THE LIBRARY
OF
THE UNIVERSITY
OF CALIFORNIA
LOS ANGELES
SCHOOL OF LAW
AW I
FEDERAL INCOME TAX
INCLUDING TAX ON UNDISTRIBUTED NET
INCOME, CAPITAL STOCK TAX, AND
WAR EXCESS PROFITS TAX
i- "
Ico.
^EY
GEORGE E. HOLMES
of the New York Bar
CHICAGO
CALLAGHAN AND COMPANY
1917
Copyright 1917
By
GEORGE E. HOLMES
\ 9 II
PREFACE
It is fortunate that we passed an Income Tax law in
1913. It would be better for us now if we had done
so ten years earlier. Without an Income Tax we could
not raise the tremendous sums of revenue now required ;
and with a new law, the Internal Revenue employees
would be like an army of raw recruits. They have had
a period of training under The 1913 and 1916 Income
Tax Laws which is now of inestimable value.
Our system of Income Tax Laws is still defective.
Years of slow development are needed to make it work
smoothly and effectively. This can take place only by
the discovery and application of correct principles to the
multitude of single cases which will arise for settlement
either by the Treasury Department or by the Courts.
This book attempts to show what the law is in its present
state of development and to present the matter in a form
readily accessible to the reader. It is not a discussion
of the principles of taxation but a practical handbook
for present use, and it is the author's hope that it may
be found of some value for that purpose. Criticisms
of its shortcomings and suggestions for its improvement
will be thankfully received.
Much criticism has been directed against the Treasury
Department for its narrow construction of many provi-
sions of the law. No doubt its rulings work hardship
on occasion, but no other course can be adopted. The
iii
734021
iy PREFACE
Treasury Department is not a judicial body the pur-
pose of its existence is to collect revenue. The first
rulings and the general rulings must construe the law
narrowly, leaving the taxpayer to protest if they operate
unfairly in his case. If a broad construction were in-
dulged in generally, no taxpayer would ever call atten-
tion to the cases where it resulted in allowing revenue
to escape. The door must first be tightly closed and
then opened in particular instances where necessary and
proper. It is the right and the duty of every taxpayer
to protest when he feels the administration of the law
operates unfairly as to him. The law makes special
provision for him to do so.
Unfortunately there are* citizens who do not scruple
to evade taxes by every means at their disposal. The
rulings must be made with that fact in view, that is,
they must be such as will make it difficult for the "tax-
dodger" to hide behind any statement of the officers
charged with the administration of the law. The con-
scientious taxpayer is sometimes penalized because of
this, but unless he sleeps on his rights, he has his remedy
at hand.
The personnel of the Treasury Department is actuated
by a high sense of public duty. The author has had the
pleasure of association with many officials, collectors and
inspectors in the past and has found them intelligent,
fair-minded and just in their dealings with the taxpayer.
Differences of opinion as to taxable income or allowable
deductions must necessarily arise, and when they do, the
officials of the Treasury Department stand always ready
to give the taxpayer full opportunity to express his view
and to raise his argument. If they do not agree with
him, it is because they are bound by what they under-
stand the law to mean, even though they recognize the
PREFACE V
.justice of his contentions. The ultimate remedy in
many cases is to improve the statute, a matter to which
the average taxpayer pays no attention.
It is the hope of the author that this book may point
out some of the needs for amendment of the statute as
well as to give the taxpayer a clearer idea of the system
by which the taxes are assessed, collected, abated and
refunded. The author's thanks are extended to the many
friends who have given him helpful suggestions and
criticisms in preparing the work, and particularly to
Mr. A. E. Young of the Pittsburgh Bar and to Messrs.
Ross W. Lynn and T. A. Clements of the New York Bar
for their careful reading of the manuscript.
GEORGE E. HOLMES.
New York, December 15, 1917.
TABLE OF CONTENTS
CHAPTER PACK
1 Introduction 1
2 The Individual Tax Rates 15
3 Individuals to Whom the Law is Applicable. ... 20
4 Citizens and Residents of the United States. ... 29
5 Non-Resident Aliens 41
6 Resident Agents for Non-Resident Aliens, For-
eign Corporations and Foreign Partnerships. . 59
7 Nominal Stockholders 66
8 Fiduciaries 73
9 Foreign Fiduciaries 98
10 Partnerships 103
11 Foreign Partnerships 117
12 Corporations 125
13 Special Provisions Applying to Insurance Com-
panies 166
1 4 Foreign Corporations 176
15 Exempt Corporations -. 193
16 Income In General 205
17 Income from Personal Services 229
18 Income from Business, Trade or Commerce 236
19 Income from Farming 242
20 Income from Sales or Dealings in Property 245
21 Income from Rent 252
22 Income from Interest 255
23 Income from Dividends. . ..262
Vlll TABLE OF CONTENTS
CHAPTER , PAGE
24 Income from Royalties 278
25 Income from Miscellaneous Sources 280
26 Receipts "Which Are in Part Return of Capital . . 286
27 Deductions In General " 296
28 Deduction of Business Expenses 304
29 Deduction of Interest 320
30 Deduction of Taxes 324
31 Deduction of Losses 331
32 Deduction of Allowance for Depreciation 346
33 Deduction of Allowance for Depletion of Oil and
Gas Deposits 360
34 Deduction of Allowance for Depletion of Mines . . 373
35 Return of Annual Net Income 382
36 Assessment and Payment of the Tax 398
37 Penalties and Compromises 421
38 Examination of Taxpayers Books. 431
39 Abatement, Refund and Recovery of Taxes 435
40 Information at the Source 450
41 Collection of the Tax at the Source. 457
42 Tax Exempt 'Covenants 482
43 Constitutionality of the Law 488
44 Tax on Undistributed Net Income of Corpora-
tions 495
45 The War Excess Profits Tax ... . 503
46 The Capital Stock Tax 534
FEDERAL INCOME TAX
CHAPTER I
INTRODUCTION l
At present the Federal Income Tax is imposed under
two statutes prescribing separate and different rates,
one additional to the other. The Act of Sept. 8, 1916
(referred to in this book as the 1916 Law) imposes a
tax at comparatively low rates and with comparatively,
high exemptions. This Act was amended in many
respects by the Act of October 3, 1917, but remains as
a separate law imposing a general income tax in con-
tradistinction to the "war income tax" which was also
included in the Act of October 3, 1917 (and which is
referred to in this book as the 1917 Law.) The 1917 Law
contains no administrative provisions, but it provides
that the tax it imposes shall be computed, levied,
assessed, collected and paid upon the same basis and in
the same manner as the similar taxes imposed by the
1916 Law. Generally speaking both laws are admin is
1 The purpose of this chapter is to describe briefly the salient
provisions and requirements of the law and the system of admin-
istration, so that the reader may obtain a general understanding
of the subject before the various provisions are taken up and
discussed in detail.
