the separate value of im- 
 provements, as shown by the real estate tax assessments, may be 
 used, or, the value of buildings and improvements may be es- 
 timated as at March i, 1913, if then in existence, "provided that 
 the value placed upon such buildings shall not be in excess of 
 the cost of such buildings, less an amount measuring the de- 
 preciation which had previously been sustained." (T. D. 2137.) 
 
 To measure the fairness of the amount on which depreciation 
 has been deducted on buildings, in returns of net income, Inter- 
 nal Revenue Inspectors have made comparison with the amount 
 of fire insurance carried thereon. But that, for obvious reasons, 
 is not a fair comparison. 
 
 The question of rate of depreciation must always be determined 
 upon the conditions governing each particular case. The rate on 
 brick buildings varies from i> to 5 per cent, per annum, accord- 
 ing to construction and use to which buildings are put. A factory 
 building, wherein manufacturing of heavy machinery is carried 
 on, may suffer a larger depreciation than 5 per cent, per annum. 
 
 It is reasonable to assume that frame buildings are subject 
 to a larger rate of depreciation than brick or concrete buildings, 
 because of having a shorter period of usefulness. The rates 
 on frame buildings will vary from i l /2 to 7> per cent., according 
 to construction and uses, and may run higher hi some cases. 
 
 In estimating the life of a building for the purpose of deter- 
 mining upon a rate of depreciation, it must be assumed that 
 the property is maintained in proper repair. The Building 
 cost of repairs and expenses of upkeep are deductible Repairs. 
 items in a return of net income. 
 
l8o INCOME TAX LAW AND ACCOUNTING 
 
 Additions to buildings or any expenditure that constitutes 
 Additions. an increase in the investment therein, such as per- 
 Better- manent improvements and betterments, are not 
 ment s- deductible. 
 
 A person or corporation holding premises as lessee, for a term 
 Additions of vears > requiring the tenant by terms of the lease to 
 to Leased make all repairs and improvements, if any, has the 
 Property, right to deduct the improvements as well as repairs 
 from his or its gross income. Such improvements should be 
 prorated over the period of the lease. The repairs, however, 
 may be deducted as current expenses. 
 
 The cost of buildings erected by tenants on leased ground, 
 which, upon expiration of the lease, revert to the landlord, 
 Buildings mav ^ e prorated over the period of the lease and 
 Erected by deducted as an expense of doing business. The 
 Tenants. amount charged off (prorated) should be deducted 
 in the return of net income of a corporation as rent paid. 
 
 Ordinarily business concerns capitalize amounts paid for 
 furniture, fixtures and office equipment; that is to say, they 
 Furniture establish a Furniture and Fixture Account in the 
 and ledger and charge purchases of that class of assets 
 
 Fixtures. to Suc j 1 accoun t. This class of property depreciates 
 from 5 to 25 per cent, per annum; 10 per cent, is the usual charge 
 where renewals are added to the account. 
 
 An uncommon practice is to charge off the entire cost of re- 
 newals of furniture and office equipment as a cost of doing busi- 
 ness. This method, in the case of Mutual Benefit Life Insurance 
 Company v. Herold (198 Fed. 199), was approved. It was there 
 held that "Renewals of office furniture and equipment" were 
 "expense of maintenance" deductible in the ascertainment of 
 net income. As this decision deals only with "renewals" of 
 such equipment it would not apply to the first cost. 
 
 Furniture, fixtures and office equipment should be carried in a 
 separate ledger account from office supplies. Office equipment 
 represents a fixed asset, whereas office supplies is an expense 
 account. 
 
 Depreciation on a dwelling (residence) occupied by the owner 
 
 Dwellin himself is not deductible; on dwellings that are 
 
 held for investment, however, by both individuals 
 
DEPRECIATION l8l 
 
 and corporations, a reasonable charge for depreciation is al- 
 lowed. 
 
 "Reasonable allowance for the wear and tear of property 
 arising from its use for rental purposes may be claimed as a 
 deduction, but no claim for depreciation should be made on 
 account of any amount of expense of restoring property or mak- 
 ing good the exhaustion thereof for which a deduction is claimed 
 elsewhere in the return." (Letter by Commissioner of Internal 
 Revenue to the Corporation Trust Co., February 26, 1916.) 
 
 Depreciation on farm buildings, other than those occupied 
 by the owner himself, may be deducted from in- Farm 
 come. (T. D. 2090.) Buildings. 
 
 A reasonable allowance for depletion of mines, 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 Depletion 
 return and computation are made, will be allowed. of Mines. 
 When the allowance authorized shall equal the capital originally 
 invested or in case of purchase made prior to March i, 1913, the 
 fair market value as of that date, no further allowance for deple- 
 tion shall be made. 
 
 Corporations operating mines (including oil or gas wells) 
 upon a royalty basis only cannot claim deprecia- Leased 
 tion because of the exhaustion of the deposit. Mines on 
 (Art. 145, Reg. 33.) Royalty. 
 
 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 Depletion, 
 regular flow. As in the case of mines, when the Oil and 
 allowance authorized for depletion shall equal the Gas WeUs - 
 capital originally invested, or in case of purchase made prior to 
 March i, 1913, the fair market value as of that date, -then no 
 further allowance shall be made. 
 
 Corporations leasing oil or gas territory shall base their 
 depletion deduction upon the cost of the lease, Leased Oil 
 and not upon the estimated value, in place of and Gas 
 the oil or gas. (Art. 144, Reg. 33.) Territory. 
 
 The rate of depreciation on timber lands should be such as 
 
1 82 INCOME TAX LAW AND ACCOUNTING 
 
 to return to the owner, when the timber has been exhausted, 
 Timber the capital originally invested therein, except if 
 Lands. the property was acquired prior to March i, 1913, 
 the fair market value as of that date. 
 
 There are so many different classes and kinds of machinery 
 that it would be well-nigh impossible to fix a rate of depreciation 
 Machiner l ^ at wou ^ uniformly apply to all classes. L. R. 
 Dicksee, an English accountant of recognized ability, 
 in his work on "Depreciation, Reserves and Reserve Funds," 
 has suggested annual rates of depreciation on machinery, based 
 on diminishing values, as follows: 
 
 General machinery 7^ to 10 per cent. 
 
 Special machinery 10 to 25 per cent. 
 
 To facilitate the computing of depreciation on a variety of 
 classes of machinery, it is advantageous to classify them ac- 
 cording to expected life, and then to compute the depreciation on 
 each class accordingly. 
 
 The scrap or residual value of machinery should be taken into 
 consideration in arriving at rates of depreciation. 
 
 There is a diversity of opinion as to the rate of depreciation 
 Boilers, to which engines and boilers are subject. Dicksee 
 Engines. suggests annual rates, on a diminishing value, as 
 follows: 
 
 Engines (in general) 10 to 12^ per cent. 
 
 Boilers 12^ to 20 per cent. 
 
 George M. Craven, whose tables of depreciation have been 
 adopted by commissions passing upon rate cases, and who errs 
 on the conservative rather than the liberal side, based on cost 
 (not diminishing value) per annum, suggests the following rates: 
 
 Steam engines 3 to 6.6 per cent. 
 
 Boilers 3 . 5 to 10 per cent. 
 
 Composite opinions, however, are that engines and boilers, if 
 maintained in a proper state of repair, which necessarily must be 
 assumed, should last, in the absence of unfavorable conditions, 
 about ten years, and would be subject to an average depreciation 
 
 x The Internal Revenue Bureau has stated (not by Treasury Decision) 
 that "the estimated lifetime of ordinary machinery is ten years." The 
 taxpayer is not bound by this estimate. 
 
DEPRECIATION 183 
 
 of 10 per cent, per annum. If unfavorable conditions prevail, 
 they would naturally be replaced oftener and the rate of de- 
 preciation would be proportionately higher. 
 
 Article 131 of Treasury Department Regulations No. 33 
 states that " Incidental repairs which neither add to R 
 the value of the property nor appreciably prolong its 
 life, but keep it in an operating condition, may be deducted as 
 expenses." Notwithstanding the apparent clearness Replace- 
 of this regulation, there have been many contro- nwnts. 
 versies between Collectors of Internal Revenue and taxpayers 
 as to what constitutes "incidental repairs." Rulings on the 
 subject have recommended the establishment of reserves for 
 depreciation and directed that to such reserve accounts should 
 be charged " the cost of renewing or replacing the property with 
 respect to which the depreciation is claimed." But it is not in- 
 tended that " incidental repairs" that merely "keep it in operat- 
 ing condition" shall be so charged, because, under the above 
 regulation, such expenses are separately deductible from income. 
 
 The main object and purpose of charging off depreciation 
 is not to provide a fund out of which to make repairs, but in 
 the case of a machine, for example, to provide for the replace- 
 ment of such machine when it has served its usefulness. 
 
 The income tax law contemplates more than a mere renewal 
 and repair reserve because it specifically permits the deduction 
 of "All the ordinary and necessary expenses paid within the 
 year in the maintenance and operation of its business and 
 properties . . . ," as well as "a reasonable allowance for the 
 exhaustion, wear and tear of property arising out of its em- 
 ployment in the business or trade." These are separate and 
 distinct provisions, first for necessary expenses, which must 
 include repairs, and, second, for depreciation. 
 
 It may be true in respect to a machine, or any other prop- 
 erty, which is periodically wholly rebuilt, that the depreciation 
 is very small, but that it suffers some degree of depreciation 
 is axiomatic. Whether, however, the cost of such renewals 
 should be charged to the reserve for depreciation or to an ex- 
 pense account, should depend upon the adequacy of the rate 
 of depreciation charged off. Hence, in fixing upon rates of 
 depreciation it should be predetermined whether renewals will be 
 
184 INCOME TAX LAW AND ACCOUNTING 
 
 charged against the reserve for depreciation or to an expense ac- 
 count. Regardless of which method is adopted the accumulation 
 of depreciation reserved should be such an amount as will equal 
 the cost of the property upon the termination of its usefulness. 
 
 Shafting, based upon a diminishing value, has been esti- 
 Shafti mated to suffer depreciation at the rate of 5 to 7^ 
 per cent, per annum. 
 
 Small tools should be charged to a separate account in the 
 ledger. Physical inventories should be taken periodically and 
 the account written down to the amount of such 
 inventory. The difference between the book value 
 and the physical inventory value should be charged to deprecia- 
 tion, and in the course of tune it should be possible to determine 
 upon an average rate of depreciation that will answer all practical 
 purposes. Such average rate should, however, from time to time, 
 be verified by physical inventories. This principle may be ap- 
 plied to all items that are being constantly used up and replaced. 
 
 Inasmuch as the rates of depreciation suggested by Craven 
 Miscel- have been adopted by various industrial concerns 
 EioiiS^ 8 anc ^ comm i ss i ns > they are worthy of consideration, 
 ment. They are, however, by many, considered too low 
 
 and are stated here only as suggestive of the most conservative 
 annual rates: 
 
 Shop Equipment 3 to 15 per cent. 
 
 Motors 4 to 10 per cent. 
 
 Storage Batteries 5 to n per cent. 
 
 Belted Generators 3 . 3 to 10 per cent. 
 
 Switchboards, etc 2 to 10 per cent. 
 
 Wires and Cables 2 to 6.6 per cent. 
 
 Steam Piping 3 . 5 to 10 per cent. 
 
 Steam Turbines 5 to 9 per cent. 
 
 Auxiliaries 5 to 10 per cent. 
 
 Laundry The equipment of laundries is, ordinarily, sub- 
 
 Equip- ject to an annual depreciation of from 7^ to 15 
 ment. per cent Q f ^ cost 
 
 Patterns are made of so large a variety of materials and 
 used so differently, that each case will have to be decided ac- 
 cording to the particular requirements. Patterns that are con- 
 
DEPRECIATION 185 
 
 tinuously used and must be replaced often may properly be 
 charged off at once as a cost of production. Special p attera 
 patterns should always be charged direct to the job 
 for which they were made. 
 
 Dicksee suggests annual rates, based on diminishing values, 
 of 25 to 33 x / 3 per cent. 
 
 But there can be no obligation on the part of the manufac- 
 turer to capitalize any expenditure unless it is unquestionably 
 a capital expense. 
 
 Accountancy maintains (some accountants to the contrary 
 notwithstanding) that where there is a reasonable doubt as 
 to whether an expenditure is a capital or expense item, it should 
 be charged against revenue. That precludes questionable 
 items entering a balance sheet, and indicates a business policy 
 with which no law should be at variance. 
 
 Patents are issued in the United States for a period of seven- 
 teen years. It is customary for manufacturing corporations, 
 operating under patent rights, to capitalize all direct p 
 expenses in connection with obtaining patents either 
 by their own application to the Patent Office or by purchase. 
 
 In case the corporation itself procures the patent, it has the 
 right to deduct depreciation annually at the rate of 1/17 of 
 the total cost, including experimental work, cost of models 
 and drawings, fees of the Patent Office, legal expenses, and 
 all direct charges in connection therewith. 
 
 If the patent is purchased by the corporation, then the de- 
 preciation would be based on the cost thereof and the rate would 
 be fixed according to the length of time that the patent had still 
 to run; for instance, a patent purchased for $10,000, that had 
 been issued seven years prior to its purchase, having a remaining 
 life of ten years, would be subject to an annual depreciation 
 of 10 per cent, of the cost, amounting to $1,000. This amount 
 would be a competent annual charge against gross income. 
 
 The principles stated with respect to patents are true also 
 as to copyrights, except that copyrights are issued for the 
 period of twenty-eight years. A more conservative method, 
 in the case of copyrights, however, is to estimate - . . t 
 the period of salability of the subject of copy- 
 right and prorate the amount to be charged off accordingly. 
 
1 86 INCOME TAX LAW AND ACCOUNTING 
 
 Automobile trucks deteriorate according to the severity of 
 the use to which they are subjected. The life of a motor, used 
 Auto for trucking purposes, receiving reasonable care 
 
 Trucks. 1 an d properly maintained, may be estimated to be 
 from three to six years. As with other property, the rate of 
 depreciation is fixed according to its life. The life of an auto 
 truck is such a length of time as it remains fit for the purpose 
 for which it was acquired. 1 
 
 The annual rate applicable to auto trucks will vary from 15 to 
 50 per cent. Based on a replacement value, the heaviest depre- 
 ciation occurs during the first year, and it is not uncommon 
 to write off as much as 50 per cent, of the cost during that time. 
 Thereafter the rate would not exceed 25 per cent, per annum. 
 
 The most accurate and conservative method is to appraise 
 motor trucks at the end of each year and to write off the shrink- 
 age in value during the year for which the return of net income 
 is computed. This method, being based on actual facts, can- 
 not be objectionable for income tax purposes. 
 
 All costs of repairs, replacements or parts, tires, overhauling, 
 painting, supplies, gas, oil, licenses and insurance, in connec- 
 tion with auto trucks are deductible expenses in the return of 
 net income. 
 
 Depreciation on horses varies so widely that each concern 
 H should work out its own table of experience for 
 
 depreciation purposes. Rather than to guess at 
 an arbitrary rate of depreciation, it is advisable to revalue 
 Stable horses at the end of each fiscal period. The loss 
 Equipment. j n value during the tax year may then be deducted 
 as depreciation, and, in the course of time, it will be possible 
 to formulate, fairly accurately, the rate of depreciation to which 
 horses, in the particular business, are subject. It may be said 
 that, ordinarily, the rate of depreciation on horses will vary 
 from 15 to 25 per cent, of their cost. 
 
 Stable equipment usually suffers a depreciation of from 7^ 
 to 15 per cent, per annum. 
 
 Depreciation of good will is not allowed, because it is an 
 
 1 The Internal Revenue Bureau has stated that it is estimated that the 
 life of automobiles used for business or farm purposes and farm tractors is 
 four to five years. Taxpayers are not bound by this estimate. 
 
DEPRECIATION 187 
 
 intangible asset that cannot suffer loss by reason of "wear 
 and tear. " From an accounting point of view, the _- WiU 
 practice of "writing down" the book value of good 
 will is not an unusual one in periods of prosperity. Its purpose 
 is, primarily, to reduce the book assets to tangible properties 
 and thereby give the balance sheet a healthier appearance. 
 The practice, although commendable, and perhaps a sign of 
 conservative management, does not permit of a deduction in 
 the income tax return. As a matter of bookkeeping, such a 
 charge would be a reduction of Surplus Account and not of 
 Profit and Loss Account for any particular period of time. 
 
 No rule for charging off good will can be laid down, because 
 in a flourishing business, the good will is of proportionate value 
 and should not, in theory, be reduced; whereas, in periods when 
 no profits are being earned, the value of good will diminishes, 
 but then there is no profit out of which to reduce the Good Will 
 Account. Hence, at best, the reduction of good will is a purely 
 arbitrary matter that bears no relation to an income tax return. 1 
 
 Stocks and bonds fluctuate in value. A downward fluctua- 
 tion, if permanent, may be said to be depreciation, Invest- 
 but such is not deductible for income tax purposes. 2 ments. 
 Losses to become deductible must be actually sustained by 
 completed and closed transactions. A mere reduc- Stocks and 
 tion hi book value by direction of a board of direc- Bonds, 
 tors, or even an order by the State or Federal Banking De- 
 partment, to reduce or write off securities, does not establish 
 a loss that constitutes a deduction from taxable income. "Losses 
 of this character are only ascertainable when the securities 
 mature, are disposed of, or canceled." (T. D. 2152.) 
 
 No arbitrary reduction of capital assets on the books of a 
 corporation or individual shall justify a deduction from income 
 for tax purposes. Conversely, the appreciating or " writing 
 up," of capital assets to conform, for instance, with appraisal 
 values, does not make such increase taxable as income. (Bald- 
 win Locomotive Works v. McCoach, 221 Fed. 59.) There must 
 be an actual realization of the enhanced value by a sale for 
 
 1 As to valuation of good will for invested capital, see p. 138. 
 * A dealer in securities may inventory the same at cost or at cost or market 
 price, whichever is the lower. (T. D. 2609.) 
 
1 88 INCOME TAX LAW AND ACCOUNTING 
 
 cash, or its equivalent, in order to make the increase taxable 
 as income. 
 
 Theatrical costumes may be depreciated. The rate should 
 be based on the life of garment or time allowed for production 
 Theatrical of play, whichever is the shorter. Wearing apparel, 
 Costumes, serving both the purpose of personal and theatrical 
 use, may not be depreciated for the purpose of income tax. 
 Trade- Neither trade-marks nor brands, acquired by 
 
 marks. purchase or otherwise, are subject to depreciation, 
 and no allowance for income tax purposes will be 
 made thereon. 
 
 In the case of resale of trademarks or brands, a loss actually 
 sustained would be deductible, as a capital loss. A profit, on 
 the other hand, would be returnable as income. 
 
 If the trade-mark or brand was acquired prior to March 1,1913, 
 then the profit or loss in the sale thereof would be computed 
 on the basis of the fair market value as of that date and not on 
 the basis of cost. This applies to the sale of all capital assets ac- 
 quired prior to the incidence of the income tax law, March 1,1913. 
 
 The cost of registering trade-marks and brands, being nominal, 
 should be included in the expense of doing business. Should 
 such an item be capitalized it would not be deductible as an 
 expense in a subsequent year. 
 
 By rulings of the Treasury Department no allowance for 
 depreciation is permitted on inventories of stock on hand. 1 
 Stock on It has been held " that depreciation will not be 
 Hand. allowed in the return or inventory, on merchandise, 
 as the same will be reflected in the income in the year of its 
 disposal." Also, as directed in the supplementary statement of 
 the return, " In case the annual gain or loss is determined by in- 
 ventory, merchandise must be inventoried at the cost price . . ." 
 This is based upon the theory that no actual loss is sustained 
 until the goods are sold. 
 
 These rulings are contrary to the well-settled principles of ac- 
 counting, that when the market value of merchandise is less than 
 the cost, the market value should prevail for inventory purposes. 
 
 1 By more recent ruling (T. D. 2609, Dec. 19, 1917) inventories may now 
 be computed at cost or at cost or market price, whichever is the lower. See 
 page 167. 
 
DEPRECIATION 189 
 
 A merchant who commits an error of judgment in buying 
 merchandise should be permitted to apportion his loss over 
 the periods during which he is obliged to carry the unsalable 
 goods in stock. In some lines of business the ruling will work 
 a hardship. Publishers, for example, who must carry slow 
 selling stock from year to year, a large part of which eventually 
 proves unsalable, will be piling up inflated and exaggerated in- 
 ventories of stock on hand, if computed at cost. No law should 
 encourage the overstatement of values of assets because such 
 overstatement affects the rights of creditors who rely on the 
 representations of financial statements as a credit basis. Be- 
 sides, under State laws, the overstatement of assets is pun- 
 ishable as a mispresentation of facts. Nor is the ruling that 
 inventories must be computed at cost consistent with conserva- 
 tive business methods. 
 
 It is noteworthy that the Federal Trade Commission in a 
 pamphlet issued on July i$th, 1916, entitled "A System of 
 Accounts for Retail Merchants" for the purpose of " Aiding 
 retail merchants to improve their accounting methods" on the 
 subject of depreciation, states: "No merchant can be said to be 
 managing his business properly unless adequate provision is 
 made for depreciation." As to depreciation on merchandise, 
 under the title of "Profit and Loss Account" it says: " A physical 
 inventory should be taken at least once a year. The basis should 
 be cost with conservative deduction for obsolete and shelf- 
 worn goods." A perusal of the proforma Profit and Loss Ac- 
 count, contained on page 18 of the pamphlet, discloses a deduc- 
 tion from inventory designated "Less Stock Depreciation" of 
 an amount equal to 5 per cent, of the inventory which con- 
 cededly was based on cost. 
 
 The only danger that the depreciation of inventories would 
 involve in connection with income tax returns, is the possible 
 manipulation of merchandise values. As in the case of deprecia- 
 tion of capital assets, fixed rates could not be prescribed to 
 cover all cases, but manipulation of inventories for the purpose of 
 showing a smaller gross income than was actually earned could 
 be prevented by requiring detailed information as to how the 
 inventory was computed, rate of depreciation deducted, etc. 
 
 Until there has been a court adjudication upon the prescribed 
 
1 90 INCOME TAX LAW AND ACCOUNTING 
 
 ruling of computing inventories, stock on hand should be valued 
 at cost. In cases where the inventory, taken at cost, results in an 
 inflated or overstated "net income," it is recommended that the 
 individual or company aggrieved place all the facts of his or its 
 case in writing before the Commissioner of Internal Revenue, 
 Washington, D. C., or the collector of his or its district, and ask 
 for a special ruling thereon. 1 
 
 Many machine shops and factories engaged in manufacturing 
 various classes of war materials have, during recent months, 
 Munitions increased their capital and enlarged their plants for 
 War Ma- ^ e P 111 ? 036 f extending their output. Some of 
 terials. these concerns have not only borrowed capital but 
 have reinvested their current profits in additions and improve- 
 ments without regard to their forthcoming obligations to the 
 Government by reason of war income and excess profits taxes 
 and without serious consideration of the questionable usefulness 
 of their additions and improvements at the close of the present 
 exceptional activities. This is a matter of which the Govern- 
 ment might well take due notice with the view of fairly compen- 
 sating those who have committed themselves by obligations, the 
 payment of which, in some cases, will leave them with but an over 
 extended plant for which there may be little or no future need. 
 
 In Great Britain liberal provision has been made by Regula- 
 tions under the Munitions of War Acts for extra allowances for 
 depreciation, the return of capital expenditures incurred par- 
 ticularly for munitions purposes, increased salaries of manage- 
 ment, and other important matters. 
 
 The following are copies of Regulations issued under the 
 Munitions of War Acts of Great Britain, as contained in " Excess 
 Profits Duty" by Mr. W. E. Snelling (London, 1916): 
 
 In determining the net profits for any period of assess- 
 ment, due consideration shall be given to, and any appro- 
 priate adjustments may be made in respect of all or any of 
 the following matters, that is to say 
 
 (a) Exceptional wear and tear of plant, buildings and 
 machinery; 
 
 (b) Capital expenditure specially incurred for the pur- 
 pose of munitions work; 
 
 1 See new ruling on this subject, page 167. 
 
DEPRECIATION 1 9! 
 
 (c) The probable value to the controlled owner at the 
 end of the period of control of any plant, buildings or ma- 
 chinery erected or installed or other expenditure incurred 
 for munitions work, since the 4th of August, 1914; 
 
 (d) Special provisions or terms of any contracts entered 
 into between the Government and the controlled owner; 
 
 (e) Any exceptional services rendered by the controlled 
 owner in connection with the controlled establishment; 
 
 (f) Any increase in salaries or other emoluments of any 
 persons engaged in the management or direction of the 
 controlled establishment made since the end of the standard 
 period, or any steps taken since the end of that period which 
 might operate to decrease net profits; 
 
 (g) Generally any other matter which may appear to 
 the Minister, or to the Referee, as the case may be, material 
 to be taken into account. 
 
 Any such adjustments may be made either by additions 
 to or deductions from the standard amount of profits or by 
 way of charges or disallowance of charges against profits for 
 the period of assessment. (Regulation 9.) 
 
 In ascertaining or determining net profits for the final 
 period of assessment proper adjustments may be made in 
 respect of the whole period of control in regard to any mat- 
 ters referred to in Rule 9, so far as it may then be shown 
 that sufficient adjustments have not been made in re- 
 gard thereto in ascertaining or determining net profits for 
 any previous period or periods of assessment. (Regula- 
 tion 12.) 
 
 The question of exceptional wear and tear of machinery and 
 plant sustained by reason of operating them, double or treble 
 the regular working time, is one upon which special rulings 
 should be obtained from the Commissioner of Internal Revenue, 
 Washington, D. C. 
 
 It seems only reasonable, also, that the Government should 
 devise some means of amortizing the capital invested in under- 
 takings where the plants, especially constructed to meet imme- 
 diate needs, will have served their usefulness at the close of the 
 present demands for them. These are matters about which the 
 Commissioner of Internal Revenue should be addressed direct, 
 and the suggestion is made with confidence that such requests 
 will receive the consideration they merit. 
 
IQ2 INCOME TAX LAW AND ACCOUNTING 
 
 As already indicated, rulings hold that rates of depreciation 
 
 should be computed upon the estimated life of property. It is 
 
 a question whether that method, applied to all 
 
 classes of property, is based upon sound reasoning. 
 
 In the case of ships, for example, the rate would, more accurately, 
 
 be computed upon the estimated period of service than upon 
 
 the duration of life. 
 
 Rates of depreciation of ships range from 3 to 10 per cent., 
 according to construction. 
 
 The English practice, as stated by Mr. William Sanders 1 
 is as follows: 
 
 "Allowances in respect of ships have, however, been prima 
 facie fixed as follows by the Revenue: 
 
 "Steamers 4 per cent, on prime cost. 
 
 "Sailing ships 3 per cent, on prime cost." 
 
 He defines the prime cost as follows: 
 
 "Prime cost is the original cost price, plus subsequent capital 
 expenditure, and the allowance is not to exceed the total prime 
 cost less the breaking up value of 4 per cent, for steamers and 
 3 per cent, for sailing vessels." 
 
 Quoting, also, from a specific case 2 mentioned by Mr. Sanders: 
 
 "The Commissioners, however, arrived at twenty-eight 
 years as being the duration of life of a passenger steamer, 
 and allowed 6 per cent, depreciation on the diminishing 
 value." 
 
 Mr. Sanders' work 3 on the English Income Tax contains a 
 very comprehensive table of rates of depreciation, applicable 
 to various industries, which rates have been granted by the Dis- 
 trict Commissioners in the districts mentioned, as follows: 
 
 1 "The Practice and Law of Income Tax and Super Tax" (1916). 
 
 2 P. and O. Steam Navigation Co. v. Leslie (1900), C. A. (82 L. T. 137; 
 4 Tax. Cas. 177). 
 
 8 "The Practice and Law of Income Tax and Super Tax" (1916) by Wil- 
 liam Sanders. 
 
DEPRECIATION 
 
 193 
 
 Nature of industry Rate per cent, 
 
 and district of allowance 
 
 Boot trade Leicester 7# 
 
 Brewers Cardiff 5 
 
 Collieries Cardiff 5 
 Coal exporting plant 
 
 Cardiff 5 
 Dyers and trimmers 
 
 Leicester 7# 
 
 do 10 
 
 Engineers Leicester ^}4 
 
 Cardiff 5 
 
 Hosiery Leicester 7> 
 
 Nottingham 5 
 
 Lace making Nottingham 5 
 
 do 7 
 Looms and spinning machines 
 
 Huddersfield 5 
 
 do l 
 
 Oldham 5 
 
 do 7} 
 Newspaper and printing 
 
 Dundee 10 
 
 Glasgow 6 
 
 do 6 
 
 do 7J 
 
 Nottingham 
 
 Cardiff 
 
 Cardiff 
 
 do 15 
 
 Remarks 
 
 On full value 
 
 On written-down value 
 
 On written-down value 
 
 On written-down value 
 
 On full value 
 
 If justified on inquiry 
 
 On full value 
 
 On written-down value 
 
 On full value and higher 
 rate if justified on in- 
 quiry 
 
 On fixed machinery 
 
 On full value 
 
 On written-down value 
 
 On motive plant 
 
 On spinning, dyeing, 
 
 carding, and finishing 
 
 machinery 
 On engines, boilers and 
 
 gearing 
 On spuming machines 
 
 On printing machinery 
 running double shifts 
 
 On ruling and book- 
 binding machines 
 
 On tvpe, linotype ma- 
 chines, etc. 
 
 To include renewal of 
 type not charged to 
 Revenue 
 
 On written-down value 
 
 On written-down value 
 
 On written-down value 
 for newspaper printing 
 machines 
 
 On type 
 
194 
 
 INCOME TAX LAW AND ACCOUNTING 
 
 Nature of industry 
 and district 
 
 Sewing machines Glasgow 
 Nottingham 
 
 Ship repairing and ship- 
 building plant Cardiff 
 
 Spinning machinery and 
 woolcombs Bradford 
 
 Rate per cent, 
 of allowance 
 
 10 
 10 
 
 Tramways Glasgow 
 
 Weaving Bradford 
 Blackburn 
 
 do 
 Huddersneld 
 
 do 
 
 Remarks 
 
 On machines used in 
 clothing factories. 
 
 Replacements all charged 
 to capital. 
 
 On written-down value 
 
 On written-down value 
 when machinery run- 
 ning day and night. 
 Allowance reduced 
 when heavy amount 
 charged for repairs and 
 renewals 
 
 Average over all per cent. 
 
 Ducts 3 
 
 Cables 3 
 
 Poles and rosettes 2 
 Section boxes 3 
 
 Telephones 5 
 
 Depot fittings 2 
 
 Electric power plant 5 
 Sub-stations plant 5 
 Car works 
 
 machinery 7^ 
 
 Permanent way 
 
 plant 1*6 
 
 Rolling stock 5 
 
 Punches 7> 
 
 Furniture 5 
 
 5 On looms 
 
 5 On fixed boilers, engines, 
 
 and fixed machinery 
 7> On loose machinery, etc. 
 
 7# On spinning, weaving, 
 
 carding, finishing and 
 condensing machinery 
 5 On motive plant, shaft- 
 
 ing, etc. 
 "On full value" would, ordinarily, be equivalent to the cost. 
 
DEPRECIATION 1 95 
 
 "On written-down value" refers to the diminishing value. 
 (See page 175.) 
 
 Like all rates of depreciation stated herein, those contained 
 in the foregoing table are suggestive only. They are particularly 
 valuable, however, in that they are drawn from actual Income 
 Tax experience. 
 
 Where it is found that an excessive rate of depreciation was 
 Adjusting deducted in past years, amended returns may be 
 Excess De- filed for such years and the additional tax will be 
 preciation. assess ed without penalty. 
 
 "This office is in receipt of your letter of the 8th instant, 
 in which you state that a corporation in its returns for the 
 years 1911, 1912 and 1913 claimed depreciation of i2>% 
 on the value of its machinery; that in 1917 an income tax 
 inspector examined the books and recommended that de- 
 preciation at the rate of 5% be allowed and as a result, 
 additional taxes were assessed against the corporation for 
 the years 1911, 1912 and 1913, based upon the increase 
 in net income resulting from the reduction of depreciation 
 from i2>2 to 5%; and that another corporation engaged in 
 the same line of business and using the same kind of ma- 
 chinery charged off 12^% for depreciation on the same, 
 but the books of this corporation were never examined and 
 you ask what penalty, if any, the latter company will be 
 required to pay for the years 1911, 1912 and 1913 if it 
 now makes a claim that its calculations for such years were 
 based on an excessive rate of depreciation. 
 
 In reply, you are informed that no penalty will attach to 
 the corporation if it files amended returns reducing its 
 depreciation deduction from i2> to 5% on its machinery. 
 The amended returns should be prepared and filed with the 
 Collector of Internal Revenue for its district with a letter 
 of transmittal, stating the reason the amended returns 
 were filed. The Collector will then notify this office and 
 an additional tax of i% will be assessed against the cor- 
 poration due to the increase in its net income on account 
 of the reduction of its depreciation deduction from i2> 
 to 5%." (Extract from letter to the First National Bank, 
 Cleveland, Ohio, by Deputy Commissioner L. F. Speer, 
 dated Nov. 16, 1917, published in the Income Tax Service 
 of the Corporation Trust Co.) 
 
CHAPTER VII 
 
 BOOKKEEPING SUGGESTIONS 
 PREPARATION OF INCOME TAX RETURNS OF CORPORATIONS 
 
 amen d e d l aw contains a provision in regard 
 to the keeping of accounts, as follows: 
 
 "A corporation, joint-stock company or association, or 
 insurance company, keeping accounts upon any basis 
 other than that of actual receipts and disbursements, un- 
 less such other basis does not clearly reflect its income, may, 
 subject to regulations made by the Commissioner of Inter- 
 nal Revenue, with the approval of the Secretary of the 
 Treasury, make its return upon the basis upon which its 
 accounts are kept, in which case the tax shall be computed 
 upon its income as so returned." 
 
 The same provision is made with respect to the accounts of 
 individuals. 
 
 This permits the individual or corporation, that employs a 
 method of bookkeeping from which a return cannot be pre- 
 pared in the prescribed form, to render the report according to 
 the method of bookkeeping employed, provided only that the 
 books from which the return is made reflect the correct income. 
 The return, however, must, in every case, be made on the 
 blank provided by the Government, with full and complete 
 explanations as to the method employed. 
 
 The dominant and foremost requisite in the preparation of 
 income tax returns is To REPORT THE FACTS. The method 
 employed to arrive at the facts is of considerable importance, 
 but secondary. A variance from the prescribed classification 
 of income and expenses may be unavoidable; a deliberate dis- 
 regard of the facts, by either omission or declaration, is tanta- 
 mount to misrepresentation. 
 
 The income and expenses should be classified as prescribed 
 
BOOKKEEPING SUGGESTIONS 197 
 
 by the return unless the nature of the business is such that it 
 does not permit of such classification or unless the books of 
 account are kept hi conformity with regulations of some de- 
 partment of the Government requiring the keeping of books 
 according to "uniform systems of accounting," as in the case 
 of corporations coming under the Interstate Commerce Com- 
 mission. 
 
 The books must be so kept that each and every item set 
 forth in the return of annual net income may be reach'ly verified 
 by an examination of the books of account. 
 
 "The books of a corporation are assumed to reflect the 
 facts as to its earnings, income, etc. Hence they will be 
 taken as the best guide in determining the net in- Books of 
 come upon which the tax imposed by this act is Account 
 calculated. Except as the same may be modified Best Guide 
 by the provisions of the law, wherein certain de- to ^c 01116 - 
 ductions are limited, the net income disclosed by the books 
 and verified by the annual balance sheet, or the annual re- 
 port to stockholders, should be the same as that returned 
 for taxation." (Regulations 33, Article 183.) 
 
 "For the purpose of verifying any return, made pur- 
 suant to this act, the Commissioner of Internal Revenue 
 may, by any duly authorized revenue agent or Examina- 
 deputy collector, cause the books of such corpo- t* 011 of 
 ration to be examined, and if such examination 2jg^J y 
 discloses that the corporation is liable to tax in Revenue 
 addition to that previously assessed, or assess- Officers, 
 able, the same shall be assessed and shall be payable imme- 
 diately upon notice and demand. For the purpose of such 
 examination, the books of corporations shall be open to the 
 examining officer, or shall be produced for this purpose upon 
 summons issued by any properly authorized officer." (Reg- 
 ulations 33, Article 186.) 
 
 Although there has been no ruling upon specific methods 
 of accounting under the present income tax law, 
 it is clear that corporations or individuals keeping 
 accounts upon the plan of accruing income and expenses or 
 deferring prepayments, may prepare their returns Prepay- 
 accordingly. From an accounting viewpoint this ments. 
 is the only correct method whereby the true profit or loss of 
 
1 98 INCOME TAX LAW AND ACCOUNTING 
 
 a business may be deduced. But the method, if employed, 
 must be used consistently and with limitation. In no case 
 shall an expense account for a tax year or fiscal year be charged 
 with a greater amount than is actually incurred or accrued 
 therein and for which the business has received value in such 
 fiscal or tax year; that is to say, no deduction shall be made 
 of an amount in excess of that actually chargeable against the 
 operations of the year (fiscal or calendar) for which the return 
 is made. Prepayments may be deferred, that is, such part of 
 expenses as are prepaid may be deducted from expenses and 
 treated as "deferred assets" or "prepayments" in the balance 
 sheet. 
 
 The accounts most commonly accrued or deferred are in- 
 terest, taxes, insurance, rents, salaries, commissions and in- 
 come taxes withheld, but the principle is applicable to all classes 
 of income and expenses. 
 
 No accruals shall be deducted from income unless they ap- 
 pear upon the books of account and represent expenses ac- 
 tually incurred or accrued during the year. 
 
 Wherever the expressions "actually paid" or "paid during 
 the year" appear herein, when applied to individuals or cor- 
 porations keeping their accounts upon the "accrual basis," 
 such accruals are comprehended therein. 
 
 Apart from facilitating the preparation of income tax re- 
 turns, bookkeeping suggestions would be out of place here. 
 Distribu- But a g reat deal of tune and work may be saved 
 tionof Ac- to the bookkeeper and to the executive who is re- 
 counts, sponsible for the contents of the report, by em- 
 ploying a method of bookkeeping that will, without analysis 
 of accounts, present to immediate view in a trial balance, the 
 component parts called for by the income tax return. This 
 can be accomplished only by a suitable distribution of accounts 
 of income and expenses, assets and liabilities. 
 
 Merchandise sales should be credited to a separate account 
 in the ledger. Where departmental accounts are kept, the 
 s . ledger should contain a separate sales account for 
 
 each department or each class of commodity. The 
 sales called for by the supplementary statement of the income 
 tax return under "Gross Income from Operations" should be 
 
BOOKKEEPING SUGGESTIONS 199 
 
 the net sales, i. e., gross sales (amounts charged to- customers) 
 less returns, allowances and discounts allowed on sales. 
 
 Goods returned by customers should be charged to a separate 
 account unless they are, in aggregate, so small a proportion 
 of the sales that a separate account would not be Return 
 justified. If no separate account is kept, the re- Sales, 
 turns should be charged to Sales Account. The advantage of 
 a separation which bears no relation to the preparation of a 
 tax report is that a monthly trial balance discloses, at a glance, 
 the proportion of returns to the volume of sales. 
 
 As stated under "Sales," goods returned by customers should, 
 for the income tax report, be deducted from amount shown 
 by Sales Account (Gross Sales). 
 
 Ordinary allowances on goods sold, such as claims by reason 
 of breakage, short shipment, overcharges, defective goods, etc., 
 should be charged to an Allowance Account and Allow- 
 deducted from sales for the income tax return, ances. 
 Exceptional allowances, such as unrecovered shipments lost 
 in transit, for which the shipper is responsible and cannot re- 
 cover from the transportation company, should be charged 
 to an account that by its title is descriptive of its contents, as 
 "Goods Lost in Transit," and should be so stated in the in- 
 come tax return. All losses, to be deductible from the income 
 tax return, must be charged off in the year the loss is sustained. 
 
 "Discounts allowed" on sales should be charged to an ac- 
 count bearing that title. "Discounts received" on Discounts 
 goods purchased should be credited to a separate Allowed, 
 account so entitled. For income tax purposes discounts allowed 
 to customers are a reduction of the gross sales, and Discounts 
 discounts received, as a trade allowance or for pre- Received, 
 payment of goods purchased, are a reduction of the cost of 
 goods bought. 
 
 Rebates on sales that are allowed by way of commissions, or 
 as a reward for selling certain quantities of commodities, should 
 be carried in a separate account in the ledger and R . 
 treated in the income tax return as a general expense 
 under "Deductions" and included in "Commissions" in the 
 supplementary statement under "General Expenses." 
 
 Merchandise purchased should be charged to a "Purchase 
 
200 INCOME TAX LAW AND ACCOUNTING 
 
 Account" in the ledger. As an income tax deduction in the 
 p . ascertainment of "Gross Income from Operations," 
 
 there should be added to the purchases all transpor- 
 tation charges paid or incurred thereon. There should be de- 
 ducted: returns, claims, discounts received and "anticipations" 
 received. 
 
 A manufacturing corporation employing a cost system that 
 is an integral part of the bookkeeping system, i. e., where such 
 system is comprehended in the general books of account and 
 included in the general ledger trial balance, may state as "Pur- 
 chases" the cost of manufactured goods, as derived from such 
 cost system. Mere cost memoranda, data, or books of account, 
 however, that are not subject to proof of correctness, are not 
 sufficiently reliable records from which to prepare income tax 
 returns. It is not necessary that the cost accounts should be 
 kept in the same binder or within the same cover as the general 
 ledger, but, in summary, the costs should be controlled by 
 general ledger accounts. For further discussion of this subject, 
 see "Manufacturing Corporations Operating Cost-systems," 
 page 216. 
 
 Where a cost-system does not answer the requirements of 
 proof as to accuracy of results the form of return (Form 1031, 
 Revised) should be adhered to. Corporations doing a mercantile 
 business (buying and selling raw materials or finished products, 
 manufactured by others) as well as a manufacturing business, 
 should conform to the classification contained in the return, 
 unless the separate departments are clearly differentiated in the 
 books of account. 
 
 Transportation charges on goods sold (freight out) should 
 Freight on be kept separate from those on goods purchased 
 Sales. (freight in). Freight on goods sold, for income tax 
 
 purposes, is an expense of doing business and should be included 
 Freight on in "General Expenses." Transportation charges 
 Purchases. on goods bought increases their cost and should be 
 added to the cost of purchases. Separate accounts in the ledger 
 should be kept of freight on sales and freight on purchases, to be 
 known, respectively, as " Freight Out " and " Freight In." Items 
 of expressage and cartage may respectively be charged or 
 credited to these accounts. In case where own trucks are used 
 
BOOKKEEPING SUGGESTIONS 2OI 
 
 the apportionment may be estimated based upon the cost of 
 stable or auto expenses, etc. 
 
 Stock on hand should be carried in a separate account in the 
 ledger under the title of "Inventory Account." Where freight 
 and other transportation charges have been added Inven- 
 to the purchases, the proportion added thereto tories. 
 should, technically, be included in the inventory. But this 
 would have to be approximated at best, and may, as an ex- 
 pediency, be disregarded except where it is a material item or 
 where the computation is rendered simple. 
 
 For income tax purposes, inventories should be computed at 
 cost and so stated in the supplementary statement of the return. 1 
 The deduction of depreciation from the cost of commodities 
 dealt in is prohibited. (See " Stock on Hand," page 188.) "No 
 part of the overhead expenses should be added to the inventory." 
 
 Care should be exercised to see that the amount of stock on 
 hand reported at the beginning of a tax year is the same amount 
 as that shown as on hand at the close of the preceding year. An 
 increase in the amount at the beginning of a year over that 
 stated at the close of the previous year would result in a decrease 
 in the gross income, which, in the absence of a clerical or tech- 
 nical error, might be prima facie evidence of fraud. 
 
 Rents received should be kept in a separate account from rents 
 paid. Receipts of rent, where the corporation owns the rented 
 property, must be reported as income, whereas Rentals 
 rents paid are deductible as general expenses. The 
 amount paid on a leasehold may be prorated over the period of 
 the lease and deducted annually as rent paid during the year. 
 This is also true where a building, reverting to the landlord, is 
 erected on leased land; the annual rate of deduction being the 
 fraction: one, as the numerator, and the number of years of the 
 leasehold, as the denominator, multiplied by the cost of the build- 
 ing and improvements. The cost of such improvements should be 
 charged to a "Leasehold Account" in the ledger and the amount 
 charged off annually should be stated in the income tax return 
 under "Expenses, General" in the supplementary statement. 
 
 Ordinary rentals paid should also be stated in the supple- 
 
 1 By more recent ruling inventories may now be computed at cost or at 
 cost or market price, whichever is the lower. See page 167. 
 
202 INCOME TAX LAW AND ACCOUNTING 
 
 mentary statement under "Expenses, General" the total of 
 which appears in the report under "Deductions." 
 
 Royalties received are returnable as income from rentals. 
 Where royalties are both paid and received, it is advisable to 
 
 Ro allies ^ ee P a se P arate account for each in the ledger, 
 designating them "Royalties Received" and "Roy- 
 alties Paid," because they are separately reported in the return 
 of net income. Royalties paid are returnable in "Payments in 
 Lieu of Rent." Royalties received should be included in item 
 "From Rentals" under "Gross Income." 
 
 Interest received and interest paid should be respectively 
 Interest credited and charged to separate ledger accounts, 
 Received. anc j eacn o f them should be further subdivided ac- 
 cording to the separation called for by the tax return, as follows: 
 
 Interest received on bonds or other obligations of the United 
 States, or its possessions, from a State, Municipality or other 
 political subdivision, although not subject to the income tax, 
 must be reported as income in the supplementary statement and 
 should be credited to an account in the ledger entitled "Interest 
 Received on Government Securities." 
 
 All interest, other than that received on Government bonds 
 or obligations, except "anticipations," should be credited to a 
 general "Interest Received Account," and should be reported 
 under "Gross Income" in the return. 
 
 "Anticipations" interest received for the prepayment of 
 accounts payable should be credited to "Anticipation Ac- 
 count" and for income tax purposes are deductible from the 
 cost of purchases, the same as are discounts received. 
 Interest Interest paid by a corporation should be classified 
 
 Paid. as follows: 
 
 1. "Interest paid on indebtedness, wholly secured by col- 
 lateral, the subject of sale in the ordinary business of the cor- 
 poration," should be charged to an account entitled "Interest 
 Paid on Secured Debts" and reported in the return under 
 "Expenses, General," in the supplementary statement thereof. 
 
 2. Interest paid on mortgages secured by property which 
 the corporation occupies but does not own and has no equity 
 in, should be charged to "Interest Paid in Lieu of Rent" and 
 stated in the return under "Deductions." 
 
BOOKKEEPING SUGGESTIONS 203 
 
 3. All interest paid on bonds and other indebtedness should 
 be charged to "Interest Paid Account" and stated in the 
 return under "Deductions." The amount of interest deduct- 
 ible under this item is the amount actually paid within the 
 year on an amount of bonded or other indebtedness not in 
 excess of the sum of one of the subdivisions of "A" plus "B": 
 
 A. i. The paid-up capital stock outstanding at the close of 
 
 the year, 
 
 or 
 
 2. If the capital stock has no par or nominal value, the 
 
 amount of cash or its equivalent paid or transferred 
 to the corporation as a consideration for shares issued 
 and outstanding at the close of the year, 
 or 
 
 3. If no capital stock, the entire amount of capital (not 
 
 including liabilities) employed in the business at 
 the close of the year, 
 plus 
 
 B. One-half of the interest-bearing indebtedness outstand- 
 
 ing at the close of the year. 
 
 For example, in the case of a corporation having, at the 
 close of the year, a capital stock of $500,000 and bonded and 
 other indebtedness of $200,000, the deductible interest, at 6 per 
 cent, per annum, would not exceed: 
 
 6 per cent, on $500,000 $30,000 
 
 6 per cent, on 100,000 6,000 
 
 Total, 6 per cent, of $600,000 $36,000 
 
 Should the actual interest paid during the year exceed the sum 
 of $36,000, in the example cited, the excess would not be de- 
 ductible and only $36,000 should be entered in the report 
 under "Deductions." 
 
 In the case of subdivision A, 3, having no capital stock, the 
 "capital employed in the business . . . contemplates the 
 entire capital paid in by the members of the company, includ- 
 ing so much of the accumulated surplus as is not in excess of 
 the needs of the business, but does not include any borrowed 
 capital or interest-bearing indebtedness." 
 