1
F. T. Tax. 1
2 FEDERAL INCOME TAX
tered as one, and only one return of annual net income
is required from each taxpayer, on the basis of which
both taxes are assessed. 2
Preceding Federal Laws. The 1916 Law was pre-
ceded by the Act of October 3, 1913, (referred to in
this book as the 1913 Law.) This law remained in force
without change or amendment up to September 9, 1916,
when the 1916 Law went into effect. The 1916 Law
contained several important amendments and effected an
increase in rates of the normal and supertaxes, but the
general provisions of both laws remained very much the
same, and rulings and decisions under the 1913 Law are
freely referred to in this book as they have direct appli-
cation to the provisions of the laws now in force. "While
the 1913 Law was the first general income tax law en-
. acted after the adoption of the Constitutional Amend-
ment permitting the imposition of an income tax without
apportionment and without regard to any census or
enumeration, there was in effect in this country from
August 5, 1909, to January 1, 1913, a corporation excise
tax act (referred to in this book as the 1909 Law) which
imposed a special excise tax on corporations with respect
to the carrying on or doing business by such corporations.
Though the 1909 Law was not intended to be and was not
in any proper sense an income tax law 3 the tax was
2 The purpose of Congress in enacting a separate ' ' war income
tax" law instead of increasing the rates of the 1916 Law, was
no doubt to facilitate a return to the lower rates when the present
extraordinary demand for revenue has ceased. Thus, the present
high rates and low exemptions are superimposed temporarily upon
our general low rates and high exemptions, a return to which is
made all the more easy by leaving the 1916 Law intact.
3 Justice Pitney in Stratton 'a Independence Limited v. How-
bert, 231 TL 8. 399, 34 Sup. Ct. 136, 58 L. Ed. 285.
INTRODUCTION 3
measured by the net income of corporations and the
language of the subsequent income tax laws is in many
instances either verbatim or very similar. To that extent
decisions and rulings under the 1909 Law throw light
on the construction of the present laws and for that
purpose are referred to in this book.
Administration of the Laws. The duty of administer-
ing the income tax laws and collecting the taxes there-
under is imposed on the Bureau of Internal Revenue,
which is a part of the Federal Treasury Department.
The bureau is in the charge of the Commissioner of
Internal Revenue, who, under the direction of the Secre-
tary of the Treasury, has general superintendence of the
assessment and collection of all duties and taxes imposed
by any law providing internal revenue. 4 The states and
territories are divided into some sixty-four collection
districts, 6 each under the charge of a collector of internal
revenue, with one or more deputy collectors. Returns
of net income are filed with the local collector and the
tax is paid to him, although the assessments are made
by the Commissioner of Internal Revenue at Washington.
Collectors have supervisory power over, and authority
to investigate, all accounts, lists or returns required to
* U. S. Rev. Stats., 321.
5 As a rule the boundaries of collection districts coincide with
the boundaries of the states, but sometimes one collection district
embraces two or three states, or one state is divided into two or
more collection districts. Districts within a state are designated
by number, as the first and sixth districts of California, being
the two districts of that state. The lack of sequence in number-
ing is due to the consolidation of districts from time to time since
the period immediately following the Civil War, when the country
was divided into the maximum number of districts.
4 FEDERAL INCOME TAX
be made by persons liable to tax, 6 may send agents to ex-
amine the books of such taxpayers, and on refusal to allow
an examination, may summon such .person or corporation
to produce the books and to appear before them to give
testimony or answer interrogatories under oath respect-
ing the matter." Collectors may make returns for tax-
payers from their own knowledge and from such informa-
tion as they can obtain through testimony or otherwise
in cases where the taxpayer fails to file a return or
makes a false or fraudulent return. 8 Appeals may be
taken from decisions of Collectors to the Commissioner
Internal Revenue. 9
REVENUE AGENTS AND INSPECTORS. The duties of
officers of this class are to ascertain and report the
names of persons who in their opinion are liable to the
income tax and who have failed to make return as
required by law ; to inquire into income tax returns where
there is any suspicion that the return made is erroneous ;
to examine the books and accounts of persons who have
made returns, for the purpose of ascertaining and report-
ing as to whether the law has been complied with, when
so ordered by the agent in charge of the division to
which they are assigned. Reports of these officers are
made to the agent in charge of the division to which
they are assigned who in turn reports to the Commis-
sioner of Internal Revenue and the collector of the
proper district. In the discharge of their official duties
officers of this class are expected to exercise sound dis-
cretion, treat all persons with due courtesy, and, while
6U. S. v. Hodson, 14 Int. Rev. Rec. 100.
7 U. S. Rev. Stats., 3173.
8 U. S. Rev. Stats., 3176.
9 Sec Chap. .>9, infra.
acting firmly and courageously, to avoid all contention
or controversy that would give just ground for com-
plaint. 10
Rulings and Regulations. For the guidance of col-
lectors and taxpayers the Commissioner of Internal
Revenue issues from time to time rulings and regula-
tions on questions which arise in the course of admin
istering the law. They are published under the caption
of "Treasury Decisions" and are numbered serially for
purpose of reference. 11 At intervals large compilations
of rulings and regulations are published by the Bun-au
it' Internal Revenue and these are designated as "Regu-
lations" and given a serial number. 12 In addition to the
rulings and regulations the Department issues so-called
mimeograph letters to collectors, more or less confidential
in their diameter and not intended for general' publica-
tion. Frequently such letters throw light on the admin-
istration of the law and such mimeograph letters as have
inade public are referred to in this book.
RETROACTIVE EFFECT OF RILINCS. Generally speaking
any ruling or regulation made by the Treasury Depart-
ment supersedes all prior rulings and regulations and is
retroactive to the time the law was enacted, since a ruling
or regulation is merely an interpretation of the mean-
ing of the law. and in theory the meaning has been the
10 T. D. 1932.
11 Treasury decisions contain rulings on all subjects over which
the Bureau of Internal Revenue has jurisdiction. Those relating
tn tlic income tax are therefore not numbered in sequence. Ref-
rinice to treasury decisions is usually made !>y employing the
aMireviation, thus, "T. D. 2476."
12 The last general compilation of rulings on the income tax i*
known as "Regulations No. 3.1" issued January ">. 1014.
6 FEDERAL INCOME TAX
same from the beginning. The Treasury Department
recognizes, however, that in some instances it would be
unjust or impracticable to reopen returns, adjustments
or assessments which have been made in accordance with
previous rulings and, where such rulings are superseded,
an express limitation is made in the superseding ruling
or regulation as to the retroactive effect thereof. 13
Construction of the Law. A statute may be con-
strued contrary to its literal meaning when a literal
construction would result in an absurdity or inconsis-
tency, and the words are susceptible of another construc-
tion which carries out the manifest intention, but it is
a well settled rule of interpretation that a legislative act
is to be interpreted according to the intention of the
legislature apparent upon its face, 14 and consequently
the statements made in debate at the time of the passage
of the law have no particular value in construing the act.
Revenue laws are not, like penal laws, to be construed
strictly in favor of the defendants. They are rather to
be regarded as remedial in their character and so con-
strued as to carry out the intentiofi of the legislature in
passing them. 15 As a general rule, the construction by
the Treasury Department is such as is most favorable
to the enforcement of the laws and no liberal interpreta-
tion in favor of the individual is indulged in. 16 The
courts construe such statutes with reasonable fairness to
13 See last paragraph of mimeograph letter to collectors dated
August 14, 1914; ITS 1917, f264; also the last paragraph of
T. D. 2313 and T. D. 2317.
14 Wilkinson v. Deland, 2 Pet. 627; U. S. v. Union Pacific E. E.
Co., 91 U. S. 72.
15 U. S. v. Stowell, 133 U. S. 1.
1818 Op. Atty. Gen. 246.
INTRODUCTION 7
the citizen, 17 an unjust or absurd construction is
avoided 18 and laws of doubtful or double meaning are
not too harshly construed. Courts are not at liberty, by
construction or legal fiction to include subjects of taxa-
tion not within the terms of the law, and duties are
never imposed on citizens upon vague or doubtful inter-
pretation. 18 Courts do not extend the provisions of
taxing statutes, by implication, beyond the clear import
of the language used, or enlarge their operations to em-
brace matters not specifically pointed out. In case of
doubt the statute is construed most strongly against the
Government, and in favor of the citizen. 198 Where the
language is dubious and open to different interpreta-
tions the construction put upon it by the Treasury De-
partment has a great, and generally a controlling, force
with the court, but in order to be binding such construc-
tion of- the Department must be long continued and
unbroken, and the rule has no application where the
statute is ambiguous, or where it will not bear the inter-
pretation put upon it by the administrative officers. 20
Porto Rico and the Philippines. In Porto Rico and
the Philippine Islands the law is administered and the
17 U. S. v. Distilled Spirits, 10 Blatch. 428.
Win re. Chapman, 166 U. 8. 661.
l&Hartranft v. Weigmann, 121 U. S. 609, Mutual Benefit Insur-
ance Company v. Herold, 198 Fed. 199.
19 United States v. Wigglesworth, 2 Story 369; American Net
and Twine Co. v. Worthington, 141 U. 8. 468; Benziger v. United
States, 192 U. S. 38; Gould v. Gould, No. 41, Oct. Term, 1917,
U. 8. Supreme Court not yet officially reported.
20 St. Paul, etc., Railway Co. v. Phelps, 137 U. S. 528; Mcrritt
v. Cameron, 137 U. S. 542; U. 8. v. Hill, 120 U. S. 169; Swift
Company v. U. S., 105 U. S. 691; U. S. v. Graham, 110 U. 8.
219; U. 8. v. Tanner, 147 U. 8. 661; U. 8. v. Alger, 152 U. &
384.
FEDERAL INCOME TAX
tax is collected by the appropriate internal revenue
officers of those governments, and the tax so collected
accrues intact to the general governments thereof respec-
tively. 21 This does not mean, however, that a separate
tax is imposed on income arising in those jurisdictions.
If a taxpayer is required under the law to make his
return in a collection district located in any state or
territory, he pays his tax there on income from all
sources, including Porto Rico and the Philippines, and
pays no tax in any other district or jurisdiction. 22 The
1917 Law does not extend to Porto Rico and the Philip-
pines, and the legislatures thereof are given power, under
the 1917 Law, as amended, to alter, amend or repeal
the income tax laws within their respective jurisdic-
tions. 23
Virgin Islands. The income tax laws have not
expressly been made applicable to the islands recently
acquired from Denmark. The words "United States"
are defined in the 1916 Law to include any Territory,
the District of Columbia, Porto Rico, and the Philippine
Islands. 24 Hence, the status of residents of our new
possessions is uncertain under the present statutes, as
is also the status of residents in other possessions not
enumerated in the above definition. 26
21 Act of September 8, 1916, 23.
22 Letter from Treasury Department dated April 4, 1917.
23 Act of October 3, 1917, Title I, 5. Since this power exists
it is no longer safe to assume that the laws in those possessions
are identical with the federal law.
24 Id., 15.
26 It seems the inhabitants of those possessions are ' ' non-resi-
dent aliens" within the meaning of the term as used in the 1916
Law. See Sec. 1 (a) and See. 15.
INTRODUCTION 9
Reporting Net Income. Taxpayers are required to
file annually a report (referred to in the law and the
regulations as a return of net income) showing the
amount of taxable income received, the deductions and
exemptions claimed, and the net income upon which the
tax is to be imposed. This return is filed in the collec-
tion district in which the taxpayer resides or has his
principal place of business. Non-residents having no
place of business in this country file their returns with
the collector of internal revenue at Baltimore, Mary-
land. 88 The tax is paid in the district in which the
return is filed. The return of annual net income is
tiled by individuals on or before March 1 in each year.
In it is reported the income received during the preced-
ing calendar year. Corporations also file an annual re-
turn at the same time, and for the same period, except
those corporations which have elected to report for their
fiscal yeai-s instead of the calendar year, in which case
the return is filed within sixty days after the close of the
fiscal year. 87 Partnerships, as such, file no annual re-
turns. 28
Individuals. Xo person whose net income is less
than $1 ,000 in any calendar year is required to file a
return for that year. Unmarried persons receiving
$1,000 or more net income during the calendar year, and
married persons receiving $2,000 or more net income
during the same period, are required to file the annual
26 This district is tho one in \\hieli Washington, the national
<:i|>it:il, is located.
27Soc Chapter TJ.
28 See Chapter 10.
10 FEDERAL INCOME TAX
return, although after deducting the personal exemptions
to which they are entitled no tax may be due. 29
PERSONAL EXEMPTION. The personal exemption is an
arbitrary amount of net income on which residents and
citizens are not taxed. It may be said to be an amount
allowed for personal or family expenses, the actual
amount of such expenses not being deductible from gross
income in the annual return. Non-resident aliens are not
entitled to claim any personal exemption, but are taxed
on their entire net income from sources within this
country. Corporations, also, are not allowed any exemp-
tion, but are taxed upon their entire net income what-
ever the amount may be. The amount of personal exemp-
tion allowed depends upon the status of the individual.
Under the 1916 Law single persons are entitled to an
exemption of $3,000, married persons living together,
and heads of families whether married or not, are entitled
to an aggregate exemption of $4,000. Under the 1917
Law the personal exemptions are $1.000 and $2,000,
respectively. Under each law an additional exemption
of $200 is allowed to the head of the family for each
child dependent upon him. if under eighteen years of
age, or of any age if the child is incapable of self-support
because mentally or physically defective. The personal
exemption may be deducted only in computing the
normal tax, which is imposed upon the entire net income
of the individual over and above such exemption. Since
the income tax is assessed under two separate laws with
different rates and different exemptions, each individual
is entitled to two personal exemptions but this does not
mean that he is entitled to the sum of the two, that is
29 See Chapter 5 as to requirements for filing returns in the
case of non-resident aliens.