204 INCOME TAX LAW AND ACCOUNTING 
 
 In the supplementary statement under "Interest Deductible" 
 should be listed "all forms of indebtedness upon which interest 
 was paid," stating as to each: 
 
 1. Name or kind of obligation (Bonds Payable, Mortgages 
 
 Payable, Bills Payable, etc.), 
 
 2. Amount of principal of each class, 
 
 3. Rate of interest on each class, 
 
 4. Amount of interest paid on each class of obligations. 
 Irrespective of the amount deducted in the main report under 
 "Deductions," the amount stated as "interest paid" in the 
 supplementary statement is the total amount paid during the 
 year. The amount deducted cannot exceed the total amount 
 actually paid, but, by the limitation of law hereinbefore stated, 
 may be less. 
 
 Interest paid on indebtedness incurred for the purchase of 
 obligations or securities, the interest upon which is exempt 
 from taxation is not deductible. 1 
 
 The interest paid on indebtedness wholly secured by property 
 collateral, tangible or intangible, the subject of sale or hypothe- 
 cation in the ordinary business of a corporation, as where a 
 dealer in the property constituting such collateral or in the 
 case of a broker loaning the funds thereby procured, may be 
 deducted as a part of the expense of doing business, but such in- 
 terest shall only be deductible on an amount of such indebted- 
 ness not in excess of the actual value of such property collateral. 
 
 No dividends or so-called interest on any kind of capital 
 stock are deductible; "guaranteed," cumulative or preferred 
 dividends are no exceptions. 
 
 Interest on any bonds of a corporation secured by mort- 
 Interest. gage on its real or personal property is deductible 
 in a return of net income of the corporation. 
 
 Where, however, a corporation issues so-called "debenture 
 bonds" secured by mortgages on real estate made by borrowers 
 " Deben- fro m the corporation in favor of such corporation, 
 ture the interest on such bonds is not deductible from 
 
 Bonds." the taxable income. In the case of Middlesex 
 Banking Company v. Robert O. Eaton, Collector (221 Fed. 
 86), affirmed by the United States Circuit Court of Appeals, 
 
 1 An exception to this rule is the Second Liberty Loan Bonds, see p. 103, 
 
BOOKKEEPING SUGGESTIONS 205 
 
 it was found upon the trial that the plaintiff, under its 
 charter had the powers of a safe-deposit company, of a 
 bank of deposit, and of a company to sell securities, but 
 that its principal business was the sale of securities. Judge 
 Ward of the United States Circuit Court of Appeals found 
 that "practically the whole of the business done by the plain- 
 tiff during the years in question was the sale of its own obliga- 
 tions, called 'debenture bonds,' secured by mortgages on prop- 
 erty in the South and West, deposited with the Columbia 
 Trust Co. as trustee for the bondholders, and of the obligations 
 of borrowers to the plaintiff, secured by mortgages, which, ac- 
 companied by its own interest coupons for a less rate of in- 
 terest than it receives from the borrowers, it guarantees as to 
 both principal and interest and sells to purchasers. These 
 latter are called 'guaranteed real estate securities.' Both 
 these forms of securities the plaintiff sells throughout the East 
 by means of agents, and its profit in each case is represented 
 by the difference between the rate of interest it receives from 
 its southern and western borrowers and the interest which it 
 pays to the eastern purchasers of the obligations." 
 
 The plaintiff's theory was that the interest in question was 
 paid upon money deposited with it and as such was deductible; 
 this the Court disposed of in the following language: "Without 
 stopping to analyze the charter powers of the plaintiff and to 
 determine whether it is or is not a bank or banking association 
 and, whether, if so, it has not also other and different powers, 
 we think it perfectly clear that the interest in question is not 
 interest upon money deposited with it, but is interest paid on 
 its own obligations or on the obligations of others guaranteed 
 by it which it has sold to the investing public. The purchase 
 price is no more money deposited with the plaintiff at interest 
 than is money paid to a railroad company for the purchase of 
 its bonds. The transaction is not a banking transaction at all 
 like the giving of a pass book or a certificate of deposit to a 
 depositor, but a business of selling securities to investors. 
 Selden v. Equitable Trust Co. (94 U. S. 419)-" 
 
 F. A. Cleveland, in his work on Funds and Their Uses says 
 that: "The term debenture bond is the most loosely used of 
 any of the terms descriptive or suggestive of financial instru- 
 
206 INCOME TAX LAW AND ACCOUNTING 
 
 ments." The test of deductibility of interest on such bonds is 
 whether it is actually an "expense of the business," and to be 
 such it must be paid upon an actual obligation of the company, 
 not merely upon an "evidence of indebtedness." Interest paid 
 as a distribution of profits is not deductible in an income tax 
 return. 
 
 Dividends received by a corporation should be credited to 
 Dividends "Dividends Received" account and the amount 
 Received, thereof should be reported in " Gross Income." 
 
 Inasmuch as dividends received by corporations upon the 
 stock of other corporations, also subject to income taxes are, 
 under the amended law, liable only for the normal tax of 2 per 
 cent, under the Act of September 8, 1916, and free of taxes under 
 the War Income Tax and the Excess Profits Tax, provision will 
 be made in the revised return of corporations for a separate 
 deduction of dividends. 
 
 Stock dividends constitute taxable income to the amount of 
 the earnings or profits so distributed. 
 
 It is not necessary that the dividends be actually paid either 
 by cash or stock, because "dividends shall be held to mean 
 any distribution made or ordered to be made by a corpo- 
 ration out of its earnings." Therefore, a mere credit on the 
 books of the issuing corporation is sufficient to obligate the 
 recipient to include the amount of such credit applicable to 
 him or it (a corporation) as income in his or its return of net 
 income. 
 
 All income, other than that derived from trading, rentals, 
 interest, dividends received, and income from the sale of capital 
 Income. assets, should be credited in the ledger to an account 
 Sundry "Income from Sundry Sources" and should be 
 Sources. included in "Gross Income." Profits from the sale 
 of capital assets should be included in this item of the return. 
 For treatment of the account in the ledger, and method of com- 
 puting profit from the sale of capital assets, see page 33. 
 
 In the supplementary statement, all income from sources 
 other than those specifically called for in the return, which is 
 subject to tax, should be itemized. 
 
 These items are called for in toto in the supplementary state- 
 ment of the report, under "Expenses, General." "Labor" and 
 
BOOKKEEPING SUGGESTIONS 207 
 
 "wages" for the purpose of the income tax return, apply to 
 all wages, direct and indirect (except where a cost- Labor, 
 system is operated, see page 216). All salaries, other cjj^s?* 
 than those of officers of the corporation which are sions. 
 stated separately should be included in "Labor, Wages and 
 Commissions." Bonus and profit sharing payments to employees 
 other than officers, which are not gratuities, but additional pay 
 for services actually rendered, should be included in this deduc- 
 tion. A separate ledger account should be kept to which items of 
 this class will be charged. 
 
 Separate ledger accounts should be kept for wages and com- 
 missions, respectively, and each of them should be further 
 subdivided into separate accounts according to requirements of 
 the business. For example, wages paid in connection with 
 production (Productive Wages), office salaries, salaries of sales- 
 men, etc., should be carried in separate accounts to facilitate the 
 preparation of intelligible Profit and Loss Accounts and for 
 purposes of comparison of various departmental expenses of 
 different periods. 
 
 Commissions, also, should be kept in accounts, that, by their 
 title, designate whether they are applicable to cost of production, 
 administration or selling expenses. 
 
 Income from commissions should be credited to a " Commis- 
 sions Received" account and included in item "Gross Income" 
 of the tax return. Where commissions are both received and 
 paid they should be credited and charged, respectively, to 
 separate ledger accounts that by their title are descriptive of 
 their contents. 
 
 These items, called for in the supplementary statement, 
 under "Expenses, General," should contain in toto only the 
 cost of supplies and service purchased, such as Fuel, Light, 
 coal, gas, electricity, power, etc., and should not Power, etc. 
 include labor of engineers, firemen, etc., which latter are called 
 for in "Wages." 
 
 For the purpose of the income tax return, it is necessary 
 only to keep one general "Repair Account" of materials. Foi 
 accounting purposes, however, repairs should be Repairs, 
 subdivided according to requirements, as Repairs ^^^ 
 to Machinery and Plant, Repairs to Buildings, etc. cidental. 
 
208 INCOME TAX LAW AND ACCOUNTING 
 
 To more easily prepare the tax report these accounts again 
 should be divided into Repairs Materials and Supplies, and 
 Repairs Wages, because they are called for separately. The 
 separation of wages and materials only applies where the repairs 
 are made by own employees of the corporation. Where the 
 repairs are made by "outsiders" the total cost of repairs should 
 be included in "Repairs." 
 
 Care should be exercised to differentiate repairs and renewals 
 from improvements and betterments; the latter are not deduc- 
 tible as expenses. A mere replacement that is not an improve- 
 ment and does not enhance the material value of property is 
 chargeable as a repair; the same is true of that which merely 
 maintains efficiency. 
 
 A separate ledger account, to which should be charged all 
 salaries of officers, should be kept. The amount of such salaries 
 Salaries of will be stated in the supplementary statement of 
 Officers. the return under "Expenses, General." A salary 
 is, in the ordinary acceptation of the word, a compensation 
 that is fixed by agreement in advance. Salaries, to be deductible, 
 shall not be based upon stockholdings; they must be a business 
 expense and not a distribution of profits. A distribution of 
 profits is not deductible as an expense. 
 
 Where, however, "special payments, often designated as 
 bonuses, are made to officers or employees of corporations, pur- 
 suant to a contract, express or implied, as additional compensa- 
 tion for services rendered, which payments, when added to 
 the stipulated salaries, do not exceed a reasonable compensa- 
 tion for the services rendered, such payments may be regarded 
 as a part of the wages or hire of the officer or employee, and, 
 as such, may allowably be deducted from gross income as a 
 business expense." In such case the bonus or additional com- 
 pensation of an officer should be included in item "Salaries of 
 Officers." But "this ruling contemplates that such payments 
 are conditioned upon the services rendered by the employee 
 and not upon the earnings of the corporation. If it should ap- 
 pear that the additional or special payments are dependent 
 upon the earnings of the company, rather than upon the services 
 rendered, or if such payments are made only occasionally, and 
 then, at the option of the corporation, as a sort of thank-offering 
 
BOOKKEEPING SUGGESTIONS 2OQ 
 
 because of a prosperous year, and not in pursuance of a fixed 
 policy or practice, or any contract, express or implied, it will 
 be held that such payments are gratuities and, as such, are 
 not properly deductible from gross income." 
 
 Voluntary contributions or donations, such as "Christmas 
 gifts" are not deductible. But a payment by an employer to 
 his employee, irrespective of when made, during the holiday 
 or any other season of the year, in consideration of services 
 rendered, as extra compensation, is deductible by the payer. 
 
 In addition to the accounts, the balances of which are sep- 
 arately called for by the return, every mercantile Sundry 
 concern has more or less additional expenses for Expense 
 which separate accounts, according to require- Accounts, 
 ments, should be kept, such as: 
 Freight on Sales Insurance 
 
 Packing Supplies Postage 
 
 Shipping Supplies Stationery & Printing 
 
 Stable Expense Telegraph & Telephone 
 
 Auto Expense Legal Expense 
 
 Advertising Auditing Expense 
 
 Traveling Expense General Office Expense 
 
 In the case of a manufacturing company, that does not 
 operate a cost-system as an integral part of the bookkeeping 
 system (see page 216) an intelligible classification would require 
 such additional accounts as General Factory Expense, Pro- 
 duction Supplies, etc. 
 
 All expenses that are not separately provided for in the 
 return, such as those just mentioned, should be stated in item 
 "Other Expenditures" in the supplementary statement. It 
 is not necessary to state each account separately; they may 
 be combined so as to include them all in five groups. Each 
 group should contain items related to each other or coming 
 under the same general head of production, administration or 
 selling expenses. For example, they may be grouped as follows: 
 
 Packing and Shipping Supplies, 
 
 Stable and Auto Expense, 
 
 Advertising and Traveling Expense, 
 
 Postage, Stationery, Telegraph & Telephone, 
 
 Legal and Auditing Expense. 
 
2IO INCOME TAX LAW AND ACCOUNTING 
 
 Items that cannot be classified under a general head may 
 be stated as "Miscellaneous Unclassified Expenses," but the 
 amount so stated should be comparatively small. 
 
 Import duties and import taxes should be charged to "Du- 
 Customs ties Account" in the ledger and included in the 
 Duties. return as expense under " General Expense." These 
 items should not be stated as taxes. 
 
 Fire losses usually involve both capital and current assets. 
 It is customary immediately after a fire casualty to proceed 
 Loss by to arrive at an inventory based on cost of the de- 
 Fire - stroyed, partly destroyed and damaged merchandise 
 
 for insurance purposes. When this has been done the value 
 of the destroyed and damaged merchandise, based on such 
 inventory, should be charged to an account in the ledger bear- 
 ing title of "Fire Loss Account." To this account should also 
 be charged all expenses incurred in the adjustment of loss, 
 including compensation of adjusters, if any, as well as the 
 cost of repairs and replacement of buildings occasioned by the 
 fire. The amount recovered from insurance companies should 
 be credited to said account. The debit excess of the Fire Loss 
 Account will then represent the loss sustained by fire which 
 should be included in the income tax return in item "Losses 
 Sustained," and under the same designation in the supplemen- 
 tary statement. At the end of the fiscal period the balance of 
 Fire Loss Account should be charged to Profit and Loss Account. 
 
 The profit or loss on the sales of capital assets is determined 
 in the case of assets acquired subsequent to March i, 1913, 
 Sales of ky the difference between the cost and selling price. 
 Capital If the assets sold were acquired prior to March i, 
 Assets. 1913, then the profit or loss is the difference be- 
 tween the fair market value on March i, 1913, and the selling 
 price. 
 
 The profit or loss on the sale of capital assets should be 
 credited or charged, respectively, to "Income on Sales of Capital 
 Assets Account" and "Loss on Sales of Capital Assets." The 
 debit of such accounts will be a transfer of the cost or fair 
 market value, as the case may be, from the asset account in 
 which the subject of sale had previously been carried in the 
 ledger. 
 
BOOKKEEPING SUGGESTIONS 211 
 
 According to the supplementary statement of the income 
 tax return, it would appear that the profit on sales of capital 
 assets should be included in "Gross Income From Operations." 
 This is obviously wrong in principle, and it is suggested that 
 such income be stated in item "From other sources." Losses 
 on sales of capital assets should be included in "Losses Sus- 
 tained." 
 
 This subject has been treated at some length in Chapter VI, 
 pages 175 to 195. Suffice it to say here, that any amount de- 
 ducted in the return of net income for depreciation peprecia- 
 (in both the report and supplementary statement) ^ on - 
 must be actually charged off in the ledger, either on the asset 
 account itself or in a negative account, such as, a Reserve for 
 Depreciation. 
 
 Depreciation is usually charged off by a journal entry, debit- 
 ing Depreciation Account and crediting Reserve for Deprecia- 
 tion. The Depreciation Account is closed into the Profit and 
 Loss Account and the Reserve Account remains open until 
 the asset that it offsets (writes down), is either sold or other- 
 wise disposed of; then the difference between the cost and the 
 amount written off in past years, plus proceeds of sale, is charged 
 off as a capital loss or profit, as the case may be. 
 
 As in the case of depreciation of property, depletion of mines 
 and oil or gas wells, by reason of exhaustion of the natural 
 product, must be actually charged off in the ledger D j ^ 
 of the corporation seeking the deduction. Mere 
 memorandum entries thereof are insufficient. The purpose 
 of an allowance for depletion is to return to the corporation 
 the capital invested, or, in case of purchase prior to March i, 
 1913, an amount sufficient to return to the corporation the 
 fair market value of such deposits as at that date. 
 
 It has been indicated by the Commissioner of Internal Reve- 
 nue that in order to render a claim for depletion of property 
 deductible from income for tax purposes, it is in- Ledger 
 sufficient to make a mere journal entry thereof; ^ 
 it must be actually charged off in the general ledger, ( 
 either against the asset account of the property erty. 
 depleted, or to the credit of "Reserve for Depletion"; further, 
 that such reserve shall be deducted from the asset account in 
 
212 INCOME TAX LAW AND ACCOUNTING 
 
 the balance sheet, as well as in the report to the stockholders. 
 The amount deducted for depletion in an income tax return 
 must, in fact, be charged off in such way that it reduces the 
 asset account in the general ledger by the amount deducted in 
 the return of annual net income. 
 
 Taxes should be charged to an account in the ledger bear- 
 _ ing that title. All taxes are deductible except 
 
 1 &XCS. , 
 
 that: 
 
 1. Income and excess profits taxes are not deductible. (Ex- 
 
 cess profits tax assessment is deductible as a credit in 
 ascertaining amount subject to income and war income 
 taxes.) 
 
 2. Foreign taxes accruing to a foreign corporation are not 
 
 deductible from income derived upon capital invested 
 in this country. 
 
 3. Taxes paid for local benefits are not deductible. 
 
 4. Taxes paid by corporations to render their stock or bonds 
 
 tax-free are not deductible, because such taxes are 
 primarily obligations of their stockholders and bond- 
 holders. 
 
 Foreign taxes paid by a corporation organized under the 
 laws of any State of the United States are deductible, because 
 such corporation pays an income tax on its entire net income 
 irrespective of where such income is derived or where its capital 
 is invested. 
 
 The income tax return calls for the amount of capital stock 
 paid in and outstanding. This does not include either stock 
 Capital unissued or "treasury stock." If the corporation 
 Stock. nas no capital stock, then it should state the amount 
 of capital employed in the business, which, ordinarily, is the 
 excess of the assets over liabilities, i. e., invested capital plus 
 surplus. 
 
 The supplementary statement calls for the division of capital 
 stock into common and preferred. If the company has no 
 capital stock then the "capital employed in the business" 
 should be stated. (See Interpretation, page 203.) 
 
 Uncollectible accounts receivable should be charged to a 
 separate account that by its title designates what it contains, 
 
BOOKKEEPING SUGGESTIONS 213 
 
 such as Bad Debts, Uncollectible Accounts or Bad Accounts. 
 Bad debts should not be charged to Profit and Loss 
 " Account until at the end of the fiscal period, when 
 the books are closed. 
 
 Rulings direct that accounts shall be deducted only when 
 they have been actually ascertained to be worthless. Reserves 
 to provide for anticipated bad debts are not deductible. The 
 accounts deducted must be charged off in the books of account 
 during the year for which the return is made, wherein the ac- 
 counts are deducted. 
 
 Payments received on accounts after they have been charged 
 off should be credited to Income from Bad Debts Account and 
 stated in the return as income "'From other Sources" under 
 "Gross Income." 
 
 The most prevalent causes that justify charging off accounts 
 receivable, are: 
 
 1. Bankruptcy of debtor. 
 
 2. Assignment by debtor for benefit of creditors. 
 
 3. Execution against property returned unsatisfied. 
 
 4. Disappearance of debtor leaving no assets. 
 
 5. Death of debtor leaving no estate. 
 
 The test of charging off accounts should not be limited to 
 the reasons stated above. Each case should be determined upon 
 the particular conditions governing it. The language of rulings 
 under the old income tax law would indicate that legal procedure 
 must be exhausted before an account may be charged off. 
 That, no doubt, is true in many cases, but all accounts do not 
 justify the expenditure of money to effect collection. 
 
 Bankruptcy, as a general rule, is sufficient in itself to warrant 
 charging off an account. The average per cent, of dividends 
 paid by the estates of bankrupts to creditors is so small that 
 unless it is apparent that an estate has realizable assets, in a 
 reasonable proportion to the liabilities, the entire account may 
 be charged off at once. Where dividends are received thereon, 
 such dividends should be stated as income. 
 
 The question as to when an account is "actually ascertained 
 to be worthless" is one that can best be answered by the cred- 
 itor, and he might better err on the side of safety than to permit 
 the accumulation of uncollectible accounts. 
 
214 INCOME TAX LAW AND ACCOUNTING 
 
 The Department, in a recent ruling, holds that a debt due 
 from a corporation possessed of assets, cannot be deducted 
 until the affairs of the corporation have been closed and its 
 receiver discharged. Under this decision, the question arises 
 "when is a bankrupt's asset an asset?" Those familiar with 
 bankruptcy practice know that, by a very large margin, the 
 supposed assets of a bankrupt ordinarily "fade away" even 
 in a superficial examination of them, and regardless of repre- 
 sentations by the bankrupt, forced sales of what remains, does 
 not, generally speaking, realize more than the cost of adminis- 
 tration of the bankrupt's estate. 
 
 " Receipt is acknowledged of your letter of October 3, 
 1917, wherein you request to be informed: 'Whether there 
 is any rule or regulation prescribing the manner of ascer- 
 taining whether a debt is worthless, in order to entitle 
 owner of the worthless debt to deduct its amount in making 
 his income tax return? We are particularly anxious to 
 know whether there must be an unsatisfied judgment or a 
 judicial determination that the debt is worthless. If the 
 creditor knows, of his own knowledge, that the debtor is 
 insolvent and accepts a part of the debt and releases the 
 debtor from the balance of the debt, is the creditor entitled 
 to deduct the amount released in his income tax return?' 
 
 "In reply you are advised that this office does not require, 
 in the case of an individual debtor, that an unsatisfied 
 judgment shall exist or a judicial determination be reached 
 in order that a creditor may secure the benefit of a deduc- 
 tion on account of a debt which he considers worthless and 
 uncollectible; but, taking into consideration the time the 
 debt has overrun and the financial condition of the debtor, 
 it is required that it be shown beyond a reasonable doubt 
 that the debt is worthless and uncollectible. 
 
 "The office holds that a debt due from a corporation 
 possessed of assets cannot be claimed as a deduction except 
 for the year during which the corporation's affairs are 
 finally closed and its receiver in bankruptcy discharged; 
 and where a creditor, to protect himself from a total loss, 
 enters into a compromise agreement under the terms of 
 which he accepts a part payment of a debt and releases the 
 debtor from payment of the balance, the unpaid portion 
 may be claimed as a deduction." (Letter to Wollman and 
 
BOOKKEEPING SUGGESTIONS 215 
 
 Wollman, New York, N. Y., signed by Commissioner 
 Daniel C. Roper, and dated October 16, 1917.) 
 
 The main report calls for the amount of bonded and other 
 interest-bearing indebtedness outstanding at the Interest- 
 close of the year, exclusive of indebtedness wholly 
 secured by collateral, the subject of sale or hypoth- ness, 
 ecation in the ordinary business of the corporation. 
 
 The supplementary statement calls for details by classifica- 
 tion, rate of interest and amount of principal of all interest- 
 bearing indebtedness. This includes all the items called for 
 in the body of the report, and in addition thereto, the total 
 amount owing, etc., on debts, wholly secured by collateral, the 
 subject of sale in the ordinary business of the corporation. 
 
 It will be noted that no provision has been made for a mer- 
 chandise account; instead, separate accounts have been recom- 
 mended, consisting of Sales, Purchases, Return Merchan- 
 Sales and Inventory. Return purchases, ordinarily, disc Ac- 
 may be credited to Purchase Account. A Mer- count - 
 chandise Account has no place in a modern set of books. 
 
 No postings should be made to the Profit and Loss Account 
 during the interim of a fiscal period, that is to p ro fi t and 
 say, until the books are closed at the end of the Loss Ac- 
 year. Co*- 
 
 The practice of charging or crediting expenses or losses and 
 income, respectively, direct to Profit and Loss Account, makes 
 it necessary to analyze the account in order to allocate the 
 items contained therein for purposes of the tax return. But 
 apart from this disadvantage and as a matter of good accounting, 
 Profit and Loss Account should contain no entries until the close 
 of the fiscal period. In the meantime all items of income and 
 expense should be credited or charged to accounts that by their 
 titles are descriptive of their contents. 
 
 After the books have been closed the balance of Profit and 
 Loss Account should be transferred either to Surplus or Impair- 
 ment of Capital Account, as the case may be. 
 
 Dividends declared should be charged to Surplus Account 
 and credited to Dividend Account against which Dividends 
 the payments of dividends should be charged. Declared. 
 
 For the purpose of future reference, the net income as shown 
 
2l6 INCOME TAX LAW AND ACCOUNTING 
 
 by the return of net income should be reconciled with the 
 Reconcilia- result shown by Profit and Loss Account. The 
 Rturn difference, where the return is made for the fiscal 
 with Books year of the corporation, will consist of such items of 
 of Account, income as are not taxable, readjustment of book 
 values to express appraisal valuations or expenses or losses not 
 by law deductible. 
 
 Items are not deductible unless they are charged off in the 
 books of account within the year covered by the return. 
 
 " A manufacturing corporation may include as an element 
 of the cost of manufactured products, the cost of raw 
 Manufac- material, the cost of labor of the men who actually 
 tiiring Cor- work on such products, as well as the cost of super- 
 porations visory , or what may be designated as ' unproductive 
 Cost-* mg labor,' such as that of the foremen, inspectors, over- 
 System, seers, etc., provided such expenditures are not 
 separately deducted from gross income in the Return of 
 Annual Net Income. 
 
 "The overhead charges referred to in Form 1031 should 
 include the salaries of officers, clerk hire, and such other 
 office expenses as do not have to do directly with the man- 
 ufacture of the product." (T. D. 2152.) 
 
 This ruling under the old law, and provisions with respect to 
 account keeping of the Act of Sept. 8, 1916, makes it possible for 
 manufacturing corporations employing cost-systems, that are 
 embraced in the general books of account and subject to proof as 
 to accuracy, to make their returns on the basis of cost of produc- 
 tion, as shown thereby. The form of the return (1031, Revised), 
 however, is not well adapted to that kind of report. For ex- 
 ample, it calls for items under "Deductions" that ordinarily (ac- 
 cording to opinion of the cost accountant) are charged to the 
 cost of production, as rent, fuel, light and power, repairs, pay- 
 ments in lieu of rent, depreciation, depletion and taxes. Any of 
 these items that are included in the cost of production through 
 the cost-system, should not again be stated as deductions. 
 
 Items that have been included in the cost of production that 
 are separately provided for in the report or supplementary 
 statement thereof, should be explained by a notation " included 
 in cost of manufacture." The detailed information as to basis of 
 
BOOKKEEPING SUGGESTIONS 217 
 
 computing depreciation and depletion, and amount of domestic 
 and foreign taxes charged to the period, should be furnished in 
 the supplementary statement even though these items, or either 
 of them, were included in the cost of manufactured goods. 
 
 Where interest on capital is theoretically added to the cost of 
 production, such interest, for income tax purposes, must either 
 be deducted from the cost of production or separately stated as 
 income in the return. 
 
 It is quite usual to maintain, in connection with a modern 
 cost-system, a " perpetual" or "running" inventory. Irrespec- 
 tive of the degree of care with which such inventory may be 
 operated, more or less differences occur in the course of time. 
 This necessitates the taking of physical inventories and the ad- 
 justment of the "running" inventory therewith. Physical 
 inventories should be taken and the book inventory reconciled 
 therewith at least once in each fiscal period. 
 
 The profit or loss of a manufacturing or mercantile business, 
 dealing in merchandise, cannot be determined without stating 
 inventories as at the beginning and end of the fiscal Inventory 
 period. Where practicable, it is required that a Equivalent, 
 physical inventory by actual count be taken. Equivalent 
 inventories are acceptable only when stock-taking by count is 
 not obtainable. 
 
 In order that certain classes of corporations may arrive 
 at their correct income, it is necessary that an inventory, 
 or its equivalent, of materials, supplies, and merchandise 
 on hand for use or sale at the close of each calendar year 
 shall be made in order to determine the gross income or to 
 determine the expense of operation. 
 
 A physical inventory is at all times preferred, but where a 
 physical inventory is impossible and an equivalent inven- 
 tory is equally accurate, the latter will be acceptable. 
 
 An equivalent inventory is an inventory of materials, 
 supplies, and merchandise on hand taken from the books of 
 the corporation. (Art. 161, Reg. 33.) 
 
 It has been ruled that materials and supplies purchased must 
 be credited with such part thereof as has not been Materials 
 used up; that is to say, inventory of the unused and Sup- 
 portion thereof must be deducted from the pur- P Ues Used - 
 
2l8 INCOME TAX LAW AND ACCOUNTING 
 
 chases in computing the amount chargeable to expense or cost of 
 operations. 
 
 In ascertaining expenses proper to be included in the 
 deductions to be made under the item of " Expenses," 
 corporations carrying materials and supplies on hand for 
 use should include in such expenses the charges for mate- 
 rials and supplies only to the amount that the same are 
 actually disbursed and used in operation and maintenance 
 during the year for which the return is made. (Art. 123, 
 Reg. 33.) 
 
APPENDIX A 
 
 FEDERAL INCOME TAX LAW 
 ENACTED SEPTEMBER 8, 1916 
 
 as amended by 
 the Acts of March 3, 1917, and October 3, 1917 
 
 PART I. ON INDIVIDUALS 
 
 SEC. 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 in- 
 come; 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. 
 
 (b) In addition to the income tax imposed by subdivision (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 in- 
 dividual, or, in the case of a nonresident alien, the total net 
 income received from all sources within the United States, 
 an additional income tax (herein referred to as the additional tax) of one 
 per centum per annum upon the payment 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 
 
220 APPENDIX A 
 
 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 
 Dividends the income derived from dividends on the capital stock or 
 Subject to from the net earnings of any corporation, joint-stock corn- 
 Additional pany or association, or insurance company, except that in 
 Tax. 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 individuals, 
 so far as they are applicable and are not inconsistent with this subdivision 
 and section three, shall apply to the imposition, levy, assessment, and col- 
 lection of the additional tax imposed under this subdivision. 
 
 (c) The foregoing normal and additional tax rates shall apply to the 
 entire net income, except as hereinafter provided, received 
 ^ v every taxable person in the calendar year nineteen hun- 
 dred and sixteen and in each calendar year thereafter. 
 
 INCOME DEFINED 
 
 1 SEC. 2. (a) That, subject only to such exemptions and deductions as 
 are hereinafter allowed, the net income of a taxable person shall include 
 Net In- gains, profits, and income, derived from salaries, wages, or 
 come of compensation for personal service of whatever kind and in 
 Individuals whatever form paid, or from professions, vocations, businesses, 
 Defined. 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. 
 
 (b) Income received by estates of deceased persons during the period 
 of administration or settlement of the estate, shall be subject to the normal 
 f and additional tax and taxed to their estates, and also such 
 Estates income of estates or any kind of property held in trust, in- 
 cluding 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 likewise taxed, the tax in each instance, except when the income is re- 
 turned 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 
 Individual where the income is to be distributed annually or regularly 
 Share of between existing heirs or legatees, or beneficiaries the rate of 
 Beneficia- tax and method of computing the same shall be based in 
 lies. each case upon the amount of the individual share to be 
 
 distributed. 
 
 1 Amendment. 
 
AMENDED INCOME TAX LAW 221 
 
 Such trustees, executors, administrators, and other fiduciaries are hereby 
 indemnified against the claims or demands of every beneficiary for all pay- 
 ments of taxes which they shall be required to make under Indemnity 
 the provisions of this title, and they shall have credit for to Fiducia- 
 the amount of such payments against the beneficiary or ries. 
 principal in any accounting which they make as such trustees or other 
 fiduciaries. 
 
 (c) For the purpose of ascertaining the gain derived from Basis of ^ 
 the sale or other disposition of property, real, personal, or petermin- 
 mixed, acquired before March first, nineteen hundred and ing Gain on 
 thirteen, the fair market price or value of such property Acauired 
 as of March first, nineteen hundred and thirteen, shall be pri^to 
 the basis for determining the amount of such gain derived. March 1 
 
 1913. 
 
 ADDITIONAL TAX INCLUDES UNDISTRIBUTED PROFITS 
 
 SEC. 3. For the purpose of the additional tax, the taxable income of 
 any individual shall include the share to which he would be entitled of the 
 gains and profits, if divided or distributed, whether divided Undistrib- 
 or distributed or not, of all corporations, joint-stock com- uted Profits 
 panics or associations, or insurance companies, however Subject to 
 created or organized, formed or fraudulently availed of for Additional 
 the purpose of preventing the imposition of such tax through Tax. 
 the medium of permitting such gains and profits to accumulate instead of 
 being divided or distributed; and the fact that any such corporation, joint- 
 stock company or association, or insurance company, is a mere holding com- 
 pany, or that the gains and profits are permitted to accumu- Unreason- 
 late beyond the reasonable needs of the business, shall be ableAc- 
 prima facie evidence of a fraudulent purpose to escape such cumulation 
 tax; but the fact that the gains and profits are in any case Evidence 
 permitted to accumulate and become surplus shall not be f Fraud. 
 construed as evidence of a purpose to escape the said tax in such case unless 
 the Secretary of the Treasury shall certify that in his opinion such accumu- 
 lation is unreasonable for the purposes of the business. When requested by 
 the Commissioner of Internal Revenue, or any district collector of internal 
 revenue, such corporation, joint-stock company or association, or insurance 
 company shall forward to him a correct statement of such gains and profits 
 and the names and addresses of the individuals or shareholders who would 
 be entitled to the same if divided or distributed. 
 
 INCOME EXEMPT FROM LAW 
 
 1 SEC. 4. The following income shall be exempt from the Tax Ex- 
 provisions of this title: emptln- 
 
 1 The proceeds of life insurance policies paid to individual come. 
 beneficiaries upon the death of the insured; the amount re- Insurance, 
 ceived by the insured, as a return of premium or premiums paid by him 
 1 Amendment. 
 
222 APPENDIX A 
 
 under life insurance, endowment, or annuity contracts, either during the 
 term or at the maturity of the term mentioned in the contract or upon sur- 
 render of the contract; the value of property acquired by gift, bequest, 
 Gifts, Be- devise, or descent (but the income from such property shall 
 quests. be included as income); 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 
 Interest on after September first, nineteen hundred and seventeen, only 
 Obligations if and to the extent provided in the Act authorizing the issue 
 of State. thereof) or its possessions or securities issued under the pro- 
 visions of the Federal Farm Loan Act of July seventeenth, nineteen hun- 
 dred and sixteen; the compensation of the present President of the United 
 Salaries of States during the term for which he has been elected and the 
 Certain judges of the supreme and inferior courts of the United States 
 Public Offi- now in office, and the compensation of all officers and em- 
 cialsand ployees of a State, or any political subdivision thereof, ex- 
 Employees. C ept when such compensation is paid by the United States 
 Government. 
 
 DEDUCTIONS ALLOWED 
 
 SEC. 5. That in computing net income in the case of a citizen or resident 
 Deduc- of the United States 
 
 tions. (a) For the purpose of the tax there shall be allowed as 
 
 deductions 
 
 Necessary First. The necessary expenses actually paid in carrying on 
 Expenses, any business or trade, not including personal, living, or family 
 expenses; 
 
 1 Second. All interest paid within the year on his indebtedness except 
 Interest on indebtedness incurred for the purchase of obligations or 
 securities the interest upon which is exempt from taxation as 
 income under this title; 
 
 1 "Third. Taxes paid within the year imposed by the authority of the 
 United States (except income and excess profits taxes) or of its Territories, 
 Taxes r P ossess i ns > or an y foreign country, or by the authority 
 
 of any State, county, school district, or municipality, 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 compen- 
 
 sated for by insurance or otherwise: Provided, That for the 
 Loss on purpose of ascertaining the loss sustained from the sale or other 
 Property disposition of property, real, personal, or mixed, acquired be- 
 Acquired fore March first, nineteen hundred and thirteen, the fair mar- 
 Prior to ket price or value of such property as of March first, nine- 
 March 1, teen hundred and thirteen, shall be the basis for determining 
 1913. the amount of such loss sustained; 
 
 1 Amendment. 
 
AMENDED INCOME TAX LAW 223 
 
 Fifth. In transactions entered into for profit but not con- 
 nected with his business or trade, the losses actually sustained Losses not 
 therein during the year to an amount not exceeding the m Trade. 
 profits arising therefrom; 
 
 Sixth. Debts due to the taxpayer actually ascertained to Bftd De t, ts> 
 be worthless and charged off within the year; 
 
 Seventh. A reasonable allowance for the exhaustion, wear Deprecia- 
 and tear of property arising out of its use or employment in the tlon - 
 business or trade; 
 
 Eighth, (a) In the case of oil and gas wells a reasonable allowance for 
 actual reduction hi 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 computa- 
 tion 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 au- Limitation 
 thorized in (a) and (b) shall equal the capital originally in- of Deple- 
 vested, or in case of purchase made prior to March first, tion. 
 nineteen hundred and thirteen, the fair market value as of that date, no 
 further allowance shall be made. No deduction shall be Improve- 
 allowed for any amount paid out for new buildings, permanent ments not 
 improvements, or betterments, made to increase the value of Deducti- 
 any property or estate, and no deduction shall be made for ble. 
 any amount of expense of restoring property or making good the exhaustion 
 thereof for which an allowance is or has been made. 
 
 1 Ninth. Contributions or gifts actually made within the year to cor- 
 porations or associations organized and operated exclusively for religious, 
 charitable, scientific, or educational purposes, or to societies Contribu- 
 tor the prevention of cruelty to children or animals, no part tions to 
 of the net income of which inures to the benefit of any private Charities. 
 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 contributions or gifts shall be allowable as deduc- 
 tions only if verified under rules and regulations prescribed by the Com- 
 missioner of Internal Revenue, with the approval of the Secretary of the 
 Treasury. 
 
 CREDITS ALLOWED 
 
 (b) For the purpose of the normal tax only, the income embraced hi a 
 personal return shall be credited with the amount received Normal 
 as dividends upon the stock or from the net earnings of any Tax Cred- 
 corporation, joint-stock company or association, trustee, or its. 
 insurance company, which is taxable upon its net income as hereinafter 
 provided: 
 
 1 Amendment. 
 
224 APPENDIX A 
 
 Dividends} (c) A like credit shall be allowed as to the amount of in- 
 
 Taxes come, the normal tax upon which has been paid or withheld 
 
 Withheld, for payment at the source of the income under the provisions 
 of this title. 
 
 NONRESIDENT ALIENS 
 
 Deductions SEC. 6. That in computing net income in the case of a non- 
 Nonresi- resident alien 
 
 ident (a) For the purpose of the tax there shall be allowed as 
 
 Aliens. deductions- 
 First. The necessary expenses actually paid in carrying on any business 
 Necessary or trade conducted by him within the United States, not 
 Expenses, including personal, living, or family expenses; 
 
 1 Second. The proportion of all interest paid within the year by such 
 person on his indebtedness (except on indebtedness incurred for the pur- 
 Interest c ^ ase f 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 sec- 
 tion eight all the information necessary for its calculation; 
 
 Third. Taxes paid within the year imposed by the authority of the 
 United States (except income and excess profits taxes), or of its Territories, 
 Taxes or P ossess * ons > or ky 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; 
 
 Fourth. Losses actually sustained during the year, incurred in business 
 or trade conducted by him within the United States, and losses of property 
 T _ within the United States arising from fires, storm, 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 amount of such loss or losses sustained in trade, or specu- 
 Ascertain- lative transactions not in trade, from the same or any kind 
 ing Amount of property acquired before March first, nineteen hundred 
 of Loss. and thirteen, the fair market price or value of such property 
 as of March first, nineteen hundred and thirteen, shall be the basis for deter- 
 mining the amount of such loss or losses sustained; 
 
 Fifth. In transactions entered into for profit but not connected with 
 Losses not his business or trade, the losses actually sustained therein 
 in Trade. during the year to an amount not exceeding the profits aris- 
 ing therefrom in the United States; 
 
 Sixth. Debts arising in the course of business or trade conducted by him 
 B A D ht within the United States due to the taxpayer actually ascer- 
 * tained to be worthless and charged off within the year; 
 1 Amendment. 
 
AMENDED INCOME TAX LAW 225 
 
 Seventh. A reasonable allowance for the exhaustion, wear and tear of 
 property within the United States arising out of its use or employment in 
 the business or trade; (a) in the case of oil and gas wells a 
 reasonable allowance for actual reduction in flow and produc- .. ^ 
 tion 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 pre- 
 scribed by the Secretary of the Treasury: Provided, That when Limitation 
 the allowance authorized in (a) and (b) shall equal the capital of Deple- 
 originally invested, or in case of purchase made prior to tion. 
 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, per- Improve- 
 manent improvements, or betterments, made to increase mentsnot 
 the value of any property or estate, and no deduction shall Deducti- 
 be made for any amount of expense of restoring property or ble. 
 making good the exhaustion thereof for which an allowance is or has been 
 made. 
 
 (b) There shall also be allowed the credits specified by 
 subdivisions (b) and (c) of section five. 
 
 1 (c) A nonresident alien individual shall receive the benefit of the de- 
 ductions and credits provided for in this section only by filing or causing 
 to be filed with the collector of internal revenue a true and Deductions 
 accurate return of his total income, received from all sources, Contingent 
 corporate or otherwise, in the United States, in the manner on Filing 
 prescribed by this title; and in case of his failure to file such Return. 
 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. 
 
 PERSONAL EXEMPTION 
 
 1 SEC. 7. That for the purpose of the normal tax only, there shall be al- 
 lowed as an exemption in the nature of a deduction from the amount of 
 the net income of each citizen or resident of the United States, Specific 
 ascertained as provided herein, the sum of $3,000, plus $1,000 Exemp- 
 additional if the person making the return be a head of a tions, Citi- 
 family or a married man with a wife living with him, or plus zensand 
 the sum of $1,000 additional if the person making the return Residents 
 be a married woman with a husband living with her; but in on ty* 
 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 if the person making the return is the head 
 
 1 Amendment. 
 
226 APPENDIX A 
 
 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 cestui que trust: Provided 
 further, That in no event shall a ward or cestui que trust be allowed a greater 
 personal exemption than as provided in this section, from the amount of 
 net income received from all sources. There shall also be allowed an exemp- 
 tion from the amount of the net income of estates of deceased citizens or 
 residents of the United States during the period of administration or settle- 
 ment, 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. 
 
 RETURNS 
 
 Returns of SEC. 8. (a) The tax shall be computed upon the net income, 
 Net In- as thus ascertained, of each person subject thereto, received 
 come. in each preceding calendar year ending December thirty-first, 
 
 (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 
 When and return under oath shall be made by each person of lawful 
 With age, except as hereinafter provided, having a net income of 
 
 Whom $3,000 or over for the taxable year to the collector of internal 
 
 to File Re- revenue for the district in which such person has his legal 
 turn. 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 Commis- 
 sioner of Internal Revenue, with the approval of the Secretary of the Treas- 
 ury, shall prescribe, setting forth specifically the gross amount of income 
 from all separate sources, and from the total thereof deducting the aggre- 
 gate items of allowances herein authorized; Provided, That the Commis- 
 Extension sioner of Internal Revenue shall have authority to grant a 
 of Time to reasonable extension of time, in meritorious cases, for filing 
 File Re- returns of income by persons residing or traveling abroad 
 turn. w ho 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: Pro- 
 vided further, That the aforesaid return may be made by an agent when by 
 reason of illness, absence, or nonresidence the person liable 
 f or g^ return j s 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. 
 1 (c) Guardians, trustees, executors, administrators, receivers, con- 
 
 1 Amendment. 
 
AMENDED INCOME TAX LAW 227 
 
 servators, and all persons, corporations, or associations, acting in any fidu- 
 ciary capacity, shall make and render a return of the income Returns by 
 of the person, trust, or estate for whom or which they act, Guardians, 
 and be subject to all the provisions of this title which apply Trustees, 
 to individuals. Such fiduciary shall make oath that he has Receivers. 
 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 p., 
 made by one of two or more joint fiduciaries filed in the dis- c j ar jes 
 trict 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: Provided further, That no return 
 of income not exceeding $3,000 shall be required except as in this title other- 
 wise provided. 
 
 (d) Repealed. 
 
 1 (e) Persons carrying on business in partnership shall be liable for in- 
 come tax only in their individual capacity, and the share of the profits of 
 the partnership to which any taxable partner would be en- 
 titled if the same were divided, whether divided or other- 
 wise, 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 addi- 
 tional, there shall be excluded their proportionate shares Interest on 
 received from interests on the obligations of a State or any State Ob- 
 political or taxing subdivision thereof, and upon the obliga- ligations 
 tions of the United States (if and to the extent that it is pro- Excluded. 
 vided 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 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. Such partnership, Returns by 
 when requested by the Commissioner of Internal Revenue Partner- 
 or any district collector, shall render a correct return of the ships. 
 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 making 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 ^ lscal 
 calendar year for which there is a rate of tax different from 
 the rate for the preceding calendar year, then (i) 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 
 
 1 Amendment. 
 
228 APPENDIX A 
 
 year falling within such calendar year bears to the full fiscal year, and (?) 
 the rate for the calendar year during which such fiscal year ends shall apply 
 to the remainder. 
 
 (f) In every return shall be included the income derived from dividends 
 Dividends on the capital stock or from the net earnings of any corpora- 
 Returna- tion, joint-stock company or association, or insurance com- 
 ble. pany, except that in the case of nonresident aliens such income 
 derived from sources without the United States shall not be included. 
 
 (g) An individual keeping accounts upon any basis other than that of 
 actual receipts and disbursements, unless such other basis does not clearly 
 Basis of reflect his income, may, subject to regulations made by the 
 Keeping Commissioner of Internal Revenue, with the approval of 
 Accounts, the Secretary of the Treasury, make his return upon the 
 basis upon which his accounts are kept, in which case the tax shall be com- 
 puted upon his income as so returned. 
 
 ASSESSMENT AND ADMINISTRATION 
 
 SEC. 9. (a) That all assessments shall be made by the Commissioner of 
 Internal Revenue and all persons shall be notified of the amount for which 
 __ _ they are respectively liable on or before the first day of June 
 p n bl * eac k success * ve vear > an d said amounts shall be paid on 
 or before the fifteenth day of June, except in cases of refusal 
 or neglect to make such return and in cases of erroneous, false, or fraudulent 
 returns, in which cases the Commissioner of Internal Revenue shall, upon 
 the discovery thereof, at any time within three years after said return is 
 due, or has been made, make a return upon information obtained as provided 
 for in this title or by existing law, or require the necessary corrections to 
 be made, and the assessment made by the Commissioner of Internal Revenue 
 thereon shall be paid by such person or persons immediately upon notifica- 
 tion of the amount of such assessment; and to any sum or sums due and 
 unpaid after the fifteenth day of June in any year, and for ten days after 
 notice and demand thereof by the collector, there shall be added the sum 
 Penalty of five per centum on the amount of tax unpaid, and interest 
 Delayed at the rate of one per centum per month upon said tax from 
 Payments, the tune the same became due, except from the estates of 
 insane, deceased, or insolvent persons. 
 
 1 (b) All persons, corporations, partnerships, associations, and insurance 
 companies, in whatever capacity acting, including lessees or mortgagors 
 Withhold- f rea l or personal property, trustees acting in any trust 
 ing Tax on capacity, executors, administrators, receivers, conservators, 
 Income of employers, and all officers and employees of the United States, 
 Nonres- having the control, receipt, custody, disposal or payment 
 ident O f interest, rent, salaries, wages, premiums, annuities, corn- 
 
 Aliens, pensation, remuneration, emoluments, or other fixed or de- 
 
 terminable annual or periodical gains, profits, and income of any nonresident 
 
 1 Amendment. 
 
AMENDED INCOME TAX LAW 22Q 
 
 alien individual, other than income derived from dividends on capital 
 stock, or from the net earnings of a corporation, joint-stock Exclusive 
 company or association, or insurance company, which is ofDivi- 
 taxable upon its net income as provided in this title, are (lends. 
 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 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 company, or demand whatsoever for all payments 
 which they shall make in pursuance and by virtue of this title. 
 
 1 (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 Withhold- 
 and mortgages, or deeds of trust or other similar obligations fog T^ on 
 of corporations, joint-stock companies, associations, and in- Interest on 
 surance companies, (if such bonds, mortgages, or other obliga- Bonds con- 
 tions contain a contract or provision by which the obligor taining 
 agrees to pay any portion of the tax imposed by this title Tax-free 
 upon the obligee or to reimburse the obligee for any portion Covenant, 
 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 nonresident 
 alien individual or to an individual citizen or resident of the United States, 
 subject to the provisions of the foregoing subdivision (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 interest shall file with the withholding agent, on or before 
 February first, a signed notice in writing claiming the benefit of an exemp- 
 tion under section seven of this Title. 
 
 (d) Repealed. 
 
 (e) Repealed. 
 