INTRODUCTION 11
to say, while a single person is entitled to a personal
exemption of $3,000 under the 1916 Law and .$1,000
under the 1917 Law, this does not give him a total
exetnption of $4,000. Each exemption is used only in
computing the tax due under the law to which it applies
and has no application to the other law. 30
Normal Tax. In the case of individuals a normal
tax of 2% is payable on the entire net income of the
individual, over and above the exemptions, under each
law, making in the case of single persons a total normal
tax of 4% on all incomes over $3,000 and a normal tax
of 2% of the amount between $1,000 and $3,000. In
the case of married persons and heads of families the
total normal tax is 4% on all income over $4,000 and
2% on the income between $2,000 and $4,000. Non-
resident alien individuals are subject only to the 2%
normal tax imposed by the 1916 Law, the normal tax
imposed by the 1917 Law being expressly limited to
citizens and residents of this country.
Supertax. In addition to the normal tax payable
under each law a supertax is imposed under the 1916
Law on all incomes over $20,000. The supertax is grad-
uated so as to bear more heavily as the amount of net in-
come increases. Under the 1917 Law the supertax com-
mences at $5,000. The law refers to the supertax as the
"additional tax" but for the sake of clearness the tax will
be referred to in this book as the supertax. The supertax
is assessed on the entire net income of each individual,
in excess of the minimum amounts, but on the separate,
not combined, incomes of husband and wife. While in
the case of non-resident aliens only one normal tax is
30 For a further discussion of the personal exemption see the
chapter on citizens and residents.
12 FEDERAL INCOME TAX '
assessed, the supertaxes of both the 1916 Law and the
1917 Law are applicable to them with respect to their
entire *net income received from sources within the
United States in excess of $20,000 and $5,000, respec-
tively. 31
Corporation Tax. The rate of tax imposed upon
the net income of corporations is 2% under the 1916
Law and 4% under the 1917 Law making a total of
6%. This total rate applies to all corporations, whether
domestic or foreign, and to all amounts of income no
matter how large or how small, except that for the pur-
pose of computing the -amount of net income under the
1917 Law dividends received by one corporation on the
stock of another corporation may be deducted, tmt in
determining the net income for the 1916 Law such
dividends must be included. 32
Collection of the Tax at the Source. Collection at
the source, deduction at the source, withholding at the
source and stoppage at the source, are synonymous terms
meaning that the one paying income to another deducts
or withholds an amount equal to the tax on the sum so
paid and turns it over to the Government to the credit
of the one against whom it was withheld. This method
is used in order to facilitate the collection of .the tax
and to prevent evasion. Collection at the source applies
at the present time only to (a) payments of fixed and
determinable annual or periodical income to non-resident
alien individuals, (b) payments of interest on bonds
and similar obligations of domestic corporations to non-
31 See Chapter 2 for further statement of the rates of tax.
32 Tor a further discussion of this subject see Chapter 12 on
corporations.
IVI'KolHTTI'iN I-'!
resident foreign partnerships and non-resident foreign
corporations, (o) payments of dividends to non-resident
foreign corporations and (d) payments of intnvsl mi
Imiiils ;m:l similar obligations of corporation*, it'
such bonds contain a so-called "tax-free covenant"
which requires the corporation to assume the burden of
the tax which it may be required to withhold or deduct
from the interest paid to its bondholders. 33 In the last
of the aforementioned cases deduction applies whether
the recipient of the income is a citizen or alien, resident
or non-resident. With this exception no withholding
is required against citizens and residents of this country.
Information at the Source. For the purpose of
checking up the returns of taxpayers the law provides
for a system of information at the source whereby every
corporation may be required to report to the Commis-
sioner of Internal Revenue the names and addresses of
its stockholders and the amount of dividends paid to
each; stockbrokers may also be required, when called
upon, to report the names and addresses of customers
and information as to the profits and losses of each, and
all persons, corporations or partnerships may be required
to report the names and addresses of any persons to
whom they pay fixed or detenu inable gains, profits or
income of $800 or more in any taxable year. In the
case of payments of interest to the bondholders of cor-
porations the names and addresses of such bondholders
are required to be reported regardless of the amount
paid during the year as is also the rule in the case
of collection of foreign items of interest and dividends. 3 *
83 See Chapter 41 on Collection at the Source.
34 For a further discussion of this subject see the chapter on
Information at the Source.
14 FEDERAL, INCOME TAX
Tax Due. The income tax is due and payable ordi-
narily on the 15th day of June following the filing of
the return of annual net income, but may be paid with-
out penalty within ten days after demand for payment
has been made by the local collector. Since demand
for payment cannot be made before the due date, the
tax may be paid without penalty within ten days there-
after, and this period of grace is extended if the col-
lector fails to make a prompt demand. In the case of
corporations reporting for their fiscal year the tax is
due and payable one hundred and five days after the
date on which the return is required to be filed, that is,
within one hundred and sixty-five days after the close
of the fiscal year, with a like period of grace of ten days
after demand for the tax has been made. The tax may
be paid in advance in instalments if the taxpayer chooses
to do so, and in such cases the Secretary of the Treasury
may allow a discount at a rate not exceeding 3% per
annum. 35
Abatement and Refund. The collection of the in-
come tax cannot be restrained by injunction, but if taxes
have been erroneously or illegally assessed or collected,
the Commissioner of Internal Revenue is authorized to
remit and pay back the amount to the taxpayer. The
importance of collecting revenue is so great that the
law permits no taxpayer to interpose a hindrance to
the orderly assessment of the tax. He must allow the
assessment to be made and may thereafter claim abate-
ment or refund by filing a claim with the local collector. 36
35 For a further discussion of this subject see Chapter 36 on
assessment and payment of the tax.
36 See Chapter 39 for procedure as to abatement and refund.
CHAPTER 2
THE INDIVIDUAL TAX BATES
As indicated in the foregoing chapter the income tax
is at present assessed and collected under two laws. The
amount of tax to which each individual is liable is com-
puted separately under each law and the two amounts
are added together to determine his total liability. Each
law prescribes a fixed rate, known as the normal tax, and
a series of graduated rates, known as the additional tax,
supertax or surtax. In the case of corporations no super-
tax is imposed, the rate being uniform on all amounts
of net income.
Normal Tax. Under the 1916 Law a normal tax of
2% is imposed upon the entire net income received
during the taxable year from all sources by every in-
dividual a citizen or resident of the United States, and
upon the entire net income received during the taxable
year from all sources within the United States by every
individual, a non-resident alien, including interest on
bonds, notes and other interest-bearing obligations of
residents, corporate or otherwise. Under the 1917 Law
a normal tax of 2% is imposed upon the net income of
very individual, a citizen or resident of the United
States, received in the calendar year 1917 and every
calendar year thereafter. A citizen of the United States,
wherever he may reside, is subject to both normal taxes.
15
16 FEDERAL INCOME TAX
An alien is subject to both normal taxes if he resides in
this country, but only to the 2% normal tax under the
1916 Law if he resides outside this country. In assessing
the normal tax under the 1916 Law, the personal exemp-
tion allowed under that law is first deducted from the
net income, and similarly in assessing the normal tax
under the 1917 Law the personal exemption allowed un-
der that law is first deducted. On all the net income in
excess of the exemptions the normal rate applies.