 *(f) All persons, corporations, partnerships, or associations, under- 
 taking as a matter of business or for profit the collection of foreign pay- 
 ments of interest or dividends by means of coupons, checks, License 
 or bills of exchange shall obtain a license from the Commis- Required 
 sioner of Internal Revenue, and shall be subject to such regu- by Collec- 
 lations enabling the Government to obtain the information tors of For- 
 required under this title, as the Commissioner of Internal eign Pay- 
 Revenue, with the approval of the Secretary of the Treasury, ments - 
 shall prescribe; and whoever knowingly undertakes to collect such pay- 
 ments as aforesaid without having obtained a license therefor, or without 
 
 1 Amendment. 
 
230 APPENDIX A 
 
 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 im- 
 prisoned for a term not exceeding one year, or both, hi the discretion of the 
 court. 
 
 (g) The tax herein imposed upon gains, profits, and incomes not falling 
 General under the foregoing and not returned and paid by virtue of 
 Assess- the foregoing or as otherwise provided by law shall be as- 
 ment of In- sessed by personal return under rules and regulations to be 
 come. 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 
 
 theLaw class> as defined b ^ this title > sha11 be char g ed 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 deter- 
 mined as of the year for which a return is required to be rendered. 
 Withhold- ^e P rov i s i ns f this section, except subdivision (c), re- 
 ing Applies lating to the deduction and payment of the tax at the source 
 only to f income shall only apply to the normal tax hereinbefore 
 
 Normal Tax. imposed upon nonresident alien individuals. 
 
 PART II. ON CORPORATIONS 
 
 1 SEC. 10. (a) That there shall be levied, assessed, collected, and paid 
 annually upon the total net income received in the preceding calendar 
 Income of year from all sources by every corporation, joint-stock corn- 
 Corpora- pany or association, or insurance company, organized in the 
 tions. 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 corpora- 
 tion, joint-stock company or association, or insurance company, organized, 
 authorized, or existing under the laws of any foreign country, including in- 
 terest 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. 
 
 The foregoing tax rate shall apply to the total net income received by 
 every taxable corporation, joint-stock company or association, or insurance 
 Calendar company in the calendar year nineteen hundred and sixteen 
 or Fiscal and in each year thereafter, except that if it has fixed its 
 Year. own fiscal year under the provisions of existing law, the fore- 
 
 going rate shall apply to the proportion of the total net income returned 
 
 1 Amendment. 
 
AMENDED INCOME TAX LAW 23! 
 
 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 as- 
 sociation, or insurance company, of property, real, personal, Ascertain- 
 or mixed, acquired before March first, nineteen hundred and ing Profit 
 thirteen, the fair market price or value of such property as or Loss. 
 of March first, nineteen hundred and thirteen, shall be the basis for deter- 
 mining the amount of such gain derived or loss sustained. 
 
 1 (b) In addition to the income tax imposed by subdivision (a) of this 
 section there shall be levied, assessed, collected, and paid annually an addi- 
 tional tax of ten per centum upon the amount, remaining Undistrib- 
 undistributed six months after the end of each calendar or uted Profits 
 fiscal year, of the total net income of every corporation, joint- Tax on 
 stock company or association, or insurance company, received Corpora- 
 during the year, as determined for the purposes of the tax tions. 
 imposed by such subdivision (a), but not including the amount of any income 
 taxes paid by it within the year imposed by the authority of the United 
 States. 
 
 1 The tax imposed by this subdivision shall not apply to that portion 
 of such undistributed net income which is actually invested Certain In- 
 and employed in the business or is retained for employment vested In- 
 in the reasonable requirements of the business or is invested come Ex- 
 in obligations of the United States issued after September empt. 
 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 ~ d(llt:i 
 is not so employed or is not reasonably required in the business 
 a tax of fifteen per centum shall be levied, assessed, collected, and paid 
 thereon. 
 
 1 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 Applicable 
 and seventeen and in each year thereafter, except that if it to Year 
 has fixed its own fiscal year under the provisions of existing 1917 and 
 law, the foregoing rates shall apply to the proportion of the Thereafter. 
 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. 
 
 1 Amendment. 
 
232 APPENDIX A 
 
 CONDITIONAL AND OTHER EXEMPTIONS 
 
 SEC. ii. (a) That there shall not be taxed under this title any income 
 Organiza- received by any 
 
 tionsNot First. Labor, agricultural, or horticultural organization. 
 
 Taxable. 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 cooperative banks 
 without capital stock organized and operated for mutual purposes and with- 
 out profit; 
 
 Fifth. Cemetery company owned and operated exclusively for the benefit 
 of its members; 
 
 Sixth. Corporation or association organized and operated exclusively 
 for religious, charitable, scientific, or educational purposes, no part of the 
 net income of which inures to the benefit of any private stockholder or in- 
 dividual; 
 
 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, recreation, 
 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 com- 
 pany, or like organization of a purely local character, the income of which 
 consists solely of assessments, dues, and fees collected from members for 
 the sole purpose of meeting its expenses; 
 
 Eleventh. Farmers', fruit growers', or like association, organized 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 neces- 
 sary selling expenses, on the basis of the quantity of produce furnished by 
 them; 
 
 Twelfth. Corporation or association organized for the 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, nine- 
 teen hundred and sixteen, entitled "An Act to provide capital for agricul- 
 tural development, to create standard forms of investment based upon farm 
 mortgage, to equalize rates of interest upon farm loans, to furnish a market 
 
AMENDED INCOME TAX LAW 233 
 
 for United States bonds, to create Government depositaries 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 be- 
 longing 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 governmental function 
 accruing to any State, Territory, or the District of Columbia, Income 
 or any political subdivision of a State or Territory, nor any from Pub- 
 income accruing to the government of the Philippine Islands lie Utility, 
 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 Terri- State and 
 tory, has, prior to the passage of this title, entered in good Municipal 
 faith into a contract with any person or corporation, the Income 
 object and purpose of which is to acquire, construct, operate, Exempt, 
 or maintain a public utility, no tax shall be levied under the provisions of 
 this title upon the income derived from the operation of such public utility, 
 so far as the payment thereof will impose a loss or burden upon such State, 
 Territory, 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. 
 
 DEDUCTIONS 
 
 SEC. 12. (a) In the case of a corporation, joint-stock com- Deductions 
 pany or association, or insurance company, organized in Allowed to 
 the United States, such net income shall be ascertained by Domestic 
 deducting from the gross amount of its income received within Corpora- 
 the year from all sources tions. 
 
 First. All the ordinary and necessary expenses paid within the year 
 in the maintenance and operation of its business and properties, including 
 rentals or other payments required to be made as a condition Necessary 
 to the continued use or possession of property to which the Expenses, 
 corporation has not taken or is not taking title, or in which it has no equity. 
 
 Second. All losses actually sustained and charged off within the year 
 and not compensated by insurance or otherwise, including , 
 a reasonable allowance for the exhaustion, wear and tear 
 of property arising out of its use or employment in the business or trade; 
 (a) in the case of oil and gas wells a reasonable allowance for Deprecia- 
 actual reduction in flow and production to be ascertained tion. 
 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 hi the mine of the product e ^ e 
 thereof which has been mined and sold during the year for which the return 
 
234 APPENDIX A 
 
 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 
 Limitation Secretary of the Treasury: Provided, That when the allow- 
 of Deple- ance authorized in (a) and (b) shall equal the capital originally 
 tion. 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; and (c) hi the case of insurance companies, 
 the net addition, if any, required by law to be made within the year to re- 
 serve funds and the sums other than dividends paid within the year on 
 Improve- policy and annuity contracts: Provided, That no deduction 
 merits. 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: Provided further, That mutual fire 
 Income of and mutual employers' liability and mutual workmen's corn- 
 Mutual pensation and mutual casualty insurance companies requir- 
 Companies. ing their members to make premium deposits to provide for 
 losses and expenses shall not return as income any portion of the premium 
 deposits returned to their policyholders, but shall return as taxable income 
 all income received by them from all other sources plus such portions of 
 the premium deposits as are retained by the companies for purposes other 
 than the payment of losses and expenses and reinsurance reserves: Provided 
 further, That mutual marine insurance companies shall include in their 
 return of gross income gross premiums collected and received by them less 
 amounts paid for reinsurance, but shall be entitled to include in deductions 
 from gross income amounts repaid to policyholders on account of premiums 
 previously paid by them and interest paid upon such amounts between the 
 ascertainment thereof and the payment thereof, and life insurance com- 
 panies shall not include as income in any year such portion of any actual 
 premium received from any individual policyholder as shall have been 
 paid back or credited to such individual policyholder, or treated as an abate- 
 ment of premium of such individual policyholder, within such year; 
 
 1 Third. The amount of interest paid within the year on its indebtedness 
 (except on indebtedness incurred for the purchase of obligations or securi- 
 
 Interest * nterest u P n which is exempt from taxation as in- 
 
 come 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 out- 
 standing 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 
 Limitation the purpose of this title preferred capital stock shall not be 
 of Interest considered interest-bearing indebtedness, and interest or 
 Deductible, 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 
 
 1 Amendment. 
 
AMENDED INCOME TAX LAW 235 
 
 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 associa- 
 tion 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 fitrther, 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 hi 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 indebtedness issued by such bank, banking association, loan or trust 
 company shall be deducted. 
 
 1 Fourth. Taxes paid within the year imposed by the authority of the 
 United States (except income and excess profits taxes), or Taxes De- 
 of its Territories, or possessions, or any foreign country, or ductible. 
 by the authority of any State, county, school district, or Exceptions. 
 municipality, or other taxing subdivision of any State, not including those 
 assessed against local benefits. 
 
 (b) In the case of a corporation, joint-stock company or association, 
 or insurance company, organized, authorized, or existing Net Tn- 
 under the laws of any foreign country, such net income shall come of 
 be ascertained by deducting from the gross amount of its Foreign 
 income received within the year from all sources within the Corpora- 
 United States tions. 
 
 First. All the ordinary and necessary expenses actually paid within the 
 year out of earnings in the maintenance and operation of Deductions 
 its business and property within the United States, including Allowed 
 rentals or other payments required to be made as a condition Foreign 
 to the continued use or possession of property to which the Corpora- 
 corporation has not taken or is not taking title, or in which tions. 
 it has no equity. 
 
 Second. All losses actually sustained within the year in business or trade 
 conducted by it within the United States and not compen- 
 sated by insurance or otherwise, including a reasonable al- 
 lowance for the exhaustion, wear and tear of property arising out of its 
 use or employment in the business or trade; (a) and in the Deprecia- 
 case (a) of oil and gas wells a reasonable allowance for actual tion. 
 reduction in flow and production to be ascertained not by the flush flow, 
 
 1 Amendment. 
 
236 APPENDIX A 
 
 D Diction k ut ky 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 
 Limitation Treasury: Provided, That when the allowance authorized 
 of Deple- in (a) and (b) shall equal the capital originally invested, or 
 tion. in case of purchase made prior to March first, nineteen hun- 
 
 dred and thirteen, the fair market value as of that date, no further allow- 
 ance shall be made; and (c) in the case of insurance companies, the net ad- 
 dition, if any, required by law to be made within the year to reserve funds 
 and the sums other than dividends paid within the year on policy and an- 
 Improve- nuity contracts: Provided, That no deduction shall be allowed 
 ments. for any amount paid out for new buildings, permanent im- 
 
 provements, 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: Provided further, That mutual fire and 
 
 mutual employers' liability and mutual workmen's compen- 
 Mutual ^ sation and mutual casualty insurance companies requiring 
 
 their members to make premium deposits to provide for losses 
 and expenses shall not return as income any portion of the premium de- 
 posits returned to their policyholders, but shall return as taxable income 
 all income received by them from all other sources plus such portions of the 
 premium deposits as are retained by the companies for purposes other than 
 the payment of losses and expenses and reinsurance reserves: Provided 
 further, That mutual marine insurance companies shall include in their 
 return of gross income gross premiums collected and received by them less 
 amounts paid for reinsurance, but shall be entitled to include in deductions 
 from gross income amounts repaid to policyholders on account of premiums 
 previously paid by them, and interest paid upon such amounts between 
 the ascertainment thereof and the payment thereof, and life insurance 
 companies shall not include as income in any year such portion of any actual 
 premium received from any individual policyholder as shall have been 
 paid back or credited to such individual policyholder, or treated as an 
 abatement of premium of such individual policyholder, within such year; 
 
 1 Third. The amount of interest paid within the year on its indebted- 
 ness (except on indebtedness incurred for the purchase of obligations or 
 Int st 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 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 
 Limitation stock, the entire amount of the capital employed in the busi- 
 of Interest ness at the close of the year, and (b) one-half of its interest- 
 Deductible, bearing indebtedness then outstanding, which the gross amount 
 
 1 Amendment. 
 
AMENDED INCOME TAX LAW 237 
 
 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 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 indebtedness issued by such bank, banking associa- 
 tion, loan or trust company, or branch thereof; 
 
 Fourth. Taxes paid within the year imposed by the authority of the 
 United States (except income and excess profits taxes), or of Taxes De- 
 its Territories, or possessions, or by the authority of any ductible. 
 State, county, school district, or municipality, or other taxing Excep- 
 subdivision of any State, paid within the United States, not tions. 
 including those assessed against local benefits. 
 
 (c) In the case of assessment insurance companies, whether domestic 
 or foreign, the actual deposit of sums with State or Terri- Reserve 
 torial officers, pursuant to law, as additions to guarantee Insurance 
 or reserve funds shall be treated as being payments required Corn- 
 by law to reserve funds. panics. 
 
 RETURNS 
 
 SEC. 13. (a) The tax shall be computed upon the net income, as thus 
 ascertained, received within each preceding calendar year ending December 
 thirty-first: Provided, That any corporation, joint-stock com- 
 pany or association, or insurance company, subject to this 
 tax, may designate the last day of any month in the year as the day of the 
 closing of its fiscal year and shall be entitled to have the tax Fiscal 
 payable by it computed upon the basis of the net income as- Year. 
 certained as herein provided for the year ending on the day so designated 
 in the year preceding the date of assessment instead of upon the basis of 
 the net income for the calendar year preceding the date of assessment; and 
 it shall give notice of the day it has thus designated as the closing of its 
 fiscal year to the collector of the district in which its principal business 
 office is located at any time not less than thirty days prior to the first day 
 of March of the year in which its return would be filed if made upon the 
 basis of the calendar year; 
 
 (b) Every corporation, joint-stock company or association, or insurance 
 company, subject to the tax herein imposed, shall, on or before the first 
 day of March, nineteen hundred and seventeen, and the first Return 
 day of March in each year thereafter, or, if it has designated When Due. 
 a fiscal year for the computation of its tax, then within sixty days after the 
 close of such fiscal year ending prior to December thirty-first, nineteen 
 hundred and sixteen, and the close of each such fiscal year thereafter, render 
 
238 APPENDIX A 
 
 a true and accurate return of its annual net income in the manner and form 
 to be prescribed by the Commissioner of Internal Revenue, with the ap- 
 proval of the Secretary of the Treasury, and containing such facts, data, 
 and information as are appropriate and in the opinion of the commissioner 
 necessary to determine the correctness of the net income returned and to 
 Sworn to cany out the provisions of this title. The return shall be 
 by Two sworn to by the president, vice president, or other principal 
 Officers of officer, and by the treasurer or assistant treasurer. The 
 Corpora- return shall be made to the collector of the district in which 
 tion. is located the principal office of the corporation, company, 
 
 or association, where are kept its books of account and other data from 
 which the return is prepared, or in the case of a foreign corporation, corn- 
 Where to P anv > or association, to the collector of the district in which 
 File Re- is located its principal place of business in the United States, 
 turn. or if it have no principal place of business, office, or agency 
 
 in the United States, then to the collector of internal revenue at Baltimore, 
 Maryland. All such returns shall as received be transmitted forthwith by 
 the collector to the Commissioner of Internal Revenue; 
 
 (c) In cases wherein receivers, trustees in bankruptcy, or assignees are 
 operating the property or business of corporations, joint-stock companies 
 Receivers, or associations, or insurance companies, subject to tax imposed 
 Trustees, by this title, such receivers, trustees, or assignees shall make 
 etc., Must returns of net income as and for such corporations, joint- 
 Make Re- stock companies or associations, and insurance companies, 
 turns. i n the same manner and form as such organizations are here- 
 inbefore required to make returns, and any income tax due on the basis of 
 such returns made by receivers, trustees, or assignees shall be assessed and 
 collected in the same manner as if assessed directly against the organiza- 
 tions of whose businesses or properties they have custody and control; 
 
 (d) A corporation, joint-stock company or association, or insurance com- 
 pany, keeping accounts upon any basis other than that of actual receipts 
 Basis of and disbursements, unless such other basis does not clearly 
 Keeping reflect its income, may, subject to regulations made by the 
 Accounts. Commissioner of Internal Revenue, with the approval of the 
 Secretary of the Treasury, make its return upon the basis upon which its 
 accounts are kept, in which case the tax shall be computed upon its income 
 as so returned; 
 
 1 (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 
 Withhold- States Government authorized to receive the same from 
 ing Tax on the income of nonresident alien individuals from sources 
 Incomes of within the United States shall be made applicable to the 
 Foreign tax imposed by subdivision (a) of section ten upon incomes 
 Corpora- derived from interest upon bonds and mortgages or deeds of 
 tions. trust or similar obligations of domestic or other resident 
 
 corporations, joint-stock companies or associations, and insurance com- 
 
 1 Amendment. 
 
AMENDED INCOME TAX LAW 239 
 
 panics by nonresident alien firms, copartnerships, companies, corporations, 
 joint-stock companies or associations, and insurance companies, not en- 
 gaged in business or trade within the United States and not having any 
 office or place of business therein. 
 
 (f) Likewise, 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 jy v 'j n( i g 
 from the income of nonresident alien individuals from sources 
 within the United States shall be made applicable to income derived from 
 dividends upon the capital stock or from the net earnings of domestic or 
 other resident corporations, joint-stock companies or associa- Nonres- 
 tions, and insurance companies by nonresident alien companies, ident Or- 
 corporations, joint-stock companies or associations, and insur- ganiza- 
 ance companies not engaged in business or trade within the tions. 
 United States and not having any office or place of business therein. 
 
 ASSESSMENT AND ADMINISTRATION 
 
 SEC. 14. (a) All assessments shall be made and the several corporations, 
 joint-stock companies or associations, and insurance companies shall be 
 notified of the amount for which they are respectively liable Assess- 
 on or before the first day of June of each successive year, ments. 
 and said assessment shall be paid on or before the fifteenth day of June; 
 Provided, That every corporation, joint-stock company or Payment 
 association, and insurance company, computing taxes upon of Tax 
 the income of the fiscal year which it may designate in the When Due. 
 manner hereinbefore provided, shall pay the taxes due under its assessment 
 within one hundred and five days after the date upon which it is required 
 to file its list or return of income for assessment; except in cases of refusal 
 or neglect to make such return, and in cases of erroneous, false, or fraudulent 
 returns, in which cases the Commissioner of Internal Revenue shall, upon 
 the discovery thereof, at any time within three years after said return is 
 due, make a return upon information obtained as provided for in this title 
 or by existing law; and the assessment made by the Commissioner of In- 
 ternal Revenue thereon shall be paid by such corporation, joint-stock com- 
 pany or association, or insurance company immediately upon notification 
 of the amount of such assessment; and to any sum or sums due and unpaid 
 after the fifteenth day of June in any year, or after one hundred and five 
 days from the date on which the return of income is required Penalty 
 to be made by the taxpayer, and after ten days' notice and Delayed 
 demand thereof by the collector, there shall be added the Payment, 
 sum of five per centum on the amount of tax unpaid and interest at the rate 
 of one per centum per month upon said tax from the time the same becomes 
 due; Provided, That upon the examination of any return of income made 
 pursuant to this title, the Act of August fifth, nineteen hundred and nine, 
 entitled, "An Act to provide revenue, equalize duties and encourage the 
 industries of the United States, and for other purposes," and the Act of 
 October third, nineteen hundred and thirteen, entitled, "An Act to reduce 
 
240 APPENDIX A 
 
 tariff duties and to provide revenue for the Government, and for other 
 purposes," if it shall appear that amounts of tax have been paid in excess 
 of those properly due, the taxpayer shall be permitted to present a claim 
 for refund thereof notwithstanding the provisions of section thirty-two 
 hundred and twenty-eight of the Revised Statutes; 
 
 (b) When the assessment shall be made, as provided in this title, the 
 returns, together with any corrections thereof which may have been made 
 Returns by the commissioner, shall be filed in the office of the Corn- 
 Constitute missioner of Internal Revenue and shall constitute public 
 Public records and be open to inspection as such; Provided, That 
 Records. anv and all such returns shall be open to inspection only 
 upon the order of the President, under rules and regulations to be prescribed 
 Conditions by the Secretary of the Treasury and approved by the Presi- 
 of Inspec- dent; Provided further, That the proper officers of any State 
 tion. imposing a general income tax may, upon the request of the 
 governor thereof, have access to said returns or to an abstract thereof, show- 
 ing the name and income of each such corporation, joint-stock company 
 or association, or insurance company, at such times and in such manner as 
 the Secretary of the Treasury may prescribe; 
 
 (c) If any of the corporations, joint-stock companies or associations, or 
 insurance companies aforesaid shall refuse or neglect to make a return at 
 Penalty ^ e ^ UTie or times hereinbefore specified in each year, or shall 
 Refusal to render a false or fraudulent return, such corporation, joint- 
 Make Re- stock company or association, or insurance company shall 
 turn and be liable to a penalty of not exceeding $10,000; Provided, 
 Making That the Commissioner of Internal Revenue shall have au- 
 False thority, in the case of either corporations or individuals, 
 Return. to gran t a reasonable extension of time in meritorious cases, 
 as he may deem proper. 
 
 (d) That section thirty-two hundred and twenty-five of the Revised 
 Statutes of the United States be, and the same is hereby, amended so as 
 to read as follows: 
 
 "SEC. 3225. When a second assessment is made in case of any list, state- 
 ment, or return, which in the opinion of the collector or deputy collector 
 Second was false or fraudulent, or contained any understatement 
 Assess- or undervaluation, no tax collected under such assessment 
 ment. shall be recovered by any suit unless it is proved that the said 
 
 list, statement, or return was not false nor fraudulent and did not contain 
 any understatement or undervaluation; but this section shall not apply to 
 statements or returns made or to be made in good faith under the laws of the 
 United States, regarding annual depreciation of oil or gas wells and mines." 
 
 PART III. GENERAL ADMINISTRATIVE PROVISIONS 
 
 " State " SEC. 15. That the word "State" or "United States" when 
 
 " United used in this title shall be construed to include any Territory, 
 
 States " the District of Columbia, Porto Rico, and the Philippine 
 
 Defined. Islands, when such construction is necessary to carry out its 
 provisions. 
 
AMENDED INCOME TAX LAW 24! 
 
 SEC. 16. That sections thirty-one hundred and sixty-seven, thirty-one 
 hundred and seventy-two, thirty-one hundred and seventy-three, and 
 thirty-one hundred and seventy-six of the Revised Statutes of the United 
 States as amended are hereby amended so as to read as follows: 
 
 "SEC. 3167. It shall be unlawful for any collector, deputy collector, agent, 
 clerk, or other officer or employee of the United States to divulge or to 
 make known in any manner whatever not provided by law Disclosing 
 to any person the operations, style of work, or apparatus of Informa- 
 any manufacturer or producer visited by him in the discharge tipn Pro- 
 of his official duties, or the amount or source of income, profits, hibited. 
 losses, expenditures, or any particular thereof, set forth or disclosed in 
 any income return, or to permit any income return or copy thereof or any 
 book containing any abstract or particulars thereof to be seen or examined 
 by any person except as provided by law; and it shall be unlawful for any 
 person to print or publish in any manner whatever not provided by law 
 any income return or any part thereof or source of income, profits, losses, 
 or expenditures appearing in any income return; and any offense against 
 the foregoing provision shall be a misdemeanor and be punished by a fine 
 not exceeding $1,000 or by imprisonment not exceeding one year, or both, 
 at the discretion of the court; and if the offender be an officer or employee 
 of the United States he shall be dismissed from office or discharged from 
 employment. 
 
 "SEC. 3172. Every collector shall, from time to time, cause his deputies 
 to proceed through every part of his district and inquire after and concern- 
 ing all persons therein who are liable to pay any internal- Collector's 
 revenue tax, and all persons owning or having the care and Duty. 
 management of any objects liable to pay any tax, and to make a list of 
 such persons and enumerate said objects. 
 
 "SEC. 3173. It shall be the duty of any person, partnership, firm, associa- 
 tion, or corporation, made liable to any duty, special tax, or other tax im- 
 posed by law, when not otherwise provided for, (i) in case Provisions 
 of a special tax, on or before the thirty-first day of July in of Admin- 
 each year, (2) in case of income tax on or before the first day istration. 
 of March in each year, or on or before the last day of the sixty-day period 
 next following the closing date of the fiscal year for which it makes a return 
 of its income, and (3) in other cases before the day on which the taxes 
 accrue, to make a list or return, verified by oath, to the collector or a deputy 
 collector of the district where located, of the articles or objects, including 
 the amount of annual income charged with a duty or tax, the quantity of 
 goods, wares, and merchandise, made or sold and charged with a tax, the 
 several rates and aggregate amount, according to the forms and regulations 
 to be prescribed by the Commissioner of Internal Revenue, with the ap- 
 proval of the Secretary of the Treasury, for which such person, partnership, 
 firm, association, or corporation is liable: Provided, That if any person 
 liable to pay any duty or tax, or owning, possessing, or having the care or 
 management of property, goods, wares, and merchandise, article or objects 
 liable to pay any duty, tax, or license, shall fail to make and exhibit a list 
 or return required by law, but shall consent to disclose the particulars of 
 
242 APPENDIX A 
 
 any and all the property, goods, wares, and merchandise, articles, and ob- 
 jects liable to pay any duty or tax, or any business or occupation liable to 
 pay any tax as aforesaid, then, and in that case, it shall be the duty of the 
 Returns, collector or deputy collector to make such list or return, 
 Collectors, which, being distinctly read, consented to, and signed and 
 verified by oath by the person so owning, possessing, or having the care and 
 management as aforesaid, may be received as the list of such person: Pro- 
 vided further, That in case no annual list or return has been rendered by 
 such person to the collector or deputy collector as required by law, and the 
 person shall be absent from his or her residence or place of business at the 
 time the collector or a deputy collector shall call for the annual list or re- 
 turn, it shall be the duty of such collector or deputy collector to leave at 
 such place of residence or business, with some one of suitable age and dis- 
 cretion, if such be present, otherwise to deposit in the nearest post office, a 
 note or memorandum addressed to such person, requiring him or her to 
 render to such collector or deputy collector the list or return required by 
 law within ten days from the date of such note or memorandum, verified by 
 oath. And if any person, on being notified or required as aforesaid, shall 
 refuse or neglect to render such list or return within the time required as 
 aforesaid, or whenever any person who is required to deliver a monthly or 
 other return of objects subject to tax fails to do so at the time required, or 
 delivers any return which, in the opinion of the collector, is erroneous, false, 
 or fraudulent, or contains any undervaluation or understatement, or refuses 
 to allow any regularly authorized Government officer to examine the books 
 of such person, firm, or corporation, it shall be lawful for the collector to 
 summon such person, or any other person having possession, custody, or 
 care of books of account containing entries relating to the business of such 
 person, or any other person he may deem proper, to appear before him and 
 produce such books at a tune and place named in the summons, and to give 
 testimony or answer interrogatories, under oath, respecting any objects or 
 income liable to tax or the returns thereof. The collector may summon 
 any person residing or found within the State or Territory in which his 
 district lies; and when the person intended to be summoned does not reside 
 and cannot be found within such State or Territory, he may enter any collec- 
 tion district where such person may be found and there make the examina- 
 tion herein authorized. And to this end he may there exercise all the author- 
 ity which he might lawfully exercise in the district for which he was commis- 
 sioned: Provided, That "person," as used in this section, shall be construed 
 to include any corporation, joint-stock company or association, or insurance 
 company when such construction is necessary to carry out its provisions. 
 
 SEC. 3176. If any person, corporation, company, or association fails to 
 make and file a return or list at the time prescribed by law, or makes, will- 
 When fully or otherwise, a false or fraudulent return or list, the 
 Collector collector or deputy collector shall make the return or list 
 MayPre- from his own knowledge and from such information as he 
 pare Re- can obtain through testimony or otherwise. Any return or 
 turn, list so made and subscribed by a collector or deputy collector 
 shall be prima facie good and sufficient for all legal purposes. 
 
AMENDED INCOME TAX LAW 243 
 
 If the failure to file a return or list is due to sickness or absence the col- 
 lector may allow such further time, not exceeding thirty days, Extension 
 for making and filing the return or list as he deems proper. of Time. 
 
 "The Commissioner of Internal Revenue shall assess all taxes, other 
 than stamp taxes, as to which returns or lists are so made by a collector 
 or deputy collector. In case of any failure to make and file Penalties 
 a return or list within the time prescribed by law or by the for Failure 
 collector, the Commissioner of Internal Revenue shall add to File 
 to the tax fifty per centum of its amount except that, when Returns, 
 a return is voluntarily and without notice from the collector filed after such 
 time and it is shown that the failure to file it was due to a reasonable cause 
 and not to willful neglect, no such addition shall be made to the tax. In 
 case a false or fraudulent return or list is willfully made, the Commissioner 
 of Internal Revenue shall add to the tax one hundred per False Re* 
 centum of its amount. turn. 
 
 "The amount so added to any tax shall be collected at the same time 
 and in the same manner and as part of the tax unless the tax has been paid 
 before the discovery of the neglect, falsity, or fraud, in which case the 
 amount so added shall be collected in the same manner as the tax." 
 
 SEC. 17. That it shall be the duty of every collector of internal revenue, 
 to whom any payment of any taxes is made under the provisions of this 
 title, to give to the person making such payment a full written Receipt for 
 or printed receipt, expressing the amount paid and the par- Payment 
 ticular account for which such payment was made; and when- of Tax. 
 ever such payment is made such collector shall, if required, give a separate 
 receipt for each tax paid by any debtor, on account of payments made to 
 or to be made by him to separate creditors in such form that such debtor can 
 conveniently produce the same separately to his several creditors in satis- 
 faction of their respective demands to the amounts specified in such receipts; 
 and such receipts shall be sufficient evidence in favor of such debtor to 
 justify him in withholding the amount therein expressed from his next pay- 
 ment to his creditor; but such creditor may, upon giving to his debtor a 
 full written receipt, acknowledging the payment to him of whatever sum 
 may be actually paid, and accepting the amount of tax paid as aforesaid 
 (specifying the same) as a further satisfaction of the debt to that amount, 
 require the surrender to him of such collector's receipt. 
 
 1 SEC. 1 8. That any person, corporation, partnership, association, or in- 
 surance company, liable to pay the tax, to make a return or to supply in- 
 formation required under this title, who refuses or neglects Penalty for 
 to pay such tax, to make such return or to supply such in- Refusal or 
 formation at the time or times herein specified in each year, Neglect to 
 shall be liable, except as otherwise specially provided in this Make Re- 
 title, to a penalty of not less than $20 nor more than $1,000. turn. 
 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 
 
 1 Amendment. 
 
244 APPENDIX A 
 
 return or statement 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 tax- 
 payer, 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 fraudu- 
 lent and for the purpose of evading payment." 
 
 SEC. 19. The collector or deputy collector shall require every return to 
 be verified by the oath of the party rendering it. If the collector or deputy 
 Returns collector have reason to believe that the amount of any income 
 Verified by returned is understated, he shall give due notice to the person 
 Oath. making the return to show cause why the amount of the 
 
 return should not be increased, and upon proof of the amount understated 
 may increase the same accordingly. Such person may furnish sworn testi- 
 mony to prove any relevant facts, and, if dissatisfied with the decision of 
 Right of the collector, may appeal to the Commissioner of Internal 
 Appeal. Revenue for his decision under such rules of procedure as 
 may be prescribed by regulation. 
 
 SEC. 20. That jurisdiction is hereby conferred upon the district courts 
 Jurisdic- f the United States for the district within which any person 
 tion of Dis- summoned under this title to appear to testify or to produce 
 trict Court, books shall reside, to compel such attendance, production 
 of books, and testimony by appropriate process. 
 
 SEC. 21. That the preparation and publication of statistics reasonably 
 available with respect to the operation of the income tax law and contain- 
 Stat'st'c * n ^ classifications of taxpayers and of income, the amounts 
 allowed as deductions and exemptions, and any other facts 
 deemed pertinent and valuable, shall be made annually by the Commis- 
 sioner of Internal Revenue with the approval of the Secretary of the Treas- 
 ury. 
 
 SEC. 22. That all administrative, special, and general provisions of law, 
 including the laws in relaticn to the assessment, remission, collection, and 
 refund of internal-revenue taxes not heretofore specifically repealed and 
 not inconsistent with the provisions of this title, are hereby extended and 
 made applicable to all the provisions of this title and to the tax herein im- 
 posed. 
 
 SEC. 23. That the provisions of this title shall extend to Porto Rico and 
 the Philippine Islands; Provided, That the administration of the law and 
 Porto Rico, the collection of the taxes imposed in Porto Rico and the 
 Philippine Philippine Islands shall be by the appropriate internal-revenue 
 Islands. officers of those governments, and all revenues collected in 
 Porto Rico and the Philippine Islands thereunder shall accrue intact to 
 the general Governments thereof, respectively: Provided further. That the 
 jurisdiction in this title conferred upon the district courts of the United 
 States shall, so far as the Philippine Islands are concerned, be vested in the 
 
AMENDED INCOME TAX LAW 245 
 
 courts of the first instance of said islands; And provided further, That nothing 
 in this title shall be held to exclude from the computation of the net income 
 the compensation paid any official by the governments of the District of 
 Columbia, Porto Rico, and the Philippine Islands, or the political sub- 
 divisions thereof. 
 
 SEC. 24. That Section II of the Act approved October third, nineteen 
 hundred and thirteen, entitled "An Act to reduce tariff duties and to pro- 
 vide revenue for the Government, and for other purposes," Repeal of 
 is hereby repealed, except as herein otherwise provided, and Income 
 except that it shall remain in force for the assessment and Tax Act of 
 collection of all taxes which have accrued thereunder, and for 1913. 
 the imposition and collection of all penalties or forfeitures which have ac- 
 crued or may accrue in relation to any of such taxes, and except that the 
 unexpended balance of any appropriation heretofore made and now avail- 
 able for the adminitsration of such section or any provision thereof shall be 
 available for the administration of this title or the corresponding provision 
 thereof. 
 
 SEC. 25. That income on which has been assessed the tax imposed by 
 Section II of the Act entitled "An Act to reduce tariff duties and to provide 
 revenue for the Government, and for other purposes," approved October 
 third, nineteen hundred and thirteen, shall not be considered as income 
 within the meaning of this title; Provided, That this section shall not conflict 
 with that portion of section ten, of this title, under which a taxpayer has 
 fixed its own fiscal year. 
 
 1 SEC. 26. Every corporation, joint-stock company or association, or 
 insurance company subject to the tax herein imposed, when required by 
 the Commissioner of Internal Revenue, shall render a cor- Returns of 
 rect return, duly verified under oath, of its payments of divi- Dividends 
 dends, whether made in cash or its equivalent or in stock, by Corpo- 
 including the names and addresses of stockholders and the rations. 
 number of shares owned by each, and the tax years and the applicable 
 amounts in which such dividends were earned, in such form and manner 
 as may be prescribed by the Commissioner of Internal Revenue, with the 
 approval of the Secretary of the Treasury. 
 
 1 SEC. 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 Returns by 
 of Internal Revenue, render a correct return duly verified Brokers, 
 under oath, under such rules and regulations as the Commissioner of In- 
 ternal Revenue, with the approval of the Secretary of the Treasury, may 
 prescribe, showing the names of customers for whom such person, corpora- 
 tion, partnership, or association has transacted any business, with such 
 details as to the profits, losses, or other information which the commissioner 
 may require, as to each of such customers, as will enable the Commissioner 
 of Internal Revenue to determine whether all income tax due on profits or 
 gains of such customers has been paid. 
 
 1 Amendment. 
 
246 APPENDIX A 
 
 1 SEC. 28. That all persons, corporations, partnerships, associations, and 
 insurance companies, in whatever capacity acting, including lessees or mort- 
 Returns. gagors of real or personal property, trustees acting in any 
 "Informa- trust capacity, executors, administrators, receivers, con- 
 tion at servators, and employers, making payment to another person, 
 
 Source." corporation, partnership, association, or insurance company, 
 of interest, rent, salaries, wages, premiums, annuities, compensation, re- 
 muneration, emoluments, or other fixed or determinable gains, profits, and 
 income (other than payments described in sections twenty-six and twenty- 
 seven), of $800 or more in any taxable year, or, in the case of such pay- 
 ments made by the United States, the officers or employees of the United 
 States having information as to such payments and required to make re- 
 turns 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 Revenue, 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 pay- 
 Returns, ment: Provided, That such returns shall be required, regard- 
 Interest on less of amounts, in the case of payments of interest upon 
 Bonds. bonds and mortgages or deeds of trust or other similar obliga- 
 
 tions of corporations, joint-stock companies, associations, 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 dividends from the stock of foreign corporations by persons, 
 corporations, 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 de- 
 mand of the person, corporation, partnership, 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 ^ EC> 2 9' That in assessing income tax the net income 
 
 Profits Tax. embraced in the return shall also be credited with the amount 
 Assess- of any excess profits tax imposed by Act of Congress and 
 mentCred- assessed for the same calendar or fiscal year upon the tax- 
 itable in payer, and, in the case of a member of a partnership, with 
 Income his proportionate share of such excess profits tax imposed 
 Tax Re- upon the partnership. 
 
 1 SEC. 30. That nothing in section II of the Act approved 
 October third, nineteen hundred and thirteen, entitled "An Act to reduce 
 Tax not tariff duties and to provide revenue for the Government, 
 Applicable and for other purposes," or in this title, shall be construed as 
 
 1 Amendment. 
 
AMENDED INCOME TAX LAW 247 
 
 taxing the income of foreign governments received from in- to Income 
 vestments in the United States in stocks, bonds, or other of Foreign 
 domestic securities, owned by such foreign governments, Govern- 
 or from interest on deposits in banks in the United States of ments - 
 moneys belonging to foreign governments. 
 
 ^EC. 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 " Divi- 
 of its earnings or profits accrued since March first, nineteen dends " 
 hundred and thirteen, and payable to its shareholders, whether Defined. 
 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. 
 
 (b) Any distribution made to the shareholders or members of a cor- 
 poration, joint-stock company, or association, or insurance company, in 
 the year nineteen hundred and seventeen, or subsequent tax Dividends 
 years, shall be deemed to have been made from the most Deemed to 
 recently accumulated undivided profits or surplus, and shall have been 
 constitute a part of the annual income of the distributee for Paid out of 
 the year in which received, and shall be taxed to the distrib- most re- 
 utee at the rates prescribed by law for the years in which cently 
 such profits or surplus were accumulated by the corporation, 5 ar JJf C 
 joint-stock company, association, or insurance company, r< 
 but nothing herein shall be construed as taxing any earnings or profits ac- 
 crued prior to March first, nineteen hundred and thirteen, but such earn- 
 ings 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 hundred and thirteen, has been made. This sub- 
 division 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. 
 
 1 SEC. 32. That premiums paid on life insurance polices pfgjjjjmug 
 covering the lives of officers, employees, or those financially nf e i nsur . 
 interested in any trade or business conducted by an indi- ance Pol- 
 vidual, partnership, corporation, joint-stock company or iciesin 
 association, or insurance company, shall not be deducted Favor of 
 in computing the net income of such individual, corpora- Corpora- 
 tion, joint-stock company or association, or insurance com- tionsand 
 pany, or in computing the profits of such partnership for the Partner- 
 purposes of subdivision (e) of section nine. 
 
 X SEC. 1 21 2. That any amount heretofore withheld by any withholding 
 agent as required by Title I of such Act of September eighth, nineteen 
 hundred and sixteen, on account of the tax imposed upon Releasing 
 the income of any individual, a citizen or resident of the Taxes with- 
 United States, for the calendar year nineteen hundred and held, 
 seventeen, except in the cases covered by subdivision (c) of section nine 
 
 1 Amendment. 
 
248 APPENDIX A 
 
 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. 
 
 Income Tax Law, approved September 8, 1916. 
 
 Amendments approved, March 3, 1917, and October 3, 1917. 
 
APPENDIX B 
 
 WAR REVENUE LAW 
 
 ENACTED OCTOBER 3, 1917 
 
 TITLE I. WAR INCOME TAX 
 
 SECTION i. That in addition to the normal tax imposed by subdivision 
 
 (a) of section one of the Act entitled "An Act to increase the Individ- 
 revenue, and for other purposes," approved September eighth, uals. 
 nineteen hundred and sixteen, there shall be levied, assessed, collected, 
 and paid a like normal tax of two per centum upon the income of every 
 individual, a citizen or resident of the United States, received Normal 
 
 in the calendar year nineteen hundred and seventeen and Tax. 
 every calendar year thereafter. 
 
 SEC. 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, there shall be levied, assessed, collected, and paid Additional 
 a like additional tax upon the income of every individual Tax. 
 received in the calendar year nineteen hundred and seventeen and every 
 calendar year thereafter, as follows: 
 
 One per centum per annum upon the amount by which the total net in- 
 come exceeds $5,000 and does not exceed $7,500; 
 
 Two per centum per annum upon the amount by which the total net in- 
 come 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 in- 
 come 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 exceed $150,000; 
 
 Twenty-five per centum per annum upon the amount by which the total 
 net income exceeds $150,000 and does not exceed $200,000; 
 
250 APPENDIX B 
 
 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 exceed $300,000. 
 
 Thirty-seven per centum per annum upon the amount by which the 
 total net income exceeds $300,000 and does not exceed $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 net in- 
 come exceeds $1,000,000. 
 
 SEC. 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 
 Basis of * n *ke same manner as tne similar taxes imposed by section 
 Computa- one f suc h Act f September eighth, nineteen hundred and 
 tion same sixteen, except that in the case of the tax imposed by section 
 as under one of this Act (a) the exemptions of $3,000 and $4,000 pro- 
 Act of vided in section seven of such Act of September eighth, nine- 
 1916. teen hundred and sixteen, as amended by this Act, shall be, 
 respectively, $1,000 and $2,000, and (b) the returns required under subdi- 
 visions (b) and (c) of section eight of such Act as amended by this Act shall 
 Exemp- be required in the case of net incomes of $1,000 or over, in the 
 tionsRe- case of unmarried persons, and $2,000 or over in the case of 
 turns. married persons, instead of $3,000 or over, as therein provided, 
 and (c) the provisions of subdivision (c) of section nine of such Act, as 
 amended by this Act, requiring the normal tax of individuals on income de- 
 Withhold- rived from interest to be deducted and withheld at the source 
 ing How of the income shall not apply to the new two per centum nor- 
 Applied. mal 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. 
 
 SEC. 4. That in addition to the tax imposed by subdivision (a) of section 
 ten of such Act of September eighth, nineteen hundred and sixteen, as 
 Corpora- amended by this Act, there shall be levied, assessed, collected, 
 tions Rate, and paid a like tax of four per centum upon the income re- 
 ceived in the calendar year nineteen hundred and seventeen and every 
 calendar year thereafter, by every corporation, joint-stock company or as- 
 Fiscal sociation, or insurance company, subject to the tax imposed 
 Year. 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, collected, and paid only on that proportion of its income for such 
 fiscal year which the period between January first, nineteen hundred and 
 
WAR EXCESS PROFITS TAX LAW 251 
 
 seventeen, and the end of such fiscal year bears to the whole of such fiscal 
 year. 
 
 The tax imposed by this section shall be computed, levied, assessed, col- 
 lected, and paid upon the same incomes and in the same manner as the tax 
 imposed by subdivision (a) of section ten of such Act of Sep- Basis of 
 tember eighth, nineteen hundred and sixteen, as amended by Computa- 
 this Act, except that for the purpose of the tax imposed by this tion. 
 section the income embraced hi a return of a corporation, joint-stock com- 
 pany or association, or insurance 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 insurance company, 
 which is taxable upon its net income as provided in this title. 
 
 SEC. 5. That the provisions of this title shall not extend to Not Appli- 
 Porto Rico or the Philippine Islands, and the Porto Rican or cable to 
 Philippine Legislature shall have power by due enactment to Porto Rico 
 amend, alter, modify, or repeal the income tax laws in force and Phil- 
 in Porto Rico or the Philippine Islands, respectively. ippines. 
 
 TITLE n. WAR EXCESS PROFITS TAX 
 
 SEC. 200. That when used in this title 
 
 The term "corporation" includes joint-stock companies or " Corpora- 
 associations and insurance companies; tion." 
 
 The term "domestic" means created under the law of the " Domes- 
 United States, or of any State, Territory, or District thereof, tic." 
 and the term "foreign" means created under the law of any other posses- 
 sion of the United States or of any foreign country or govern- rjnjted 
 ment; States." 
 
 The term "United States" means only the States, the Ter- . 
 
 ritories of Alaska and Hawaii, and the District of Columbia; reign. 
 
 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 " Taxable 
 year. The first taxable year shall be the year ending December Year." 
 thirty-first, nineteen hundred and seventeen, 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 seven- 
 teen. If a corporation or partnership, prior to March first, nineteen hundred 
 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 proportion 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 years 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 " Prewar 
 individual was not engaged in a trade or business during the Period." 
 
2$2 APPENDIX B 
 
 whole of such period, then as many of such years during the whole of which 
 the corporation or partnership was in existence of the individual was en- 
 " Trade " gaged in the trade or business. 
 
 and " Busi- The terms "trade" and "business" include professions and 
 ness." occupations. 
 
 The term "net income" means in the case of a foreign corporation or 
 " Net In- partnership or a nonresident alien individual, the net income 
 come." received from sources within the United States. 
 
 SEC. 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 
 Additional year upon the income of every corporation, partnership, or 
 Taxes. individual, a tax (hereinafter in this title referred to as the 
 
 tax) equal to the following percentages of the net income: 
 P Twenty per centum of the amount of the net income in ex- 
 
 cess 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; 
 
 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 partnership not exempt 
 under the provisions of this section shall be deemed to be engaged in busi- 
 ness, and all the trades and businesses in which it is engaged shall be treated 
 as a single trade or business, and all its income from whatever source derived 
 shall be deemed to be received from such trade or business. 
 
 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 
 Incomes State, Territory, or the District of Columbia, or any local 
 Exempt. 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, nineteen hundred and sixteen, 
 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 insur- 
 ance combined in one policy issued on the weekly premium payment plan. 
 
 SEC. 202. That the tax shall not be imposed in the case of the trade or 
 business of a foreign corporation or partnership or a nonresident alien in- 
 dividual, the net income of which trade or business during the taxable year 
 is less than $3,000. 
 
 Deduc- SEC. 203. That for the purposes of this title the deduction 
 
 tions. shall be as follows, except as otherwise in this title provided 
 
WAR EXCESS PROFITS TAX LAW 253 
 
 (a) In the case of a domestic corporation, the sum of (i) 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 Domestic 
 or business during the prewar period was of the invested capi- Corpora- 
 tal for the prewar period (but not less than seven or more tion. 
 
 than nine per centum of the invested capital for the taxable year), and 
 (2) $3,000; 
 
 (b) In the case of a domestic partnership or of a citizen or resident of 
 the United States, the sum of (i) an amount equal to the same Domestic 
 percentage of the invested capital for the taxable year which Partner- 
 the average amount of the annual net income of the trade or ship- 
 business during the prewar period was of the invested capital Citizen or 
 for the prewar period (but not less than seven or more than Resident. 
 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 Foreign 
 or of a nonresident alien individual, an amount ascertained Corpora- 
 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 satisfac- ^^ p,. e _ 
 torily to determine the average amount of the annual net war j n _ 
 income of the trade or business during the prewar period, come not 
 the deduction shall be determined in the same manner as Deter- 
 provided in section two hundred and five. minable. 
 
 SEC. 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 de- Not in 
 duction shall be an amount equal to eight per centum of the Business 
 invested capital for the taxable year, plus in the case of a During 
 domestic corporation $3,000, and in the case of a domestic Prewar 
 partnership or a citizen or resident of the United States $6,000. Period. 
 
 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 con- Continua- 
 tinuation of a trade or business carried on prior to that date, tion of Old 
 shall, for the purposes of this title, be deemed to have been Business. 
 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. 
 
 SEC. 205. (a) That if the Secretary of the Treasury, upon complaint 
 finds either (i) that during the prewar period a domestic corporation or 
 partnership, or a citizen or resident of the United States, had Compara- 
 no net income from the trade or business, or (2) that during tivelyLow 
 the prewar period the percentage, which the net income was Netln- 
 of the invested capital, was low as compared with the per- comeDur- 
 centage, which the net income during such period of repre- ing Prewar 
 sentative corporations, partnerships, and individuals, engaged Period 
 in a like or similar trade or business, was of their invested Complaint. 
 capital, then the deduction shall be the sum of (i) an amount equal to the 
 
254 APPENDIX B 
 
 same percentage of its invested capital for the taxable year which the aver- 
 age deduction (determined 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 
 Percent- United States $6,000. 
 
 age Net ^ ne P ercen tage which the net income was of the invested 
 
 Income to capital in each trade or business shall be determined by the 
 Invested Commissioner of Internal Revenue, in accordance with 
 Capital regulations prescribed by him, with the approval of the 
 Deter- Secretary of the Treasury. In the case of a corporation 
 
 mined by or partnership which has fixed its own fiscal year, the per- 
 Depart- centage determined by the calendar year ending during 
 such fiscal year shall be used. 
 
 (b) The tax shall be assessed upon the basis of the deduction determined 
 as provided in section two hundred and three, but the taxpayer claiming 
 Claim for the benefit of this section may at the tune of making the 
 Abate- return file a claim for abatement of the amount by which the 
 
 ment. 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 Internal 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 payment 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 assessed 
 shall be collected and the amount overpaid, if any, shall upon final deci- 
 sion of the application be refunded as a tax erroneously or illegally col- 
 lected. 
 
 SEC. 206. That for the purposes of this title the net income of a corpora- 
 tion shall be ascertained and returned (a) for the calendar years nineteen 
 Net In- hundred and eleven and nineteen hundred and twelve upon 
 come of tne same basis and in the same manner as provided in section 
 Corpora- thirty-eight of the Act entitled "An Act to provide revenue, 
 tion, How equalize duties, and encourage the industries of the United 
 Deter- States, and for other purposes," approved August fifth, nine- 
 
 muied teen hundred and nine, except tnat income taxes paid by it 
 
 1Q1 \' 1912> within tne y ear im P osed b y tne 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 Government, and for other purposes," approved October 
 third, nineteen hundred and thirteen, except that income taxes paid by it 
 within the year imposed by the authority of the United States shall be in- 
 
WAR EXCESS PROFITS TAX LAW 255 
 
 eluded, 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 ForTax- 
 "An Act to increase the revenue, and for other purposes," able Year. 
 approved September eighth, nineteen hundred and sixteen, 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 1 
 of such Act of September eighth, nineteen hundred and sixteen, shall be 
 deducted. 
 
 The net income of a partnership or individual shall be ascertained and 
 returned for the calendar years nineteen hundred and eleven, nineteen 
 hundred and twelve, and nineteen hundred and thirteen, and j^ et ^ 
 for the taxable year, upon the same basis and in the same come of 
 manner as provided in Title I of such Act of September eighth, Partner- 
 nineteen hundred and sixteen, as amended by this Act, except ship or In- 
 that the credit allowed by subdivision (b) of section five of dividual, 
 such Act shall be deducted. There shall be allowed (a) in the How De- 
 case of a domestic partnership the same deductions as allowed terminea. 
 to individuals in subdivision (a) of section five of such Act of September 
 eighth, nineteen hundred and sixteen, as amended by this Act; and (b) in 
 the case of a foreign partnership the same deductions as allowed to indi- 
 viduals in subdivision (a) of section six of such Act as amended by this 
 Act. 
 
 SEC. 207. That as used hi this title, the term "invested capital" for 
 any year means the average invested capital for the year, Invested 
 as defined and limited in this title, averaged monthly. Capital 
 
 As used in this title "invested capital" does not include Defined. 
 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 limi- 
 tations: 
 
 (a) In the case of a corporation or partnership: (i) 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 Corpora- 
 time of such payment (but in case such tangible property tionor 
 was paid in prior to January first, nineteen hundred and four- Partner- 
 teen, the actual cash value of such property as of January ship. 
 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 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 p , , 
 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 
 
256 APPENDIX B 
 
 to exceed the par value of such stock or shares at the time of such payment, 
 G d Will anc * ^) t ^ ie &d 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 
 property paid therefor at the time of such payment; but good will, trade- 
 marks, trade brands, franchise of a corporation or partnership, 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 
 Limited March third, nineteen hundred and seventeen), in an amount 
 Proportion not to exceed, on March third, nineteen hundred and seven- 
 of Capital teen, twenty per centum of the total interests or shares in 
 Stock. t ne partnership or of the total shares of the capital stock of 
 
 the corporation, shall be included in invested capital at a value not to ex- 
 ceed 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; 
 
 (b) In the case of an individual, (i) actual cash paid into the trade or 
 business, and (2) the actual cash value of tangible property paid into the 
 Individual trac * e or DUsmess > other than cash, at the time of such pay- 
 ment (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) 
 Patents, the actual cash value of patents, copyrights, good will, trade- 
 Good Will, marks, trade brands, franchises, or other intangible property, 
 paid into the trade or business, at the time of such payment, if payment 
 was made therefor specifically 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 ^ n tne case f a foreign corporation or partnership or of a 
 
 Corpora- nonresident alien individual the term "invested capital" 
 tion Part- means that proportion of the entire invested capital, as de- 
 nership fined and limited in this title, which the net income from 
 Nonres- sources within the United States bears to the entire net 
 ident Alien. income> 
 
 SEC. 208. That in case of the reorganization, consolidation or change of 
 ownership of a trade or business after March third, nineteen hundred and 
 Reorgani- seventeen, if an interest or control in such trade or business of 
 zation. fifty per centum or more remains in control of the same per- 
 
 sons, corporations, associations, partnerships, or any of them, then in ascer- 
 taining the invested capital of the trade or business no asset transferred or 
 Invested received from the prior trade or business shall be allowed a 
 Capital. greater value than would have been allowed under this title 
 in computing the invested 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 
 
WAR EXCESS PROFITS TAX LAW 257 
 
 actual cash or actual cash value of the tangible property paid therefor at the 
 time of such payment. 
 
 SEC. 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 Nominal 
 law and under this Act, in lieu of the tax imposed by section or no 
 two hundred and one, a tax equivalent to eight per centum of Capital, 
 the net income of such trade or business in excess of the following deduc- 
 tions: 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. 
 
 SEC. 210. That if the Secretary of the Treasury is unable in any case 
 satisfactorily to determine the invested capital, the amount of the deduc- 
 tion shall be the sum of (i) an amount equal to the same Where In- 
 proportion of the net income of the trade or business received vested 
 during the taxable year as the proportion which the average Capital is 
 deduction (determined in the same manner as provided in not Deter- 
 section two hundred and three, without including the $3,000 minable. 
 or $6,000 therein referred to) for the same calendar year of representative 
 corporations, partnerships, and individuals, engaged in a like or similar 
 trade or business, bears to the total net income of the trade or business re- 
 ceived by such corporations, partnerships, and individuals, plus (2) in the 
 case of a domestic corporation $3,000, and in the case of a domestic partner- 
 ship or a citizen or resident of the United States $6,000. 
 
 For the purpose of this section the proportion between Pf n or ^ on 
 the deduction and the net income in each trade or business of Deduc- 
 shall be determined by the Commissioner of Internal Revenue tion and 
 in accordance with regulations prescribed by him, with the Netln- 
 approval of the Secretary of the Treasury. In the case of a come De- 
 corporation or partnership which has fixed its own fiscal termined 
 year, the proportion determined for the calendar year ending ^y Depart- 
 during such fiscal year shall be used. ment. 
 
 SEC. 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 taxable year, shall render a Partner- 
 correct return of the income of the trade or business for the ship Re- 
 taxable year, setting forth specifically the gross income for turns. 
 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. 
 
 SEC. 212. That all administrative, special, and general provisions of law, 
 including the laws in relation to the assessment, remission, collection, and 
 refund of internal-revenue taxes not heretofore specifically Adminis- 
 repealed, and not inconsistent with the provisions of this title trative 
 are hereby extended and made applicable to all the provisions 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 
 
258 APPENDIX B 
 
 this Act, relating to returns and payment of the tax therein imposed, in- 
 cluding penalties, are hereby made applicable to the tax imposed by this 
 title. 
 
 SEC. 213. That the Commissioner of Internal Revenue, with the approval 
 of the Secretary of the Treasury, shall make all necessary regulations for 
 Regula- carrying out the provisions of this title, and may require 
 tions. any corporation, partnership, 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. 
 
 SEC. 214. That Title II (sections two hundred to two hundred and seven, 
 Repeal of inclusive) of the Act entitled "An Act to provide increased 
 Old Excess revenue to defray the expenses of the increased appropriations 
 Profits Tax for the Army and Navy, and the extensions of fortifications, 
 Law. anc j f or other purposes," approved March third, nineteen 
 
 hundred and seventeen, is hereby repealed. 
 
 Any amount heretofore or hereafter paid on account of the tax imposed 
 Applica- by such Title II, shall be credited toward the payment of 
 tion of the tax imposed by this title, and if the amount so paid ex- 
 
 Payments ceeds the amount of such tax the excess shall be refunded as a 
 Made. tax erroneously or illegally collected. 
 
 Subdivision (i) of section three hundred and one of such Act of Septem- 
 Muni tions ber eighth, nineteen hundred and sixteen, is hereby amended 
 Tax Re- so that the rate of tax for the taxable year nineteen hundred 
 ducedto and seventeen shall be ten per centum instead of twelve and 
 10% one-half per centum, as therein provided. 
 
 Subdivision (2) of such section is hereby amended to read as follows: 
 
 "(2) This section jhall cease to be of effect on and after January first, 
 nineteen hundred and eighteen." 
 
 TITLE III. WAR TAX ON BEVERAGES 
 
 SEC. 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 
 Distilled or that may be then or thereafter produced in or imported 
 Spirits. into the United States, except such distilled spirits as are 
 subject to the tax provided in section three hundred and three, in addition 
 to the tax now imposed by law, a tax of $1.10 (or, if withdrawn for beverage 
 Rate of purposes or for use in the manufacture or production of any 
 Tax. 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. 
 
 That in addition to the tax under existing law there shall be levied and 
 collected upon all perfumes hereafter imported into the United States con- 
 Perfumes taining distilled spirits, a tax of $1.10 per wine gallon, and a 
 Containing proportionate tax at a like rate on all fractional parts of such 
 Distilled wine gallon. Such tax shall be collected by the collector of 
 Spirits. customs and deposited as internal-revenue collections, under 
 
WAR TAX ON BEVERAGES 259 
 
 such rules and regulations as the Commissioner of Internal Revenue, with 
 the approval of the Secretary of the Treasury, may prescribe. 
 
 SEC. 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 Jmporta- 
 (unless produced from products the growth of such islands, tionPro- 
 and not then into any State or Territory or District of the hibited. 
 United States in which the manufacture 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 Exception 
 may prescribe, the provisions of this section shall not apply 
 to distilled spirits imported for other than (i) beverage purposes or (2) use 
 in the manufacture or production of any article used or intended for use as a 
 beverage. 
 
 SEC. 302. That at registered distilleries producing alcohol, 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 Bonded 
 without being entered into bonded warehouse. Such spirits may Ware- 
 be also transferred from the receiving cisterns at such distill- houses, 
 eries, by means of pipe lines, direct to storage tanks in the Transfers, 
 bonded warehouse and may be warehoused in such storage tanks. Such 
 spirits may be also transferred in tanks or tank cars to general bonded ware- 
 houses for storage therein, either in storage tanks in such warehouses or in the 
 tanks in which they were transferred. Such spirits may also be Regula- 
 transferred after tax payment from receiving cisterns or ware- tions for 
 house storage tanks to tanks or tank cars and may be trans- Drawing, 
 ported in such tanks or tank cars to the premises of rectifiers etc. 
 of spirits. The Commissioner of Internal Revenue, with the approval of the 
 Secretary of the Treasury, is hereby empowered to prescribe all necessary 
 regulations relating to the drawing off, transferring, gauging, storing and 
 transporting 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 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 p av abj e * 
 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 Ethyl and 
 deposited in distillery warehouses without having affixed to Denatured 
 the packages containing the same distillery warehouse stamps, Alcohol, 
 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 de- 
 posit. 
 
 Under such regulations as the Commissioner of Internal Revenue, with 
 
260 APPENDIX B 
 
 the approval of the Secretary of the Treasury, may prescribe, the manu- 
 Regula- facture, warehousing, withdrawal, and shipment, under the 
 tions Ethyl provisions of existing law, of ethyl alcohol for other than (i) 
 Alcohol beverage purposes or (2) use in the manufacture or production 
 Manufac- O f anv article used or intended for use as a beverage, and de- 
 ture ' natured alcohol, may be exempted from the provisions of section 
 
 thirty-two hundred and eighty-three, Revised 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 provisions of section thirty-two hundred and eighty-five, Revised 
 Statutes of the United States, to fill fermenting tub in a sweet-mash distillery 
 not of tener than once in forty-eight hours. 
 
 SEC. 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 
 Tax on which, on the day this Act is passed, are held by a retailer in a 
 
 Stock Dis- quantity in excess of fifty gallons in the aggregate, or by any 
 tilled other person, corporation, partnership, or association in any 
 
 Spirits. quantity, and which are intended for sale, there shall be 
 
 levied, assessed, collected, and paid a tax of $1.10 (or, if intended for sale 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, 
 Rate of and a proportionate tax at a like rate on all fractional parts 
 Tax. 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 such distilled spirits at the time of such delivery, 
 to the extent that the amount thus delivered exceeds the fifty gallons herein- 
 before provided. 
 
 SEC. 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 
 Additional 15 cents on each proof gallon and a proportionate tax at a like 
 Tax. rate on all fractional parts of such proof gallon on all distilled 
 
 spirits or wines hereafter rectified, purified, or refined in such manner, and 
 on all mixtures hereafter produced in such manner, that the person so recti- 
 fying, 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: Provided, That this tax shall not apply 
 to gin produced by the redistillation 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 
 Diluting to reduce in proof or increase in volume such spirits or wine by 
 Prohibited, the addition of water or other substance; nothing herein con- 
 tained shall, however, prevent a rectifier from using again in the process of 
 rectification spirits already rectified and upon which the tax has theretofore 
 been paid. 
 
WAR TAX ON BEVERAGES 261 
 
 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 purposes," approved September Cordials, 
 eighth, nineteen hundred and sixteen, nor to the mixing Liqueurs 
 and blending of wines, where such blending is for the sole pur- not Af- 
 pose of perfecting such wines according to commercial stand- fected. 
 ards, 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 addi- 
 tion 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 com- Blended 
 pounded under the immediate supervision of a revenue officer, Whiskies, 
 in such tanks and under such conditions and supervision as the Commis- 
 sioner of Internal Revenue, with the approval of the Secretary of the Treas- 
 ury, may prescribe. 
 
 All distilled spirits taxable under this section shall be subject to uniform 
 regulations concerning the use thereof in the manufacture, Uniform 
 blending, compounding, mixing, marking, branding, and sale Regula- 
 of whisky and rectified spirits, and no discrimination whatso- tions. 
 ever 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 Commissioner of In- 
 ternal Revenue, with the approval of the Secretary of the Treasury. 
 
 Any person violating any of the provisions of this section shall be deemed 
 to be guilty of a misdemeanor and, upon conviction, shall be Penalty for 
 fined not more than $1,000 or imprisoned not more than two Violations, 
 years. He shall, in addition, be liable to double the tax evaded together 
 with the tax, to be collected by assessment or on any bond given. 
 
 SEC. 305. That hereafter collectors of internal revenue shall not furnish 
 wholesale liquor dealer's stamps in lieu of and in exchange Stamps Ex- 
 for stamps for rectified spirits unless the package covered changed, 
 by stamp for rectified spirits is to be broken into smaller packages. 
 
 The Commissioner of Internal Revenue, with the approval stamps 
 of the Secretary of the Treasury, is authorized to discon- maybe 
 tinue the use of the following stamps whenever in his judg- Discon- 
 ment the interests of the Government will be subserved tinued. 
 thereby: 
 
 Distillery warehouse, special bonded warehouse, special bonded reware- 
 house, general bonded warehouse, general bonded retransfer, transfer 
 brandy, export tobacco, export cigars, export oleomargarine and export 
 fermented liquor stamps. 
 
 SEC. 306. That the Commissioner of Internal Revenue, with the approval 
 of the Secretary of the Treasury, is hereby authorized to require at distil- 
 leries, breweries, rectifying houses, and wherever else in his . . 
 judgment such action may be deemed advisable, the installa- 
 tion of meters, tanks, pipes, or any other apparatus for the purpose of pro- 
 
262 APPENDIX B 
 
 tecting 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 refusing or neg- 
 lecting to install such apparatus when so required by the commissioner shall 
 not be permitted to conduct business on such premises. 
 
 SEC. 307. That on and after the passage of this Act there shall be levied 
 and collected on all beer, larger beer, ale, porter, and other similar fermented 
 Beer, Ale, liquor, containing one-half per centum or more of alcohol, 
 etc. 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 gallons,, 
 and at a like rate for any other quantity or for the fractional parts of a barrel 
 authorized and denned by law. 
 
 SEC. 308. That from and after the passage of this Act taxable fermented 
 liquors may be conveyed without payment of tax from the brewery premises 
 Fermented where produced to a contiguous industrial distillery of either 
 Liquors class established under the Act of October third, nineteen 
 Conveyed, hundred and thirteen, to be used as distilling material, and 
 the residue from such distillation, containing 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 distillery premises or elsewhere. 
 
 The removal of the taxable fermented liquor from the brewery to the 
 distillery and the operation of the distillery and removal of the residue 
 Removal therefrom shall be under the supervision of such officer or 
 of Liquor, officers as the Commissioner of Internal Revenue 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 sec- 
 tion and to safeguard the revenue. 
 
 SEC. 309. That upon all still wines, including vermuth, and upon all 
 champagne and other sparkling wines, liqueurs, cordials, artificial or imita- 
 Still Wines, tion wines or compounds sold as wine, produced in or imported 
 etc. 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. 
 
 SEC. 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 
 Excess on tne day this Act is passed held in excess of twenty-five 
 Stock Tax- gallons in the aggregate of such articles and intended for sale, 
 able. there shall be levied, collected, and paid a tax equal to the 
 
 tax imposed by such section. 
 
 SEC. 311. That upon all grape brandy or wine spirits withdrawn by a 
 producer of wines from any fruit distillery or special bonded warehouse 
 
WAR TAX ON BEVERAGES 263 
 
 under subdivision (c) of section four hundred and two of the Act entitled 
 "An Act to increase the revenue, and for other purposes," Grape 
 approved September eighth, nineteen hundred and sixteen, Brandy, 
 there shall be levied, assessed, collected, and paid in addition etc. 
 to the tax therein imposed, a tax equal to double such tax, to be assessed, 
 collected, and paid under the provisions of existing law. 
 
 SEC. 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 equivalent to 10 cents per proof Sweet 
 gallon upon the grape brandy or wine spirits used in the for- Wine. 
 tification of such wine, and an additional tax of 20 cents per proof gallon 
 shall be levied, assessed, collected, 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. 
 
 SEC. 313. That there shall be levied, assessed, collected, and paid 
 
 (a) Upon all prepared sirups or extracts (intended for use in the manu- 
 facture or production of beverages, commonly known as soft drinks, by 
 soda fountains, bottling establishments, and other similar Sirups, Ex- 
 places) sold by the manufacturer, producer, or importer tracts. 
 thereof, if so sold for not more than $1.30 per gallon, 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 
 
 (b) Upon all unfermented grape juice, soft drinks, or artificial mineral 
 waters (not carbonated), and fermented liquors containing less than one- 
 half per centum of alcohol, sold by the manufacturer, pro- Soft 
 ducer, or importer thereof, in bottles or other closed containers Drinks. 
 and upon all ginger ale, root beer, sarsaparilla, pop, and other carbonated 
 waters or beverages, manufactured and sold by the manufacturer, producer, 
 or importer of the carbonic acid gas used in carbonating the same, a 
 tax of i cent per gallon; and 
 
 (c) Upon all natural mineral waters or table waters, sold by the pro- 
 ducer, bottler, or importer thereof, in bottles or other closed TH- * r 
 containers, at over 10 cents per gallon, a tax of i cent per gallon. 
 
 SEC. 314. That each such 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 principal place of j> ^ m 
 business, containing such information necessary for the assess- 
 ment of the tax, and at such times and hi such manner, as the Commis- 
 sioner of Internal Revenue, with the approval of the Secretary of the Treas- 
 ury, may by regulation prescribe. 
 
 SEC. 315. That upon all carbonic acid gas in drums or other containers 
 (intended for use in the manufacture or production of carbonated water 
 or other drinks) sold by the manufacturer, producer, or im- Carbonic 
 porter thereof, there shall be levied, assessed, collected, and Acid Gas 
 paid a tax of 5 cents per pound. Such tax shall be paid by Tax. 
 
264 APPENDIX B 
 
 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. WAR TAX ON CIGARS, TOBACCO, AND MANUFACTURES THEREOF 
 
 SEC. 400. That upon cigars and cigarettes, which shall be manufac- 
 tured and sold, or removed for consumption or sale, there shall be levied 
 Cigars and and collected, in addition to the taxes now imposed by exist- 
 Cigarettes. ing law, the following taxes, to be paid by the manufacturer 
 or importer thereof: (a) on cigars of all descriptions made of tobacco, or 
 any substitute therefor, and weighing not more than three pounds per 
 Rates of thousand, 25 cents per thousand; (b) on cigars made of to- 
 Taxes. bacco, 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, $i per thousand; (c) if manu- 
 factured 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 
 " Retail " mean the ordinary retail price of a single cigar, and that the 
 Defined. Commissioner of Internal Revenue may, by regulation, require 
 the manufacturer or importer to affix to each box or container a conspicuous 
 label indicating by letter the clause of this section under which the cigars 
 therein contained have been tax-paid, which must correspond with the 
 tax-paid stamp on said box or container; (f) on cigarettes made of tobacco, 
 Cigarettes or any substitute therefor, made in or imported into the 
 Tax. United States, and weighing not more than three pounds per 
 
 thousand, 80 cents per thousand; weighing more than three pounds per 
 thousand, $1.20 per thousand. 
 
 Every manufacturer of cigarettes (including small cigars weighing not 
 more than three pounds per thousand) shall put up all the cigarettes and 
 Packages such small cigars that he manufactures or has manufac- 
 of Ciga- tured for him, and sells or removes for consumption or use, 
 rettes. 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 
 Use of suitable stamp denoting the tax thereon and shall properly 
 
 Stamps. 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 imported from a foreign country shall be packed, stamped, 
 Imported and the stamps canceled in a like manner, in addition to 
 Cigarettes, the import stamp indicating inspection of the custom-house 
 before they are withdrawn therefrom. 
 
 SEC. 401. That upon all tobacco and snuff hereafter manufactured and 
 
WAR TAX ON CIGARS AND TOBACCO 265 
 
 sold, or removed for consumption or use, there shall be levied Tobacco 
 and collected, in addition to the tax now imposed by law and Snuff 
 upon such articles, a tax of 5 cents per pound, to be levied, Tax. 
 collected, and paid under the provisions of existing law. 
 
 In addition to the packages provided for under existing law, manufac- 
 tured tobacco and snuff may be put up and prepared by the manufacturer 
 for sale or consumption, in packages of the following descrip- Additional 
 tion: Packages containing one-eighth, three-eighths, five- Packages. 
 eighths, seven-eighths, one and one-eighth, one and three-eighths, one and 
 five-eighths, one and seven-eighths, and five ounces. 
 
 SEC. 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 When Ef- 
 the expiration of the aforesaid thirty days, cigarettes and fective. 
 manufactured tobacco and snuff may be put up in the packages now pro- 
 vided for by law or in the packages provided for in sections four hundred 
 and four hundred and one. 
 
 SEC. 403. That there shall also be levied and collected, upon all manu- 
 factured tobacco and snuff in excess of one hundred pounds or upon cigars 
 or cigarettes in excess of one thousand, which were manufac- Excess 
 tured or imported, and removed from factory or custom- Quantity, 
 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, cor- 
 poration, partnership, or association, and upon all manufactured tobacco, 
 snuff, cigars, or cigarettes, removed from factory or customs house after 
 the passage of this Act but prior to the time when the tax Rate of 
 imposed by section four hundred or section four hundred and Tax. 
 one upon such articles takes effect, an additional tax equal to one-half the 
 tax imposed by such sections upon such articles. 
 
 SEC. 404. That there shall be levied, assessed, and collected upon cig- 
 arette paper made up into packages, books, sets, or tubes, made up in 
 or imported into the United States and intended for use Cigarette 
 by the smoker in making cigarettes the following taxes: On Paper, etc. 
 each package, book, or set, containing more than twenty-five but not more 
 than fifty papers, one-half of i cent; containing more than fifty but not 
 more than one hundred papers, i cent; containing more than Rate of 
 one hundred papers, i cent for each one hundred papers or Tax. 
 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 
 
 SEC. 500. That from and after the first day of November, nineteen 
 hundred and seventeen, there shall be levied, assessed, collected, and paid 
 (a) a tax equivalent to three per centum of the amount paid Transpor- 
 ter the transportation by rail or water or by any form of tation 
 
266 APPENDIX B 
 
 mechanical motor power when in competition with carriers by rail or water 
 F 'eht * P r P ertv ty f re ig nt consigned from one point in the United 
 States to another; (b) a tax of i cent for each 20 cents, or 
 fraction thereof, paid to any person, corporation, partnership, or associa- 
 Rate of tion, engaged in the business of transporting parcels or pack- 
 Tax, ages by express over regular routes between fixed terminals, 
 for the transportation of any package, parcel, or shipment by express from 
 Express- one point in the United States to another: Provided, That 
 age. nothing herein contained shall be construed to require the 
 carrier collecting 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; (c) a tax equiva- 
 Rateof lent to eight per centum of the amount paid for the trans- 
 Tax, portation of persons by rail or water, or by any form of me- 
 chanical 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 to any point in Canada or Mexico, where the ticket therefor is sold or 
 issued in the United States, not including the amount paid for commutation 
 Passen- or season tickets for trips less than thirty miles, or for trans- 
 gers, Rate portation the fare for which does not exceed 35 cents, and a 
 of Tax. tax equivalent to ten per centum of the amount paid for 
 seats, berths, and staterooms 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 mileage book, or paying the cash fare, by the conductor or 
 other agent, when presented for such transportation or ac- 
 commodation, and the amount so collected shall be paid to the United 
 States in such manner and at such times as the Commissioner 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; (d) a tax equiva- 
 lent to five per centum of the amount paid for the transportation of oil 
 Pipe Line by pipe line; (e) a tax of 5 cents upon each telegraph, tele- 
 Rate, phone, 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 transmission of such dispatch, message, or conversation. 
 
 SEC. 501. That the taxes imposed by section five hundred shall be paid 
 Who Pays by the person, corporation, partnership, or association paying 
 Tax. for the services or facilities rendered. 
 
 In case such carrier does not, because of its ownership of the commodity 
 
WAR TAX ON PUBLIC UTILITIES 267 
 
 transported, or for any other reason, receive the amount which as a carrier 
 it would otherwise charge, such carrier shall pay a tax equiva- Ownership 
 lent to the tax which would be imposed upon the transporta- of Com- 
 tion of such commodity if the carrier received payment for modities. 
 such transportation: Provided, That in case of a carrier which on May first, 
 nineteen hundred and seventeen, had no rates or tariffs on file with the 
 proper Federal or State authority, the tax shall be computed p ar jg s 
 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 When Tax 
 of any commodity which is necessary for the use of the carrier not Appli- 
 in the conduct of its business as such and is intended to be cable, 
 so used or has been so used; or (b) upon the transportation of company 
 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. 
 
 SEC. 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 Columbia. The right to Exemp- 
 exemption under this section shall be evidenced in such man- tion. 
 ner as the Commissioner of Internal Revenue, with the approval of the 
 Secretary of the Treasury, may by regulation prescribe. 
 
 SEC. 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 such section from Monthly 
 the person, corporation, partnership, or association making Returns, 
 such payments, and shall make monthly returns under oath, hi duplicate, 
 and pay the taxes so collected and the taxes imposed upon it under para- 
 graph two of section five hundred 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 Secre- 
 tary of the Treasury, may by regulation prescribe. 
 
 SEC. 504. That from and after the first day of November, nineteen hun- 
 dred and seventeen, there shall be levied, assessed, collected, WhenEf- 
 and paid the following taxes on the issuance of insurance fective. 
 policies: 
 
 (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 Life In- 
 
 is called: Provided, That on all policies for life insurance only surance. 
 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 poli- 
 cies of reinsurance shall be exempt from the tax imposed by this subdivi- 
 sion; 
 
 (b) Marine, inland, and fire insurance: A tax equivalent to i cent on each 
 dollar or fractional part thereof of the premium charged under each policy 
 
268 APPENDIX B 
 
 of insurance or other instrument by whatever name the same is called 
 Marine,In- whereby insurance is made or renewed upon property of any de- 
 land Fire scription (including rents or profits), whether against peril by 
 Insurance, sea or inland waters, or by fire or lightning, or other peril: Pro- 
 vided, That policies of reinsurance shall be exempt from the tax imposed by 
 this subdivision; 
 
 (c) Casualty insurance: A tax equivalent to i cent on each dollar or 
 fractional part thereof of the premium charged under each policy of insur- 
 Casualty ance or obligation of the nature of indemnity for loss, damage. 
 Insurance, or liability (except bonds taxable under subdivision two of 
 schedule A of Title VIII) issued or executed or renewed by any person, cor- 
 poration, partnership, or association, transacting the business of employ- 
 ers' liability, workmen's compensation, accident, health, tornado, plate 
 glass, steam boiler, elevator, 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 reinsur- 
 ance shall be exempt from the tax imposed by this subdivision; 
 
 (d) Policies issued by any person, corporation, partnership, or association, 
 Exempt whose income is exempt from taxation under Title I of the 
 Organiza- Act entitled "An Act to increase the revenue, and for other 
 tions. purposes," approved September eighth, nineteen hundred 
 and sixteen, shall be exempt from the taxes imposed by this section. 
 
 SEC. 505. That every person, corporation, partnership, or association, 
 issuing policies of insurance upon the issuance of which a tax is imposed 
 Monthly by section five hundred and four, shall, within the first fifteen 
 Returns. 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, partner- 
 ship, 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 regulation prescribe. 
 
 TITLE VI. WAR EXCISE TAXES 
 
 Automo- SEC. 600. That there shall be levied, assessed, collected, and 
 
 biles, Auto paid- 
 Trucks, (a) Upon all automobiles, automobile trucks, automobile 
 Motor- wagons, and motorcycles, sold by the manufacturer, producer, 
 cycles. or importer, a tax equivalent to three per centum of the price 
 for which so sold; and 
 
 (b) Upon all piano players, graphophones, phonographs, talking machines, 
 Piano and records used in connection with any musical instru- 
 PlayerSi ment, piano player, graphophone, phonograph, or talking 
 Phono- machine, sold by the manufacturer, producer, or importer, 
 graphs. a tax equivalent to three per centum of the price for which 
 so sold; and 
 
 (c) Upon all moving-picture films (which have not been exposed) sold 
 Films ky t* 16 manufacturer or importer a tax equivalent to one-fourth 
 
 of i cent per linear foot; and 
 
WAR EXCISE TAXES 269 
 
 (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 i cent per linear foot; and 
 
 (e) Upon any article commonly or commercially known as jewelry, 
 whether real or imitation, sold by the manufacturer, producer, j . 
 
 or importer thereof, a tax equivalent to three per centum of ^ 
 the price for which so sold; and 
 
 (f) Upon all tennis rackets, golf clubs, baseball bats, lacrosse sticks, 
 balls of all kinds, including baseballs, foot balls, tennis, golf, Sporting 
 lacrosse, billiard and pool balls, fishing rods and reels, billiard Goods 
 
 and pool tables, chess and checker boards and pieces, dice, games and parts 
 
 of games, except playing cards and children's toys and games, 
 
 Toys. 
 
 sold by the manufacturer, producer, or importer, a tax equiv- 
 alent to three per centum of the price for which so sold; and 
 
 (g) Upon all perfumes, essences, extracts, toilet waters, cosmetics, pe- 
 troleum jellies, hair oils, pomades, hair dressings, hair restoratives, hair- 
 dyes, tooth and mouth washes, dentifrices, tooth pastes, aro- Perfumes, 
 matic cachous, toilet soaps and powders, or any similar sub- Toilet Ar- 
 stance, article, or preparation by whatsoever name known or tides. 
 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 manu- 
 facturer, importer, or producer, a tax equivalent to two per centum of the 
 price for which so sold; and 
 
 (h) Upon all pills, tablets, powders, tinctures, troches or lozenges, sirups, 
 medicinal cordials or bitters, anodynes, tonics, plasters, liniments, salves, 
 ointments, pastes, drops, waters (except those taxed under sec- Proprietary 
 tion three hundred and thirteen of this Act), essences, spirits, Medicines. 
 oils, and all medicinal preparations, compounds, or compositions whatso- 
 ever, the manufacturer or producer 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 recommended to the public by 
 the makers, venders, or proprietors thereof as proprietary medicines or 
 medicinal proprietary articles or preparations, or as remedies Rate of 
 or specifics for any disease, diseases, or affection whatever Tax. 
 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 
 
 (i) Upon all chewing gum or substitute therefor sold by the manufacturer, 
 producer, or importer, a tax equivalent to two per centum Chewing 
 of the price for which so sold; and Gum. 
 
 (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. Cameras. 
 
 SEC. 601. That each manufacturer, producer, or importer of any of the 
 articles enumerated in section six hundred shall make monthly returns 
 
270 APPENDIX B 
 
 under oath in duplicate and pay the taxes imposed on such articles by 
 Monthly this title to the collector of internal revenue for the district in 
 Returns. which is located the principal place of business. Such returns 
 shall contain such information and be made at such times and in such man- 
 ner as the Commissioner of Internal Revenue, with the approval of the 
 Secretary of the Treasury, may by regulations prescribe. 
 
 SEC. 602. That upon all articles enumerated in subdivisions (a), (b), 
 (e), (f)-, (g), (h), (i), or (j) of section six hundred, which on the day this 
 
 Floor Tax ^ ct * s P asse( ^ are ^ e ^ an< ^ mten ded for sale by any person, 
 corporation, partnership, or association, other than (i) a re- 
 tailer 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 per- 
 son, corporation, partnership, or association so holding such articles. 
 
 The taxes imposed by this section shall be assessed, collected, 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 upon articles 
 Limitation so ^ anc * delivered P r ^ or to May ninth, nineteen hundred and 
 seventeen, where the title is reserved in the vendor as security 
 for the payment of the purchase money. 
 
 SEC. 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 
 
 Yachts k at k y a user > ^ on any ot ^ er date t ^ lan J u ^ ^ rst ' t^ 616 sna ^ 
 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 
 Pleasure Navy Department, an excise tax to be based on each yacht 
 Boats. 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 
 Rate of and not over one hundred feet, $i for each foot, length over 
 Tax. 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, 
 Detennin- motor boats with fixed engines, and sailing boats, the measure- 
 ing Length, ment of over-all length shall govern. 
 
 In the case of a tax imposed at the time of the original purchase of a 
 Apportion- n ^w boat on any other date than July first, the amount to be 
 ment of paid shall be the same number of twelfths of the amount of 
 Tax. 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 
 SEC. 700. That from and after the first day of November, nineteen 
 
WAR TAX ON ADMISSIONS AND DUES 271 
 
 hundred and seventeen, there shall be levied, assessed, collected, and paid 
 (a) a tax of i cent for each 10 cents or fraction thereof of 
 the amount paid for admission to any place, including ad- 
 mission by season ticket or subscription, to be paid by the person paying 
 for such admission : Provided, That the tax on admission of Rate of 
 children under twelve years of age where an admission charge Tax. 
 for such children is made shall in every case be i cent; and (b) in the case of 
 persons (except bona fide employees, 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 i 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 i cent for each 10 cents or fraction thereof paid for admis- 
 sion to any public performance for profit at any cabaret or 
 other similar entertainment to which the charge for admis- 
 sion 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 ap- 
 proval 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 per- 
 sons 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 Leased 
 in such opera house or place of amusement there shall be Boxes and 
 levied, assessed, collected, and paid a tax equivalent to ten Seats, 
 per centum of the amount for which a similar box or seat is sold for per- 
 formance 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 maximum charge for admission to which is 5 cents, Tax not 
 or in the case of shows, rides, and other amusements, (the Imposed. 
 maximum charge for admission to which is 10 cents) within outdoor general 
 amusement parks, or in the case of admissions to such parks. 
 
 No tax shall be levied under this title in respect to any Exemp- 
 admissions all the proceeds of which inure exclusively to tionsRe- 
 the benefit of religious, educational, or charitable institu- ligious, 
 tions, societies, or organizations, or admissions to agricul- Educa- 
 tural fairs none of the profits of which are distributed to 
 stockholders or members of the association conducting the 
 
 The term "admission" as used in this title includes seats " Admis- 
 and tables, reserved or otherwise, and other similar accom- l* on ." 
 modations, and the charges made therefor. nnea. 
 
 SEC. 701. That from and after the first day of November, nineteen hun- 
 dred and seventeen, there shall be levied, assessed, collected, and paid, 
 a tax equivalent to ten per centum of any amount paid as Club Dues, 
 dues or membership fees (including initiation fees), to any Member- 
 social, athletic, or sporting club or organization, where such ship Fees. 
 dues or fees are in excess of $12 per year; such taxes to be paid by the person 
 
272 APPENDIX B 
 
 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 
 Exemp- or for the exclusive benefit of the members of a fraternity 
 tion. 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. 
 
 SEC. 702. That every person, corporation, partnership, or association 
 (a) receiving any payments for such admission, dues, or fees, shall collect 
 Returns the amount of the tax imposed by section seven hundred or 
 Required, seven hundred and one from the person making such pay- 
 ments, 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 and from the person so admitted, and (c) in either case shall make 
 returns and payments 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 
 
 SEC. 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 
 Stamp f the several bonds, debentures, or certificates of stock and 
 
 Taxes of indebtedness, and other documents, instruments, matters, 
 
 WhenEf- and things mentioned and described in Schedule A of this 
 fective. title, or for or in respect of the vellum, parchment, 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, removes, 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. 
 
 SEC. 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 Govern- 
 Exemp- ment, or by any State, Territory or the District of Columbia, 
 tions. or local subdivision thereof, or municipal or other corporation 
 
 exercising the taxing power, when issued in the exercise of a strictly govern- 
 mental, taxing, or municipal function; or stocks and bonds issued by co- 
 operative building and loan associations which are organized and operated 
 exclusively for the benefit of their members and make loans only to their 
 shareholders, or by mutual ditch or irrigating companies. 
 
 SEC. 802. That whoever 
 
 (a) Makes, signs, issues, or accepts, or causes to be made, signed, issued, 
 Insufficient or accepted, any instrument, document, or paper of any 
 Amount of kind or description whatsoever without the full amount of 
 Stamps. 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 
 
WAR STAMP TAXES 273 
 
 manufactured or imported and sold, or offered for 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 imposed by 
 this title without canceling or obliterating such stamp as pay^e to 
 prescribed in section eight hundred and four; Cancel. 
 
 Is guilty of a misdemeanor and upon conviction thereof _ . 
 shall pay a fine of not more than $100 for each offense. Penalty. 
 
 SEC. 803. That whoever 
 
 (a) Fraudulently cuts, tears, or removes from any vellum, parchment, 
 paper, instrument, writing, package, or article, upon which any tax is im- 
 posed by this title, any adhesive stamp or the impression of Removing 
 any stamp, die, plate, or other article provided, made, or Stamps, 
 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, (i) any adhesive stamp, or Fraud- 
 the impression of any stamp, die, plate, or other article, which ulent Use 
 has been cut, torn, or removed from any other vellum, parch- of Stamps, 
 ment, 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 know- Removes 
 ingly or Willfully buys, sells, offers for sale, or gives away, any Stamps, 
 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, In Posses- 
 restored, or altered stamp, which has been removed from sion of 
 any vellum, parchment, paper, instrument, writing, package, Washed 
 
 or article, is guilty of a misdemeanor, and upon conviction Stamps, 
 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 p .. 
 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. 
 
 SEC. 804. That whenever an adhesive stamp is used for denoting any 
 tax imposed by this title, except as hereinafter provided, the person, cor- 
 poration, partnership, or association, using or affixing the Prescribed 
 same shall write or stamp or cause to be written or stamped Method of 
 thereupon the initials of his or its name and the date upon Cancella- 
 which the same is attached or used, so that the same may not tion. 
 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. 
 
274 APPENDIX B 
 
 SEC. 805. (a) That the Commissioner of Internal Revenue shall cause 
 Prepara- * ^ e prepared and distributed for the payment of the taxes 
 tionand prescribed in this title suitable stamps denoting the tax on 
 Distribu- the document, articles, or thing to which the same may be 
 tion of affixed, and shall prescribe such method for the affixing of 
 
 Stamps. said stamps in substitution for or in addition to the method 
 provided in this title, as he may deem expedient. 
 
 (b) The Commissioner of Internal Revenue, with the approval of the 
 Secretary of the Treasury, is authorized to procure any of the stamps pro- 
 Procuring vided for in this title by contract whenever such stamps can 
 Stamps by not be speedily prepared by the Bureau of Engraving and 
 Govern- Printing; but this authority shall expire on the first day of 
 ment. January, nineteen hundred and eighteen, except as to im- 
 printed stamps furnished under contract, authorized by the Commissioner 
 of Internal Revenue. 
 
 (c) All internal-revenue laws relating to the assessment and collection 
 Assess- f taxes are hereby extended to and made a part of this title, 
 ment, Col- so far as applicable, for the purpose of collecting stamp taxes 
 lection. omitted through mistake or fraud from any instrument, docu- 
 ment, paper, writing, parcel, package, or article named herein. 
 
 SEC. 806. That the Commissioner of Internal Revenue shall furnish to 
 the Postmaster General without prepayment a suitable quantity of adhesive 
 Stamps stamps to be distributed to and kept on sale by the various 
 Advanced postmasters in the United States. The Postmaster General 
 to Post- may require each such postmaster to give additional or in- 
 masters. creased 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 Gen- 
 eral 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. 
 
 SEC. 807. That the collectors of the several districts shall furnish without 
 prepayment to any assistant treasurer or designated depositary of the 
 Sale of United States located in their respective collection districts 
 
 Stamps. a suitable quantity of adhesive stamps for sale. In such cases 
 the collector may require a bond, with sufficient sureties, to an amount 
 equal to the value of the adhesive stamps so furnished, conditioned for the 
 faithful return, whenever 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 
 made 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 
 
 i. Bonds of indebtedness: Bonds, debentures, or certificates of indebted- 
 ness issued on and after the first day of December, nineteen hundred and 
 Bonds, De- seventeen, by any person, corporation, partnership, or asso- 
 bentures. ciation, on each $100 of face value or fraction thereof, 5 cents; 
 
WAR STAMP TAXES 275 
 
 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 pay- 
 ment of money is given in a penal sum greater than the debt Rate of 
 secured, the tax shall be based upon the amount secured. Tax. 
 
 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 per- Surety 
 formance of any contract, obligation, or requirement, or the Bonds. 
 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 re- 
 quired in legal proceedings, not otherwise provided for in this Rate of 
 schedule, 50 cents; Provided, That where a premium is charged Tax. 
 
 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. 
 
 3. Capital stock, issue: On each original issue, whether an organization or 
 reorganization, of certificates of stock by any association, Capital 
 company, or corporation, on each $100 of face value or frac- Stock. 
 tion thereof, 5 cents: Provided, That where capital stock is issued without 
 face value, the tax shall be 5 cents per share, unless the actual Original 
 value is in excess of $100 per share, in which case the tax shall Issue. 
 
 be 5 cents on each $100 of actual value or fraction thereof. 
 
 The stamps representing the tax imposed by this subdivision shall be 
 attached to the stock books and not to the certificates issued. 
 
 4. Capital stock, sales or transfers: On all sales, or agreements 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 cor- Capital 
 poration, whether made upon or shown by the books of the Stock, 
 association, company, or corporation, or by any assignment in Sales and 
 blank, or by any delivery, or by any paper or agreement or Transfers. 
 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 Rate of 
 agreement to sell on each share, unless the actual value thereof Tax. 
 
 is in excess of $100 per share, in which case the tax shall be 2 cents on each 
 $ TOO 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 actually sold, nor upon such stock certif- ,. 
 icates so deposited: Provided further, That the tax shall not 
 be imposed upon deliveries or transfers to a broker for sale, nor upon deliver- 
 ies 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 owner- 
 
276 APPENDIX B 
 
 ship is by transfer of the certificate the stamp shall be placed upon the 
 Affixing certificate; and in cases of an agreement to sell or where the 
 Stamps. 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 memoran- 
 dum 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 pro- 
 vided, or anyone who acts in the matter as agent or broker for such person 
 Agents, or persons who shall make any such sale, or who shall in pur- 
 Brokers, suance of any such sale deliver any stock or evidence of the 
 sale of any stock or bill or memorandum thereof, as herein required, without 
 having the proper stamps affixed thereto with intent to evade the foregoing 
 p .. 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. 
 
 5. Produce, sales of, on exchange: Upon each sale, agreement of sale, 
 or agreement to sell, including so-called transferred or scratch sales, any 
 Sale of products or merchandise at any exchange, or board of trade, 
 
 Produce or other similar place, for future delivery, for each $100 in 
 on Ex- value of the merchandise covered by said sale or agreement 
 
 change. O f sai e or agreement to sell, 2 cents, and for each additional 
 $100 or fractional part thereof in excess of $100, 2 cents: Provided, That on 
 Rate of every sale or agreement of sale or agreement to sell as afore- 
 Tax. said there shall be made and delivered by the seller to the 
 
 buyer a bill, memorandum, agreement, or other evidence of such sale, agree- 
 Evidence ment of sale, or agreement to sell, to which there shall be 
 of Sale. affixed a lawful stamp or stamps in value equal to the amount 
 of the tax on such sale: Provided further, That sellers of commodities de- 
 scribed herein, having paid the tax provided by this subdivision, may trans- 
 fer 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 agree- 
 ment to sell within the provisions of this Act, provided that such transfer 
 shall not vest any beneficial interest in such clearing 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, 
 Agreement or other evidence of sale or agreement to sell shall show the 
 of Sale. 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 merchandise without a bill, memorandum, or other evidence thereof as 
 herein required, or who shall deliver such bill, memorandum, or other evi- 
 dence of sale, or agreement to sell, without having the proper stamps affixed 
 
WAR STAMP TAXES 277 
 
 thereto, with intent to evade the foregoing provisions, shall be deemed 
 guilty of a misdemeanor, and upon conviction thereof shall p ... 
 pay a fine of not exceeding $1,000, or be imprisoned not more 
 than six months, or both, at the discretion of the court. 
 
 That no bill, memorandum, agreement, or other evidence of such sale, 
 or agreement of sale, or agreement to sell, in case of cash Sales Ex- 
 sales of products or merchandise for immediate or prompt empt. 
 delivery which in good faith are actually intended to be delivered shall be 
 subject to this tax. 
 
 6. Drafts or checks payable otherwise than at sight or on demand, promis- 
 sory notes, except bank notes issued for circulation, and for Time 
 each renewal of the same, for a sum not exceeding $100, Drafts and 
 2 cents; and for each additional $100 or fractional part thereof, Notes. 
 
 2 cents. 
 
 7. Conveyance: Deed, instrument, or writing, whereby any lands, tene- 
 ments, or other realty sold shall be granted, assigned, transferred, or other- 
 wise conveyed to, or vested in, the purchaser or purchasers, Convey- 
 or any other person or persons, by his, her, or their direction, ances. 
 when the consideration or value of the interest or property conveyed, ex- 
 clusive of the value of any lien or encumbrance remaining thereon at the 
 time of sale, exceeds $100 and does not exceed $500, 50 cents; Rate of 
 and for each additional $500 or fractional part thereof 50 Tax. 
 cents: Provided, That nothing contained in this paragraph shall be so con- 
 strued as to impose a tax upon any instrument or writing given to secure 
 a debt. 
 
 8. Entry of any goods, wares, or merchandise at any custom-house, 
 either for consumption or warehousing, not exceeding $100 in Custom 
 value, 25 cents; exceeding $100 and not exceeding $500 in House 
 value, 50 cents; exceeding $500 in value, $i. Entries. 
 
 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 passenger, 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 Passage 
 exceeding $30, $i; costing more than $30 and not exceeding Tickets. 
 $60, $3; costing more than $60, $5: Provided, That such passage tickets, 
 costing $10 or less, shall be exempt from taxation. 
 
 11. Proxy for voting at any election for officers, or meeting for the trans- 
 action of business, of any incorporated company or associa- p^ . 
 tion, except religious, educational, charitable, fraternal, or ' 
 literary societies, or public cemeteries, 10 cents. 
 