Supertax. In addition to the normal tax a supertax,
called in the law "the additional tax" is imposed at
various rates under the 1916 Law and the 1917 Law. For
the purpose of assessing the supertax the personal exemp-
tions are not deducted. The rates are as follows:
On the amount by which the total net income
But does not .1916 1917
Exceeds Exceed Law. Law.
$ 5,000* 7,500 None 1%
7,500 10,000 None 2%
10,000 12,500 None 3%
12,500 15,000 None 4%
15,000 20,000 None 5%
20,000 40,000 1% 7%
40,000 60,000 2% 10%
60,000 80,000 3% 14%
80,000 100,000 4% 18%
100,000 150,000 5% 22%
150,000 200,000 6% 25%
200,000 250,000 7% 30%
250,000 300,000 8%, 34%
300,000 500,000 9% 37%,
500,000 750,000 10% 40%
THE INDIVIDUAL TAX RATES
17
1916
1917
Law.
Law.
10%
45%
11%
50%
12%
50%
13%
:,<>',
1917 Law.
On the amount by which the total net income
But does not
Exceeds Exceed
750,000 1,000,000
1,000,000 1,500,000
1,500,000 2,000,000
Over 2,000,000
COMPUTING THE TAX ILLUSTRATION. The tax on a
married person with a net income of $50,000 for the year
is computed as follows:
Normal Tax.
$50,000 minus $4,000 (per- 1916 Law.
sonal exemption) equals
$46,000 at 2%
$50,000 minus $2,000 (per-
sonal exemption) equals
48,000, at
Supertax
On first $ 5,000
On urxt 2,500
2,500
2,500
2,500
5,000
20,000
10,000
$920
2% $960
(15.000 to $7.500)
On next
<$;.r.uo to sio.ooo)
On next
($10.000 to $12. 500)
On next
'*! J.MiO to $15.000)
On iH-xt
($15.000 to $20.000)
On next
($20.000 to $40.000)
On next
($40.000 to $50.000)
Totals $.10,000
Total income taxc din-
F. I. Tax. 2
1%
25
2%
50
3%
75
4%
100
5%
250
% 200
7%
1,400
% 200
10%
1,000
$1.320
$3.860
1,320
$5,180
18 FEDERAL INCOME TAX
The tax on an unmarried person would be increased
by 2% on $2,000, or $40, since the personal exemption is
$1,000 less under each law. In case a married person
or the head of a family is entitled to further exemption
because of dependent children, the normal tax will be
reduced at the rate of $8 for each such child, that is,
2% on $200 under each law.
Husband and Wife. "Where a husband and wife make
returns of their joint incomes the supertax is not com-
puted on the joint income of both, but on the separate
income of each, although the incomes of both may be
reported on the same return. 1
Supertax on Stockholders in Respect of Undistributed
Profits of Corporations. The supertax is ordinarily
assessed only upon the income actually received by the
taxpayer but where an individual forms or fraudulently
avails himself of a corporation for the purpose of pre-
venting the imposition of the supertax through the
medium -of permitting the gains and profits of such cor-
poration to accumulate, instead of being divided or
distributed, the law provides that for the purpose of the
supertax the taxable income of such individual shall
include the share to which he would be entitled of the
gains and profits of such corporation if they were
divided or distributed. This provision applies only
where the accumulation is permitted for the purpose of
fraudulently avoiding the supertax. Ordinarily, the
stockholder of a corporation has no need to concern him-
self with this provision or to make any inquiry as to
the undistributed income of the corporation. 2 If a cor-
1T. D. 2090; T. D. 2137.
2 T. D. 2135.
THE INDIVIDUAL. TAX RATES 19
poration is a mere holding company, or the gains and
profits are permitted to accumulate beyond the reason-
able needs of the business, that fact is prima facie evi-
dence of a fraudulent purpose on the part of the stock-
holders to escape the supertax. Neither the collectors
nor the Commissioner of Internal Revenue, however,
have any authority to decide when the surplus or un-
divided profits of a corporation are accumulated beyond
the reasonable needs of the business, and therefore tax-
able under this provision as though distributed. The
Secretary of the Treasury must first certify that in his
opinion the accumulation is unreasonable. When he has
so certified the stockholders are notified thereof and
called upon to add the amount of their respective shares
in the undistributed gains and profits of the corporation
for the year to their income from other sources and to
pay the supertax accordingly. 3
3 Act of September 8, 1916, 3.
CHAPTER 3
INDIVIDUALS TO WHOM THE LAW IS APPLICABLE
|
The theory upon which the tax is imposed seems to be
two-fold. The law imposes the tax upon the entire net
income of all persons within its jurisdiction, regardless
of where the income arises, and on all income arising in
the United States, regardless of whether or not the
United States has jurisdiction of the person who receives
it. The tax has been denned as a tax on the person,
measured by his ability to pay, that is, his net income, 1
and as a tax on the income itself. 2 As a matter of fact, it
is both. The Government claims personal jurisdiction
over all of its citizens wherever they reside and over all
aliens who reside within its borders. Hence, as to citi-
zens and resident aliens, the tax is imposed on income
from all sources whether arising in this country or in a
foreign country. No jurisdiction can be claimed over
the persons of non-resident aliens, but so far as their
income is received from sources in this country it is
taxed on the theory that the Government has jurisdiction
1 In Brady v. Anvlerson, 240 Ted. 665, the court said : "In our
opinion the tax is against citizens and residents of the United
States personally. They are chargeable in respect to income re-
ceived by them. ' '
2 In a case decided by the Supreme Judicial Court of Massa-
chusetts, Suter v. Jordan-Marsh Company, 113 N. E. 580, it was
held that the tax was levied upon the rent paid by the defendant
to the plaintiff.
20
INDIVIDC.M.S TO WHOM l.A\V IS .\ITUC.\HI.I-: 21
i
tin- income, grants protection to the. creation of
Mich income, and is, therefore, entitled to a share thereof
to defray tin- expenses of jrovermuent. The faet tliat a
person is taxalile in foreign countries on all or part of
his income does not relieve him for that reason from tax
liability on the same income in this country. 8
Persons Exempt from the Tax. The only citizens or
residents \\ho are exempt from all requirements of the
law are those receiving less than $1,000 of income dur-
ing the year, if unmarried, or le*s than $2,000, if mar-
ried. Non-resident aliens are not exempt no matter
how small the income, provided it is received from
sources within this country. Individuals' may, however,
en joy an exemption from the tax because of the character
of the income they receive, since the law expressly pro-
vides that certain kinds of income shall not be subject
to the tax. Among the items of income so exempt are
the proceeds of life insurance policies paid to individual
beneficiaries upon the death of the insured ; the amount
received by the insured as a return of premiums jjaid
by him under life insurance, endowment, or annuity
contracts, property acquired by gift, bequest, devise, or
descent (but the income from such property is taxable),
interest on the obligations of a State or any political
subdivision thereof or upon the obligations of the United
States (to the extent provided in the Act authorizing the
i.ssiif. if the bonds are issued after September 1, 1917),
or its possessions or securities issued under the pro-
visions of the Federal Farm Loan Act of July 17, 1916:
and the compensation of all officers and employees of a
state, or any political subdivision thereof, except when
such compensation is paid by the United States Govern-
3 T. D. 2152.
22 FEDERAL INCOME TAX
ment. Under these provisions officers and employees of
a state, city or county, including public school teachers,
etc., are exempt from the tax to the extent that their
income is derived fro^n salaries paid by the state, county
or city. They enjoy, however, no exemption from tax
on income from taxable sources merely because of their
position as employees of a state. The Act also exempts
from tax the compensation of the present President of
the United States during the term for which he has been
elected and the judges of the Supreme Court and infer-
ior courts of the United States in office at the time the
Act was passed. Exempt income is omitted from the
returns of annual net income of individuals but is re-
quired to be reported by corporations.