 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 re- Powers of 
 quired upon any papers necessary to be used for the collec- Attorney, 
 tion 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. 
 
278 APPENDIX B 
 
 13. Playing cards: Upon every pack of playing cards, containing not 
 Playing more than fifty- four cards, manufactured or imported, and 
 Cards. sold, or removed for consumption or sale, after the passage 
 of this Act, a tax of 5 cents per pack in addition to the tax imposed under 
 existing law. 
 
 14. Parcel-post packages: Upon every parcel or package transported 
 Parcel from one point in the United States to another by parcel 
 Post Pack- post on which the postage amounts to 25 cents or more, a 
 ages. tax of i 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 
 
 SEC. 900. That in addition to the tax imposed by section two hundred 
 When Ef- and one of the Act entitled "An Act to increase the revenue, 
 fective. and for other purposes," approved September eighth, nine- 
 teen hundred and sixteen, 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 pas- 
 Rates of sage of this Act, the transfer of which is taxable under such 
 Tax. 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) : 
 
 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 exceeds $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 
 
ADMINISTRATIVE PROVISIONS 279 
 
 Ten per centum of the amount by which such net estate exceeds 
 $10,000,000. 
 
 SEC. 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 Military 
 in which the United States is now engaged, or if death results Service 
 from injuries received or disease contracted in such service, Exempt, 
 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 
 
 SEC. looo. 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- Imports 
 revenue tax imposed in the United States upon like articles from West 
 of domestic manufacture; such articles shipped from said Indian Is- 
 islands to the United States shall be exempt from the payment lands. 
 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. 
 
 SEC. 1001. That all administrative, special, or stamp provisions of law, 
 including the law relating to the assessment of taxes, so far as applicable, 
 are hereby extended to and made a part of this Act, and every Adminis- 
 person, corporation, partnership, or association liable to any tration 
 tax imposed by this Act, or for the collection thereof, shall Assess- 
 keep such records and render, under oath, such statements ment. 
 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. 
 
 SEC. 1002. That where additional taxes are imposed by this Act upon 
 articles or commodities, upon which the tax imposed by existing law has 
 been paid, the person, corporation, partnership, or association Additional 
 required by this Act to pay the tax shall, within thirty days Taxes. 
 after its passage, make return under oath in such form and under such regu- 
 lations as the Commissioner 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 from the passage 
 of this Act, upon the filing of a bond for payment 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. 
 
 SEC. 1003. That in all cases where the method of collecting the tax im- 
 posed by this Act is not specifically provided, the tax shall be collected in 
 
280 APPENDIX B 
 
 such manner as the Commissioner of Internal Revenue with the approval 
 Method of of the Secretary of the Treasury may prescribe. All adminis- 
 Collection. trative and penalty provisions of Title VIII of this Act, in so far 
 as applicable, shall apply to the collection of any tax which the Commis- 
 sioner of Internal Revenue determines or prescribes shall be paid by stamp. 
 
 SEC. 1004. That whoever fails to make any return required by this Act, 
 or the regulations made under authority thereof within the time prescribed 
 Penalties or w ^ ma ^ es anv ^ a ^ se 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 specific- 
 ally provided. 
 
 Rules and SEC. 1005. That the Commissioner of Internal Revenue, 
 Regula- with the approval of the Secretary of the Treasury, is hereby 
 tions. authorized to make all needful rules and regulations for the 
 
 enforcement of the provisions of this Act. 
 
 SEC. 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 
 Stamps on collectors' offices and in the Bureau of Internal Revenue may 
 Hand. 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 assess- 
 ment 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 provided by 
 this Act. 
 
 SEC. 1007. That (a) if any person, corporation, partnership, or associa- 
 tion has prior to May ninth, nineteen hundred and seventeen, made 
 Prior Con- a bona fide contract with a dealer for the sale, after the tax 
 tracts. 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 imposed 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 tune the sale or lease is consummated, 
 Vendor, and collected, returned, and paid to the United States by 
 Lessor. 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 pur- 
 " Dealer " chases any article with intent to use it in the manufacture 
 Defined. or production of another article intended for sale. 
 
POSTAL RATES 281 
 
 SEC. 1008. That in the payment of any tax under this Act not payable 
 by stamp a fractional part of a cent shall be disregarded un- Fraction of 
 less it amounts to one-half cent or more, in which case it shall Cent, 
 be increased to one cent. 
 
 SEC. 1009. That the Secretary of the Treasury, under rules and regula- 
 tions prescribed by him, shall permit taxpayers liable to income and excess 
 profits taxes to make payments in advance in installments Acl V an Ce 
 or in whole of an amount not in excess of the estimated taxes Install- 
 which will be due from them, and upon determination of the ment, 
 taxes actually due any amount paid in excess shall be refunded Payments 
 as taxes erroneously collected: Provided, That when payment is of Income 
 made in installments at least one-fourth of such estimated tax an( ^ Excess 
 shall be paid before the expiration of thirty days after the close P r fi ts 
 of the taxable year, at least an additional one-fourth within two axes * 
 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 regula- 
 tions 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 pay- 
 ments 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 existing 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. 
 
 SEC. 1010. That under rules and regulations prescribed by the Secre- 
 tary of the Treasury, collectors of internal revenue may receive, at par 
 and accrued interest, certificates of indebtedness issued under Payment 
 section six of the Act .entitled "An Act to authorize an issue by Certifi- 
 of bonds to meet expenditures for the national security and cates of In- 
 defense, and, for the purpose of assisting in the prosecution debted- 
 of the war, to extend credit to foreign governments, and ness. 
 for other purposes," approved April twenty-fourth, nineteen hundred and 
 seventeen, and any subsequent Act or Acts, and uncertified checks in pay- 
 ment of income and excess-profits taxes, during such time Uncertified 
 and under such regulations as the Commissioner of Internal Checks. 
 Revenue, with the approval of the Secretary of the Treasury, shall pre- 
 scribe; but if a check so received is not paid by the bank on which it is drawn 
 the person by whom such check has been tendered shall remain liable for 
 the payment of the tax and for all legal penalties and additions the same 
 as if such check had not been tendered. 
 
 TITLE XI. POSTAL RATES 
 
 SEC. noo. 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, i cent for each ounce or fraction thereof: 
 
282 APPENDIX B 
 
 Provided, That the rate of postage on drop letters of the first class shall be 
 Mail Mat- 2 cents an ounce or fraction thereof. Postal cards, and pri- 
 ter First vate mailing or post cards when complying with the require- 
 Class. ments of existing law, shall be transmitted through the mails at 
 
 i cent each in addition to the existing rate. 
 
 That letters written and mailed by soldiers, sailors, and marines assigned 
 Free of to duty in a foreign country engaged in the present war may 
 Postage. be mailed free of postage, subject to such rules and regulations 
 as may be prescribed by the Postmaster General. 
 
 SEC. no i. That on and after July first, nineteen hundred and eighteen, 
 the rates of postage on publications entered as second-class matter (includ- 
 Second ing sample copies to the extent of ten per centum of the 
 Class Mail, weight of copies mailed to subscribers during the calendar 
 year) \vhen sent by the publisher thereof 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: (i) On and after July first, 
 Rates of nineteen hundred and eighteen, and until July first, nine- 
 Tax, teen hundred and nineteen, i*4 cents per pound or fraction 
 thereof; (2) on and after July first, nineteen hundred and nineteen, i^4 
 cents per pound or fraction thereof. 
 
 (b) In the case of the portion of such publication devoted to advertise- 
 Portion ments the rates per pound or fraction thereof for delivery 
 Devoted to within the several zones applicable to fourth-class matter 
 Advertise- shall be as follows (but where the space devoted to advertise- 
 ments, ments does not exceed five per centum of the total space, 
 the rate of postage shall be the same as if the whole of such publication 
 Rates July was devoted to matter other than advertisements): (i) On 
 1, 1918, and after July first, nineteen hundred and eighteen, and 
 until July first, nineteen hundred and nineteen, for the first and second 
 zones, i*4 cents; for the third zone, i> cents; for the fourth zone, 2 cents; 
 for the fifth zone, 2% cents; for the sixth zone, 2^2 cents; for the seventh 
 July 1, zone, 3 cents; for the eighth zone, 3^ cents; (2) on and after 
 1919) July first, nineteen hundred and nineteen, and until July first, 
 nineteen hundred and twenty, for the first and second zones, i> cents; 
 for the third zone, 2 cents; for the fourth zone, 3 cents; for the fifth zone 
 3K cents; for the sizth zone, 4 cents; for the seventh zone, 5 cents; for the 
 Julyl, eighth zone, $y? cents; (3) on and after July first, nineteen 
 
 1920. hundred and twenty, and until July first, nineteen hundred 
 and twenty-one, for the first and second zones, iy 4 cents; for the third 
 zone, 2j^ 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 
 July 1, zone, 7^4 cents; (4) on and after July first, nineteen hundred 
 
 1921. and twenty-one, for the first and second 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; 
 
POSTAL RATES 283 
 
 (c) With the first mailing of each issue of each such publication, the 
 publisher shall file with the postmaster a copy of such issue, together with 
 a statement containing such information as the Postmaster TVJ CODV 
 General may prescribe for determining the postage charge- 
 able thereon. 
 
 SEC. 1 102. 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 Daily 
 affect existing law as to free circulation and existing rates on News- 
 second-class mail matter within the county of publication: papers. 
 Provided, That the Postmaster General may hereafter require publishers to 
 separate or make up to zones in such a manner as he may direct all mail 
 matter of the second class when offered for mailing. 
 
 SEC. 1103. That in the case of newspapers and periodicals entitled to be 
 entered as second-class matter and maintained by and in the interest of 
 religious, educational, scientific, philanthropic, agricultural Religious, 
 labor, or fraternal organizations or associations, not organized Educa- 
 for profit and none of the net income of which inures to the tional, etc., 
 benefit of any private stockholder or individual, the second- Publica- 
 class postage rates shall be, irrespective of the zone in which tions. 
 delivered (except when the same are deposited in a letter carrier office for 
 delivery by its carriers, in which case the rates shall be the same as now pro- 
 vided by law), i l /% cents a pound or fraction thereof on and after July first, 
 nineteen hundred and eighteen, and until July first, nineteen hundred and 
 nineteen, and on and after July first, nineteen hundred and 
 nineteen, i^ cents a pound or fraction thereof. The publish- 
 ers of such newspapers or periodicals before being entitled to the foregoing 
 rates shall furnish to the Postmaster General, at such tunes and under such 
 conditions as he may prescribe, satisfactory evidence that none of the net 
 income of such organization inures to the benefit of any private stockholder or 
 individual. 
 
 SEC. 1104. That where the total weight of any one edition or issue of 
 any publication mailed to any one zone does not exceed one * . . 
 pound, the rate of postage shall be i cent. 
 
 SEC. 1105. The zone rates provided by this title shall relate to the entire 
 bulk mailed to any one zone and not to individually addressed Zone 
 packages. Rates. 
 
 SEC. 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. 
 
 SEC. 1107. That the Postmaster General, on or before the tenth day of 
 each month, shall pay into the general fund of the Treasury Payment 
 an amount equal to the difference between the estimated to General 
 amount received during the preceding month for the trans- Fund. 
 portation of first class matter through the mails and the estimated amount 
 which would have been received under the provisions of the law in force 
 at the time of the passage of this Act. 
 
284 APPENDIX B 
 
 SEC. 1108. That the salaries of postmasters at offices of the first, second, 
 Salaries an d third classes shall not be increased after July first, nine- 
 Postmas- teen hundred and seventeen, during the existence of the present 
 ters. war. The compensation of postmasters at offices of the fourth 
 
 class shall continue to be computed on the basis of the present rates of post- 
 age. 
 
 SEC. 1109. That where postmasters at offices of the third class have been 
 Leave for since May first, nineteen hundred and seventeen, or hereafter 
 Military are granted leave without pay for military purposes, the Post- 
 Service, master 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. 
 
 SEC. 1 1 10. That section five of the Act approved March third, nineteen 
 hundred and seventeen, entitled "An Act making appropriations for the 
 Construe- Post Office Department for the year ending June thirtieth, 
 tion. nineteen hundred and eighteen," shall not be construed to 
 
 apply to ethyl alcohol for governmental, scientific, medicinal, mechanical, 
 manufacturing, and industrial purposes, 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 ministers 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 
 Inserted in Federal Income Tax Law (Appendix A, page 219.) 
 
 TITLE XIII. GENERAL PROVISIONS 
 
 SEC. 1300. That if any clause, sentence, paragraph, or part of this Act 
 shall for any reason be adjudged by any court of competent jurisdiction 
 Saving to be invalid, such judgment shall not affect, impair, or in- 
 
 Clause. validate the remainder of said Act, but shall be confined in its 
 operation to the clause, sentence, paragraph, or part thereof directly in- 
 volved in the controversy in which such judgment shall have been rendered. 
 
 SEC. 1301. That Title I of the Act entitled "An Act to provide increased 
 revenue to defray the expenses of the increased appropriations for the 
 Title Re- Army and Navy and the extension of fortifications, and for 
 pealed. other purposes," approved March third, nineteen hundred 
 and seventeen, be, and the same is hereby, repealed. 
 
 Eff ct* ^ EC * Z 3 O2 ' That unless otherwise herein specially provided, 
 
 this Act shall take effect on the day following its passage. 
 
 Approved, October 3, 1917. 
 
APPENDIX C 
 
 FEDERAL CORPORATION CAPITAL STOCK TAX LAW 
 ENACTED SEPTEMBER 8, 1916 
 
 SEC. 407. That on and after January first, nineteen hundred and seven- 
 teen, special taxes shall be, and hereby are, imposed annually, When Ef- 
 as follows, that is to say: f active. 
 
 Every corporation, joint-stock company or association, now or here- 
 after organized in the United States for profit and having a capital stock 
 represented by shares, and every insurance company, now All Corpo- 
 or hereafter organized under the laws of the United States, rations Or- 
 or any State or Territory of the United States, shall pay ganized for 
 annually a special excise tax with respect to the carrying on Profit, 
 or doing business by such corporation, joint-stock company or association, 
 or insurance company, equivalent to 50 cents for each $1,000 of the fair 
 value of its capital stock and in estimating the value of capital p . 
 stock, the surplus and undivided profits shall be included: 
 Provided, That in the case of insurance companies such deposits and reserve 
 funds as they are required by law or contract to maintain or hold for the 
 protection of or payment to or apportionment among policyholders shall 
 not be included. The amount of such annual tax shall in all cases be com- 
 puted on the basis of the fair average value of the capital stock for the 
 preceding year: Provided, That for the purpose of this tax Exemp- 
 an exemption of $99,000 shall be allowed from the capital tion. 
 stock as defined in this paragraph of each corporation, joint-stock company 
 or association, or insurance company: Provided further, That a corporation, 
 joint-stock company or association, or insurance company, Munitions 
 actually paying the tax imposed by section three hundred Tax Cred- 
 and one of Title III of this act shall be entitled to a credit itable. 
 as against the tax imposed by this paragraph equal to the amount of the 
 tax so actually paid: And provided further. That this tax shall not be im- 
 posed upon any corporation, joint-stock company or as- Preceding 
 sociation, or insurance company not engaged in business Taxable 
 during the preceding taxable year, or which is exempt under Year, 
 the provisions of section eleven, Title I, of this act. 
 
 Every corporation, joint-stock company or association, or insurance 
 company, now or hereafter organized for profit under the laws of any foreign 
 country and engaged in business in the United States shall pay Foreign 
 annually a special excise tax with respect to the carrying on or Corpora- 
 doing business in the United States by such corporation joint- tions. 
 stock company or association, or insurance company, equivalent to 50 cents 
 for each $1,000 of the capital actually invested in the tran- 
 saction of its business in the United States: Provided, That 
 
286 APPENDIX C 
 
 in the case of insurance companies such deposits or reserve funds as they 
 Reserve are required by law or contract to maintain or hold in the 
 Funds of United States for the protection of or payment to or appor- 
 Insurance tionment among policyholders, shall not be included. The 
 Companies, amount of such annual tax shall in all cases be computed on 
 the basis of the average amount of capital so invested during the preceding 
 year: Provided, That for the purpose of this tax an exemption from the 
 Average amount of capital so invested shall be allowed equal to such 
 Capital. proportion of $99,000 as the amount so invested bears to 
 the total amount invested in the transaction of business in the United States 
 Exemp- or elsewhere: Provided, further, That this exemption shall be 
 tion. allowed only if such corporation, joint-stock company or 
 
 association, or insurance company makes return to the Commissioner of 
 Internal Revenue, under regulations prescribed by him, with the approval 
 of the Secretary of the Treasury, of the amount of capital invested in the 
 transaction of business outside the United States: And provided further, 
 That a corporation, joint-stock company or association, or insurance com- 
 Munitions pany actually paying the tax imposed by section three hun- 
 Tax. dred and one of Title III of this act, shall be entitled to a 
 
 credit as against the tax imposed by this paragraph equal to the amount 
 of the tax so actually paid: And provided further , That this tax shall not be 
 Preceding imposed upon any corporation, joint-stock company or asso- 
 Year. ciation, or insurance company not engaged in business during 
 
 the preceding taxable year, or which is exempt under the provisions of 
 section eleven, Title I, of this act. 
 
 SEC. 408. (Last paragraph.) Every preson who carries on any business 
 or occupation for which special taxes are imposed by this title, without 
 P altv having paid the special tax therein provided, shall, besides 
 being liable to the payment of such special tax, be deemed 
 guilty of a misdemeanor, and upon conviction thereof shall pay a fine of 
 not more than $500, or be imprisoned not more than six months, or both, 
 in the discretion of the court. 
 
 SEC. 409. That all administrative or special provisions of law, includ- 
 Adminis- ing the law relating to the assessment of taxes, so far as ap- 
 tration. plicable, are hereby extended to and made a part of this 
 title, and every person, firm, company, corporation, or association liable 
 to any tax imposed by this title, shall keep such records and render, under 
 R c rds oat h, suc h 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. 
 
 REGULATIONS 
 
 Concerning the special excise tax imposed by section 407, Title IV, act of 
 September 8, 1916, on corporations, joint-stock companies or associa- 
 tions, and insurance companies, organized for profit in the United 
 States, and on the capital invested in the United States of foreign 
 companies and associations transacting business in the United States. 
 
CAPITAL STOCK TAX REGULATIONS 287 
 
 RETURNS COMPUTATION OF TAX, COLLECTIONS, AND PENALTIES 
 
 Tax imposed 
 
 Article i. Section 407 imposes a special excise tax with respect to the 
 carrying on or doing business by corporations, joint-stock companies or 
 associations, or insurance companies, as follows: 
 
 Corporations in the United States 
 
 (a) Every corporation, joint-stock company or association, or insurance 
 company, now or hereafter organized in the United States for profit and 
 having a capital stock represented by shares, 50 cents for each $1,000 of 
 the fair value of the capital stock in excess of $99,000, except as hereinafter 
 indicated; and 
 
 Foreign Corporations 
 
 (6) Every corporation, joint-stock company or association, or insurance 
 company, now or hereafter organized for profit under the laws of any for- 
 eign country and engaged in business in the United States, 50 cents for each 
 $1,000 of the capital actually invested in the transaction of its business in 
 the United States. It is provided in cases in which the foreign corporation 
 makes a return of the total amount of capital invested in the transaction 
 of business, both abroad and in this country, that such proportion of $99,000 
 as the amount invested in the United States bears to the total amount 
 invested in the United States and elsewhere may be remitted in computing 
 the tax upon the capital invested in the United States. 
 
 Corporations Exempt 
 Corporations and associations exempt 
 
 Art. 2. (a) The following corporations, joint-stock companies or associa- 
 tions, or insurance companies, which are exempt from income tax under the 
 provisions of section n, Title I, are also specifically exempt from the capital- 
 stock tax under section 407, Title IV, of this act: 
 
 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 fra- 
 ternity itself operating under the lodge system, and providing for the pay- 
 ment of life, sick, accident, or other benefits to the members of such society, 
 order, or association, or their dependents; 
 
 Fouth. Domestic building and loan association and coSperative banks 
 without capital stock organized and operated for mutual purposes and with- 
 out profit; 
 
 Fifth. Cemetery company owned and operated exclusively for the benefit 
 of its members; 
 
 Sixth. Corporation or association organized and operated exclusively for 
 
288 APPENDIX C 
 
 religious, charitable, scientific, or educational purposes, no part of the net in- 
 come 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, recreation, 
 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 com- 
 pany, or like organization of a purely local character, the income of which 
 consists solely of assessments, dues, and fees collected from members for the 
 sole purpose of meeting its expenses; 
 
 Eleventh. Farmers,' fruit growers,' or like association, organized 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 the 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, nine- 
 teen hundred and sixteen, entitled "An act to provide capital for agricultural 
 development, to create standard forms of investment based upon farm mort- 
 gage, to equalize rates of interest upon farm loans, to furnish a market for 
 United States bonds, to create Government depositaries and financial agents 
 for the United States, and for other purposes." 
 
 Mutual companies exempt 
 
 (6) Inasmuch as the basis of tax is the fair value of the stock of a cor- 
 poration, mutual insurance companies and other associations not having 
 capital stock represented by shares will also be exempt from tax, in the 
 absence of a basis for the computation of the tax. 
 
 Returns 
 Tax due in January and July, 1917, and annually in July thereafter 
 
 Art. 3. (a) Section 3237, Revised Statutes, as amended by section 53 
 of the act of October i, 1890 (26 Stats., 567), provides "that all special 
 taxes shall become due on the ist day of July, 1891, and on the ist day of 
 July in each year thereafter, or on commencing any trade or business on 
 which such tax is imposed. In the former case the tax shall be reckoned 
 for one year, and in the latter case it shall be reckoned proportionately 
 from the ist day of the month in which the liability to a special tax com- 
 
CAPITAL STOCK TAX REGULATIONS 289 
 
 menced to the ist day of July following." The capital-stock tax, therefore, 
 which becomes effective January i, 1917, will be payable in January, 1917, 
 on returns to be made during that month for the six months ending June 30, 
 1917. In July, 1917, and annually in July thereafter, returns must again 
 be made and the tax paid for the ensuing fiscal year. 
 
 Returns required of every United States corporation having capital stock 
 outstanding of $75,000 or over 
 
 (b) Every corporation, joint-stock company or association, or insurance 
 company, organized in the United States for profit and having a capital 
 stock issued and outstanding, represented by shares of the market value of 
 $75,000 or over, and not exempt as indicated in article 2, shall make a return 
 on Form 707 irrespective of the par value of its capital stock, unless such 
 corporation, joint-stock company or association, or insurance company 
 was not engaged in business during the preceding taxable year, which for 
 the return due January i, 1917, shall be the fiscal year July i, 1915, to June 
 30, 1916. 
 
 Return required of every foreign corporation 
 
 (c) Every corporation, joint-stock company or association, or insurance 
 company, organized for profit under the laws of any foreign country and 
 engaged in business in the United States, shall make return on Form 708 
 irrespective of the amount of capital employed either at home or in this 
 country in the transaction of its business. 
 
 Form of return for United States corporations 
 Substance of return required from United States Corporations 
 
 Art. 4. The return required by article 3 of corporations, joint-stock com- 
 panies or associations, or insurance companies, organized in the United 
 States, shall be made on Form 707, to be supplied by this department, and 
 shall set forth the following particulars: 
 
 (1) Total number of shares of stock now outstanding. 
 
 (2) Par value of shares. 
 
 (3) Par value of total capital stock outstanding. 
 
 (4) Amount of surplus. 
 
 (5) Amount of undivided profits. 
 
 (6) Case I. Average market value per share during preceding fiscal 
 year, if stock is listed on an exchange. 
 
 Case II. If stock is not listed on an exchange, average market value 
 per share computed from sales made during preceding fiscal year. 
 
 Case III. If stock is not listed on any exchange and no sales have been 
 made during preceding fiscal year, or if sales have been made and the price 
 is unknown, the fair average value of the stock may be estimated from the 
 following data set forth on the return: Amount of surplus, amount of un- 
 divided profits, nature of business, estimated earning capacity, average 
 
2 QO APPENDIX C 
 
 dividends per share paid during preceding five years, average profits pei 
 share earned during preceding five years. 
 
 (7) Total number of shares of stock outstanding on last day of fiscal year. 
 
 (8) Fair value of total capital stock for preceding fiscal year. 
 
 (9) Deduction allowed by law of $99,000. 
 
 (10) Amount of fair value of stock over $99,000 upon which tax should 
 be computed. 
 
 (n) Tax at rate of 50 cents per year for each full $1,000. 
 
 (12) Amount of munitions tax, if any, paid under Title III of this act 
 since making the last previous return. 
 
 (13) Amount of tax due. 
 
 Form of return for foreign corporations 
 Substance of return required of foreign corporations 
 
 Art. 5. The return required by article 3 of foreign corporations, joint- 
 stock companies or associations, or insurance companies, having capital 
 invested in the transaction of its business in the United States, shall be 
 made on Form 708, to be supplied by this department, and shall set forth 
 the following particulars: 
 
 (1) Amount of capital invested in the United States. 
 
 (2) Amount of capital invested in foreign countries. 
 
 (3) Total amount of capital invested in the corporation, both in the 
 United States and elsewhere. 
 
 (4) Percentage of capital invested in the United States. 
 
 (5) Percentage of $99,000 allowed to be deducted under the law. 
 
 (6) Amount of capital upon which tax should be computed. 
 
 (7) Tax at the rate of 50 cents per year for each full $1,000. 
 
 (8) Amount of munitions tax, if any, paid under Title III of this act 
 since making the last previous return. 
 
 (9) Amount of tax due. 
 
 Computation of Tax 
 United States corporations 
 
 Art. 6. Sec. I. Companies or associations organized in the United States 
 for profit. The tax on companies or associations having a capital stock 
 represented by shares is imposed on the fair average value for the preceding 
 year and not the face or par value of the capital stock. The fair value of 
 the capital stock shall be ascertained as follows: 
 
 Stock listed on exchange 
 
 (a) Case I. If the stock is listed on any exchange its fair value will be 
 determined by adding the quoted highest bid price for the stock on the last 
 business day of each month during the preceding fiscal year (or if no bid 
 price was quoted on the last day then the latest day in the month on which 
 
CAPITAL STOCK TAX REGULATIONS 2QI 
 
 a bid was quoted), and dividing by 12, the result being the average bid 
 price per share for that year. 
 
 Stock not listed, but of which sales have been made 
 
 (b) Case II. If the stock is not listed on any exchange, but sales thereof 
 have been actually made, and the price paid for the stock is known to the 
 officer making the return, or can be discovered by him, the average price 
 at which sales were made during the preceding fiscal year shall be the de- 
 termining factor in ascertaining the fair value per share. 
 
 (In the foregoing two cases the actual fair value of the stock is ascer- 
 tainable from the facts without the necessity of making an estimate.) 
 
 Cases in which fair average value of stock shall be estimated 
 
 (c) Case III. If Case I and Case II can not be applied, viz., the stock 
 is not listed on any exchange, and no actual sales have been made during 
 the preceding fiscal year, or if the price at which sales have been made is 
 not known to the officer making the return the fair average value of the 
 capital stock shall be estimated, and the surplus and undivided profits for 
 the preceding fiscal year will be taken into consideration as required by 
 the statute, as well as the nature of the business, its earning capacity and 
 average dividends paid, or profits earned during the preceding five years. 
 
 Fair value of total capital stock outstanding 
 
 (d) The fair value per share ascertained or estimated as above multiplied 
 by the number of shares outstanding will give the fair value of the stock 
 for taxation purposes. 
 
 Deduction of $99,000 
 
 (e) From this total will be deducted the sum of $99,000, the exemption 
 allowed by law, and the tax will be laid upon the balance at the rate of 50 
 cents for each full $1,000 of the remainder. 
 
 Tax due January, 1917 
 
 (/) Upon the returns to be made during January, 1917, for the six months 
 ending June 30, 1917, the tax due will be 25 cents per $1,000 of such re- 
 mainder. 
 
 Deduction of munitions tax 
 
 (g) From the tax due as so determined will be deducted the amount of 
 munitions tax, if any, actually paid since making the last previous return. 
 As the special excise tax on capital stock is due in January, 1917, and the 
 munitions tax will not be determined and assessed until March or April, 
 no deductions for munitions tax will be allowed on the January, 1917, return. 
 Deductions, however, will be allowed on the July, 1917, return for munitions 
 taxes actually paid prior to that date. 
 
2Q2 APPENDIX C 
 
 SEC. 2. Corporations, joint-stock companies or associations, or insurance 
 companies, organized for profit under the laws of any foreign country and en- 
 gaged in business in the United States. 
 
 Foreign corporations 
 
 (a) The tax imposed on such companies or associations shall be computed 
 upon the actual capital invested in the transaction of its business in the 
 United States. The basis of taxation is the average amount of capital so 
 invested during the preceding fiscal year. 
 
 Deduction of proportion of $99,000 only allowed if corporation makes return 
 of total capital invested 
 
 (6) The exemption from the amount of capital invested in the United 
 States equal to the proportion of $99,000 as the amount so invested bears 
 to the total amount invested in the transaction of business in the United 
 States or elsewhere shall only be allowed a company or association which 
 makes return to the Commissioner of Internal Revenue, under these regula- 
 tions, of the amount of capital invested in the transaction of business out- 
 side of the United States. Thus a foreign company or association investing 
 part of its capital in the transaction of business in the United States shall 
 be liable for tax in the amount of 50 cents for each $1,000 of the actual capital 
 invested in the United States, . without deduction of the said proportion 
 of $99,000, unless it discloses in its return the amount of capital invested 
 in the transaction of business outside of the United States. 
 
 Corporations not in business during preceding taxable year 
 
 SEC. 3. Corporations not engaged in business during preceding taxable year. 
 This tax shall not be imposed upon any corporation, joint-stock company 
 or association, or insurance company not engaged in business during the 
 preceding taxable year, or in the case of the taxable period ending June 30, 
 1917, not so engaged during the year July i, 1915, to June 30, 1916. The 
 tax shall be computed upon each full value of $1,000 and not on any frac- 
 tional part thereof. 
 
 Collection of tax 
 
 Special list, Form 23C 
 
 Art. 7. On account of the impracticability of issuing stamps in the various 
 amounts, this tax will be collected by assessment on a special list for the 
 months of January and July, 1917, and annually thereafter in July. Any 
 delinquent returns made in February or other months, or any assessments 
 for delinquency in taxes, may be listed on the regular list Form 23, and col- 
 lected in the usual way. 
 
 Returns retained by collector 
 
 (a) Returns listed on special lists will be retained in the office of the col- 
 lector as the special list will be prepared so as to give the essential data 
 shown by the return. 
 
CAPITAL STOCK TAX REGULATIONS 293 
 
 Returns forwarded to commissioner 
 
 (&) Returns listed on regular lists will be forwarded to this office with the 
 list for audit. 
 
 Penalty of 5 per cent. 
 
 (c) Upon failure to pay the tax assessed within 10 days, after notice and 
 demand, a penalty of 5 per cent, of the tax unpaid and interest at the rate 
 of i per cent, per month until paid shall be added to the amount of such 
 tax. 
 
 Penalties 
 Administrative and assessment laws applicable to this law. 
 
 Art. 8. (a) Under section 409 it is provided that "all administrative or 
 special provisions of law, including the law relating to the assessment of 
 taxes so far as applicable, are hereby extended to and made a part of Title 
 IV, and every person, firm, company, corporation, or association liable to 
 any tax imposed by this title shall keep such records and render under 
 oath such statements and returns as 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." 
 
 Penalties for failure to make return 
 
 (b) Any company or association, therefore, subject to special tax under 
 section 407 of this act, which fails to make returns during the months of 
 January, 1917, and July, 1917, and annually in July thereafter, will be 
 liable to the penalties imposed by section 3176, Revised Statutes, as amended 
 by section 16, act of September 8, 1916, which reads as follows: 
 
 Collector may make the return 
 
 If any person, corporation, company, or association fails to make and 
 file a return or list at the time prescribed by law, or makes, wilfully or other- 
 wise, a false or fraudulent return or list, the collector or deputy collector 
 shall make the return or list from his own knowledge and from such informa- 
 tion as he can obtain through testimony or otherwise. Any return or list 
 so made and subscribed by a collector or deputy collector shall be prima 
 facie good and sufficient for all legal purposes. 
 
 Extension of 30 days 
 
 If the failure to file a return or list is due to sickness or absence the col- 
 lector may allow such further time, not exceeding thirty days, for making 
 and filing the return or list as he deems proper. 
 
 Fifty per cent, penalty 
 
 The Commissioner of Internal Revenue shall assess all taxes, other than 
 stamp taxes, as to which returns or lists are so made by a collector or deputy 
 
294 APPENDIX C 
 
 collector. In case of any failure to make and file a return or list within the 
 time prescribed by law or by the collector, the Commissioner of Internal 
 Revenue shall add to the tax fifty per centum of its amount except that, 
 when a return is voluntarily and without notice from the collector filed after 
 such time and it is shown that the failure to file it was due to a reasonable 
 cause and not to willful neglect, no such addition shall be made to the tax. 
 In case a false or fraudulent return or list is willfully made, the Commis- 
 sioner of Internal Revenue shall add to the tax one hundred per centum of 
 its amount. 
 
 The amount so added to any tax shall be collected at the same time and 
 in the same manner and as part of the tax unless the tax has been paid be- 
 fore the discovery of the neglect, falsity, or fraud, in which case the amount 
 so added shall be collected in the same manner as the tax. 
 
 (c) In addition to the penalties imposed by section 3176, Revised Stat- 
 utes, section 408 provides as follows: 
 
 Specific penalty 
 
 Every person who carries on any business or occupation for which special 
 taxes are imposed by this title, without having paid the special tax therein 
 provided, shall, besides being liable to the payment of such special tax, be 
 deemed guilty of a misdemeanor, and upon conviction thereof shall pay a 
 fine of not more than $500, or be imprisoned not more than six months, or 
 both, in the discretion of the court. 
 
 W. H. OSBORN, 
 
 Approved: Commissioner of Internal Revenue. 
 
 WM. P. MALBURN, 
 Acting Secretary of the Treasury. 
 
 (T. D. 2418) 
 
 CITATIONS FROM DECISIONS OF THE SUPREME COURT RE- 
 GARDING "DOING BUSINESS" UNDER CAPITAL-STOCK 
 TAX, ACT OF SEPTEMBER 8, 1916 
 
 TREASURY DEPARTMENT, 
 OFFICE OF COMMISSIONER OF INTERNAL REVENUE, 
 
 Washington, D. C., December 15, ip/tf. 1 
 To COLLECTORS OF INTERNAL REVENUE: 
 
 The following decisions made in cases arising under the corporation-tax 
 Act of August 5, 1909, will be followed where they are final or have been ac- 
 quiesced in by the department in similar questions arising under the special 
 excise tax imposed by section 407, Title IV, act of September 8, 1916: 
 
 I. When is a corporation "engaged in business," "doing business," or 
 "transacting business" ? [113096]. 
 
 II. "Massachusetts trusts" are exempt from the special excise tax 
 
 [1f3097l. 
 
 1 Released for publication December 21, 1916. 
 
CAPITAL STOCK TAX REGULATIONS 2Q5 
 
 III. Filing of returns [fl 3098]. 
 
 IV. Foreign corporations transacting business in the United States 
 
 [K3099]. 
 
 V. Domestic building and loan associations organized and operated for 
 mutual purposes and without profit are exempt ffl 3100]. 
 
 VI. Insurance companies claiming exemption as fraternal beneficiary 
 societies [^ 3101]. 
 
 The special excise tax imposed under section 407 of the act of September 8, 
 1916, is very similar in some respects to the corporation-tax act of August 5, 
 1909, and therefore the following court decisions rendered under that act 
 would apply to the present law: 
 
 WHEN is A CORPORATION "ENGAGED IN BUSINESS," "DOING BUSINESS," 
 OR "TRANSACTING BUSINESS"? 
 
 Flint v. Stone Tracy Co., Cedar Street Co. v. Park Realty Co. and 13 other 
 cases (220 U. S. 107; T. D. 1685) 
 
 In these cases it was held that section 38, act of August 5, 1909, impos- 
 ing a special excise tax on corporations was constitutional, and further 
 that corporations whose business is principally the holding and manage- 
 ment of real estate are actively "engaged in business" within the meaning 
 of that statute. 
 
 In the case of Cedar Street Co. v. Park Realty Co. it developed that the 
 Park Realty Co. was organized to "work, develop, sell, convey, mortgage, 
 or otherwise dispose of real estate; to lease, exchange, hire, or otherwise 
 acquire property; to erect, alter, or improve buildings; to conduct, operate, 
 manage, or lease hotels, apartment houses, etc.; to make and carry out con- 
 tracts in the manner specified concerning buildings . . . and generally to 
 deal in, sell, lease, exchange, or otherwise deal with lands, buildings, and 
 other property, real or personal," etc. 
 
 The court, in its decision, used the following language: 
 
 We think it is clear that corporations organized for the purpose of doing 
 business, and actually engaged in such activities as leasing property, col- 
 lecting rents, managing office buildings, making investments of profits, 
 or leasing ore lands and collecting royalties, managing wharves, dividing 
 profits, and in some cases investing the surplus, are engaged in business 
 within the meaning of this statute, and in the capacity necessary to make 
 such organizations subject to the law. 
 
 Several good illustrations of what constitutes "engaging in business" 
 are cited in the decision of the court in these cases. 
 
 Zonne v. Minneapolis Syndicate et al. (220 U. S. 187; T. D. 1687) Pe- 
 culiarity of corporate organization exempting it from special excise tax 
 
 Where a corporation originally organized for the purpose of owning and 
 renting an office building leased the property for 130 years and reorganized 
 and practically went out of business, its sole authority being to hold the 
 
296 APPENDIX C 
 
 title subject to the lease and to receive and distribute the rentals accruing 
 thereunder or the proceeds of sale if the property should be sold, held not 
 liable to the special excise tax under section 38 of the act of August 5, 1909. 
 
 The court stated in this case as follows: 
 
 The corporation involved in the present case, as originally organized, 
 and owning and renting an office building, was doing business within the 
 meaning of the statute as we have construed it. Upon the record now pre- 
 sented we are of opinion that the Minneapolis syndicate, after the demise 
 of the property and reorganization of the corporation, was not engaged in 
 doing business within the meaning of the act. It had wholly parted with 
 control and management of the property; its sole authority was to hold the 
 title subject to the lease for 130 years, to receive and distribute the rentals 
 which might accrue under the terms of the lease, or the proceeds of any sale 
 of the land if it should be sold. The corporation had practically gone out 
 of business in connection with the property and had disqualified itself by 
 the terms of reorganization from any activity in respect to it. We are of 
 opinion that the corporation was not doing business in such wise as to make 
 it subject to the tax imposed by the act of 1909. 
 
 McCoach, collector, v. Minehill & Schuylkill Haven Railroad Co. (228 U. S. 
 295; T. D. 1847) 
 
 Leased railroads. A railroad corporation, which has leased its property 
 for a term of years and parted with its control and management, but which 
 maintains its corporate organization and collects rentals from the lessee 
 company and distributes the same among its stockholders, is not "engaged 
 in business" within the meaning of the corporation-tax act of 1909 and is 
 not liable for taxes thereunder, notwithstanding the lease provides for 
 recovery of the property in case of default. 
 
 Corporations out of business. When the corporation owning the property 
 has gone out of business in connection therewith, and disqualified itself 
 from any activity in regard to it, there is no liability, the principle being 
 the same as that involved in the case of Zonne v. Minneapolis Syndicate 
 (220 U. S. 187), which is held to govern this case. 
 
 The court stated in this case as follows: 
 
 From the facts as stated above it is entirely clear that the Minehill Co. 
 was not, during the years 1909 and 1910, engaged at all in the business of 
 maintaining or operating a railroad, which was the prime object of its in- 
 corporation. This business, by the lease of 1896, it had turned over to the 
 Reading Co. If that lease had been made without authorization of law 
 it may be that for some purposes, and possibly, for the present purpose 
 the lessee might be deemed in law the agent of the lessor; or at least the lessor 
 held estopped to deny such agency. But the lease was made by the express 
 authority of the State that created the Minehill Co., conferred upon it its 
 franchise, and imposed upon it the correlative public duties. The effect 
 of this legislation and of the lease made thereunder was to constitute the 
 Reading Co. the public agent for the operation of the railroad and to prevent 
 the Minehill Co. from carrying on business in respect of the maintenance and 
 
CAPITAL STOCK TAX REGULATIONS 297 
 
 operation of the railroad so long as the lease shall continue. And it is the 
 Reading Co., and not the Minehill Co., that is "doing business" as a rail- 
 road company upon the lines covered by the lease, and is taxable because 
 of it. The corporation-tax law does not' contemplate double taxation in 
 respect of the same business. 
 
 United States v. Emery-Bird-Thayer Realty Co. (237 U. S. 28; T. D. 2188) 
 
 Engaged in business. The lessor corporation was not carrying on or doing 
 business within the meaning of the law, the only business done being keeping 
 up its corporate organization and collecting and distributing rent received 
 from lessee following the rule laid down in T. D. 1847. 
 
 The court states as follows: 
 
 Being of opinion that the District Court had jurisdiction, we pass to the 
 merits. They also may be disposed of without much discussion. The line 
 lies between Cedar Street Co. v. Park Realty Co. (220 U. S. 107, 170) and 
 Zonne v. Minneapolis Syndicate (220 U. S. 187), the latter case being carried 
 perhaps a little further by McCoach v. Minehill & Schuylkill Haven R. R. 
 Co. (228 U. S. 295). We are of opinion that this case is governed by the last 
 two and that the decision was right. The question is rather what the cor- 
 poration is doing than what it could do (228 U. S. 205, 306), but looking 
 even to its powers, they are limited very nearly to the necessary incidents 
 of holding a specific tract of land. The possible sale of the whole would be 
 merely the winding up of the corporation. That of a part would signify 
 that the dry goods company did not need it. The claimants characteristic 
 charter function and the only one that it was carrying on was the bare re- 
 ceipt and distribution to its stockholders of rent from a specified parcel of 
 land. Unless its bare existence as an intermediary was doing business, it 
 is hard to imagine how it could be less engaged. 
 
 Station's Independence (Ltd.) v. F. W. Howbert, collector (231 U. S. 399; 
 
 T. D. 1913} 
 
 Mining companies. Section 38, act of August 5, 1909, imposing a special 
 excise tax on corporations applies to mining companies. 
 
 The court stated as follows: 
 
 It is not correct, from either the theoretical or the practical standpoint, 
 to say that a mining corporation is not engaged in business, but is merely 
 occupied in converting its capital assets form one form into another. The 
 ?:.\e outright of a mining property might be fairly described as a mere con- 
 version of the capital from land into money. But when a company is digging 
 pits, sinking shafts, tunneling, drifting, stoping, drilling, blasting, and hoist- 
 ing ores, it is employing capital and labor in transmuting a part of the 
 realty into personalty and putting it into marketable form. The very proc- 
 ess of mining is, in a sense, equivalent in its results to a manufacturing 
 process. And, however the operation shall be described, the transaction 
 is indubitably "business" within the fair meaning of the act of 1909; and 
 the gains derived from it are properly and strictly from that business; for 
 
2Q8 APPENDIX C 
 
 "income" may be defined as the gain derived from capital, from labor, or 
 from both combined, and here we have combined operations of capital and 
 labor. As to the alleged inequality of operation between mining corporations 
 and others, it is of course true that the revenues derived from the working 
 of mines result to some extent in the exhaustion of the capital. But the 
 same is true of the earnings of the human brain and hand when unaided by 
 capital, yet such earnings are commonly dealt with in legislation as in- 
 come. . . . That mining companies are doing business, within the fair 
 intent and meaning of this clause, seems to us entirely plain, for reasons 
 already given. 
 
 Rio Grande Junction Railway Co. v. United States, Case No. 32746, Court of 
 Claims. (T. D. 2345.} (Decided May 26, 1916) 
 
 The Minehill decision in the Supreme Court. Decision in the Minehill 
 case (228 U. S. 295; T. D. 1847) does not apply where a corporation is or- 
 ganized for the ostensible purpose of building and operating a railroad and 
 leases the road before it is built. 
 
 Corporations organized to build and lease property. If the purpose for which 
 it was organized was to build and lease property, the rents derived from such 
 lease are taxable, even though thereby the corporation leases all the property 
 and of necessity goes out of all corporate business excepting the collection 
 and distribution of the rents. 
 
 The court stated: 
 
 We do not think, however, the case presented by the plaintiff comes 
 within the cases cited, for reasons which we will proceed to give. Its articles 
 of incorporation show that it was designed as a junction company; that is 
 to say, that it was intended as a connecting line between other lines 
 named. The contract for a lease was executed within six months after the 
 date of its articles of incorporation, and by its terms it may be well inferred 
 that the lessees guaranteed the payment of all funds borrowed for its con- 
 struction, and from the latter fact it may well be inferred that its construc- 
 tion was not begun until these bonds were issued and their payment guar- 
 anteed. It does does not appear that this company ever purchased or 
 owned any rolling stock or anything pertaining to the operation of a rail- 
 road, except its track and appurtenances necessary for the use of rolling 
 stock. As soon as said junction railroad was completed the lessees took 
 possession of it and have been operating it ever since. Shortly after it was 
 incorporated and before the execution of the agreement the General Assembly 
 of Colorado authorized the plaintiff to lease its railroad (not then built), 
 which must have been for the purpose of making doubly certain what the 
 articles of incorporation already seemed to allow. These facts lead to but 
 one conclusion, and that is that the "business" for which the plaintiff was 
 incorporated was to build and lease a junction railroad and enjoy the profits 
 of that business alone. It never equipped a railroad for use as such and 
 never intended to, as all the facts show. If plaintiff is allowed to evade 
 payment of the corporation tax in this way, we see no reason why this 
 practice can not be followed in the construction hereafter of every railroad, 
 
CAPITAL STOCK TAX REGULATIONS 2QQ 
 
 and thus evade the payment of a large percentage of the tax upon the net 
 income of railway corporations. 
 
 There are cited below several decisions of the lower courts, construing 
 the language of the Supreme Court in the above cases and further denning 
 the terms "doing business," "engaged in business," and "transaction of 
 business": Baumbach, collector, v. Sargent Land Co. et al. (219 Fed. 31), 
 (now before the Supreme Court on writ of certiorari); Lewellyn, collector, 
 v. Pittsburgh, B. & L. E. R. R. Co. et al. (222 Fed. 177); Miller, collector, 
 v. Snake River Valley R. R. Co. (223 Fed. 946); Traction Co. v. Collectors 
 of Internal Revenue (six cases) (233 Fed. 984), (decision of District Court 
 printed in T. D. 2000 reversed); Waterbury Gaslight Co. v. Walsh (228 
 Fed. 54); McCoach, collector, v. Continental Passenger Railway Co. of 
 Philadelphia (233 Fed. 976); State Line & S. R. Co. v. Davis (228 Fed. 246); 
 Wilkes-Barre & W. V. Traction Co. v. Davis, collector (214 Fed. 511); 
 Maxwell v. Abrast Realty Co. (218 Fed. 457); United States v. Nipissing 
 Mines Co. (206 Fed. 431). 
 
 Corporations which are not "engaged in business," "doing business" or 
 "transacting business," as construed under the language of the courts in 
 the above decisions are not subject to the special excise tax imposed under 
 section 407 of the act of September 8, 1916. 
 
 n 
 
 "MASSACHUSETTS TRUSTS" ARE EXEMPT FROM THE SPECIAL EXCISE TAX 
 Eliot v. Freeman et al. (220 U. S. 178; T. D. 1686) 
 
 Intent of Congress. It was the intention of Congress to embrace within 
 the statute imposing a special excise tax on corporations only such corpora- 
 tions and joint-stock associations as are organized under some statute or 
 derive from that source some quality or benefit not existing at the common 
 law. 
 
 The court stated as follows: 
 
 The two cases now under consideration embrace trusts which do not 
 derive any benefit from and are not organized under the statutory laws of 
 Massachusetts. Joint-stock companies of the statutory character are not 
 known to the laws of that Commonwealth. Ricker v. American Tea Co. 
 (140 Mass. 346). These trusts do not have perpetual succession, but end 
 with lives in being and 20 years thereafter. 
 
 Entertaining the view that it was the intention of Congress to embrace 
 within the corporation-tax statute only such corporations and joint-stock 
 associations as are organized under some statute or derive from that source 
 some quality or benefit not existing at the common law, we are of opinion 
 that the real-estate trusts involved in these two cases are not within the 
 terms of the act. In that view the decrees in both cases will be reversed 
 and the same remanded to the Circuit Court of the United States for the 
 District of Massachusetts, with directions to overrule the demurrers and 
 for further proceedings consistent with this opinion. 
 
300 APPENDIX C 
 
 III 
 
 NECESSITY FOR THE FILING OF A RETURN 
 United States v. Military Construction Co. (204 Fed. 153; T. D. 1774} 
 
 Returns. Corporations having a net income of $5,000 or less are not 
 exempt from the requirement that a return be made to the collector of the 
 district in which such corporation has its principal place of business. 
 
 The court stated as follows: 
 
 The return required is a somewhat complicated one. It consists of eight 
 sections, the proper interpretation of which controls the determination of 
 what the net income may be. This is a matter for the exercise of the of- 
 ficial judgment and discretion of the revenue department. In order that 
 it may exercise such judgment and discretion it must have the facts before 
 it. The officers of the corporation and those of the revenue department 
 may differ as to the ultimate effect of such facts. 
 
 This ruling with regard to filing returns is also laid down in United States 
 v. Acorn Roofing Co. and four other corporations (204 Fed. 157; T. D. 1784). 
 
 IV 
 
 FOREIGN CORPORATIONS TRANSACTING BUSINESS IN THE UNITED STATES 
 Laurentide Co. (Ltd.) v. Durey, collector (231 Fed. 223; T. D. 2346) 
 
 Liability of foreign corporation "Doing business" "Transacting busi- 
 ness" "Engaged in business." Under the revenue act of August 5, 1909, 
 taxing the net income of foreign corporations engaged in business in the 
 United States, and under the income-tax law of October 3, 1913, taxing 
 such income of such corporations accruing from business transacted and 
 capital invested within the United States, where a Canadian corporation 
 making news print paper sent agents into the United States to solicit pur- 
 chasers for its product, paying their expenses, hiring desk room in the United 
 States, empowering the salesmen to make written contracts, in part in the 
 United States, subject to the corporation's approval in Canada, and, when 
 approved, to deliver the contracts, paying rent, storage charges on paper 
 snipped into the United States, and also for work done by checks drawn 
 on a bank in the United States where the company kept its funds received 
 for goods delivered in the United States to purchasers, and then, to perform 
 its written contracts, shipped paper consigned to itself in the United States 
 to different points, where it hired storage rooms, and had the paper de- 
 livered to itself at such rooms, where it stored it in its own name and at its 
 own risk pending delivery, doing so for its own convenience and to insure 
 delivery according to contract, also shipping into the United States and 
 storing in such manner paper to meet anticipated demands, such Canadian 
 company "did business" in the United States, and "engaged in business" 
 therein, and also "transacted business" in the United States, so that it 
 was liable to taxation under both acts. 
 
 The court stated: 
 
 Appropriating the idea of Mr. Justice Peckham expressed in Pennsyl- 
 
CAPITAL STOCK TAX REGULATIONS 301 
 
 vania L. M. F. I. Co. v. Meyer (197 U. S. at p. 415; 25 Sup. Ct. 483; 42 
 L. Ed. 810), I think it would be somewhat difficult for the Laurentide 
 Co. (Ltd.), or its able attorney, to describe what it was doing in the United 
 States if it was not doing, carrying on, and transacting business therein 
 when there receiving large quantities of news paper consigned to itself and 
 storing it, hiring and paying for storage room therefor, delivering it to cus- 
 tomers, purchasers thereof, soliciting contracts by agents for the purchase 
 and supply of same, renting and paying rent for a room for doing the busi- 
 ness, depositing and collecting the checks received in payment, and paying 
 the expenses of the business therefrom, all done in the State of New York 
 in the United States. It was not necessary that the contracts should have 
 been made wholly in the United States. Pennsylvania Life Insurance Co. 
 v. Meyer (197 U. S. 407, 414; 25 Sup. Ct. 483; 49 L. Ed. 810), or that their 
 execution or performance should have been wholly in the United States. 
 
 DOMESTIC BUILDING AND LOAN ASSOCIATIONS ORGANIZED AND OPERATED 
 FOR MUTUAL PURPOSES AND WITHOUT PROFIT ARE EXEMPT 
 
 Herald, collector, v. Park View Building and Loan Association (210 Fed. 577; 
 
 T. D. 1941) 
 
 Construction of clause. The words "no part of the net income of which 
 inures to the benefit of any private stockholder or individual" do not apply 
 to domestic building and loan associations operated for the mutual benefit 
 of members. 
 
 Exemption. Building and loan associations operated exclusively for 
 the mutual benefit of their members are exempt. 
 
 Issuance of prepaid stock. The issuance of prepaid stock does not de- 
 stroy mutuality (affirming 203 Fed. 876). 
 
 VI 
 
 INSURANCE COMPANIES CLAIMING EXEMPTION AS FRATERNAL BENEFICIARY 
 
 SOCIETIES 
 
 Commercial Travelers' Life and Accident Association v. Rodway, collector 
 (235 Fed. 370; T. D. 1918} 
 
 Insurance companies. The corporation in question is an insurance com- 
 pany within the meaning of the law and subject to the tax imposed by 
 section 38, act of August 5, 1909. 
 
 Fraternal beneficiary societies. There is no exemption in the law in favor 
 of insurance companies other than fraternal beneficiary societies operating 
 under the lodge system (see T. D. 1738). Fraternal beneficiary societies 
 defined. 
 
 Inasmuch as the basis of tax is the fair value of the stock of a corporation, 
 mutual insurance companies and other associations not having capital 
 
302 APPENDIX C 
 
 stock represented by shares will also be exempt from tax, in the absence 
 of a basis for the computation of the tax. 
 
 Respectfully, 
 
 W. H. OSBORN, 
 
 Commissioner of Internal Revenue. 
 Approved: 
 W. G. McADOO, 
 Secretary of the Treasury. 
 
 (T. D. 2423) 
 
 SPECIFIC RULINGS MADE BY THIS OFFICE IN ANSWER TO 
 QUESTIONS ARISING UNDER THE SPECIAL EXCISE TAX 
 IMPOSED BY SECTION 407 OF THE ABOVE ACT 
 
 I. ESTIMATING FAIR VALUE OF CAPITAL STOCK. 
 II. COMPUTING FAIR VALUE OF CAPITAL STOCK WHEN SALES HAVE BEEN 
 
 MADE. 
 
 III. CHARACTER OF THE EXCISE TAX. CORPORATIONS LIABLE. 
 
 TREASURY DEPARTMENT, 
 OFFICE OF COMMISSIONER OF INTERNAL REVENUE, 
 
 Washington, D. C., December 30, ipid. 
 To COLLECTORS OF INTERNAL REVENUE: 
 
 i. The following suggestions have been made regarding the method of 
 estimating the fair value of stock under Case III, Item 6, on Form 707 : 
 
 (a) Where the capital stock of a corporation is worth $100 per share par 
 value and the corporation reports 10,000 shares, having a total value of 
 $1,000,000, and also reports a surplus of $500,000, and undivided profits 
 of $50,000, the book value of such stock would be $1,550,000. This should 
 be taken as the basis of the approximate value of the stock per share ($155) 
 unless by reason of earning capacity the real value is in excess of the book 
 value, or unless for any reason the book value is fictitious and is shown by 
 over-estimating the value of assets. 
 
 (6) If the "average profits per share earned during preceding five years" 
 indicate an "estimated earning capacity" in excess of the book value, the 
 fair value of the capital stock may be based upon a reasonable return on cap- 
 ital invested, dependent on the hazards of the business and what prices the 
 stock of corporations engaged in a similar character of business brings in the 
 open market. 
 
 (c) If the book value is fictitious and is shown by over-estimating the cap- 
 ital assets, this fact should be fully explained, either on the return or in a 
 statement attached thereto, and may be given allowance in determining the 
 fair value of stock where the "average profits per share earned during pre- 
 ceding five years" and "earning capacity" are exceedingly low. 
 
 (d) The "average dividends per share paid during preceding five years" 
 are stated merely for the information of this office in a case where a corpora- 
 tion shows an earning capacity but states no surplus or undivided profits. 
 
CAPITAL STOCK TAX REGULATIONS 303 
 
 (e) One return submitted by a lumber company for examination showed 
 a surplus of $257,700, but stated that it was "not earned." In view of the 
 fact that the total profits of this company for the last four years of operation 
 only amounted to $22,709.19, and it had paid no dividends within the last 
 five years, and its earning capacity was practically nothing, the corporation 
 was advised to file a statement, explaining how the surplus was acquired, 
 and if it was real or fictitious owing to the inflated valuation of assets on the 
 books. The fair value of the stock of this company, which was estimated 
 on the return at par, $100 per share, would largely depend upon the value of 
 its assets, especially the surplus of $257,700. In other words, if the capital 
 stock of $450,000, the surplus of $257,700, and the undivided profits of 
 $22,708.19, were divided up at the present time, would the corporation pay 
 $162 per share to each of the stockholders, that being approximately the 
 book value? 
 
 (/) A return filed by a Cotton Yarn Manufacturing Corporation showing 
 average profits for the last five years of $15,949.45 on capital stock of 
 $200,000, stated an estimated value under Case III of $70 per share. An 
 industrial corporation of this character stating the fair value of its stock at 
 $70 upon a return showing an earning capacity of seven to eight per cent., 
 is considered fair, in view of the speculative character of its business. 
 
 (g) The Collectors may make notations at the foot of special lists, Form 
 23C, of any exceptional cases in which specific rulings of the Department 
 are desired, and if it is necessary for this ofike to make an examination of 
 the return, statements, or affidavits of officers of the corporation, the Col- 
 lectors will be asked to forward them for that purpose. 
 
 (A) Where a holding company owns all the stock of several subsidiary 
 corporations which is not listed on any exchange or which has not been 
 sold in the last fiscal year, it has been held that the fair value of the stock 
 of such subsidiary companies may be estimated from the market value of 
 the total capital stock of the holding company (the parent corporation) by 
 apportionment of the fair value of the total capital stock of the holding cor- 
 porations among the subsidiary companies. This does not of course relieve 
 the holding company from its liability to the special excise tax, the average 
 fair value of the stock of which can probably be computed under Case I 
 or II. 
 
 II. Corporations estimating the fair value of their stock under Case II, 
 Item 6, on Form 707, will comply strictly with the provisions in the regu- 
 lations by taking "the average price at which sales were made during the 
 preceding fiscal year" and not the average selling price per share. Thus, 
 if ten shares were sold at $100 and one thousand shares were sold at $70, 
 the "average price at which sales were made" would be $85. The average 
 selling price in such case would be $70.29, but this price will not be accepted 
 as an average fair value. Corporations protesting against the computation 
 of the value of stock on this basis may file a statement with the return on 
 Form 707 setting forth the facts in detail and requesting the Collector to 
 bring the case to the attention of this ofike by a notation on the special list, 
 Form 23C, when it is forwarded to the Department for audit. 
 
 III. From correspondence reaching this office there appears to be a general 
 
304 APPENDIX C 
 
 lack of understanding of the character and scope of the special excise tax 
 imposed upon corporations by this act. 
 
 This tax is an excise tax on the privilege of doing business similar to occu- 
 pational taxes imposed on individuals, except that instead of a flat tax the 
 amount of tax is measured by the average value of the stock during the pre- 
 ceding year. Being a privilege or occupational tax, it is payable in advance 
 for a period from the time the Act goes into effect to the end of the fiscal 
 year and annually thereafter in July, the beginning of the Government's 
 fiscal year. The tax is payable to the Collector at any time after Jan. i, 
 1917, but penalties for non-payment do not attach until ten days after notice 
 and demand therefor has been served by the Collector upon the tax-payer. 
 
 It is a condition precedent that the corporation to be liable must have been 
 engaged in business during the preceding taxable (fiscal) year. This means, 
 however, not that it must have been engaged in business during the entire 
 year, but at some time in the year, and the length of time has no bearing 
 upon the amount of tax due. That is found by ascertaining the actual aver- 
 age market value of the stock from known sales, or estimating such value 
 for the preceding taxable year, which, in the case of the return due in Jan., 
 1917, is the Government's fiscal year from July i, 1915, to June 30, 1916. 
 
 Respectfully, 
 
 G. E. FLETCHER, 
 Acting Commissioner. 
 
APPENDIX D 
 
 SPECIAL EXCISE TAX ON CORPORATIONS l 
 
 ENACTED AUGUST 5, 1909 
 (REPEALED BY ACT OF OCTOBER 3, 1913) 
 
 SEC. 38. That every corporation, joint-stock company or association, 
 organized for profit and having a capital stock represented by shares, and 
 every insurance company, now or hereafter organized under Corpora- 
 the laws of the United States or of any State or Territory of tions Tax- 
 the United States or under the Acts of Congress applicable able, 
 to Alaska or the District of Columbia, or now or hereafter organized under 
 the laws of any foreign country and engaged in business in any State or 
 Territory of the United States or in Alaska or in the District of Columbia, 
 shall be subject to pay annually a special excise tax with respect to the carry- 
 ing on or doing business by such corporation, joint-stock company or asso- 
 ciation, or insurance company, equivalent to one per centum upon the entire 
 net income over and above five thousand dollars received by it from all 
 sources during such year, exclusive of amounts received by it as dividends 
 upon stock of other corporations, joint-stock companies or associations, or 
 insurance companies, subject to the tax hereby imposed; or if organized 
 under the laws of any foreign country, upon the amount of net income over 
 and above five thousand dollars received by it from business transacted 
 and capital invested within the United States and its Territories, Alaska, 
 and the District of Columbia during such year, exclusive of amounts so 
 received by it as dividends upon stock of other corporations, joint-stock com- 
 panies or associations, or insurance companies, subject to the tax hereby 
 imposed: Provided, however, That nothing in this section con- j? xemo t 
 tained shall apply to labor, agricultural or horticultural or- 
 ganizations, or to fraternal beneficiary societies, orders, or associations 
 operating under the lodge system, and providing for the payment of life, 
 sick, accident, and other benefits to the members of such societies, orders 
 or associations, and dependents of such members, nor to domestic building 
 and loan associations, organized and operated exclusively for the mutual 
 benefit of their members, nor to any corporation or association organized 
 and operated exclusively for religious, charitable, or educational purposes, 
 no part of the net income of which inures to the benefit of any private stock- 
 holder or individual. 
 
 1 For reference to this law in the ascertainment of net income of corpora- 
 tions for prewar period (years 1911 and 1912) under the Excess Profits 
 Tax Law, see page 122. 
 
306 APPENDIX D 
 
 Second. Such net income shall be ascertained by deducting from the gross 
 amount of the income of such corporation, joint-stock company or associa- 
 " Net In- tion, or insurance company, received within the year from all 
 come " sources, (first) all the ordinary and necessary expenses actually 
 
 Defined. paid within the year out of income in the maintenance and 
 operation of its business and properties, including all charges such as rentals 
 or franchise payments, required to be made as a condition to the continued 
 Expenses, use or possession of property; (second) all losses actually 
 Losses. sustained within the year and not compensated by insurance 
 or otherwise, including a reasonable allowance for depreciation of property, 
 if any, and in the case of insurance companies the sums other than dividends, 
 paid within the year on policy and annuity contracts and the net addition, 
 if any, required by law to be made within the year to reserve funds; (third) 
 Interest interest actually paid within the year on its bonded or other 
 
 indebtedness to an amount of such bonded and other indebt- 
 edness not exceeding the paid-up capital stock of such corporation, joint- 
 stock company or association, or insurance company, outstanding at the 
 close of the year, and in the case of a bank, banking association or trust 
 Taxes company, all interest actually paid by it within the year on 
 
 deposits; (fourth) all sums paid by it within the year for taxes 
 imposed under the authority of the United States or of any State or Terri- 
 tory thereof, or imposed by the government of any foreign country as a 
 Dividends condition to carry on business therein; (fifth) all amounts 
 Received, received by it within the year as dividends upon stock of 
 other corporations, joint-stock companies or associations, or insurance com- 
 panies, subject to the tax hereby imposed: Provided, That in the case of 
 Foreign a corporation, joint-stock company or association, or insurance 
 Corpora- company, organized under the laws of a foreign country, 
 tions. such net income shall be ascertained by deducting from the 
 
 gross amount of its income received within the year from business transacted 
 and capital invested within the United States and any of its Territories, 
 Expenses Alaska, an( i the District of Columbia, (first) all the ordinary 
 
 and necessary expenses actually paid within the year out of 
 earnings in the maintenance and operation of its business and property 
 within the United States and its Territories, Alaska, and the District of 
 Columbia, including all charges such as rentals or franchise payments re- 
 quired to be made as a condition to the continued use or possession of prop- 
 r erty; (second) all losses actually sustained within the year 
 
 in business conducted by it within the United States or its 
 Territories, Alaska, or the District of Columbia not compensated by insur- 
 ance or otherwise, including a reasonable allowance for depreciation of 
 property, if any, and in the case of insurance companies the sums other than 
 dividends, paid within the year on policy and annuity contracts and the 
 net addition, if any, required by law to be made within the year to reserve 
 j , . funds; (third) interest actually paid within the year on its 
 
 bonded or other indebtedness to an amount of such bonded 
 and other indebtedness, not exceeding the proportion of its paid-up capital 
 stock outstanding at the close of the year which the gross amount of its in- 
 
EXCISE TAX ON CORPORATIONS (1909) 307 
 
 come for the year from business transacted and capital invested within the 
 United States and any of its Territories, Alaska, and the District of Columbia 
 bears to the gross amount of its income derived from all sources within and 
 without the United States; (fourth) the sums paid by it within 
 the year for taxes imposed under the authority of the United 
 States or of any State or Territory thereof; (fifth) all amounts received by 
 it within the year as dividends upon stock of other corporations, Dividends 
 joint-stock companies or associations, and insurance compa- Received. 
 nies, subject to the tax hereby imposed. In the case of assessment insurance 
 companies the actual deposit of sums with State or Territorial office 
 pursuant to law, as additions to guaranty or reserve funds eserves 
 shall be treated as being payments required by law to reserve 
 funds. 
 
 Third. There shall be deducted from the amount of the net income of each 
 of such corporations, joint-stock companies or associations, or insurance 
 companies, ascertained as provided in the foregoing para- Exemp- 
 praphs of this section, the sum of five thousand dollars, and said tion. 
 tax shall be computed upon the remainder of said net income of such cor- 
 poration, joint-stock company or association, or insurance company, for the 
 year ending December thirty-first, nineteen hundred and nine, Due Date 
 and for each calendar year thereafter; and on or before the of Returns. 
 first day of March, nineteen hundred and ten, and the first day of March 
 in each year thereafter, a true and accurate return under oath or affirmation 
 of its president, vice-president, or other principal officer, and its treasurer or 
 assistant treasurer, shall be made by each of the corporations, Q ,. 
 joint-stock companies or associations, and insurance compa- 
 nies, subject to the tax imposed by this section, to the collector of internal 
 revenue for the district in which such corporation, joint-stock company 
 or association, or insurance company has its principal place of business, or, 
 in the case of a corporation, joint-stock company or association, or insurance 
 company, organized under the laws of a foreign country, in the place where 
 its principal business is carried on within the United States, in such form 
 as the Commissioner of Internal Revenue, with the approval of the Secre- 
 tary of the Treasury, shall prescribe, setting forth (first) the Contents 
 total amount of the paid-up capital stock of such corporation, o f Returns, 
 joint-stock company or association, or insurance company, Capital 
 outstanding at the close of the year; (second) the total amount Stock, In- 
 of the bonded and other indebtedness of such corporation, debted- 
 joint-stock company or association, or insurance company ness, Gross 
 at the close of the year; (third) the gross amount of the income l^ 01116 * 
 of such corporation, joint-stock company or association, or insurance com- 
 pany received during such year from all sources, and if organized un- 
 der the laws of a foreign country the gross amount of its income received 
 within the year from business transacted and capital invested within 
 the United States and any of its Territories, Alaska, and the District of 
 Columbia; also the amount received by such corporation, joint-stock com- 
 pany or association, or insurance company within the year by way of divi- 
 dends upon stock of other corporations, joint-stock companies or associa- 
 
308 APPENDIX D 
 
 tions, or insurance companies, subject to the tax imposed by this section; 
 (fourth) the total amount of all the ordinary and necessary expenses actu- 
 
 Exoenses a ^ y pa ^ Ut * eamm S s i* 1 tne maintenance and operation of 
 the business and properties of such corporation, joint-stock 
 company or association, or insurance company within the year, stating sep- 
 arately all charges such as rentals or franchise payments required to be made 
 as a condition to the continued use or possession of property, and if organ- 
 ized under the laws of a foreign country the amount so paid in the main- 
 tenance and operation of its business within the United States and its Terri- 
 tories, Alaska, and the District of Columbia; (fifth) the total amount of 
 j all losses actually sustained during the year and not compen- 
 
 sated by insurance or otherwise, stating separately any 
 amounts allowed for depreciation of property, and in the cases of insurance 
 companies the sums other than dividends, paid within the year on policy 
 Reserve and annuity contracts and the net addition, if any, required 
 Funds. by law to be made within the year to reserve fund; and in the 
 
 case of a corporation, joint-stock company or association, or insurance com- 
 pany, organized under the laws of a foreign 'country, all losses actually sus- 
 tained by it during the year in business conducted by it within the United 
 States or its Territories, Alaska, and the District of Columbia, not com- 
 pensated by insurance or otherwise, stating separately any amounts allowed 
 for depreciation of property, and in the case of insurance companies the sums 
 other than dividends, paid within the year on policy and annuity contracts 
 and the net addition, if any, required by law to be made within the year to 
 reserve fund; (sixth) the amount of interest actually paid within the year 
 Interest on * ts Bonded or ther indebtedness to an amount of such 
 bonded and other indebtedness not exceeding the paid-up 
 capital stock of such corporation, joint-stock company or association, or 
 insurance company, outstanding at the close of the year, and in the case of 
 a bank, banking association, or trust company, stating separately all interest 
 paid by it within the year on deposits; or in case of a corporation, joint-stock 
 company or association, or insurance company, organized under the laws of 
 a foreign country, interest so paid on its bonded or other indebtedness to an 
 amount of such bonded and other indebtedness not exceeding the proportion 
 of its paid-up capital stock outstanding at the close of the year, which the 
 gross amount of its income for the year from business transacted and 
 capital invested within the United States and any of its Territories, Alaska, 
 and the District of Columbia, bears to the gross amount of its income de- 
 rived from all sources within and without the United States; (seventh) the 
 Taxes amount paid by it within the year for taxes imposed under the 
 
 authority of the United States or any State or Territory 
 thereof, and separately the amount so paid by it for taxes imposed by the 
 government of any foreign country as a condition to carrying on business 
 therein; (eighth) the net income of such corporation, joint-stock com- 
 pany or association, or insurance company, after making the deductions in 
 this section authorized. All such returns shall as received be trans- 
 mitted forthwith by the collector to the Commissioner of Internal Rev- 
 enue. 
 
EXCISE TAX ON CORPORATIONS (1909) 309 
 
 Fourth. Whenever evidence shall be produced before the Commissioner 
 of Internal Revenue which in the opinion of the commissioner justifies the 
 belief that the return made by any corporation, joint-stock com- Verifying 
 pany or association, or insurance company is incorrect, or Returns, 
 whenever any collector shall report to the Commissioner of Internal Revenue 
 that any corporation, joint-stock company or association, or insurance com- 
 pany has failed to make a return as required by law, the Commissioner of 
 Internal Revenue may acquire from the corporation, joint-stock company 
 or association, or insurance company making such return, such further in- 
 formation with reference to its capital, income, losses, and expenditures 
 as he may deem expedient; and the Commissioner of Internal Revenue, for 
 the purpose of ascertaining the correctness of such return or for the purpose 
 of making a return when none has been made, is hereby authorized, by any 
 regularly appointed revenue agent specially designated by Examina- 
 him for that purpose, to examine any books and papers bear- tion. 
 ing upon the matters required to be included in the return of such corpora- 
 tion, joint-stock company or association, or insurance company, and to re- 
 quire the attendance of any officer or employee of such corporation, joint- 
 stock company or association, or insurance company, and to take his testi- 
 mony with reference to the matter required by law to be included in such 
 return, with power to administer oaths to such person or persons; and the 
 Commissioner of Internal Revenue may also invoke the aid of any court 
 of the United States having jurisdiction to require the attendance of such 
 officers or employees and the production of such books and papers. Upon 
 the information so acquired the Commissioner of Internal Returns by 
 Revenue may amend any return or make a return where none Depart- 
 has been made. All proceedings taken by the Commissioner ment. 
 of Internal Revenue under the provisions of this section shall be subject 
 to the approval of the Secretary of the Treasury. 
 
 Fifth. All returns shall be retained by the Commissioner of Internal 
 Revenue, who shall make assessments thereon; and in case of any return 
 made with false or fraudulent intent, he shall add one hundred Penalties, 
 per centum of such tax, and in case of a refusal or neglect to False In- 
 make a return or to verify the same as aforesaid he shall add tent, 
 fifty per centum of such tax. In case of neglect occasioned by the sickness 
 or absence of an officer of such corporation, joint-stock company or associa- 
 tion, or insurance company, required to make said return, or for other suf- 
 ficient reason, the collector may allow such further time for making and 
 delivering such return as he may deem necessary, not exceeding thirty days. 
 The amount so added to the tax shall be collected at the same time and in 
 the same manner as the tax originally assessed, unless the refusal, neglect, 
 or falsity is discovered after the date for payment of said taxes, in which 
 case the amount so added shall be paid by the delinquent corporation, joint- 
 stock company or association, or insurance company, immediately upon 
 notice given by the collector. All assessments shall be made and the several 
 corporations, joint-stock companies or associations, or insurance companies, 
 shall be notified of the amount for which they are respectively liable on or 
 before the first day of June of each successive year, and said assessments 
 
310 APPENDIX D 
 
 shall be paid on or before the thirtieth day of June, except in cases of refusal 
 or neglect to make such return, and in cases of false or fraudulent returns, 
 in which cases the Commissioner of Internal Revenue shall, upon the dis- 
 Discovery covery thereof, at any time within three years after said re- 
 Limita- turn is due, make a return upon information obtained as above 
 tion. provided for, and the assessment made by the Commissioner 
 
 of Internal Revenue thereon shall be paid by such corporation, joint-stock 
 company or association, or insurance company immediately upon notifica- 
 Penalty tion of the amount of such assessment; and to any sum or 
 Delayed sums due and unpaid after the thirtieth day of June in any 
 Payment, year, and for ten days after notice and demand thereof by 
 the collector, there shall be added the sum of five per centum on the amount 
 of tax unpaid and interest at the rate of one per centum per month upon said 
 tax from the time the same becomes due. 
 
 Sixth. When the assessment shall be made, as provided in this section, 
 the returns, together with any corrections thereof which may have been 
 Public made by the commissioner, shall be filed in the office of the 
 
 Record. Commissioner of Internal Revenue and shall constitute public 
 records and be open to inspection as such. 
 
 Seventh. It shall be unlawful for any collector, deputy collector, agent, 
 clerk, or other officer or employee of the United States to divulge or make 
 Divulging known in any manner whatever not provided by law to any 
 Contents person any information obtained by him in the discharge of 
 of Returns, his official duty, or to divulge or make known in any manner 
 not provided by law any document received, evidence taken, or report made 
 under this section except upon the special direction of the President; and any 
 offense against the foregoing provision shall be a misdemeanor and be pun- 
 p |, ished by a fine not exceeding one thousand dollars, or by im- 
 
 prisonment not exceeding one year, or both, at the discretion 
 of the court. 
 
 Eighth. If any of the corporations, joint-stock companies or associations, 
 or insurance companies aforesaid, shall refuse or neglect to make a 
 Refusal to return at the time or times hereinbefore specified in each year, 
 Make Re- or shall render a false or fraudulent return, such corporation, 
 turn Pen- joint-stock company or association, or insurance company shall 
 alty. be liable to a penalty of not less than one thousand dollars 
 
 and not exceeding ten thousand dollars. 
 
 Any person authorized by law to make, render, sign, or verify any return 
 who makes any false or fraudulent return, or statement, with intent to 
 False Re- defeat or evade the assessment required by this section to 
 turn Pen- be made, shall be guilty of a misdemeanor, and shall be 
 alty. fined not exceeding one thousand dollars or be imprisoned not 
 
 exceeding one year, or both, at the discretion of the court, with the costs of 
 prosecution. 
 
 All laws relating to the collection, remission, and refund of internal- 
 revenue taxes, so far as applicable to and not inconsistent with the pro- 
 Collections, visions of this section, are hereby extended and made applic- 
 able to the tax imposed by this section. 
 
EXCISE TAX ON CORPORATIONS (1909) 311 
 
 Jurisdiction is hereby conferred upon the circuit and district courts of 
 the United States for the district within which any person Jurisdic- 
 summoned under this section to appear to testify or to pro- tionof 
 duce books as aforesaid, shall reside, to compel such attend- Courts, 
 ance, production of books, and testimony by appropriate process. 
 
APPENDIX E 
 
 EXTRACTS FROM FEDERAL INCOME TAX l 
 RELATING TO CORPORATIONS 
 
 ENACTED OCTOBER 3, 1913 
 (REPEALED BY ACT OF SEPTEMBER 8, 1916) 
 
 G. (a) That the normal tax hereinbefore imposed upon individuals 
 likewise shall be levied, assessed, and paid annually upon the entire net 
 Domestic income arising or accruing from all sources during the pre- 
 Corpora- ceding calendar year to every corporation, joint-stock com- 
 tions. pany or association, and every insurance company, organized 
 
 in the United States, no matter how created or organized, not including 
 partnerships; but if organized, authorized, or existing under the laws of 
 Foreign any foreign country, then upon the amount of net income 
 Exempt. accruing from business transacted and capital invested within 
 the United States during such year: Provided, however, That nothing in this 
 section shall apply to labor, agricultural, or horticultural organizations, or 
 to mutual savings banks not having a capital stock represented by shares, 
 or to fraternal beneficiary societies, orders, or associations operating un- 
 der 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, and other benefits to the members of 
 such societies, orders, or associations and dependents of such members, 
 nor to domestic building and loan associations, nor to cemetery companies, 
 organized and operated exclusively for the mutual benefit of their members, 
 nor to any corporation or association organized and operated exclusively 
 for religious, charitable, scientific, or educational purposes, no part of the 
 net income of which inures to the benefit of any private stockholder or in- 
 dividual, nor to business leagues, nor to chambers of commerce or boards 
 of trade, not organized for profit or no part of the net income of which inures 
 to the benefit of the private stockholder or individual; nor to any civic 
 league or organization not organized for profit, but operated exclusively 
 for the promotion of social welfare: Provided further, That there shall not 
 be taxed under this section any income derived from any public utility or 
 Public from the exercise of any essential governmental function 
 
 Utility. accruing to any State, Territory, or the District of Columbia, 
 
 1 Official Title of the law: "Tariff Act of Oct. 3, 1913." For reference to 
 this law in the ascertainment of net income of corporations for the prewar 
 period (year 1913) see page 122. 
 
EXTRACTS FROM INCOME TAX OF 1913 313 
 
 or any political subdivision of a State, Territory, or the District of Columbia, 
 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 Act, entered in good faith into a contract with any 
 person or corporation, the object and purpose of which is to acquire, con- 
 struct, operate or maintain a public utility, no tax shall be levied under 
 the provisions of this Act upon the income derived from the operation of 
 such public utility, so far as the payment thereof will impose a loss or bur- 
 den 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 section upon the part or portion of the said income to which 
 such person or corporation shall be entitled under such contract. 
 
 (b) Such net income shall be ascertained by deducting from the gross 
 amount of the income of such corporation, joint-stock company or associ- 
 ation, or insurance company, received within the year from "Net In- 
 all sources, (first) all the ordinary and necessary expenses paid come " 
 within the year in the maintenance and operation of its busi- Defined. 
 ness and properties, including rentals or other payments required to be 
 made as a condition to the continued use or possession of prop- Expenses, 
 erty; (second) all losses actually sustained within the year Losses. 
 and not compensated by insurance or otherwise, including a reasonable 
 allowance for depreciation by use, wear and tear of property, if any; and in 
 the case of mines a reasonable allowance for depletion of ores Deoletion 
 and all other natural deposits, not to exceed 5 per centum of 
 the gross value at the mine of the output for the year for which the com- 
 putation is made; and in case of insurance companies the net addition, if 
 any, required by law to be made within the year to reserve p 
 funds and the sums other than dividends paid within the 
 year on policy and annuity contracts: Provided, That mutual fire insurance 
 companies requiring their members to make premium de- Insurance 
 posits to provide for losses and expenses shall not return as Companies. 
 income any portion of the premium deposits returned to their policyholders, 
 but shall return as taxable income all income received by them from all 
 other sources plus such portions of the premium deposits as are retained 
 by the companies for purposes other than the payment of losses and expenses 
 and reinsurance reserves: Provided further, That mutual marine insurance 
 companies shall include in their return of gross income gross premiums col- 
 lected and received by them less amounts paid for reinsurance, but shall 
 be entitled to include in deductions from gross income amounts repaid to 
 policyholders on account of premiums previously paid by them and interest 
 paid upon such amounts between the ascertainment thereof and the pay- 
 ment thereof and life insurance companies shall not include as income in 
 any year such portion of any actual premium received from any individual 
 policyholder as shall have been paid back or credited to such individual 
 
314 APPENDIX E 
 
 policyholder, or treated as an abatement of premium of such individual 
 policyholder, within such year; (third) the amount of interest accrued and 
 - . . paid within the year on its indebtedness to an amount of 
 such indebtedness not exceeding one-half of the sum of its 
 interest bearing indebtedness and its paid-up capital stock outstanding at 
 the close of the year, or if no capital stock, the amount of interest paid within 
 the year on an amount of its indebtedness not exceeding the amount of 
 capital employed in the business at the close of the year: Provided, That in 
 case of indebtedness wholly secured by collateral the subject of sale in or- 
 dinary business of such corporation, joint-stock company, or association, 
 the total interest secured and paid by such company, corporation, or asso- 
 ciation, within the year on any such indebtedness may be deducted as a 
 part of its expense of doing business: 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 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 indebtedness issued by such bank, banking 
 , association, loan or trust company; (fourth) all sums paid by 
 
 it within the year for taxes imposed under the authority of 
 the United States or of any State or Territory thereof, or imposed by the 
 Foreign Government of any foreign country: Provided, That in the 
 Corpora- case of a corporation, joint-stock company or association, or 
 tions. insurance company, organized, authorized, or existing under 
 
 the laws of any foreign country, such net income shall be ascertained by 
 deducting from the gross amount of its income accrued within the year 
 from business transacted and capital invested within the United States, 
 p, (first) all the ordinary and necessary expenses actually paid 
 
 within the year out of earnings in the maintenance and opera- 
 tion of its business and property within the United States, including rentals 
 or other payments required to be made as a condition to the continued use 
 Losses r P ssess i n f property; (second) all losses actually sus- 
 
 tained within the year in business conducted by it within the 
 United States and not compensated by insurance or otherwise, including a 
 reasonable allowance for depreciation by use, wear and tear of property, if 
 any, and in the case of mines a reasonable allowance for depletion of ores 
 Pj .. and all other natural deposits, not to exceed 5 per centum of 
 the gross value at the mine of the output for the year for 
 which the computation is made; and in case of insurance companies the net 
 addition, if any, required by law to be made within the year to reserve 
 funds and the sums other than dividends paid within the year on policy 
 Insurance and annuity contracts: Provided further, That mutual fire 
 Companies, insurance companies requiring their members to make pre- 
 mium deposits to provide for losses and expenses shall not return as income 
 any portion of the premium deposits returned to their policyholders, but 
 shall return as taxable income all income received by them from all other 
 sources plus such portions of the premium deposits as are retained by the 
 
EXTRACTS FROM INCOME TAX OF 1913 315 
 
 companies for purposes other than the payment of losses and expenses and 
 reinsurance reserves: Provided further, That mutual marine insurance com- 
 panies shall include in their return of gross income gross premiums collected 
 and received by them less amounts paid for reinsurance, but shall be entitled 
 to include in deductions from gross income amounts repaid to policy-holders 
 on account of premiums previously paid by them, and interest paid upon 
 such amounts between the ascertainment thereof and the payment thereof 
 and life insurance companies shall not include as income in any year such 
 portion of any actual premium received from any individual policy-holder 
 as shall have been paid back or credited to such individual policy- 
 holder, or treated as an abatement of premium of such individual policy- 
 holder, within such year; (third) the amount of interest jjj^ eres ^ 
 accrued and paid within the year on its indebtedness to an 
 amount of such indebtedness not exceeding the proportion of one-half of 
 the sum of its interest bearing indebtedness and its paid-up capital stock 
 outstanding at the close of the year, or if no capital stock, the capital em- 
 ployed in the business at the close of the year 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 shall be allowed; faxes 
 (fourth) all sums paid by it within the year for taxes imposed 
 under the authority of the United States or of any State or Territory thereof 
 or the District of Columbia. In the case of assessment insurance com- 
 panies, whether domestic or foreign, the actual deposit of sums with State 
 or Territorial officers, pursuant to law, as additions to guarantee or re- 
 serve funds shall be treated as being payments required by law to reserve 
 funds. 
 
 (c) The tax herein imposed shall be computed upon its entire net income 
 accrued within each preceding calendar year ending December thirty-first: 
 Provided, however, That for the year encUng December thirty- Ten 
 first, nineteen hundred and thirteen, said tax shall be imposed Months 
 upon its entire net income accrued within that portion of of 1913. 
 said year from March first to December thirty-first, both dates inclu- 
 sive, to be ascertained by taking five-sixths of its entire net income for 
 said calender year: Provided further, That any corporation, joint-stock 
 association, or insurance company subject to this tax may Desig- 
 designate the last day of any month in the year as the day of nated Fis- 
 the closing of its fiscal year and shall be entitled to have calYear. 
 the tax payable by it computed upon the basis of the net income 
 ascertained as herein provided for the year ending on the day so designated 
 in the year preceding the date of assessment instead of upon the basis of 
 the net income for the calendar year preceding the date of assessment; 
 and it shall give notice of the day it has thus designated as the closing of its 
 fiscal year to the collector of the district in which its principal business office 
 is located at any time not less than thirty days prior to the date upon which 
 
316 APPENDIX E 
 
 its annual return shall be filed. All corporations, joint-stock companies 
 or associations, and insurance companies subject to the tax herein imposed, 
 Due Date computing taxes upon the income of the calendar year, shall, 
 of Return, on or before the first day of March, nineteen hundred and 
 fourteen, and the first day of March in each year thereafter, and all cor- 
 porations, joint-stock companies or associations, and insurance companies, 
 computing taxes upon the income of a fiscal year which it may designate 
 in the manner hereinbefore provided, shall render a like return within sixty 
 days after the close of its said fiscal year, and within sixty days after the 
 close of its fiscal year in each year thereafter, or in the case of a corporation, 
 joint-stock company or association, or insurance company, organized or 
 Returns. existing under the laws of a foreign country, in the place where 
 Oath. its principal business is located within the United States, in 
 
 such form as the Commissioner of Internal Revenue, with the approval of 
 the Secretary of the Treasury, shall prescribe, shall render a true and accur- 
 ate return under oath or affirmation of its president, vice president, or other 
 Capital principal officer, and its treasurer or assistant treasurer, to the 
 
 Stock. collector of internal revenue for the district in which it has 
 
 its principal place of business, setting forth (first) the total amount of its 
 paid-up capital stock outstanding, or if no capital stock is capital employed 
 in business, at the close of the year; (second) the total amount of its bonded 
 and other indebtedness at the close of the year; (third) the gross amount 
 Indebted- of its income, received during such year from all sources, and 
 ness. if organized under the laws of a foreign country the gross 
 
 amount of its income received within the year from business transacted and 
 Expenses ca Pi ta * invested within the United States; (fourth) the total 
 
 amount of all its ordinary and necessary expenses paid out 
 of earnings in the maintenance and operation of the business and properties 
 of such corporation, joint-stock company or association, or insurance com- 
 pany within the year, stating separately all rentals or other payments re- 
 quired to be made as a condition to the continued use or possession of prop- 
 erty, and if organized under the laws of a foreign country the amount so 
 paid in the maintenance and operation of its business within the United 
 States; (fifth) the total amount of all losses actually sustained during the 
 y year and not compensated by insurance or otherwise, stating 
 
 separately any amounts allowed for depreciation of property, 
 and in case of insurance companies the net addition, if any, required by law 
 to be made within the year to reserve funds and the sums other than divi- 
 dends paid within the year on policy and annuity contracts: Provided 
 further, That mutual fire insurance companies requiring their members 
 Insurance to make premium deposits to provide for losses and expenses 
 Com- shall not return as income any portion of the premium de- 
 
 panies. posits returned to their policyholders, but shall return as 
 
 taxable income all income received by them from all other sources plus 
 such portions of the premium deposits as are retained by the companies 
 for purposes other than the payment of losses and expenses and reinsurance 
 reserves: Provided further, That mutual marine insurance companies shall 
 include in their return of gross income gross premiums collected and received 
 
EXTRACTS FROM INCOME TAX OF 1913 317 
 
 by them less amounts paid for reinsurance, but shall be entitled to include 
 in deductions from gross income amounts repaid to policyholders on account 
 of premiums previously paid by them, and interest paid upon such amounts 
 between the ascertainment thereof and the payment thereof and life insur- 
 ance companies shall not include as income in any year such portion of any 
 actual premium received from any individual policyholder as shall have 
 been paid back or credited to such individual policyholder, or treated as an 
 abatement of premium of such individual policyholder, within such year; 
 and in case of a corporation, joint-stock company or association, or insurance 
 company, organized under the laws of a foreign country, all losses actually 
 sustained by it during the year in business conducted by it within the United 
 States, not compensated by insurance or otherwise, stating separately any 
 amounts allowed for depreciation of property, and in case of insurance com- 
 panies the net addition, if any, required by law to be made within the year 
 to reserve funds and the sums other than dividends paid within the year on 
 policy and annuity contracts: Provided further, That mutual fire insurance 
 companies requiring their members to make premium deposits to provide 
 for losses and expenses shall not return as income any portion of the premium 
 deposits returned to their policyholders, but shall return as taxable income 
 all income received by them from all other sources plus such portions of the 
 premium deposits as are retained by the companies for purposes other than 
 the payment of losses and expenses and reinsurance reserves: Provided further , 
 That mutual marine insurance companies shall include in their return of 
 gross income gross premiums collected and received by them less amounts 
 paid for reinsurance, but shall be entitled to include in deductions from gross 
 income amounts repaid to policyholders on account of premiums previously 
 paid by them and interest paid upon such amounts between the ascertain- 
 ment thereof and the payment thereof and life insurance companies shall 
 not include as income in any year such portion of any actual premium re- 
 ceived from any individual policyholder as shall have been paid back or 
 credited to such individual policyholder, or treated as an abatement of 
 premium of such individual policyholder, within such year; jjj^ eres t 
 (sixth) the amount of interest accrued and paid within the 
 year on its bonded or other indebtedness not exceeding one-half of the sum 
 of its interest bearing indebtedness and its paid-up capital stock, outstand- 
 ing at the close of the year, or if no capital stock, the amount of interest 
 paid within the year on an amount of indebtedness not exceeding the amount 
 of capital employed in the business at the close of the year, and in the case 
 of a bank, banking association, or trust company, stating separately all 
 interest paid by it within the year on deposits; or in case of a corporation, 
 joint-stock company or association, or insurance company, organized under 
 the laws of a foreign country, interest so paid on its bonded or other indebt- 
 edness to an amount of such bonded or other indebtedness not exceeding 
 the proportion of its paid-up capital stock outstanding at the close of the 
 year, or if no capital stock, the amount of capital employed in the business 
 at the close of the year, 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 
 
318 APPENDIX E 
 
 without the United States; (seventh) the amount paid by it within the year 
 Taxes. * 0r taxes imposed under the authority of the United States 
 
 and separately the amount so paid by it for taxes imposed 
 by the Government of any foreign country; (eighth) the net income of such 
 corporation, joint-stock company or association, or insurance company, 
 after making the deductions in this subsection authorized. All such returns 
 shall as received be transmitted forthwith by the collector to the Commis- 
 sioner of Internal Revenue. 
 
 All assessments shall be made, and the several corporations, joint-stock 
 companies or associations, and insurance companies shall be notified of the 
 Due Date amount for which they are respectively liable on or before 
 Payment. the first day of June of each successive year, and said assess- 
 ment shall be paid on or before the thirtieth day of June: Provided, That 
 every corporation, joint-stock company or association, and insurance com- 
 pany, computing taxes upon the income of the fiscal year which it may 
 designate in the manner hereinbefore provided, shall pay the taxes due 
 under its assessment within one hundred and twenty days after the date 
 upon which it is required to file its list or return of income for assessment; 
 Refusal, except in cases of refusal or neglect to make such return, and 
 Neglect. in cases of false or fraudulent returns, in which cases the Com- 
 missioner of Internal Revenue shall, upon the discovery thereof, at any 
 time within three years after said return is due, make a return upon in- 
 formation obtained as provided for in this section or by existing law, and 
 the assessment made by the Commissioner of Internal Revenue thereon 
 shall be paid by such corporation, joint-stock company or association, or 
 insurance company immediately upon notification of the amount of such 
 assessment; and to any sum or sums due and unpaid after the thirtieth day 
 of June in any year, or after one hundred and twenty days from the date 
 on which the return of income is required to be made by the taxpayer, and 
 after ten days' notice and demand thereof by the collector, there shall be 
 added the sum of 5 per centum on the amount of tax unpaid and interest 
 at the rate of i per centum per month upon said tax from the tune the same 
 becomes due. 
 
 (d) When the assessment shall be made, as provided in this section, 
 the returns, together with any corrections thereof which may have been 
 Assess- made by the commissioner, shall be filed in the office of the 
 ments. Commissioner of Internal Revenue and shall constitute 
 
 public records and be open to inspection as such: Provided, That any and 
 all such returns shall be open to inspection only upon the order of the Presi- 
 dent, under rules and regulations to be prescribed by the Secretary of the 
 Treasury and approved by the President: Provided further, That the proper 
 officers of any State imposing a general income tax may, upon the request 
 of the governor thereof, have access to said returns or to an abstract thereof, 
 showing the name and income of each such corporation, joint-stock com- 
 pany, association or insurance company, at such times and in such manner 
 as the Secretary of the Treasury may prescribe. 
 
 If any of the corporations, joint-stock companies or associations, or 
 insurance companies aforesaid, shall refuse or neglect to make a return at 
 
EXTRACTS FROM INCOME TAX OF 1913 319 
 
 the time or times hereinbefore specified in each year, or shall Penalty, 
 render a false or fraudulent return, such corporation, joint- Fraud. 
 stock company or association, or insurance company shall be liable to a 
 penalty of not exceeding $10,000. 
 
 H. That the word "State" or "United States" when used in this sec- 
 tion shall be construed to include any Territory, Alaska, the " United 
 District of Columbia, Porto Rico, and the Philippine Islands, States." 
 when such construction is necessary to carry out its provisions. 
 
APPENDIX F 
 
 TABLE OF ADDITIONAL TAXES (SURTAXES) IMPOSED UPON 
 INDIVIDUALS BY INCOME TAX 
 
 ACT OF OCTOBER 3, 1913 ("TARIFF ACT") l 
 (REPEALED BY ACT OF SEPTEMBER 8, 1916) 
 
 Upon the amount by which the total net income exceeds: 
 
 Per Annum 
 
 $20,000 and does not exceed $50,000 i per cent. 
 
 50,000 " " " " 75,000 2 " " 
 
 75,000 ' 100,000 3 " " 
 
 100,000 " " " " 250,000 4 " " 
 
 250,000 " " " " 500,000 ' 5 " " 
 
 and in excess of $500,000 6 " " 
 
 1 For present application of surtaxes under this law, see "Dividends," 
 page 23. 
 
APPENDIX G 
 
 NEW YORK STATE INCOME TAX ON MANUFACTURING AND 
 MERCANTILE CORPORATIONS 
 
 ENACTED JUNE 4, 1917 
 AN ACT 
 
 TO AMEND THE TAX LAW, IN RELATION TO A FRANCHISE TAX 
 ON MANUFACTURING AND MERCANTILE CORPORATIONS, 
 AND MAKING APPROPRIATIONS FOR ADMINISTRATION 
 EXPENSES. 
 The People of the State of New York, represented in Senate and Assembly, 
 
 do enact as follows: 
 
 Section i. Chapter sixty- two of the laws of nineteen hundred and nine, 
 
 entitled "An act in relation to taxation, constituting chapter sixty of the 
 
 consolidated laws," is hereby amended by inserting therein a new article, 
 
 to be article nine-a, to read as follows: 
 
 ARTICLE 9-A 
 FRANCHISE TAX ON MANUFACTURING AND MERCANTILE CORPORATIONS 
 
 Sec. 208. Definitions. 
 