Citizens of the United States. For the purpose of
the income tax law no distinction is made between
native and naturalized citizens. They are taxable upon
their entire net income from all sources whether they
reside within this country or not. Married women are
considered to have the same citizenship as their hus-
bands. An American woman who marries a foreigner
consequently loses her status as an American citizen
and is thereafter treated as an alien.* But determina-
tion by the State Department of the status of an individ-
ual is not conclusive upon the Treasury Department in
fixing citizenship for income tax purposes, 6
RESIDING IN THE UNITED STATES. Citizens residing
in the United States report and pay the tax in the dis-
trict in which they reside or have their principal place
of business, regardless of where the income may arise.
4T. D. 2092.
5T. D. 2135.
INDIVIDUALS TO WHOM LAW IS APPLICABLE 23
RESIDING ABROAD. If a citizen residing abroad has
no office or place of business in this country he files his
return and pays his tax to the Collector of Internal
Revenue at Baltimore, Maryland. He is, of course, re-
quired to report his income from all sources whether
within or without the United States. Although the ques-
tion as to the liability of a non-resident citizen is not
determined by the State Department but by the Treasury
Department, still, in the case of a naturalized citizen
against whom the presumption of expatriation has
arisen, the fact that he has paid the income tax will re-
ceive due consideration by the State Department in con-
nection with other ^evidence submitted to overcome such
presumption in connection with applications for pass-
ports or for registration in a consulate or for actual
protection in a foreign country. The payment of the
income tax will also be duly considered by the State
Department in passing upon rights to the continued
protection of this Government in cases of native Ameri-
can citizens who have resided abroad for a period
so long that the natural presumption may be held to
have arisen that they have abandoned citizenship in this
country. 8
Aliens Residing in the United States. The question
of whether or not an alien resides in this country is
sometimes difficult to determine. The Treasury Depart-
ment has held that where for business purposes or
otherwise an alien is permanently located in the United
States, has there his principal business establishment
and is there permanently occupied or employed, even
though his domicile may be without the United States,
8 Letter from Secretary of State to American Diplomatic ami
Consular Officers, dated March 18, 1914.
24 FEDERAL INCOME TAX
he will be held to be residing in the United States. On
the other hand an alien physically present in the United
States, but only temporarily residing or employed here
(as for a season or other similiar definite term) and with
the expectation of leaving the United States upon the
termination of employment or accomplishment of the
purpose which necessitates his presence in the United
States, will be considered a non-resident. 7 The Treasury
Department has adopted the following definition of the
word ' ' residence ' ' as used in the income tax laws :
"That place where a man has his true, fixed and perma-
nent home and principal establishment, and to 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. ' ' 8
Aliens coming into the United States .with the intention
of becoming residents may establish that fact and have
the privilege of resident aliens under the statute, by
filing a certificate 9 with the withholding agents charged
with the duty of withholding the tax on income paid to
non-resident aliens.
Non-Resident Aliens. Non-resident aliens are those
persons who are neither citizens nor residents of this
country. As stated above, they are taxable only to
the extent of the income they derive from sources
7 This rule differs from the English rule which provides that
a person within the United Kingdom for some temporary purpose
only for less than six months during the year is not taxable as a
resident but after a residence of six months he becomes charge-
able with the duties for the year commencing on April 6th pre-
ceding.
8T. D. 2242.
9 T. D. 2242. The certificate to be used is known officially :i*
Form 1078.
INDIVIDUATE TO \VIIOM I . \ \V IS APPLICABLE 25
within the United States, including interest on
notes or other interest-bearing obligations of residents.
'nrporate or otherwise. If a non-resident alien eon
ducts business through an agent in this country, the
agent will be subject to the duty of filing a return for
his non-resident principal and of paying both the normal
and the supertaxes. 10
Husband and Wife. In so far as possible the family
is treated as a unit for the purpose of the income tax,
and husband and wife are required to make joint returns
unless they have separate estates. The personal exemp-
tion is in such cases deducted from the joint income,
but the surtax is in all cases imposed upon the separate
incomes. 11
Minors. Minors arc unable to make returns for
themselves, and such returns are required to be made
by their guardians. 12 If the minor has a separate legal
estate a separate return is made of his income, but
where a minor child has received gifts of money and
other property from relatives and the property has
been invested on behalf of the child by the father,
although he has not been legally appointed guardian,
the amount should be included in the return made
by the father as a part of his (the father's) income. 18
10 See Chapter 6 on agents for non-resident aliens.
11 T. D. 2090.
18 Reg. 33, Art. 17.
13 Letter from Treasury Department dated October 20, 1916;
I. T. S. 1917, f 248. This ruling is made apparently to prevent
evasion of the law by distributing the income of the parent
among his minor children. '
26 FEDERAL INCOME TAX
Incompetents. Incompetent or insane persons are
unable to make their own returns of net income, and
the same are required to be made by the duly author-
ized agent, guardian or committee having charge of
such incompetent or insane person. 14
Absentees. Where a persons is absent from the
country or is a non-resident and is unable to make the
return of annual net income it may be made for him
by an agent, the agent assuming the responsibility of
making the return and incurring penalties provided for
erroneous, false or fraudulent returns. 16
Agents. Any person duly authorized and having
knowledge of the income of another may file returns
for his principal and pay the tax based thereon. The
intent and purpose of the act is "that all gains, profits
and income of a taxable class," as defined by the law,
shall be charged and assessed with the corresponding
tax, normal and supertax, prescribed by the law, and
the tax shall be paid by the owner of such income or
the proper representative having the receipt, custody,
control or disposal of the same. 16 Persons having the
control and custody of income of non-resident aliens
may, without having been appointed by the principal,
be charged with the duty of making a return and paying
the tax on the income passing through their hands. 17
'
Fiduciaries. Trustees, executors, administrators and
other persons acting in a fiduciary capacity are charged
14 Keg. 33, Art. 17.
15 Act of September 8, 1916, 8 (b).
18 Act of September 8, 1916, 9 (g).
17 See Chapter 6 for duties of agents of non-resident*.
INDIVIDUALS TO WHOM LAW IS APPLICABLE 27
with special duties under the law. These duties are
fully discussed in the chapter on fiduciaries. 18
Persons Dyinef During the Year. When a person dies
during any calendar year it is the duty of the executor
or administrator or person taking charge of his prop-
erty to make a return for the .deceased from the begin-
ning of the year to the date of death. In this return
should be reported all of the income received up to
the time of death and all the allowable deductions
incurred up to that time. The personal exemption
may be claimed in full according to the status of the
decedent and regardless of the length of time during
the year in which he lived. In case the decedent dies
after the close of the calendar year, but before March
1st of the following year, and has not made a return
for the preceding calendar year a return should be
made for the full year preceding and in addition a
return from January 1 of the current year to the
date of death. If during the period in which the
decedent lived .he was not in receipt of $1,000 of net
income, if unmarried, or $2,000, if married, no return
need be filed, unless he was a non-resident alien, in which
case a return should be filed, whether married or single,
if the amount is $1,000 or more. The fact that a person
may have died before the passage of the law does not
relieve his estate of liability for tax, if he lived during
any part of the time after the incidence of the tax.