 209. Franchise tax on corporations based on net income. 
 
 210. Corporations exempt from article. 
 
 211. Reports of corporations to tax commission. 
 
 212. Reports by corporation on basis of fiscal year. 
 
 213. Reports to be sworn to; forms. 
 
 214. Computation of tax. 
 
 215. Rate of tax. 
 
 216. Penalty for failure to report. 
 
 217. Powers of tax commission. 
 
 218. Revision and readjustment of accounts by tax commission. 
 
 219. Review or determination of tax commission by certiorari. 
 2i9a. Audit and statement of tax. 
 
 2i9b. Notice of tax. 
 
 2i9C. When tax payable. 
 
 2i9d. Corrections and changes. 
 
 2196. Warrant for the collection of taxes. 
 
 2i9f. Action for recovery of taxes; forfeiture of charter by delinquent 
 
 corporations. 
 
 2i9g. Deposit of revenues collected. 
 2 igh. Disposition of revenues collected. 
 
322 APPENDIX G 
 
 Sec. 2iQL Secrecy required of officials; penalty for violation. 
 
 2igj. Manufacturing and mercantile corporations exempt from per- 
 sonal property tax and from the provisions of sections twelve, 
 twenty-seven, one hundred and eighty-two and one hundred 
 and ninety-two of the tax law. 
 2igk. Limitation of time. 
 
 208. DEFINITIONS. As used in this article, i. The term "corporation" 
 includes a joint-stock company or association; 
 
 2. The words "tangible personal property" shall be taken to mean cor- 
 poreal personal property, such as machinery, tools, implements, goods, wares 
 and merchandise, and shall not be taken to mean money, deposits hi bank, 
 shares of stock, bonds, notes, credits or evidences of an interest in property 
 and evidences of debt; 
 
 3. The term "manufacturing corporation" means a corporation princi- 
 pally engaged in the business of manufacturing tangible personal property 
 for itself or for others; 
 
 4. The term "mercantile corporation" means a corporation principally 
 engaged in the business of buying or selling tangible personal property for 
 itself or for others. 
 
 209. FRANCHISE TAX ON CORPORATIONS BASED ON NET INCOME. For 
 the privilege of exercising its franchises in this state in a corporate or organ- 
 ized capacity every domestic manufacturing and every domestic mercantile 
 corporation, and for the privilege of doing business in this state, every 
 foreign manufacturing and every foreign mercantile corporation, except 
 corporations specified in the next section, shall annually pay in advance for 
 the year beginning November first next preceding an annual franchise tax, 
 to be computed by the tax commission upon the basis of its net income for 
 its fiscal or the calendar year next preceding, as hereinafter provided, upon 
 which income such corporation is required to pay a tax to the United States. 
 
 210. CORPORATIONS EXEMPT FROM ARTICLE. Corporations liable to a 
 tax under section one hundred and eighty-four of this chapter, corporations 
 owning or operating elevated railroads or surface railroads not operated by 
 steam, or formed for supplying water or gas or for electric or steam heating, 
 lighting or power purposes and liable to a tax under sections one hundred 
 and eighty-five and one hundred and eighty-six of this chapter, shall be 
 exempt from the payment of the taxes prescribed by this article. 
 
 211. REPORTS OF CORPORATIONS TO TAX COMMISSION. Every corpora- 
 tion taxable under this article as well as foreign corporations having officers, 
 agents or representatives within the state shall annually on or before July first 
 transmit to the tax commission a report in the form prescribed by the tax 
 commission specifying: i. The name and location of the principal place of 
 business of such corporation, the state under the laws of which organized, 
 and the date thereof; the kind of business transacted. 
 
 2. The amount of its net income for its preceding fiscal or the preceding 
 calendar year as shown in the last return of annual net income made by it 
 to the United States treasury department. 
 
 3. The average monthly value for the fiscal or calendar year of its real 
 property and tangible personal property in each city, village or portion of a 
 
NEW YORK STATE INCOME TAX 323 
 
 town outside of a village within the state, and the average monthly value 
 of all its real property and tangible personal property wherever located. 
 
 4. The average monthly value for the fiscal or calendar year of bills and 
 accounts receivable for (a) tangible personal property sold from its stores 
 or stocks within the state, (b) tangible personal property manufactured or 
 shipped from within the state and (c) services performed within the state, 
 and the average monthly total value for the fiscal or calendar year of bills 
 and accounts receivable for (a) tangible personal property sold from its 
 stores or stocks within and without the state, (b) tangible personal property 
 manufactured or shipped from within the state and other states and coun- 
 tries, and (c) services performed both within and without the state. 
 
 5. The average total value for the fiscal or calendar year of the stock of 
 other corporations owned by the corporation, and the proportion of the 
 average value of the stock of such other corporations within the state of 
 New York, as allocated pursuant to section two hundred and fourteen of 
 this chapter. 
 
 6. If the corporation has no real or tangible personal property within the 
 state, the city, village or portion of a town outside of a village in the state 
 in which is located the office in which its principal financial concerns within 
 the state are transacted. 
 
 7. Such other facts as the tax commission may require for the purpose of 
 making the computation required by this article. 
 
 8. Any corporation taxable hereunder may omit from its report the 
 statements required by subdivisions three to seven, both inclusive, by in- 
 corporating in its report a consent to be taxed upon its entire net income. 
 
 212. REPORTS BY CORPORATION ON BASIS OF FISCAL YEAR. A cor- 
 poration which reports to the United States treasury department on the 
 basis of its fiscal year, may report to the tax commission upon the same 
 basis. 
 
 213. REPORTS TO BE SWORN TO; FORMS. Every report required by this 
 article shall have annexed thereto the affidavit of the president, vice-presi- 
 dent, secretary or treasurer of the corporation to the effect that the state- 
 ments contained therein are true. Blank forms of report shall be furnished 
 by the tax commission, on application, but failure to secure such a blank 
 shall not release any corporation from the obligation of making a report 
 herein required. The commission may require a further or supplemental 
 report under this article to contain further information and data necessary 
 for the computation of the tax herein provided. 
 
 214. COMPUTATION OF TAX. If the entire business of the corporation 
 be transacted within the state, the tax imposed by this article shall be based 
 upon the entire net income of such corporation as returned to the United 
 States treasury department for such fiscal or calendar year. 
 
 If the entire business of such corporation be not transacted within the 
 state, the tax imposed by this article shall be based upon a proportion of the 
 net income, to be determined in accordance with the following rules: 
 
 The proportion of the net income of the corporation upon which the tax 
 under this article shall be based, shall be such portion of the entire net in- 
 come as the aggregate of 
 
324 APPENDIX G 
 
 1. The average monthly value of the real property and tangible personal 
 property within the state, 
 
 2. The average monthly value of bills and accounts receivable for (a) 
 tangible personal property sold from its stores or stocks within the state, 
 (b) tangible personal property manufactured or shipped from within the 
 state and (c) services performed within the state, 
 
 3. The proportion of the average value of the stocks of other corpora- 
 tions owned by the corporation, allocated to the state as provided by this 
 section, 
 
 Bears to the aggregate of 
 
 4. The average monthly value of all the real property and tangible per- 
 sonal property of the corporation, wherever located, 
 
 5. The average total value of bills and accounts receivable for (a) tangible 
 personal property sold from its stores or stocks within and without the state, 
 (b) tangible personal property manufactured or shipped from within this 
 and other states and countries, and (c) services performed both within and 
 without this state, 
 
 6. The average total value of the stocks of other corporations owned by 
 the corporation. 
 
 Real property and tangible personal property shall be taken at its actual 
 value where located. The value of share stock of another corporation 
 owned by a corporation liable hereunder shall for purposes of allocation of 
 assets be apportioned in and out of the state in accordance with the value 
 of the physical property in and out of the state representing such share 
 stock. 
 
 215. RATE OF TAX. The tax imposed by this article shall be at the 
 rate of three per centum of the net income of the corporation or portion 
 thereof taxable within the state, determined as provided by this article. 
 
 216. PENALTY FOR FAILURE TO REPORT. Any corporation which fails 
 to make any report required by this article shall be liable to a penalty of 
 not more than five thousand dollars to be paid to the state, to be collected 
 in a civil action, at the instance of the tax commission; and any officer of 
 any such corporation who makes a fraudulent return or statement with 
 intent to defeat or evade the payment of the taxes prescribed by this article 
 shall be liable to a penalty of not more than one thousand dollars, to be 
 collected in like manner. All moneys recovered as penalties, for a failure 
 to report or for making fraudulent reports shall be paid to the state comp- 
 troller. 
 
 217. POWERS OF TAX COMMISSION. The tax commission may for good 
 cause shown extend the time within which any corporation is required to 
 report by this article. If any report required by this article be not made 
 as herein required, the tax commission is authorized to make an estimate 
 of the net income of such corporation and of the amount of tax due under 
 this article, from any information in its possession, and to order and state 
 an account according to such estimate for the taxes, penalties and interest 
 due the state from such corporation. If the tax imposed upon any corpora- 
 tion under this article is based upon an estimate as provided in this sec- 
 tion, the tax commission shall notify such corporation of a time and place 
 
NEW YORK STATE INCOME TAX 325 
 
 at which opportunity will be given to the corporation to be heard hi respect 
 thereof. Such notice shall be mailed to the post-office address of the cor- 
 poration. All the authority and powers conferred on the tax commission 
 by the provisions of section one hundred and ninety-five of the tax law 
 shall have full force and effect in respect of corporations which may be 
 liable hereunder. 
 
 218. REVISION AND READJUSTMENT OF ACCOUNTS BY TAX COMMIS- 
 SION. If an application for revision be filed with the commission by a cor- 
 poration against which an account is audited and stated within one year 
 from the time any such account shall have been audited and stated, the 
 commission shall grant a hearing thereon and if it shall be made to appear 
 upon any such hearing by evidence submitted to it or otherwise, that any 
 such account included taxes or other charges which could not have been 
 lawfully demanded, or that payment has been illegally made or exacted of 
 any such account, the commission shall resettle the same according to law 
 and the facts, and adjust the account for taxes accordingly, and shall send 
 notice of its determination thereon to the corporation and state comptroller 
 forthwith. 
 
 219. REVIEW OF DETERMINATION OF TAX COMMISSION BY CERTIORARI. 
 The determination of the commission upon any application made to it by 
 any corporation for revision and resettlement of any account, as prescribed 
 in this article, may be reviewed in the manner prescribed by and subject 
 to the provisions of sections one hundred and ninety-nine and two hundred 
 of this chapter. 
 
 2iga. AUDIT AND STATEMENT OF TAX. On or before the first day of 
 November in each year the tax commission shall audit and state the ac- 
 count of each corporation known to be liable to a tax under this article, for 
 its preceding fiscal or the preceding calendar year, and shall compute the 
 tax thereon and forthwith notice the same to the state comptroller for col- 
 lection. The tax commission shall determine the portion of such tax to 
 be distributed to the several counties and the amounts to be credited to the 
 several cities or towns thereof, when the same is collected, and shall indicate 
 such determination in noticing such tax to the state comptroller. If the 
 corporation has real property or tangible personal property located in a 
 village, or if it has no real or tangible personal property in the state but 
 the office in which its principal financial concerns within the state are trans- 
 acted is located in a village, the tax commission shall indicate such facts 
 to the state comptroller, with the name of the village hi which such office 
 or property is located. 
 
 2igb. NOTICE OF TAX. Every report required by section two hundred 
 and eleven of this chapter shall contain the post-office address of the cor- 
 poration and lines or spaces upon which the corporation shall enter the 
 portion of its net income which it believes to be the basis upon which the 
 tax shall be imposed under this article, and the amount of such tax. No- 
 tice of tax assessment shall be sent by mail to the post-office address given 
 in the report, and the record that such notice has been sent shall be pre- 
 sumptive evidence of the giving of the notice and such record shall be pre- 
 served by the tax commission. 
 
326 APPENDIX G 
 
 2igc. WHEN TAX PAYABLE. The tax hereby imposed shall be paid 
 to the state comptroller on or before the first day of January of each year. 
 If such tax be not paid on or before January first, or in the case of addi- 
 tional taxes, within thirty days after the bill for such additional tax has 
 been rendered, the corporation liable to such tax shall pay to the state 
 comptroller, in addition to the amount of such tax, ten per centum of such 
 amount, plus one per centum for each month the tax remains unpaid. 
 Each such tax shall be a lien upon and binding upon the real and personal 
 property of the corporation liable to pay the same from the time when it is 
 payable until the same is paid in full. 
 
 2igd. CORRECTIONS AND CHANGES. If the amount of the annual net 
 income of any corporation taxable under this article as returned to the 
 United States treasury department is changed or corrected by the commis- 
 sioner of internal revenue or other officer of the United States or other com- 
 petent authority, such corporation, within ten days after receipt of notice 
 of such change or correction, shall make return under oath or affirmation 
 to the tax commission of such changed or corrected net income. The tax 
 commission shall compute the taxes which, in view of such change or correc- 
 tion, would be due from such corporation for the fiscal or calendar year for 
 which such change or correction is made. If from such computation it 
 appear that such corporation shall have paid under this article an excess 
 of tax for the year for which such computation is made, the tax commission 
 shall return a statement of the amount of such excess to the comptroller, 
 who shall credit such corporation with such amount. Such credit may be 
 assigned by the corporation in whose favor it is allowed to a corporation 
 liable to pay taxes under this article, and the assignee of the whole or any 
 part of such credit on filing with the commission such assignment shall 
 thereupon be entitled to credit upon the books of the comptroller for the 
 amount thereof on the current account for taxes of such assignee in the 
 same way and with the same effect as though the credit had originally been 
 allowed in favor of such assignee. If from such computation it appear 
 that an additional tax is due from such corporation for such fiscal or calendar 
 year, such corporation shall, within thirty days after notice has been given 
 as provided in section two hundred and nineteen b of this chapter by the 
 tax commission, pay such additional tax. 
 
 2196. WARRANT FOR THE COLLECTION OF TAXES. If the tax imposed 
 by this article be not paid within thirty days after the same becomes due, 
 unless an appeal or other proceeding shall have been taken to review the 
 same, the comptroller may issue a warrant under his hand and official seal 
 directed to the sheriff of any county of the state commanding him to levy 
 upon and sell the real and personal property of the corporation owning the 
 same, found within his county, for the payment of the amount thereof, with 
 the added penalties, interest and the cost of executing the warrant, and to 
 return such warrant to the comptroller and pay to him the money collected 
 by virtue thereof by a time to be therein specified, not less than sixty days 
 from the date of the warrant. Such warrant shall be a lien upon and shall 
 bind the real and personal property of the corporation against whom it is 
 issued from the time an actual levy shall be made by virtue thereof. The 
 
NEW YORK STATE INCOME TAX 327 
 
 sheriff to whom any such warrant shall be directed shall proceed upon the 
 same in all respects, with like effect, and in the same manner as prescribed 
 by law in respect to executions issued against property upon judgments of 
 a court of record, and shall be entitled to the same fees for his services in 
 executing the warrant, to be collected in the same manner. 
 
 2191. ACTION FOR RECOVERY OF TAXES; FORFEITURE OF CHARTER BY 
 DELINQUENT CORPORATIONS. Action may be brought at any time by the 
 attorney-general at the instance of the comptroller, in the name of the 
 state, to recover the amount of any taxes, penalties and interest due under 
 this article. If such taxes be not paid within one year after the same be 
 due, and the comptroller is satisfied that the failure to pay the same is 
 intentional he shall so report to the attorney-general, who shall immediately 
 bring an action in the name of the people of the state, for the forfeiture of 
 the charter or franchise of any corporation failing to make such payment, 
 and if it be found that such failure was intentional, judgment shall be ren- 
 dered in each action for the forfeiture of such charter and for its dissolution 
 if a domestic corporation and if a foreign corporation for the annulment 
 of its franchise to do business in this state. 
 
 2igg. DEPOSIT OF REVENUES COLLECTED. The state comptroller shall 
 deposit all taxes, interest and penalties collected under this article in re- 
 sponsible banks, banking houses or trust companies in the state which shall 
 pay the highest rate of interest to the state for such deposit, to the credit 
 of the state comptroller on account of the franchise tax. And every such 
 bank, banking house or trust company shall execute and file in his office an 
 undertaking to the state, in the sum, and with such sureties, as are re- 
 quired and approved by the comptroller, for the safe keeping and prompt 
 payment on legal demand therefor of all such moneys held by or on de- 
 posit in such bank, banking house or trust company, with interest thereon 
 on daily balances at such rate as the comptroller may fix. Every such un- 
 dertaking shall have indorsed thereon, or annexed thereto, the approval 
 of the attorney-general as to its form. The state comptroller shall on the 
 first day of each month make a verified return to the state treasurer of all 
 revenues received by him under this article during the preceding month, 
 stating by whom and when paid, and shall credit himself with all payments 
 made to county treasurers since his last previous return pursuant to section 
 two hundred and nineteen h of this chapter. 
 
 2iQh. DISPOSITION OF REVENUES COLLECTED. The state comptroller 
 shall on or before the tenth day of each month pay into the state treasury 
 to the credit of the general fund two-thirds of all taxes, interest and penal- 
 ties received by him under this article during the preceding month, as ap- 
 pears from the return made by him to the state treasurer. The balance 
 of all taxes, interest and penalties collected and received by him under this 
 article from any corporation, as appears from the return made by him to 
 the state treasurer, shall, on or before the tenth day of April, July, October 
 and January, for the quarter ending with the last day of the preceding 
 month, be distributed and paid by him to the treasurers of the several coun- 
 ties of the state and disposed of by such treasurers, in accordance with the 
 following rules: 
 
328 APPENDIX G 
 
 1. If the corporation has no real property or tangible personal property 
 within the state, such payment shall be made to the county treasurer of 
 the county in which is located the office at which its principal financial 
 concerns within the state are transacted; 
 
 2. If the corporation has real property or tangible personal property, 
 as shown by its report pursuant to section two hundred and eleven, in but 
 one city or town of the state, such payment shall be made to the county 
 treasurer of the county in which such city or town is located; 
 
 3. If the corporation has real property or tangible personal property in 
 more than one city or town of the state, as shown by its report pursuant to 
 section two hundred and eleven, such payment shall be made to the county 
 treasurers of the counties in which such cities or towns are located in the 
 proportion that the average monthly value of the real property and tangible 
 personal property of such corporation in the cities and towns of such county 
 bears to the average monthly value of all its real property and tangible 
 personal property within the state; 
 
 4. In making such payment to a county treasurer, the state comptroller 
 shall indicate the portion thereof to be credited to any city or town within 
 the county on account of the location therein of its principal financial office 
 or property as determined by the preceding subdivisions, and if such prin- 
 cipal financial office or property is located in a village shall indicate the village 
 in which it is located; if such principal financial office or property located 
 in a city or in a town outside of a village, the whole of such portion shall be 
 paid to such city or town as hereinafter provided; if such principal financial 
 office or property is located in a village, there shall be paid to such village 
 as hereinafter provided so much of such portion credited to the town as the 
 assessed valuation of the real and personal property in such village or portion 
 thereof in such town as appears by the last preceding town assessment-roll 
 bears to twice the total assessed valuation of the real and personal property 
 in such town as appears by such assessment-roll; 
 
 5. As to any county wholly included within a city such payment shall be 
 made to the chamberlain or other chief fiscal officer of such city and be paid 
 into the general fund for city purposes; 
 
 6. As to any county not wholly included within a city the county treas- 
 urer shall within ten days after the receipt thereof pay to the chief fiscal 
 officer of a city or to the chief fiscal officer of a village or to the supervisor 
 of a town the portion of money received by him from the state comptroller 
 to which such city, village or town is entitled, which shall be credited by such 
 officer to general city, village or town purposes. 
 
 2igi. SECRECY REQUIRED OF OFFICIALS; PENALTY FOR VIOLATION, i. 
 Except in accordance with proper judicial order or as otherwise provided by 
 law, it shall be unlawful for any tax commissioner, agent, clerk or other 
 officer or employee to divulge or make known in any manner the amount of 
 income or any particulars set forth or disclosed in any report under this 
 article. Nothing herein shall be construed to prohibit the publication of 
 statistics so classified as to prevent the identification of particular reports 
 and the items thereof, or the publication of delinquent lists showing the 
 names of taxpayers who have failed to pay their taxes at the time and in 
 
NEW YORK STATE INCOME TAX 329 
 
 the manner provided by section two hundred and nineteen-c together with 
 any relevant information which in the opinion of the comptroller may assist 
 in the collection of such delinquent taxes; or the inspection by the attorney- 
 general or other legal representatives of the state of the report of any cor- 
 poration which shall bring action to set aside or review the tax based thereon, 
 or against whom an action or proceeding has been instituted in accordance 
 with the provisions of sections two hundred and sixteen or two hundred and 
 nineteen-f of this article. 
 
 Reports shall be preserved for three years, and thereafter until the state 
 tax commission orders them to be destroyed. 
 
 2. Any offense against the foregoing provision shall be punished by a fine 
 not exceeding one thousand dollars or by imprisonment not exceeding one 
 year, or both, at the discretion of the court and if the offender be an officer 
 or employee of the state he shall be dismissed from office and be incapable 
 of holding any public office in this state for a period of five years thereafter. 
 
 2igj. MANUFACTURING AND MERCANTILE CORPORATIONS EXEMPT 
 FROM PERSONAL PROPERTY TAX AND FROM THE PROVISIONS OF SECTIONS 
 TWELVE, TWENTY-SEVEN, ONE HUNDRED AND EIGHTY-TWO AND ONE HUN- 
 DRED AND NINETY-TWO OF THE TAX LAW. After this article takes effect 
 manufacturing and mercantile corporations shall not be assessed on any 
 personal property which for the purpose of this exemption shall include such 
 machinery and equipment affixed to the building as would not pass between 
 grantor and grantee as a part of the premises if not specifically mentioned 
 or referred to in the deed, or as would, if the building were vacated or sold, 
 or the nature of the work carried on therein changed, be moved, except 
 boilers, ventilating apparatus, elevators, gas, electric and water power 
 generating apparatus and shafting. After this article takes effect manu- 
 facturing and mercantile corporations shall not be assessed or taxed upon 
 their capital stock as provided for in section twelve of this chapter, nor shall 
 they be required to pay the franchise tax imposed by section one hundred 
 and eighty-two of this chapter, nor to make the reports called for in sections 
 twenty-seven and one hundred and ninety-two of this chapter. Nothing 
 herein shall be construed to impair the obligation to pay franchise taxes due 
 on or before the fifteenth day of January, nineteen hundred and seventeen, 
 or taxes on personal property or capital stock assessed in the year nineteen 
 hundred and sixteen or hi the year nineteen hundred and seventeen before 
 this article takes effect, whether payable in that year or not. But if any 
 manufacturing or mercantile corporation shall pay taxes on personal prop- 
 erty or capital stock assessed in any tax district in the year nineteen hundred 
 and seventeen, such corporation shall be entitled to credit for the amount 
 of such taxes so paid on its account for taxes first assessed against it under 
 this article by the tax commission, not exceeding, however, the amount of 
 such first assessment. 
 
 2igk. LIMITATION OF TIME. The provisions of the code of civil proce- 
 dure relative to the limitation of time of enforcing a civil remedy shall not 
 apply to any proceeding or action taken to levy, appraise, assess, determine 
 or enforce the collection of any tax or penalty prescribed by this article. 
 
 2. The sum of forty thousand dollars ($40,000) or so much thereof as 
 
330 APPENDIX G 
 
 may be needed is hereby appropriated to the state comptroller for the ex- 
 penses to be incurred by him in administering the provisions of this act; 
 and the sum of seventy-five thousand dollars ($75,000) or so much thereof 
 as may be needed is hereby appropriated to the state tax department for the 
 expenses to be incurred by such department in administering the provisions 
 of this act. 
 
 3. This act shall take effect immediately. 
 
TABLE OF CASES 
 
 PAGE 
 
 Anderson vs. Forty-two Broadway Co. (209 Fed. 991 and 213 Fed. 777) 104 
 
 Baldwin Locomotive Works vs. McCoach (221 Fed. 59) 106, 130, 187 
 
 Baumbach vs. Sargent Land Co. (219 Fed. 31) 299 
 
 Brady vs. Anderson (240 Fed. 665) 82 
 
 Cedar Street Co. vs. Park Realty Co. (T. D. 1685) 295 
 
 Cohen vs. Lowe (234 Fed. 474) 178 
 
 Commercial Travelers' Life and Accident Assoc'n vs. Rodway (235 
 
 Fed. 370) 301 
 
 Edwards vs. Keith (224 Fed. 585 and 231 Fed. no) 39 
 
 Eliot vs. Freeman (220 U. S. 178) 299 
 
 Flint vs. Stone Tracy Co. (220 U. S. 107) 295 
 
 Grand Rapids & Indiana Ry. Co. vs. Doyle (T. D. 2210) 102 
 
 Herold vs. Park View Building & Loan Assoc'n (210 Fed. 577) 301 
 
 Laurentide Co. (Ltd.) vs. Durey (231 Fed. 223) 300 
 
 Lewellyn vs. Pittsburgh, B. & L. E. R. R. Co. (222 Fed. 177) 299 
 
 McCoach vs. Continental Passenger Ry. Co. of Phila. (233 Fed. 976) . . 299 
 
 McCoach vs. Minehill & Schuylkill Haven R. R. Co. (228 U. S. 295) . . 296 
 
 Maxwell vs. Abrast Realty Co. (218 Fed. 457) 299 
 
 Middlesex Banking Co. vs. Eaton (221 Fed. 86) 204 
 
 Miller vs. Snake River Valley R. R. Co. (223 Fed. 946) 299 
 
 Mitchell Bros. vs. Doyle (225 Fed. 437) 130 
 
 Mutual Benefit Life Insurance Co. vs. Herold (198 Fed. 199) i8a 
 
 P. & O. Steam Navigation Co. vs. Leslie (82 L. T. 137; 4 Tax Cas. 177 
 
 Eng.) 192 
 
 Pennsylvania Life Insurance Co. vs. Meyer (197 U. S. 407; 25 Sup. Ct. 
 
 483; 49 L. Ed. 810) 301 
 
 Ricker vs. American Tea Co. (140 Mass. 346) 299 
 
 Rio Grande Junction Ry. Co. vs. U. S. (T. D. 2345) 298 
 
 -Selden vs. Equitable Trust Co. (94 U. S. 419) 205 
 
 State Line & S. R. Co. vs. Davis (228 Fed. 246) 299 
 
 Stratton's Independence (Ltd.), vs. Howbert (231 U. S. 399) 297 
 
 Traction Co. vs. Collectors of Int. Rev. (233 Fed. 984) 299 
 
 Union Hollywood Water Co. vs. Coster (238 Fed. 329) 89, in 
 
 U. S. vs. Acorn Roofing Co. (204 Fed. 157) 300 
 
 U. S. vs. Emery-Bird-Thayer Realty Co. (237 U. S. 28) 297 
 
 U. S. vs. Guggenheim Exploration Co. (238 Fed. 231) 130 
 
 U. S. vs. Military Construction Co. (204 Fed. 153) 300 
 
 U. S. vs. Nippissing Mines Co. (206 Fed. 431) 299 
 
 U. S. vs. The Cleveland, Cincinnati, Chicago and St. Louis Ry. Co. 
 
 (Feb. 23, 1916, U. S. Dist. Court, Southern Dist. of Ohio) nr 
 
 Waterbury Gaslight Co. vs. Walsh (228 Fed. 54) 299 
 
 Wilkes-Barre & W. V. Traction Co. vs. Davis (214 Fed. 511) 299 
 
 Zonne vs. Minneapolis Syndicate (220 U. S. 187) 295 
 
INDEX 1 
 
 Abatement; claim for if 
 
 Abroad; citizen residing 14 
 
 ABSENCE; EXTENSION OF TIME BECAUSE OF: 
 
 Corporation 78 
 
 Individual 16 
 
 Absence abroad does not absolve from making return 15 
 
 Accident insurance 21 
 
 Accident; reimbursement of expenses of 21 
 
 ACCOUNT: 
 
 Advertising 209 
 
 Allowance 199 
 
 Auditing Expense 209 
 
 Auto Expense 209 
 
 Bad Debts 212 
 
 Commissions 207 
 
 Debentures 204 
 
 Depletion 211 
 
 Depreciation 211 
 
 Discounts Allowed 199 
 
 Discounts Received 199 
 
 Dividends Paid 215 
 
 Dividends Received 206 
 
 Duties 210, 
 
 Fire Loss 210 
 
 Freight on Purchases 200 
 
 Freight on Sales 200, 209 
 
 Fuel, Light, Power, etc 207 
 
 General Factory Expense 209 
 
 Income from Sundry Sources 206 
 
 Insurance 209 
 
 Interest Paid 202 
 
 Interest Received 202 
 
 Inventory 201 
 
 Labor, Wages and Commissions 207 
 
 Leasehold 201 
 
 Legal Expense 209 
 
 Light, Heat and Power 207 
 
 Merchandise 215 
 
 Negative (Note) 176 
 
 Packing Supplies 209 
 
 Perpetual Inventory 217 
 
 Postage 209 
 
 Productive Wages 207 
 
 1 Numbers refer to pages and those preceded by "L." indicate references 
 to text of the Laws. 
 
334 INDEX 
 
 ACCOUNT Continued 
 
 Production Supplies 209 
 
 Profit and Loss 215 
 
 Purchases 200 
 
 Rebates I99 
 
 Rents Paid 201 
 
 Rents Received 201 
 
 Repairs 207 
 
 Reserve for Depreciation 211 
 
 Return Sales ipo. 
 
 Royalties 202 
 
 Salaries of Officers 208 
 
 Sales (merchandise) 198 
 
 Sales of Capital Assets 210 
 
 Shipping Supplies 209 
 
 Stable Expense 209 
 
 Stationery and Printing 209 
 
 Sundry Expense 209 
 
 Surplus 215 
 
 Taxes 212 
 
 Telegraph and Telephone 209 
 
 Traveling Expense 209 
 
 ACCOUNT; BOOKS OF: 
 
 Best Guide to Income 197 
 
 Corporation's 196 
 
 Examination of, by Internal Revenue Officers 197 
 
 Individual's 196 
 
 Reconciliation of, with return 216 
 
 ACCOUNTS: 
 
 Basis of keeping; corporations and individuals 196, L. 228, 238 
 
 Basis of keeping; of partnerships 69 
 
 Distribution of 198 
 
 Prepayment of 197 
 
 Reestablishing, of properties 131 
 
 What justifies charging off 213 
 
 Worthless/**? "Debts, Bad.") 
 
 Accounts Receivable 212 
 
 Accrual basis of bookkeeping 196 
 
 Accruals: treatment of accruals in return 197 
 
 Accrued interest on bonds purchased 52 
 
 Accumulation of surplus 20, 73, L. 221 
 
 Act of 1909, Special Excise Tax on Corporations 305 
 
 Act of 1913, Extracts from Income Tax Law relating to Corporations. . 312 
 Act of 1916, Federal Corporation Capital Stock Tax Law (Sept. 8, 1916) 285 
 
 Act of 1916, Income Tax Law (Sept. 8, 1916) 219 
 
 Act of 1917, War Revenue Bill (Oct. 3, 1917) 249 
 
 Act of New York State Income Tax 321 
 
 Actors and Actresses; depreciation of costumes of 188 
 
 "Actually paid" or "paid during the year" 198 
 
 ADDITIONAL INCOME TAX (SURTAX): 
 
 Computation, examples of 7, 8, 9 
 
 Dividends included in computing 2 
 
 Rates of. 2, L. 219 
 
INDEX 335 
 
 ADDITIONAL INCOME TAX (SURTAX) Continued 
 
 Table of, under Act of 1913 320 
 
 Undistributed surplus subject to 20, L. 221 
 
 ADDITIONAL WAR INCOME TAX (SURTAX): 
 
 Computation, examples of 7> 8, 9 
 
 Dividends included in computing 3 
 
 Rates of 4, L. 249 
 
 ADDITIONAL INCOME AND WAR INCOME TAXES (COMBINED): 
 
 Computation, examples of 7, 8, 9, 10 
 
 Rates of 5 
 
 Table of, on various amounts of income 10 
 
 ADDITIONAL TAXES: 
 
 Computation, illustration of . 7> 8, 9 
 
 Dividends included in computing 2, 3 
 
 Rates of 2, 4, 5 
 
 Undistributed profits subject to 20 
 
 Undistributed surplus of corporation subject to 73 
 
 Additions and betterments (see "Improvements"). 
 
 Adjusting excess depreciation deductions 195 
 
 Administration of estates; income during 13, 37 
 
 Administration of Excess Profits Tax 116 
 
 Administation of Income Tax Law; provisions of 239 
 
 Administrators (see "Fiduciaries"). 
 
 Admissions; War Tax on L. 271 
 
 Advance payment of taxes 18 
 
 AGENT: 
 
 Collecting agent of foreign income 45 
 
 Foreign corporation represented by 84 
 
 Insurance agent, commissions of 39 
 
 Liability of making return 84 
 
 Power of attorney, agent under 13 
 
 Real estate agent, commissions of 57 
 
 Return may be made by 13 
 
 Agreement of sale; War Tax on L. 276 
 
 Agricultural corporations, exempt 85 
 
 ALIENS, NONRESIDENT: 
 
 Income of, subject to withholding 60 
 
 ALIENS, RESIDENT: 
 
 Permanent residence 65 
 
 Temporary residence 65 
 
 Visiting 66 
 
 Alimony, not income 45 
 
 Allowance account (deductible from sales) 199 
 
 Allowance for depreciation 177 
 
 Amended returns 161, 195 
 
 Amended Income Tax Statute (Sept. 8, 1916) L. 219 
 
 Amortization of bonds 177 
 
 Amortization of capital invested in munitions plant 191 
 
 Amortization of discounts on bonds 104 
 
 Annual return (see "Returns"). 
 
 Annuities 21 
 
 Appeal, right of 59, L. 244 
 
 Appendix A, Amended Federal Income Tax Law (Sept. 8, 1916) L. 219 
 
336 INDEX 
 
 Appendk B, War Revenue Law (Oct. 3, 1917) L. 249 
 
 Appendix C, Corporation Capital Stock Tax Law (Sept. 8, 1916) and 
 
 Regulations L. 285 
 
 Appendix D, Special Excise Tax on Corporations (Aug. 5, 1909) L. 305 
 
 Appendix E, Extracts from Federal Income Tax Law relating to Cor- 
 porations (Oct. 3, 1913) L. 312 
 
 Appendk F, Table of Additional Taxes imposed upon individuals by 
 
 Act of Oct. 3, 1913 L. 320 
 
 Appendix G, New York State Income Tax on Manufacturing and 
 
 Mercantile Corporations L. 321 
 
 Apportioning income of 1916 and 1917 77 
 
 Appreciation in value in good will (note) 23, 187 
 
 Appreciation in value of assets not income 36 
 
 Assessment insurance companies, reserves of 114 
 
 ASSESSMENTS: 
 
 Capital Stock, assessment of, not income 92 
 
 Capital Stock, assessments of, not deductible by individuals 57 
 
 Excess profits tax, creditable L. 246 
 
 General assessment L. 230 
 
 Local benefits, assessment of 53 
 
 Notice of assessment, corporations 76 
 
 Notice of assessment, individuals 17 
 
 Recovery of 79 
 
 Second assessment 79 
 
 ASSETS : 
 
 Computing profit on sales of 33, 34, 35 
 
 Deferred 197 
 
 Income on sales of 33 
 
 Treatment of depreciation in sales of 34 
 
 Associations; income of mutual 91 
 
 Attorney's fees; when returnable 33 
 
 Auto trucks, depreciation of 186 
 
 Automobiles, War Tax on L. 268 
 
 Auxiliaries, depreciation of 184 
 
 Bad debts 213 
 
 BANKS: 
 
 Depreciation of securities 187 
 
 Doing business as partnership 14 
 
 Gross profit of 91 
 
 Interest on deposits in 45 
 
 Returns by private banks 14 
 
 Taxes on stock of 58 
 
 Banking department; order by State or Federal 187 
 
 Bankruptcy of debtor 213 
 
 Batteries; depreciation of storage 184 
 
 BENEFICIARIES: 
 
 Heirs and legatees, income of 37, L. 220 
 
 Income received by 37 
 
 Proceeds of accident policy : 21 
 
 Proceeds of life insurance 21 
 
 Return by 13, 37 
 
 Undistributed income returnable by fiduciary 37 
 
INDEX 337 
 
 Bequests and gifts, exempt 37 
 
 Betterments (see "Improvements"). 
 
 Beverages, War Tax on L. 258 
 
 Board and lodging in lieu of cash 32 
 
 Boards of trade, exempt 84 
 
 Boilers and engines, depreciation of 182 
 
 Bonded indebtedness 173, 215 
 
 BONDS: 
 
 Accrued interest on bonds purchased 52 
 
 Amortization of bonds 177 
 
 Charging off depreciation of bonds 187 
 
 Debenture bonds, interest on 204 
 
 Discounts on 104 
 
 Discounts on, charged off prior to 1909 106 
 
 Exchange of, hi reorganization 93 
 
 Income on Government bonds 40, 41 
 
 Interest on bonds 104 
 
 Liberty Loan 41 
 
 Premium on fidelity bond paid by employee 53 
 
 Premium on bonds purchased 105 
 
 Redemption of bonds 105 
 
 Tax-free covenants in bonds 62, L. 229 
 
 Withholding tax from interest on bonds 62 
 
 BONUSES: 
 
 Taxable as income of recipient no 
 
 When deductible 108 
 
 BOOK VALUE: 
 
 Decrease in book value not deductible 187 
 
 Increase in book value not income 187 
 
 BOOKKEEPING METHODS: 
 
 Corporations' 196 
 
 Cost-system 216 
 
 Individuals' 196 
 
 Bookkeeping suggestions 196 
 
 Books of Account (see "Accounts, books of"). 
 
 BRANCHES, FOREIGN: 
 
 Corporations having 84 
 
 Rates of exchange of 44 
 
 BRANDS: 
 
 Depreciation of 188 
 
 Loss on sale of 188 
 
 Brokers; special return by (names of customers, etc.) L. 245 
 
 BUILDINGS: 
 
 Buildings erected by tenant 180 
 
 Depreciation on buildings, generally 178 
 
 Depreciation on dwellings 180 
 
 Depreciation on factory buildings 179 
 
 Depreciation on farm buildings 178, 181 
 
 Determining cost of buildings for depreciation purposes 179 
 
 Dilapidated buildings removed by authority of Government 57 
 
 Improvements and betterments 56, 180 
 
 Repairs to buildings 179 
 
 Voluntary removal of building 56 
 
338 INDEX 
 
 BUSINESS: 
 
 Doing business; what constitutes 295 
 
 Individuals having more than one business 54 
 
 Losses in business 54 
 
 Place of business, filing returns at 15 
 
 Cabaret, War Tax on 271 
 
 Cables and wires, depreciation of 184 
 
 CALENDAR YEAR: 
 
 Corporation return for 76, L. 230 
 
 Individual tax based on n, L. 226 
 
 Cameras, War Tax on L. 269 
 
 Campaign expenses 57, 1 13 
 
 CAPITAL ASSETS: 
 
 Appreciation in value of 187 
 
 Depreciation of 175 
 
 Increase or decrease in book value of 160 
 
 Losses on 34, 210 
 
 Profits on 33, 35, 91, 210 
 
 Sales of ; 33, 210 
 
 Treatment of depreciation in sales of 34 
 
 Valuation of . . 35 
 
 CAPITAL EMPLOYED IN THE BUSINESS: 
 
 Definition of 203 
 
 Interest deductible based on 203 
 
 CAPITAL, INVESTED (EXCESS PROFITS TAX): 
 
 Accounts payable, deduction from 157, 163 
 
 Accounts receivable 155, 159 
 
 Accruals as 157, 163 
 
 Bills Payable 157, 163 
 
 Bills Receivable 155, 160 
 
 Bonds, discussion of 173 
 
 Bonds payable 157, 163 
 
 Books of account, showing 130 
 
 Books of account, relation of 130 
 
 Buildings as 156, 162 
 
 Cash as 155, 159 
 
 Copyrights 1 29 
 
 Definition of 128 
 
 Depreciation charged off prior to incidence of Excise Tax 161 
 
 Depreciation charged off in excess 161 
 
 Determined, how 134 
 
 Dividends declared 157, 164 
 
 Druggists, capital of 133 
 
 Examples of computing 155-165 
 
 Foreign businesses 129 
 
 Franchise 138 
 
 Furniture and fixtures 156, 162 
 
 Good will 138, 157, 163 
 
 Good will, trade-marks and franchises 138 
 
 Good will written off 131 
 
 Individuals, capital of 129, 154 
 
 Inventory valuations 167 
 
INDEX 339 
 
 CAPITAL, INVESTED (EXCESS PROFITS TAX) Continued 
 
 Investments as 155, 160 
 
 Land 156, 162 
 
 Liberty Loan bonds 130 
 
 Nominal capital 133 
 
 Organization expenses 166 
 
 Ownership, partial change of 135 
 
 Partnerships 1 28 
 
 Patents 129 
 
 Patterns and designs 167 
 
 Plant and machinery 155, 160 
 
 Plates and dies 167 
 
 Prepayments 157, 163 
 
 Professions 133 
 
 Property accounts, depreciated 132 
 
 Property accounts, reestablishing in books of account 131 
 
 Property, actual value of, discussion 1 74 
 
 Reorganization after Jan. 2, 1913 136 
 
 Reserve accounts and funds 138 
 
 Reserve for amortization of bonds 140 
 
 Reserve for bad debts - 140 
 
 Reserve for loss on investments 140 
 
 Reserve for working capital ; 140 
 
 Reserve for depreciation and depletion 140 
 
 Reserves, generally 157, 164 
 
 Revaluation of property 153 
 
 Securities, inventory of, by dealer 167 
 
 Stocks and bonds 128 
 
 Stock on hand 155, 160 
 
 Subscriptions to capital stock 166 
 
 Surplus 154, 158, 164 
 
 Tangible property, value of 129 
 
 Trade-marks 138 
 
 Treasury stock 166 
 
 Undistributed surplus of taxable year 128 
 
 Capital returned to stockholders 31 
 
 CAPITAL STOCK: 
 
 Assessment of capital stock not income 92 
 
 Capital stock outstanding at close of year 212 
 
 Depreciation of stock 187 
 
 Dividends on stock (see "Dividends"). 
 
 Estimating value of 302 
 
 Exchange of property for stock 93 
 
 Exchange of shares 27, 93 
 
 Preferred, interest on 104 
 
 Sale of rights to subscribe to 30 
 
 Sale of stock at premium 94 
 
 Stock having no par value 203 
 
 War Tax on certificates of L. 275 
 
 Capital Stock Tax Law (Sept. 8, 1916) L. 285 
 
 Capital Stock Tax Law Regulations 286 
 
 Carrying charges of real estate company 96 
 
 Cemetery companies, exempt 85 
 
340 INDEX 
 
 Certificates of indebtedness of U. S. accepted in payment of taxes .... 19 
 
 Certificates of stock; war tax on 275 
 
 Charitable organizations, exempt 85 
 
 Charities, contributions to 52, L. 223 
 
 Christmas gifts to clergymen 33 
 
 Cigars and tobacco, War Tax on L. 264 
 
 Citizen residing abroad must make return 15 
 
 Civic league or association, exempt 85 
 
 CLAIMS: 
 
 Abatement of assessment 17 
 
 Excess amounts paid to Government 17 
 
 Refund of taxes 17, 18 
 
 Specific exemptions 51 
 
 Statute of limitation 59 
 
 Clergymen; income of 33 
 
 "CLOSE CORPORATIONS": 
 
 Dividends credited by 21 
 
 Not exempt 87 
 
 Clubs organized for pleasure and recreation, exempt 85 
 
 Collateral; interest on debts secured by 204 
 
 Collecting agents of foreign income 45, L- 229 
 
 COLLECTION OF TAX; DDE DATE AND PENALTY FOR DELAYED PAYMENTS: 
 
 Corporations 76 
 
 Individuals 17 
 
 COLLECTORS OF INTERNAL REVENUE: 
 
 Duties of L. 241 
 
 Returns made by collectors for corporations 79 
 
 Returns made by collectors for individuals 17 
 
 Commission account 207 
 
 COMMISSIONS: 
 
 Insurance agents' 39 
 
 Labor, wages and commissions 207 
 
 Real estate agents' 57 
 
 Salesmen's 33 
 
 Trustee's 33 
 
 When returnable 33 
 
 Compensation of trustee 33 
 
 Compromise of penalty for failure to make return 16 
 
 Conservators (see "Fiduciaries"). 
 
 Contingent reserves 103, 138 
 
 Contracting corporations; gross income of 90 
 
 Contractor doing work for State 40 
 
 Contributions (bonus) 108 
 
 Contributions to charities 52, L. 223 
 
 Contributions to campaign expenses 113 
 
 Conveyances, War Tax on 277 
 
 Co-operative associations (exempt) 85 
 
 Co-partnerships (see "Partnerships"). 
 
 Copyright; depreciation of 186 
 
 CORPORATE OBLIGATIONS: 
 
 Exempt organizations subject to withholding of tax 86 
 
 Interest on bonds, mortgages, and deeds of trust 63 
 
 Limitation of interest deductible . . . 202 
 
INDEX 341 
 
 CORPORATE OBLIGATIONS Continued 
 
 Tax-free covenant 62 
 
 Corporation Capital Stock Tax Law L. 285 
 
 Corporation Capital Stock Tax Regulations L. 286 
 
 CORPORATIONS: 
 
 Additions and betterments 180 
 
 Agent of foreign 84 
 
 Apportionment of income for 1917 77 
 
 Assessment of capital stock of 92 
 
 Bonds issued at discount 104 
 
 Books of account 196 
 
 Close corporations 87 
 
 Cost-system 216 
 
 Deductions (see "Deductions in returns of corporations"). 
 Dividends (see "Dividends"). 
 
 Doubtful as to exemption 87 
 
 Exempt organizations 84 
 
 Exempt organizations includes foreign, of the same classes 87 
 
 Fiscal year of 77, L. 237 
 
 Foreign income of domestic corporations 73 
 
 Foreign branches 44> 80 
 
 Gross income from all sources 90 
 
 Gross income of banks 91 
 
 Gross income of contracting corporations 90 
 
 Gross income of insurance companies 91 
 
 Gross income of manufacturing corporations 90 
 
 Gross income of mercantile corporations 90 
 
 Gross income of miscellaneous corporations 90 
 
 In liquidation 82 
 
 Income of domestic corporations 72, 89, L. 230 
 
 Income of foreign corporations 72, L. 230 
 
 Incompletely organized corporations 80 
 
 Interstate commerce 83 
 
 Losses of, when deductible 101 
 
 Net income 72 
 
 Organized during the year 81 
 
 Return, false or fraudulent 78 
 
 Return, foreign corporations 76 
 
 Return, holding companies 80 
 
 Return, mercantile corporations 75, 76 
 
 Return prepared by Collector of Internal Revenue 79 
 
 Return, refusal or neglect to prepare 79 
 
 Return, receivers and trustees 81 
 
 Return, specific exemption 73 
 
 Return, subsidiary companies 81 
 
 Return, when due, where, etc 76, L. 237, 238 
 
 Return, withheld taxes 63 
 
 Water companies 89 
 
 Year, tax L. 237 
 
 CORPORATIONS, FOREIGN: 
 
 Agent of 84 
 
 Deductions allowed 114 
 
 Dividends of 31 
 
34 2 INDEX 
 
 CORPORATIONS, FOREIGN Continued 
 
 Income of 72, L. 235 
 
 Where to file return 76 
 
 CORPORATIONS; NONRESIDENT FOREIGN: 
 
 Withholding tax on income of 61 
 
 COST SYSTEM: 
 
 Manufacturing corporation operating 216 
 
 "Purchases" according to 200 
 
 Reliability of 200 
 
 Cost of manufactures 216, 217 
 
 COST OF PROPERTY ACQUIRED PRIOR TO MARCH i, 1913: 
 
 Corporations 91 
 
 Individuals 35 
 
 Cost of property acquired since March i, 1913 36 
 
 Cost of real estate 36 
 
 Costumes of actors; depreciation of 188 
 
 Courts; jurisdiction of L. 244 
 
 Crop snares; farmers' 49 
 
 Custom House entries; War Tax on L- 277 
 
 Customs duties 59 
 
 Damages received for injuries sustained 21 
 
 Damage suits, test of deductibility of payment of 57 
 
 Debenture bonds; interest on 204 
 
 DEBTS, BAD: 
 
 Bankruptcy 213 
 
 Corporations 102 
 
 Deductible 213 
 
 Individual 55 
 
 Reserve for 102 
 
 Deceased persons; income to time of death of 13 
 
 DEDUCTIONS IN RETURNS OF DOMESTIC CORPORATIONS: 
 
 Allowable 100, L. 233 
 
 Amortization of bonds 177 
 
 Bad debts 102 
 
 Bonuses 108 
 
 Campaign expenses 113 
 
 Defalcation, embezzlement in 
 
 Depletion 101, L. 233 
 
 Depreciation 101, L. 233 
 
 Expenses, necessary 100, L. 233 
 
 Improvements (not deductible) 1 10, L. 234 
 
 Interest . . . , 103, L. 234 
 
 Lobbying expense in 
 
 Losses 101, L. 233 
 
 Maintenance expenses 102 
 
 Organization expenses in 
 
 Premium on bonds 105 
 
 Salaries of National Guardsmen no 
 
 Salesmen's expenses no 
 
 Taxes no, 212, L. 235 
 
 DEDUCTIONS IN RETURNS OF FOREIGN CORPORATIONS: 
 
 Depletion 1 14, L. 236 
 
INDEX 343 
 
 DEDUCTIONS IN RETURNS OF FOREIGN CORPORATIONS Continued 
 
 Depreciation 114, L. 235 
 
 Improvements (not allowed) 115, L. 236 
 
 Interest 115, L. 236 
 
 Losses 114, L. 235 
 
 Necessary expenses 1 14, L. 235 
 
 Restoring property 115 
 
 Taxes 115, L. 237 
 
 DEDUCTIONS IN RETURNS OF INDIVIDUALS: 
 
 Accrual basis of bookkeeping 196 
 
 Bad debts 55, L. 223 
 
 Contributions to charities ,52, L. 223 
 
 Depletion 56, L. 223 
 
 Depreciation 55, L. 223 
 
 Dividends 2,3 
 
 Exemptions (see "Exemptions"). 
 
 Improvements (not deductible) 56, L. 223 
 
 Interest 52, L. 222 
 
 Living expenses (not deductible) 52 
 
 Losses 54, L. 222 
 
 Necessary expenses 52, L. 222 
 
 Nonresident alien, deductions of L. 224, 225 
 
 Normal tax withheld 52 
 
 Only items applicable to the year deductible 33 
 
 Prorating compensation of trustees 33 
 
 Taxes 53, L. 222 
 
 Taxes on bank stock 58 
 
 DEDUCTIONS UNDER EXCESS PROFITS TAX: 
 
 Allowable 141 
 
 Applicable to real and nominal capital 152 
 
 Foreign nonresident businesses 146 
 
 Interest on capital 172 
 
 Interest on loans by partners 171 
 
 Representative concerns 134, 147 
 
 Salaries of partners and individuals 169 
 
 Salary allowance, partnerships 148 
 
 Wages, members of farmer's family 151 
 
 Defalcation when deductible in 
 
 Deferred assets 197 
 
 Delay in filing return (see "Failure to file return"). 
 
 DELAYED PAYMENT OF TAX; PENALTY: 
 
 Corporation 76 
 
 Individual 17 
 
 DEPLETION OF NATURAL DEPOSITS: 
 
 Deductible by corporations 181 
 
 Deductible by individuals 56 
 
 Deductible by nonresident aliens 225 
 
 Gas and oil wells : 181 
 
 Ledger account of depletion 211 
 
 Limitation of depletion 223 
 
 Mines 181 
 
 Purpose of depletion 211 
 
344 INDEX 
 
 DEPRECIATION: 
 
 Account of depreciation 211 
 
 Adjusting excess 195 
 
 Deductible by corporation 100 
 
 Deductible by individual 55 
 
 Definition of 175 
 
 Diminishing value method 175 
 
 Entries of depreciation 211 
 
 Equal instalment method 175 
 
 Excess charge for depreciation 161, 195 
 
 Fixing upon rates of depreciation 178 
 
 Limitation of amount chargeable 178 
 
 Methods of computing 175 
 
 Rates of, indicated by Department (notes) 178, 182, 186 
 
 Rates of depreciation, generally 178 
 
 Repairs and replacements 183 
 
 Reserve for depreciation 176 
 
 Treatment of depreciation in sales of capital assets 34 
 
 Property subject to depreciation: 
 
 Auto trucks 186 
 
 Auxiliaries 184 
 
 Belted generators 184 
 
 Boilers 182 
 
 Boot trade 193 
 
 Brands (not deductible) 188 
 
 Breweries 193 
 
 Buildings 178 
 
 Collieries 193 
 
 Copyrights 186 
 
 Dwellings 180 
 
 Dyers and trimmers 193 
 
 Engines 182 
 
 Farm buildings 178, 181 
 
 Furniture and fixtures 180 
 
 Goodwill (not deductible) 187 
 
 Horses 186 
 
 Hosiery trade 193 
 
 Inventories 167, 188 
 
 Investments (not deductible) 187 
 
 Lace makers 193 
 
 Laundry equipment 184 
 
 Leased property 180 
 
 Looms 193 
 
 Machinery 182 
 
 Miscellaneous equipment 184 
 
 Motors 184 
 
 Munitions works 190 
 
 Newspapers and printing 193 
 
 Patents 185 
 
 Patterns 185 
 
 Rolling stock 194 
 
 Securities 167, 187 
 
 Sewing machines 193 
 
INDEX 345 
 
 DEPRECIATION Continued 
 
 Shafting 184 
 
 Ships 192 
 
 Shipyards 194 
 
 Shop equipment 184 
 
 Spinning machinery 194 
 
 Stable equipment 186 
 
 Steam piping 184 
 
 Steam turbines 184 
 
 Stock on hand 167, 188 
 
 Stocks and bonds 187 
 
 Storage batteries 184 
 
 Switchboards 184 
 
 Theatre costumes 188 
 
 Timber land 182 
 
 Tools 184 
 
 Trade-marks (not deductible) 188 
 
 Tramways 194 
 
 War materials 190 
 
 Weaving trade 194 
 
 Wires and cables 184 
 
 Disclosing information prohibited L. 241 
 
 Discounts allowed 199 
 
 Discounts received 199 
 
 Discount on bonds charged off prior to Jan. i, 1909 106 
 
 DISCOUNTS; RESERVE FOR: 
 
 Amortization of discounts on bonds 104 
 
 Discounts on sales of merchandise 103 
 
 DISSOLVED CORPORATION: 
 
 Liability for tax of 82 
 
 Return of capital of 31 
 
 Distribution of accounts 198 
 
 District Court, jurisdiction of L. 244 
 
 Diverting reserves 177 
 
 DIVIDENDS: 
 
 Accounts of 206, 215 
 
 Creditable as to normal tax 51, L. 223 
 
 Credits to partners for proportionate share of 70 
 
 Declared out of profits earned prior to March i, 1913 22 
 
 Declared out of capitalized good will (note) 23 
 
 Declared payable in securities 23, 91 
 
 Definition of 21, L. 247 
 
 Distributed or undistributed 21 
 
 Double tax on 75 
 
 How taxable 21, 22, 23, L. 247 
 
 Life Insurance policies 20 
 
 Must be included in return L. 228 
 
 Not subject to normal tax 2, 3 
 
 Received by corporations 75 
 
 Received by individuals 21, 22, 23 
 
 Received by nonresident foreign corporations 61 
 
 Received by [nonresident alien individuals 60 
 
 Received by partnerships 69 
 
346 INDEX 
 
 DIVIDENDS Continued 
 
 Received from foreign corporations 31 
 
 Reserves, dividends paid out of 24, 25, 26 
 
 Returns of, by corporations (names of stockholders) L. 245 
 
 Stock dividend 23 
 
 Stock dividend to nonresident foreign corporation 67 
 
 Subject to additional taxes 22, L. 220 
 
 Doctors, fees of 33 
 
 Donations (see "Gifts"). 
 
 Drafts, Time, War Tax on L. 277 
 
 DUE DATE: 
 
 Payment of tax by corporations 76 
 
 Payment of tax by individuals 17 
 
 Return of corporations 76 
 
 Return of individuals 15 
 
 Return, when last day falls on Sunday or legal holiday 76 
 
 Dues, War Tax on L. 271 
 
 Duress, payment under 59 
 
 Duty, customs 59 
 
 Duties account 210 
 
 Dwellings, depreciation of 180 
 
 Embezzlement, deduction of 1 1 1 
 
 Engines and boilers, depreciation of 182 
 
 Entertainment by salesmen, when deductible no 
 
 Estate Tax, War L. 278 
 
 ESTATES: 
 
 Exemption of 51 
 
 Income of 37, L. 220 
 
 Sale of securities by 35 
 
 EXCESS PROFITS TAX: 
 
 Administration of 116, 152 
 
 Assessment deductible from income tax 8, 10, L. 246 
 
 Capital invested (see "Capital, invested"). 
 Deductions allowed (see "Deductions"). 
 
 Duration of 118 
 
 Examples of computing 142 
 
 Exempt organizations 117 
 
 Incidence of 1 18 
 
 Income exempt from 117 
 
 Invested capital (see "Capital, invested"). 
 
 Investments, income from, not subject to 126 
 
 Landowner, when subject to 1 23 
 
 Method of computing, where capital is employed. .142, 143, 144, 145 
 
 Method of computing, where no capital employed 8, 145 
 
 Mines, oil wells and timber lands, income from 1 24 
 
 Occupation and salary, defined 123 
 
 Old tax repealed 118 
 
 Partners' profits not subject to 171 
 
 Partnership, assessment of, should be apportioned to partners. ... 121 
 
 Partnership, domestic, returns of 120 
 
 Partnership, foreign, returns of 121 
 
 Penalties, failure to make return and for false return 121 
 
INDEX 347 
 
 EXCESS PROFITS TAX Continued 
 
 Prewar years (see "Prewar period"). 
 
 Principle of computing 118 
 
 Rate of, where no capital is employed 119 
 
 Rates of, where capital is employed 118 
 
 Real or nominal capital 152 
 
 Return, due date of filing 121 
 
 Returns, nonresident aliens and foreign corporations 120 
 
 Taxable year, denned 119 
 
 Undistributed surplus of taxable year 128 
 
 Who is subject to tax 117 
 
 Excess Profits Tax Law (Text of) L. 251 
 
 Exchange, rates of foreign 44 
 
 Exchange of stock and bonds in reorganization 93 
 
 Excise Tax on Corporations (Act of 1909) L. 305 
 
 Executors, returns by 13 
 
 EXEMPT CORPORATIONS AND ORGANIZATIONS: 
 
 Classes of 84 
 
 Doubtful as to exemption 87 
 
 Foreign 87 
 
 Must withhold at source 86 
 
 Salary received from 32 
 
 Water companies, not exempt 89 
 
 Exempt income of individuals L. 221, 222 
 
 Exempt, tax, clause in bonds 62 
 
 EXEMPTIONS, SPECIFIC: 
 
 Claims for 51 
 
 Corporation (under Income Tax Law) 73 
 
 Corporation (under Excess Profits Tax Law) 141 
 
 Estate 51 
 
 Individual, under Income Tax 2, 51 
 
 Individual, under War Income Tax 3, 51 
 
 Individual, under Excess Profits Tax 141 
 
 Individual, nonresident alien 2, 51 
 
 Prorating exemption between husband and wife 12 
 
 Ward, cestui que trust 51 
 
 Expense accounts, sundry 209 
 
 Expenses, necessary to business 52, 100 
 
 Expenses on account nontaxable income $? 
 
 EXTENSION OF TIME: 
 
 Corporation 78 
 
 Individual 16 
 
 FAILURE TO FILE RETURN, PENALTIES FOR: 
 
 Compromises of 16 
 
 Corporations' 78 
 
 Individuals' 16 
 
 FAILURE TO PAY TAX, PENALTIES FOR: 
 
 Corporations' 76 
 
 Individuals' 17 
 
 FALSE RETURNS, PENALTIES FOR: 
 
 Corporations' 78 
 
 Individuals' 17 
 
348 INDEX 
 
 Family, head of, defined (note) 2 
 
 Family, head of, exemptions 51 
 
 FARM AND FARMER: 
 
 Books of account of 50 
 
 Buildings 178, 181 
 
 Deductions allowed farmer 48 
 
 Definition of 48 
 
 Depreciation of farm property 50 
 
 Expenses of 49 
 
 Income of 49 
 
 Losses of 49 
 
 Maintained for recreation only 50 
 
 Shares in 49 
 
 Stock of 49> So 
 
 Federal Corporation Capital Stock Tax Law and Rulings L. 285 
 
 Federal Farm Loan, interest on, exempt 40 
 
 Federal Income Tax Law (Sept. 8, 1916) L. 219 
 
 Federal Trade Commission 175 
 
 Fees, professional; when returnable 33 
 
 Fidelity bond, premium on 53 
 
 FIDUCIARIES: 
 
 Agents are not fiduciaries 13 
 
 Compensation of 33 
 
 Income from 37 
 
 Indemnity to L. 221 
 
 More than one fiduciary 13 
 
 Receivers 81 
 
 Return by 12, L. 227 
 
 FILING RETURN: 
 
 Due date of 16 
 
 Where to file 15 
 
 Final returns (see "Tentative returns")- 
 
 Fire insurance premiums 57 
 
 Fire loss, treatment of account of 210 
 
 FISCAL YEAR OF CORPORATION: 
 
 Extension of time 78 
 
 How to adopt fiscal year 77 
 
 When return is due under fiscal year 77 
 
 When tax payable 78 
 
 Fiscal year of partnerships 68, L. 227 
 
 Floor tax L. 270 
 
 Foreign corporations (see "Corporation, Foreign "). 
 
 Foreign exchange, rates of 44 
 
 FOREIGN INCOME: 
 
 License required by collectors of 45, L. 229 
 
 Of nonresident aliens 46 
 
 Foreigners (see "Aliens"). 
 
 Forms must be obtained by taxpayer 12 
 
 Fraud, unreasonable accumulation of surplus evidence of 20, L. 221 
 
 Freight on purchases 200 
 
 Freight on sales 200, 209 
 
 Fuel, light and power 207 
 
 Funds and Reserves 138 
 
INDEX 349 
 
 "Fundamentals of a cost-system for manufactures" 175 
 
 Furniture and fixtures 180 
 
 GAS WELLS: 
 
 Depletion of 56, 181 
 
 Royalties 181 
 
 Generators, depreciation of belted generators 184 
 
 GIFTS: 
 
 Bonuses 108 
 
 Christmas gifts 109 
 
 Exemption of 37, L. 222 
 
 Gratuities, test of deducibility 108 
 
 Income from gifts 37 
 
 Received by clergymen 33 
 
 GOOD WILL: 
 
 Depreciation of 187 
 
 Dividend declared out of capitalized (note) 23 
 
 Invested capital 131, 138, 157, 163 
 
 Treatment of account 187 
 
 Government, foreign, income of L. 246 
 
 GOVERNMENT BONDS, INCOME FROM: 
 
 Liberty Bonds, 3^ per cent 41 
 
 Liberty Bonds, 4 per cent 41 
 
 Miscellaneous 40 
 
 Government employees, income and expenses of 41 
 
 Gratuities (* "Gifts"). 
 
 GROSS INCOME: 
 
 All sources 90 
 
 Banks 91 
 
 Contracting corporations 90 
 
 Insurance companies 91 
 
 Manufacturing corporations 90 
 
 Mercantile corporations 90 
 
 Miscellaneous corporations 00 
 
 GUARDIANS: 
 
 Deduction of exemption of ward or ceslui que trust 51 
 
 Return by 12, L. 227 
 
 Gum, chewing, War Tax on L. 269 
 
 HEAD OF FAMILY: 
 
 Definition of (note) 2 
 
 Exemptions of 51 
 
 Heat, light and power account 207 
 
 Heirs and legatees, income returnable 37 
 
 Holding companies, returns of 80 
 
 Holiday, when due date falls on 76 
 
 Horses, depreciation of 186 
 
 Horticultural organizations 85 
 
 Household expenses; not deductible 52 
 
 How to adopt fiscal year of corporation 77 
 
 HUSBAND AND WIFE: 
 
 Exemption of, may be prorated 12 
 
 Returns by 12 
 
350 INDEX 
 
 HUSBAND AND WIFE Continued 
 
 Separate income, computing additional tax 12 
 
 Specific exemption 51 
 
 Impairment of capital account 215 
 
 IMPROVEMENTS: 
 
 Betterments 56 
 
 Leased property 180 
 
 Local benefits 53 
 
 Not deductible 56 
 
 Repairs 179 
 
 In trade, denned 54, 55 
 
 INCOME: 
 
 Accrued 197 
 
 Apportionment of income for 1916 and 1917 in case of designated 
 
 fiscal year 77 
 
 Appreciation in value, not income 36 
 
 Attorneys' fees 33 
 
 Beneficiaries 37 
 
 Bonuses 32, 108, no 
 
 Clergymen 33 
 
 Commissions of insurance agents 39 
 
 Corporations, domestic 72, 88, L. 230 
 
 Corporations, foreign 72, L. 235 
 
 Deduction from (see "Deductions"). 
 
 Estates 37 
 
 Exempt from tax L. 221, L. 233 
 
 Government employees 41 
 
 Gross income (see "Gross Income"). 
 
 Heirs and legatees 37 
 
 In trade 55 
 
 Individuals 19 
 
 Instalment business 98 
 
 Interest (see "Interest"). 
 
 Legacies. 37 
 
 Money equivalent 32 
 
 Oil wells, mines, and timber lands 124 
 
 Partnerships, general 69 
 
 Partnerships, limited 70 
 
 Professional services 33 
 
 Promissory note 36 
 
 Public utility L. 233 
 
 Real estate development corporation 94, 95 
 
 Rents, when returnable 39 
 
 Return (see "Returns"). 
 
 Salaries, when returnable 31 
 
 Sale of stock rights 30 
 
 Sinking fund, interest on 92 
 
 Stock received in reorganization 29 
 
 Subject to withholding 60 
 
 Sundry sources 206 
 
 Table of rates on various amounts of (individuals) 10 
 
 Timber, lumber and stumpage 99 
 
INDEX 351 
 
 INCOME -^Continued 
 
 Undivided surplus of corporations 20 
 
 Income taxes applicable to income of year 1917 i 
 
 Income taxes paid not deductible 53 
 
 Incorporation expenses in 
 
 Indebtedness, bonded, interest paid on 173, 215 
 
 Indebtedness, interest bearing 215 
 
 Indemnity to withholding party 63 
 
 INDIVIDUALS: 
 
 Deductions of 51 
 
 Income of 19 
 
 Income of nonresident aliens 60 
 
 Returns of n 
 
 Information at source 63, L. 246 
 
 Inheritance tax, not deductible 58 
 
 Injuries, damages received on account of 21 
 
 Instalment business 94, 98 
 
 Instalment payment of taxes 18 
 
 INSURANCE: 
 
 Accident 21 
 
 Account of 209 
 
 Agents. 39 
 
 Annuities ; 21 
 
 Damages 21 
 
 Dividends 20 
 
 Injuries 21 
 
 Losses not compensated for by 57 
 
 Partnership and corporation 69, 107, L. 247 
 
 Premiums, fire 57 
 
 Premiums, life 58 
 
 Proceeds of policy of 21, L. 221 
 
 Reserves for 57 
 
 Settlement under state compensation laws (note) 21 
 
 War tax on L. 267 
 
 INSURANCE COMPANIES: 
 
 Additions to reserve funds 113 
 
 Assessment companies 114 
 
 Gross income of 91 
 
 Losses by 113 
 
 Mutual , 91 
 
 Reserves of 114 
 
 Returns of 75 
 
 Interstate Commerce corporation, return of 83 
 
 INTEREST: 
 
 Account 202 
 
 Accrued on bonds bought 52 
 
 Annuities 21 
 
 Bank deposits 45 
 
 Bonds, information at source 65, L. 246 
 
 Collateral subject to sale, etc 104 
 
 Cost of manufactures 200 
 
 Debenture bonds 204 
 
 Deductible by corporations 103, 104 
 
35 2 
 
 INDEX 
 
 INTEREST Continued 
 
 Deductible by individuals 52 
 
 Government bonds 40, 41 
 
 Incurred in purchase of Liberty Loan Bonds, 4% 52, 103 
 
 Liberty bonds, 3^2% 4* 
 
 Liberty bonds, 4%. 41, 103 
 
 Limitation of corporations 202 
 
 Obligations of State L. 222 
 
 Preferred Stock 104 
 
 Sinking funds 93 
 
 Tax-free covenant 62 
 
 Withholding at source on 62, 63 
 
 INTERNAL REVENUE OFFICERS: 
 
 Examination of books by 197 
 
 When returns may be prepared by 17 
 
 INVENTORIES (STOCK ON HAND): 
 
 Account 201 
 
 Depreciation of 188 
 
 Equivalent of 217 
 
 Valuations of 167 
 
 Invested capital (see "Capital, invested"). 
 
 Investments, depreciation of 56 
 
 Investments, foreign, rates of exchange on 44 
 
 Jewelry, War Tax on L. 269 
 
 Joint fiduciaries 12 
 
 Journal entries of depreciation 211 
 
 Joint-stock companies (see "Corporation"). 
 
 Judgments, test of deducibility of 57 
 
 Jurisdiction of District Court L. 244 
 
 Labor, wages and commissions 207 
 
 Land, not subject to depreciation 179 
 
 Land, timber 182 
 
 Last day, when last day to file returns falls on Sunday or legal holiday . . 76 
 
 Laundry equipment, depreciation of 184 
 
 Lawyer's fees, when returnable 33 
 
 LEASED PROPERTY: 
 
 Additions to 180 
 
 Permanent buildings erected by tenant 180 
 
 Leasehold account 201 
 
 Legacies, not income 37 
 
 Legatees, income of, returnable 37 
 
 Liberty Loans, interest on 41, 103 
 
 License required by collecting agents 45 
 
 Life insurance (see "Insurance"). 
 
 Limitations, statute of (see "Statute of Limitations"). 
 
 LIMITED PARTNERSHIPS: 
 
 How created 70 
 
 Profits of 31 
 
 Returns of 70 
 
 Liquidation, corporation in 31 
 
 Liquors, War Tax on L. 258 
 
INDEX 353 
 
 Living expenses, not deductible 52 
 
 Living quarters part of compensation 32 
 
 Local benefits, not deductible S3 
 
 Lodging, board and, in lieu of money 32 
 
 LOSSES: 
 
 Bad debts (see "Debts, bad")- 
 
 Deductible by domestic corporation 101 
 
 Deductible by foreign corporation 114 
 
 Deductible by individual 54 
 
 Deductible by nonresident alien L. 224 
 
 Definition of 54 
 
 Farms and farmers 49 
 
 Fluctuating 56 
 
 In trade 54, 55 
 
 Retirement of bonds 106 
 
 Speculations, losses in 55 
 
 When deductible 101 
 
 Lumber, and stumpage, profit or loss on 99 
 
 Machinery, depreciation of 182 
 
 Mailing returns in due time 76 
 
 Maintenance expenses 102 
 
 MANUFACTURING CORPORATION: 
 
 Cost-system of 216 
 
 Gross income of 90 
 
 Market value of securities, how determined 35 
 
 MARRIED PERSON: 
 
 Exemption of 51 
 
 Status of, when determined 51 
 
 " Massachusetts Trusts" 294, 299 
 
 Medicines, War Tax on L. 269 
 
 MERCANTILE CORPORATION: 
 
 Gross income of 90 
 
 MERCHANDISE: 
 
 Account 215 
 
 Allowances 199 
 
 Purchases of 200 
 
 Sales of 198 
 
 METHOD OF BOOKKEEPING: 
 
 Corporations 196 
 
 Cost-system 216 
 
 Individuals 196 
 
 METHOD OF COMPUTING TAX: 
 
 Excess profits 142, 143, 144, 145 
 
 Normal and additional 6, 7, 8, 9 
 
 Military service, verification of returns of persons in 15 
 
 Mines, depletion of 56 
 
 Mines, oil wells, and timber lands, income from 124 
 
 Miscellaneous corporations, gross income of 90 
 
 Misrepresentation by omission or declaration 196 
 
 Money equivalent, income received in 32 
 
 Motors, depreciation of 184 
 
 Municipalities, interest on obligations of 39 
 
354 
 
 Munitions Tax creditable (Capital Stock Tax) L. 286 
 
 Mutual insurance companies, income of 91, L. 236 
 
 National guardsmen, salaries of no 
 
 Nationality of husband, wife assumes 66 
 
 Naval service, verification of returns of persons in 15 
 
 Negative account (note) 176 
 
 NET INCOME DEFINED: 
 
 Corporations 89 
 
 Individuals 19, L. 220 
 
 New York State Income Tax Law L. 321 
 
 Nonresident citizen required to make return 15 
 
 NONRESIDENT ALIEN: 
 
 Deductions of L. 224, 225 
 
 Exemption (None) 51 
 
 Foreign income of 46 
 
 Income of L. 219 
 
 Return, where filed 15 
 
 Stock of, held by another 46 
 
 Withholding from income of 60, L. 228 
 
 NONTAXABLE INCOME: 
 
 Corporations L. 233 
 
 Individuals L. 221 
 
 NORMAL TAX: 
 
 Dividends not subject to 51, L. 223 
 
 Examples of computing 6 
 
 Income Tax 2, L. 219 
 
 Limited partnerships, distributed income of, not subject to 31 
 
 War Income Tax 3, L. 249 
 
 NOTES, PROMISSORY: 
 
 Equivalent to cash receipts 36 
 
 War Tax on L. 277 
 
 NOTICE OF ASSESSMENT BY COLLECTOR: 
 
 Corporation 76 
 
 Individual 17 
 
 NOTICE TO COLLECTOR: 
 
 Corporation designating fiscal year 77 
 
 Extension of tune 78 
 
 Obligations of Government, interest on 40 
 
 Obsolescence as element of loss (note) 175 
 
 Office equipment 180 
 
 Officers' salaries 208 
 
 OIL WELLS: 
 
 Depreciation of 56 
 
 Income of 1 24 
 
 Ores, depletion of (see "Mines"). 
 
 Organization expense, not deductible in 
 
 Organizations exempt 84 
 
 Paid: "actually paid" or "paid during the year" 198 
 
 Parcel post packages, War Tax on L. 278 
 
 PARTNERS: 
 
 Creditable with share of excess Profits Tax assessment. . .121 
 
INDEX 355 
 
 PARTNERS Continued 
 
 Credits on individual returns of 70 
 
 Drawing accounts of 148 
 
 Life insurance of 69, 107 
 
 Returns of 68 
 
 Salaries of 169 
 
 Subject to income taxes only 68 
 
 PARTNERSHIPS: 
 
 Dividends received by 69 
 
 Exclusion of interest on Government obligations in returns of . . 70, L. 227 
 
 Expenses of 70 
 
 Fiscal year of 68, L. 227 
 
 Income of 69 
 
 Income Tax, Returns of 68, L. 227 
 
 Limited partnership, taxable as corporation 70 
 
 Not required to make income tax return unless order 68, L. 227 
 
 Foreign, not subject to withholding 61 
 
 Profits, distributed or not 69, L. 227 
 
 Profits, when accrued ^ 69 
 
 PARTNERSHIPS, LIMITED: 
 
 How created 70 
 
 Make returns as corporations 70 
 
 Profits of 31, 71 
 
 PATENTS: 
 
 Depreciation of 185 
 
 Royalties from 202 
 
 Patterns, depreciation of 185 
 
 PAYMENT OF TAXES: 
 
 By instalments 18 
 
 Certificates of indebtedness of the U. S 19 
 
 Uncertified cheques 19 
 
 When due 17, 76 
 
 PENALTIES FOR DELAYED PAYMENT OF TAX: 
 
 Corporations 76, L. 239 
 
 Individuals 17, L. 228 
 
 PENALTIES FOR FAILURE TO FILE RETURN: 
 
 Corporations 78, L. 243 
 
 Individuals 16, L. 243 
 
 PENALTIES, SUNDRY: 
 
 False or fraudulent return 78, L. 240 
 
 Refusal or neglect to make return 79, L. 240 
 
 PENSIONS: 
 
 Paid to retired employees 53, no 
 
 Received from United States 45 
 
 Perfumes and toilet articles, War Tax on L. 269 
 
 Permanent improvements (see "Improvements"). 
 
 Personal exemptions 51 
 
 Philippine Islands, taxes not applicable to 19 
 
 Pianos, War Tax on L. 268 
 
 Piping, steam, depreciation of 184 
 
 PLACE OF BUSINESS, FILING RETURNS AT: 
 
 Domestic corporations 76 
 
 Foreign corporations 76 
 
356 INDEX 
 
 PLACE OF BUSINESS, FILING RETURNS AT Continued 
 
 Individuals 15 
 
 Nonresident aliens 15 
 
 Subsidiary companies 81 
 
 Playing cards, War Tax on L. 278 
 
 Political campaign expenses 57, 113 
 
 Political subdivision, defined 40 
 
 Porto Rico, taxes not applicable to 19 
 
 Postal Rates, War Tax on L. 281 
 
 Power, fuel, light, etc 207 
 
 Power of attorney, agent acting under 13 
 
 Power of attorney, War Tax on L. 277 
 
 Preferred stock, interest on, not deductible 104 
 
 PREMIUMS: 
 
 Bonds purchased 105 
 
 Bonds redeemed 105 
 
 Fidelity bond, paid by employee 53 
 
 Fire insurance ...; 57 
 
 Life insurance, individuals 58 
 
 Life insurance in favor of partnership or corporation. . 69, 107, L. 247 
 
 Prepayments, treatment of, in returns 197 
 
 PRESIDENT OF UNITED STATES: 
 
 Inspection of return subject to order of 79 
 
 Salary of, exempt 51 
 
 PREWAR PERIOD (EXCESS PROFITS TAX): 
 
 Business not in existence during 146 
 
 Definition of 120 
 
 Returns for, corporations 121 
 
 Returns for, individuals 123 
 
 Returns for, limited partnerships 122 
 
 Returns for, partnerships 123 
 
 Returns for, when required 121 
 
 Returns for, when not required 172 
 
 Subnormal profit in 146 
 
 Price: Fair market price or value 35 
 
 Professional fees, when returnable 33 
 
 Profit and Loss account 215 
 
 PROFIT: 
 
 Accumulation of profit of corporation 73 
 
 Definition of 36 
 
 In trade 55 
 
 Sales of capital assets 33, 34, 35 
 
 Profit returnable by legatee 37 
 
 Promissory note, income 36 
 
 Property acquired by gift 37 
 
 PROPERTY ACQUIRED PRIOR TO MARCH i, 1913: 
 
 Computing profit or loss on 33, 34, 35, L. 221, 231 
 
 Property: Restoring property 56 
 
 PRORATING: 
 
 Cost of improvements by tenant 180 
 
 Exemption, husband and wife 12 
 
 Loss on sale of bonds 104 
 
 Profit or loss on sale of capital assets 34, 210 
 
INDEX 357 
 
 Protest to assessment and collection 59 
 
 Proxies, War Tax on L. 277 
 
 Public records, returns become 79, L. 240 
 
 Public utilities, War Tax on '. L. 265 
 
 Public utility, payments to Government by in 
 
 PURCHASES: 
 
 Account of 200 
 
 Discounts received on 199 
 
 Merchandise 215 
 
 Freight on 200 
 
 Railroad company, damages received from 21 
 
 Ranches (see "Farms"). 
 RATES OF INCOME TAXES: 
 
 Corporations 72, L. 230 
 
 Individuals 2, 3, 4, 5 
 
 Table of, on various amounts 10 
 
 RATES OF EXCESS PROFITS TAX: 
 
 Capital 118 
 
 Nominal capital 119 
 
 Rates, water 53 
 
 Rates of depreciation 178 
 
 Real estate, sales of 36, 94, 96 
 
 REAL ESTATE AGENTS: 
 
 Commissions paid to 57 
 
 REAL ESTATE COMPANIES: 
 
 Accounts of 94 
 
 Development corporations 94 
 
 Property collateral of 104 
 
 Rebates 199 
 
 Receipts for taxes paid 17, L. 243 
 
 Receivers (see "Fiduciaries"). 
 
 Record owner of stock not actual owner 46 
 
 Redemption of bonds 105 
 
 Refund, claims for 17 
 
 Refusal to file (see "Penalties"). 
 
 Regulations, Corporation Capital Stock Tax Law L. 286 
 
 Renewals and improvements 102 
 
 Renewals of office equipment 180 
 
 RENT: 
 
 Account of 39, 201 
 
 Crop shares received by farmer 48 
 
 Interest paid in lieu of 202 
 
 Real estate agent collecting 57 
 
 When returnable 39 
 
 Rental value as income 32 
 
 Rents: Paid and received 201 
 
 REORGANIZATION : 
 
 Exchange of stock and bonds in 93 
 
 Stock received in 29 
 
 REPAIRS: 
 
 Buildings 179 
 
 Incidental 183 
 
358 INDEX 
 
 REPAIRS Continued 
 
 When deductible 183 
 
 Replaced buildings 56 
 
 Replacements, test of deductibility 183 
 
 RESERVES: 
 
 Bad debts 102 
 
 Contingent 103 
 
 Depreciation 176 
 
 Discounts on sales 103 
 
 Diverting reserves 177 
 
 Dividends paid out of 24 
 
 Insurance 57 
 
 Insurance companies 103 
 
 Miscellaneous, as invested capital 140, 157, 164 
 
 Secret 103 
 
 Separate accounts of 177 
 
 Sinking fund 103 
 
 RESIDENCE: 
 
 Citizen residing abroad 15 
 
 Definition of 65, 66 
 
 Depreciation of dwelling 180 
 
 Resident alien 65 
 
 Temporary, in the U. S 65 
 
 Retirement of bonds, loss in 105 
 
 Restoring property, not deductible 56 
 
 RETURN: 
 
 By agent 13, L. 226 
 
 Defined 1 1 
 
 Publicity of 79 
 
 Receivers and trustees must make L. 238 
 
 Reconciliation of, with books of account 216 
 
 Taxes, withheld 63 
 
 Tentative and amended 80 
 
 Verification of, by inspectors of Internal Revenue 197 
 
 Where to file 15 
 
 RETURNS OF CORPORATIONS: 
 
 Amended 80 
 
 Books of account 196 
 
 By receivers 81 
 
 Designating fiscal year 77 
 
 Dissolved corporation 82 
 
 Due date of 76 
 
 Extension of time to file 78 
 
 Failure to file, penalty 78 
 
 False or fraudulent 78 
 
 Form of return 75 
 
 Holding companies 80 
 
 How executed 76 
 
 Incompletely organized corporation 80 
 
 In liquidation 82 
 
 Insurance companies 75 
 
 Interstate commerce 83 
 
 Publicity of 79 
 
INDEX 359 
 
 RETURNS OF CORPORATIONS Continued 
 
 Refusal to file 79 
 
 Subsidiary companies 81 
 
 Suggestions as to preparation of 196 
 
 Tentative 80 
 
 When due 76 
 
 When Internal Revenue officer will prepare return 79 
 
 When tax payable 76, 78 
 
 Where filed 76 
 
 RETURNS OF INDIVIDUALS: 
 
 By agent 13 
 
 By husband and wife 12 
 
 Books of account 196 
 
 Citizen residing abroad 15 
 
 Delayed 16 
 
 Extension of time to file 16 
 
 Fiduciaries 12 
 
 Form of return n 
 
 Failure to file, penalty 16 
 
 False or fraudulent 17 
 
 Liability of agent making return 13 
 
 Refusal to file 17 
 
 Verification of 15 
 
 When due 16 
 
 Where filed 15 
 
 When Internal Revenue officer will prepare 17 
 
 Who is required to make return 10 
 
 Returns, conditions of inspection of . L. 240 
 
 Returns, monthly, under Excise Tax L. 270 
 
 Returns of exempt organizations 86 
 
 Returns of fiduciaries 12 
 
 Returns of nonresident aliens 15 
 
 RETURNS OF GENERAL PARTNERSHIPS: 
 
 Accrual basis 68 
 
 Credits on 70 
 
 When required 68 
 
 RETURNS OF LIMITED PARTNERSHIPS: 
 
 Same as corporations 70 
 
 Returns of private banks 14 
 
 Revenue Law, War L. 249 
 
 "Rights," sale of 30 
 
 Royalties received and paid 202 
 
 SALARIES: 
 
 Based on stockholdings 208 
 
 Bonuses 108 
 
 Commissions 207 
 
 Exempt 51, L. 222 
 
 Information at source 63, 64 
 
 National Guardsmen no 
 
 Ofikers 208 
 
 Paid by stock 32 
 
 Received from exempt corporation 32 
 
360 INDEX 
 
 SALARIES Continued 
 
 When returnable 31 
 
 Sale, agreement of: War Tax on L. 276 
 
 SALES: 
 
 Account of (merchandise) 198 
 
 Capital stock sold at premium 94 
 
 Freight on 200, 209 
 
 Instalment business 94, 98 
 
 Profit on sales of capital assets 33, 34, 35 
 
 Real estate development corporation 94 
 
 Reserve for discounts on sales of commodities 103 
 
 Sales of capital assets 33, 91 
 
 Sales of property acquired prior to March i, 1913 34 
 
 Salesmen, commissions of 33 
 
 Salesmen, expenses of no 
 
 Salvage value of goods returned 98 
 
 Scrip dividends 3 
 
 Second assessments 79 
 
 Secured debts, interest on 104 
 
 SECURITIES: 
 
 Dividends paid by 23, 91 
 
 Fair market value of 35 
 
 Inventory valuations by dealers 167 
 
 Profit or loss on, acquired prior to March i, 1913 35 
 
 Service connections, water company in 
 
 Services, professional, when returnable 33 
 
 Shafting, depreciation of 184 
 
 Ships, depreciation of 192 
 
 Shipwrecks, losses by L. 222 
 
 SICKNESS: 
 
 Extension of time to file return on account of 78 
 
 Corporations 7$ 
 
 Individuals 16 
 
 Return by agent 13 
 
 Single or married status 5 1 
 
 Sinking fund, not deductible 103 
 
 Sinking fund, interest on, is income 9 2 
 
 Source, information at 63 
 
 Source, return of tax withheld at 63 
 
 Specific exemptions (see "Exemptions, specific"). 
 
 Spirits, War Tax on distilled L. 258 
 
 Sporting goods, War Tax on L. 269 
 
 Stable equipment, depreciation of 186 
 
 Stamp Taxes, War L. 272 
 
 STATE: 
 
 Compensation of employees of . , 5 1 
 
 Contractor doing work for 40 
 
 Definition of L. 240 
 
 Interest on obligations of 4 
 
 STATUTE OF LIMITATIONS: 
 
 Claims for refund under old law 18 
 
 Recovery of tax paid 59 
 
 Return may be made by Internal Revenue officer within three years 1 7 
 
INDEX 361 
 
 Steam piping, depreciation of 184 
 
 Steam turbines, depreciation of 184 
 
 Stock assessment, payment of, not deductible 57 
 
 Stock assessment, not income of corporation 58 
 
 STOCK, CAPITAL: 
 
 Called for by, return 212 
 
 Sales of, not income 94 
 
 Sales of rights to subscribe to 30 
 
 STOCK: 
 
 Depreciation of 187 
 
 Dividends on 21 
 
 Exchange of 27 
 
 Interest on preferred 104 
 
 Purchases and sales of same issue 26 
 
 Record owner of, not actual owner 46 
 
 Salary paid by 32 
 
 Stock received in reorganization 29 
 
 STOCK ON HAND: 
 
 Account of 201 
 
 Depreciation of 188 
 
 Value of 167 
 
 Stock rights, sales of 30 
 
 Stockholders' responsibility for undivided surplus 20 
 
 Stockholder, return of capital to 24, 31 
 
 Stocks and bonds, fluctuation in value of 56 
 
 Subdivision, political, defined 40 
 
 SUBSIDIARY COMPANIES: 
 
 Income of 81 
 
 Where to file returns of 81 
 
 Suggestions, bookkeeping 196 
 
 SUMMONS: 
 
 Collector has authority to summons taxpayer or other person in 
 
 connection with his examinations L. 242 
 
 Sunday or legal holiday, last day falling on 76 
 
 Sundry expense accounts 209 
 
 Supertax (see "Additional tax"). 
 SURPLUS: 
 
 Account of 215 
 
 Beyond reasonable needs of corporation 20, 74 
 
 Dividends charged to 215 
 
 Undistributed surplus tax 73 
 
 Undivided 20, 73, L. 221 
 
 Surtax (see "Additional tax"). 
 
 Suspense items not deductible 103 
 
 Switchboards, depreciation of 184 
 
 "System of accounts for retail merchants" 189 
 
 Table of Income and War Income Taxes on various amounts 10 
 
 Tax paid under protest 59 
 
 TAX-BILLS: 
 
 Corporations 76 
 
 Individuals 17 
 
 Tax-free covenant bonds, interest subject to withholding 62, L. 229 
 
362 INDEX 
 
 TAX ON CORPORATION: 
 
 Assessment, notice of 76 
 
 Calendar year 76, L. 230 
 
 Delayed payment of tax, penalty, etc 76 
 
 Fiscal year 77, L. 230 
 
 Local benefits no 
 
 Rates 72, L. 230 
 
 Receipt for taxes paid 17 
 
 Undistributed surplus tax 73 
 
 When due 76 
 
 TAX ON INDIVIDUALS: 
 
 Assessment of tax 17 
 
 Additional tax 2, 4, 5 
 
 Calendar year (note) n 
 
 Claims for abatement and refund 17 
 
 Delayed payment of, penalty 17,- L. 228 
 
 Examples of computing 6, 7, 8, 9 
 
 Income Tax, not deductible 53 
 
 Normal tax 2, 3 
 
 Rates of . . 2, 3, 4, 5 
 
 Tax exempt income L. 221, L. 233 
 
 Who is subject to income tax i 
 
 Who is subject to war income tax 3 
 
 Who is subject to excess profits tax 117 
 
 When due 17, L. 228 
 
 When 50 per cent penalty is added 16 
 
 TAXES: 
 
 Accounts of 212 
 
 Deductible S3 
 
 Examples of computing 6, 7, 8, 9 
 
 Inheritance tax 58 
 
 Local benefits 53 
 
 On bank stock 58 
 
 Taxes paid by tenant 58 
 
 See" Normal Taxes." 
 
 See "Additional Taxes." 
 
 See "Undistributed Surplus Tax." 
 
 See "Excess Profits Tax." 
 
 See "Corporation Capital Stock Tax." 
 
 Withheld tax, creditable 52, L. 224 
 
 TENANT: 
 
 Buildings erected by 180 
 
 Improvements made by 180 
 
 Taxes paid by 58 
 
 Tentative returns 80 
 
 Theatrical costumes, depreciation of 188 
 
 Three year limitation, collector may make return within 17 
 
 Timber lands, depletion of 182 
 
 Tobacco, War Tax on L. 264 
 
 Tools, depreciation of 184 
 
 Toys, War Tax on L. 269 
 
 TRADE: 
 
 "In trade," defined 55 
 
INDEX 363 
 
 TRADE Continued 
 
 Income, in trade 54 
 
 Losses, in trade 54 
 
 Trade-marks, depreciation of 188 
 
 Transportation charges 200 
 
 Transportation, War Tax on L. 265 
 
 Traveling abroad, extension of time 16 
 
 Treasury Regulations, Corporation Capital Stock Law Tax L. 286 
 
 Treasury Stock 212 
 
 Trucks, auto, depreciation of 186 
 
 TRUSTEES: 
 
 Compensation of 33 
 
 Returns by 12, L. 227 
 
 Trust estate undistributed for period of years 38 
 
 Trusts (see "Fiduciaries"). 
 
 Turbines, depreciation of 184 
 
 UNDISTRIBUTED INCOME: 
 
 Of corporations 73, 74 
 
 Of estates 37, 38 
 
 Of partnerships 69 
 
 Subject to additional tax 20, L. 221 
 
 Undistributed surplus tax 73, L. 231 
 
 United States, denned L. 240 
 
 Value, fair market 35 
 
 VERIFICATION OF RETURNS OF: 
 
 Corporations 76 
 
 Individuals 15 
 
 Military and Naval Service 15 
 
 Vested interest, agent required to report distributed and undistributed 
 
 income 37 
 
 Voluntary assessment of stockholders 57, 92 
 
 Wages (see "Salaries"). 
 
 War Estate Tax L. 278 
 
 War Excess Profits Tax (see "Excess Profits Tax"). 
 
 War Income Taxes, when effective i 
 
 War Revenue Law L. 249 
 
 Ward, cestui que trust, exemption of 51 
 
 Water company, service connections of not exempt in 
 
 Water rates on rented property 53 
 
 Who is subject to Income Tax i 
 
 Who is subject to War Income Tax 3 
 
 Who is subject to War Excess Profits Tax 117 
 
 Wife assumes nationality of husband 66 
 
 WITHHOLDING TAX: 
 
 Amended law in re 60 
 
 Dividends to nonresident aliens not subject to L. 229 
 
 Income subject to 60 
 
 Indemnity of withholding party 63 
 
 Information at source, substituted for 63 
 
 Nonresident aliens subject to 60, L. 228 
 
364 INDEX 
 
 WITHHOLDING TAX -^Continued 
 
 Nonresident foreign corporations subject to 60, L. 238 
 
 Normal tax only subject to withholding L. 230 
 
 Release of taxes withheld 63, L. 247 
 
 Returns of taxes withheld 63 
 
 Stock dividend to nonresident foreign corporation 66 
 
 Tax exempt clause in bonds 62, L. 229 
 
 Tax withheld creditable 52, L. 224 
 
 Wires and cables, depreciation of 184 
 
 Worthless accounts receivable 213 
 
 Worthless stocks and bonds 187 
 
 Yachts and pleasure boats, War Tax on L. 270 
 
 Printed in the United States of America 
 
following pages contain advertisements of a few 
 of the Macmillan books on kindred subjects. 
 
The Value of Money 
 
 BY B. M. ANDERSON, JR., PH.D. 
 
 Assistant Professor of Economics, Harvard University 
 Author of " Social Value " 
 
 Cloth, izmoj xxviii + 610 pp., Index, $2.25 
 
 Convinced of the fact that the value of money cannot be studied suc- 
 cessfully as an isolated problem, the author of this text considers virtually 
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 he reaches concerning the central problem of this book. The following 
 topics are discussed: the general theory of value; the role of money in 
 economic theory and the functions of money in economic life; the value 
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 doctrine of cost of production, and in relation to the capitalization theory; 
 the theory of the values of stocks and bonds, of " good will," established 
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 a challenge to the existing theories on the subject 
 
 THE MACMILLAN COMPANY 
 
 Publishers 64-66 Fifth Avenue New Tork 
 
The Distribution of Wealth 
 
 BY JOHN R. COMMONS 
 
 258 pp. J2, $1.25 
 
 FROM THE PREFACE 
 
 In the present essay an adequate acknowledgment of indebt- 
 edness to others would require a history and criticism of theories 
 of distribution, pointing out what seems to me to be of perma- 
 nent value in the work of the leading economists, and showing 
 reasons for disagreeing with their weaker and more transient 
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 present I am interested in the practical outcome of these theories. 
 
 Neither should the reader expect to find in this essay more 
 than an outline. I have attempted to cut a straight line through 
 a tangled jungle, and to give merely a glimpse into the maze of 
 conflicting opinions. Each chapter herein might well be ex- 
 panded into a volume; and this would necessarily be done were 
 it not that I assume on the part of my readers a fair acquaintance 
 with the problems and the extant discussions of the subject. 
 
 TABLE or CONTENTS 
 
 I. Value, Price and Cost. II. The Factors in Distribution. 
 III. Diminishing Returns and Rent. IV. Diminishing Returns 
 and Distribution. V. Statistical Data. VI. Conclusion. 
 
 THE MACMILLAN COMPANY 
 
 Publishers 64-66 Fifth Avenue New York 
 
The American World Policies 
 
 BY WALTER E. WEYL 
 
 Author of "The New Democracy" 
 
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 The United States is deeply concerned with the peace which 
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 An Inquiry Into the Nature of Peace 
 and the Terms of Its Perpetuation 
 
 BY THORSTEIN VEBLEN 
 
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 Germany and the Industrial Revolution," "The 
 
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 footing of unreserved democracy." 
 
 Readers of Professor Veblen's other books will welcome thii 
 new volume which is written in his usual suggestive and con 
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Poverty and Social Progress 
 
 BY MAURICE PARMELEE, PH.D. 
 
 Cloth, crown 8vo, 477 pp., $1.90 
 
 "Suitable for college classes as well as for the general reader, 
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 UNIVERSITY OF CALIFORNIA LIBRARY