Thus a person dying after March 1, 1913, but before
October 3, 1913, the date on which the 1913 Law was
passed, was held to be taxable thereunder. The effect
of making the act retroactive is to apply it to him
li See Chapter 8.
28 FEDERAL INCOME TAX
exactly as if it had been enacted on March 1, 1913. 19
Similarly if a person dies at any time after the 1st of
January, 19J.7, his estate will be subject to the tax im-
posed by the 1917 Law.
19 Brady v. Anderson, 240 Fed. 665.
CHAPTER 4
CITIZENS AND RESIDENTS OP THE UNITED STATES
All citizens of this country, residing here or elsewhere,
and all residents of this country, whether citizens or
not, are classed together for the purpose of the income
tax. 1
Extent to Which Taxable. Citizens and residents
are taxable upon their entire net income received in
each calendar year from all sources, except income
declared by the law to be exempt. On dividends of
corporations taxable under the act they are liable only
for supertaxes. The regulations and rulings respecting
taxable and non-taxable income are applicable to both
individuals and corporations and are discussed in the
later chapters on income. 2
Deductions and Exemptions Allowed. Citizens and
residents are allowed the following deductions in com-
puting net income for the purpose of the tax. Many
of the deductions are the same as those permitted to
corporations and in such cases the deduction is fully
discussed in a subsequent chapter. In this chapter only
the special provisions applicable to individuals are dis-
cussed at length.
1 See preceding Chapter for definition of citizens and residents
* See Chapters 16 to 26 on income.
30 FEDERAL INCOME TAX
Business Expenses. An individual may deduct from
his gross income all necessary expenses actually paid in
carrying on any business or trade but may not deduct
personal living or family expenses. 3 A subsequent para-
graph of this chapter defines what is held by the Depart-
ment to be the meaning of the words "business or
trade."
BUILDINGS USED FOR RENTAL PURPOSES. A landlord
may claim as an expense any amounts for maintenance
of the property or its use for rental purposes, including
amounts paid for repairs, insurance, fuel, light and
water, and janitor and elevator service, if any. 4 Where
the landlord occupies a part of the building as his own
dwelling he should not deduct such proportion of the
expenses of operating the building as inure to his per-
sonal benefit, as that part constitutes personal or living
expenses which are not deductible. Thus, if a landlord
lives in one-half of the building, one-half of the expenses
are not allowable deductions in his return.
PERSONAL LIVING OR FAMILY EXPENSES. The personal
living or family expenses which are not deductible under
the law are intended to be those which are not incurred
by the taxpayer in carrying on his business or trade.
They include, for example, the expense of maintaining
his home, payments to his servants, payments for the
support and education of his children. Premiums paid
for insurance on property occupied by the owner as
a dwelling are a personal expense and not allowed as
8 The personal exemptions may be said to be an arbitrary sum
allowed for such expenses.
4 Letter from Treasury Department dated February 26, 1915;
I. T. S. 1917, If 224.
CITIZENS AND RESIDENTS OF UNITED STATES 31
a deduction. Premiums paid on life insurance by the
insured are also not allowed as a deduction. 6 Alimony
is regarded as a personal expense and is not an allow-
able deduction. 8
Interest. A citizen or resident may, with one excep-
tion, deduct all interest paid within the year on his
indebtedness. 7 This includes not only indebtedness
incurred for business purposes, but indebtedness incurred
for any purpose, such as for the purpose of buying a
dwelling house or any article or thing of personal use.
The one limitation on the amount of interest which may
be deducted is with respect to interest paid on indebted-
ness incurred for the purchase of obligations or securi-
ties, the interest upon which is exempt from taxation
as income of the individual. 8
Taxes. Citizens or residents may deduct all taxes
paid within the year imposed by the authority of any
territory or possession of the United States, or any
foreign country, or under the authority of any state,
county, school district or municipality or other taxing
subdivision of any state. Taxes assessed against local
benefits, however, may not be deducted. Taxes imposed
by the United States may be deducted, except income
taxes and excess profits taxes. Inheritance taxes are
held not to be taxes contemplated by this provision of
the law. 9
6 T. D. 2090.
6 T. D. 2090.
7 Telegram from Treasury Department dated February 16,
1915.
> For a further discussion of this subject see Chapter 29.
9 For a further discussion of the rules relating to the deduction
of taxes see Chapter 30.
32 FEDERAL INCOME TAX
Losses Incurred in Trade. Citizens and residents
may deduct losses actually sustained during the year
incurred in business or trade. A loss incurred in busi-
ness or trade must be an absolute loss, not a speculative
or fluctuating valuation of a continuing investment, but
must be determined and ascertained upon an actual,
a completed, a closed transaction. 10
BUSINESS OR TRADE. Business or trade has been de-
fined as being synonymous terms and to be ' ' That which
occupies and engages the time, attention and labor of
anyone for the purpose of livelihood, profit, or improve-
ment; that which is his personal concern or interest;
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 business. 11 "In trade" as used in the law
is held to mean the trade or trades in which the person
making the return is engaged; that is, in which he has
invested money, otherwise than for the purpose of being
employed in isolated transactions, and to which he
devotes at least a part of his time and attention. A
person may be engaged in more than one trade and may
deduct losses incurred in all of them, provided that in
each trade the above requirements are met. Losses on
stocks, grain, cotton, etc., may be deducted by a person
engaged in the trade to which the buying or selling
thereof are incident as a part of the business, as by a
member of a stock, grain, or cotton exchange, 12 but
10 T. D. 1989. Depreciation in the value of property is treated
as a separate deduction and should not be confused with loss.
11 T. D. 1989.
12 T. D. 2090.
CITIZENS AND RESIDENTS OK UNITED STATI-.> 33
neither the investment of money in the stock of a com-
pany nor employment by the company in any official
capacity makes the business of the company the trade
of the investor or employee. 13 The losses which seem
to be limited by this provision of the law are those
incurred in transactions involving sales or dealings in
property. The law seems clearly to make a distinction
between such losses and losses arising from fires, storms,
shipwreck, or other casualty, and from theft.
Losses of Property from Fire, Storms, Etc. The law
does not require that the property lost by fires, storms,
shipwreck, or other casualty, or from theft, should be
properly employed in the business or trade of the indi-
vidual, but the Treasury Department seems to hold
that even such losses must be sustained in trade. 14 It
seems to have been the intent of Congress, however, to
permit the deduction of these losses by citizens or resi-
dents to the extent that the losses are not compensated
for by insurance or otherwise. 16
Losses Not Incurred in Trade. In transactions en-
tered into for profit but not connected with his business
or trade, a citizen or resident may deduct the losses
13 T. D. 2135. This extremely narrow construction of the
language of the law has perhaps been the subject of more criti-
cism than any other ruling of the Treasury Department. It
operates to the detriment of every person who invests or specu-
lates in property. Notwithstanding the criticism, however,
Congress has not seen fit to remedy the injustice by permitting
the deduction of all losses in transactions on which the gain, it
any, is taxable.
14 T. D. 2005.
W Act of September 8, 1916, 5 (a). For a further discussion
of the subject of losses see Chapter 31.
F. I. Tax. 3
34 FEDERAL INCOME TAX
actually sustained therein during the year to an amount
not exceeding the profits arising therefrom. The loss
must be actually sustained during the year and the
total amount which may be deducted shall not exceed
the profits arising from the same class of transactions. 16
Under this heading an individual who makes invest-
ments in property from time to time, or who speculates,
is required to report all of the gains from such invest-
ments or speculations and may offset against the gains
all losses which he has sustained in similar transactions.
He is thus required to report only the net gain from
such transactions during the year. If, however, the net
result for the year of a series of such transactions is
a loss, he is not entitled to offset the loss against his
income from buiness or trade. 17
Worthless Debts. A citizen or resident may deduct
all debts due to him actually ascertained to be worth-
less and charged off within the year. The law does not
require such debts to have been incurred in the business
or trade of the individual. It is sufficient if a debt
was legally due and owing to the taxpayer, has actually
16 Act of September 8, 1916, 5.
17 Prior to the passage of the Act of September 8, 1916, author-
izing the deduction of losses not incurred in trade to the extent
indicated above, it was held by the Treasury Department that
an individual was required to report all income from transactions
not incurred in trade but was not entitled to deduct any of the
losses. Thus, if on a series of transactions during the year a
gain of $5,000 was made, and $4,000 was lost, the sum of $5,000
was to be reported as income and no deduction could be made
for the loss. T. D. 2135. Under the present law the taxpayer
pays the tax only. upon the net gain of $1,000. Logically, since
the law taxes all gains from the sale of capital assets whether or
not employed in business or trade, the law ought also to permit
a deduction for all losses in the sale of similar assets.
CITIZENS AM) KKS1DENTS OK UNITED STATES 35
been ascertained to be worthless and has been charged
off within the year. 18
Depreciation. An individual is allowed a reasonable
deduction for exhaustion, wear and tear of property
arising out of its use or employment in his business
or trade. It is to be noted that this deduction applies
expressly to property used in the individual's business
or trade. No allowance for depreciation can be claimed
upon other property, such as the individual's residence
or his pleasure automobile. This limitation applies
expressly to individuals. In other respects the provi-
sions for allowing depreciation in the case of individuals
and corporations are the sdme, and are treated in a
subsequent chapter on depreciation. 19
Depletion of Natural Resources. Individuals are
permitted the same allowance for the exhaustion of
natural resources as is allowed to corporations in the
case of oil wells, gas wells and mines. This subject is
discussed in subsequent chapters. 20
Improvements and Betterments. No deduction is
allowed for amounts expended for new buildings, per-
manent improvements or betterments made to increase
the value of any property or estate and no deduction
is allowed for any amount expended for restoring prop-
erty or making good the exhaustion thereof for which
an allowance has been made. This limitation on the
deductions allowed to individuals is the same as in the
18 See Chapter 31 for a further discussion on the deduction
of worthless debts.
19 Ree Chapter 32 on Depreciation
Roe Chapters 33 and 34.
36 FEDERAL INCOME TAX
case of corporations, and is a reasonable limitation.
Amounts of capital invested in permanent improvements
or betterments add to the value of the property. If
such property is subject to wear and tear or depletion
the additional amount so invested in the property may
be taken into consideration in computing the allowance
for depreciation or depletion. This subject is more
fully discussed in a subsequent chapter. 21
Contributions to Charities. A citizen or resident is
allowed to deduct from his net income contributions
or gifts actually made within the year to corporations
or associations organized and operated exclusively for
religious, charitable, scientific or educational purposes,
or to societies for the prevention of cruelty to children
or animals, no part of the net income of which inures
to the benefit of any private stockholder or individual.
This deduction, however, is limited to an amount not
in excess of 15% of the taxpayer's taxable net income
including the amount of such contributions. The law
further provides that such contributions or gifts shall
be allowable as deductions only if verified under rules
and regulations prescribed by the Treasury Department.
The deduction is not allowed to non-resident aliens or
corporations. 22
Credit of Dividends. For the purpose of computing
the normal tax the individual may also deduct from his
net income the amount received as dividends upon the
stock or from the net earnings of any .corporation tax-
able upon its net income under the law. The dividends
intended to be included in this provision of the law are
21 See Chapter 27,
22 Act of Sept. 8, 1916, as amended, 5.
CITIZENS AND RESIDENTS OP UNITED STATES 37
apparently those of domestic corporations and also those
of foreign corporations, if the foreign corporation is
within this country and is taxable upon its net income.
The amount of such dividends is deductible only for the
purpose of assessing the normal tax, and not for the
supertax. 23
Personal Exemption. The personal exemption is
allowed only to citizens and residents. A non-resident
alien or a corporation has no right to claim this ex-
emption. In the case of unmarried citizens or residents
the amount of the exemption is $3,000 under the 1916
Law, and $1,000 under the 1917 Law. In the case of
married persons living together, the exemption is $4,000,
under the 1916 Law and $2,000 under the 1917 Law. In
the case of the head of a family it is also $4,000 and
$2,000 under the respective laws. If the person making
the return is the head of a family there is an addi-
tional exemption of $200 for each child dependent upon
such person, if under 18 years of age, or if incapable of
self-support because mentally or physically defective.
This deduction, of course, can be claimed only by one
parent in a family. The same allowance for dependent
children may be claimed under each law. 8 *
GUARDIANS AND TRUSTEES. Guardians or trustees are
allowed 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,
the amount of exemption depending, of course, on the
single or married status of the ward or cestui qite trust
and the existence of dependent children. In no event,
88 Act of September 8, 1918, Sec. 5 (b).
M Act of September 8, 1916, 7, as amended. T. D. 2547.
38 FEDERAL, INCOME TAX
however, is a ward or cestui que trust allowed a greater
personal exemption than is provided in the law from the
amount of net income received from all sources. That
is, if such ward or beneficiary claims the personal exemp-
tion through the trustee it cannot again be claimed
against the income from other sources.
ESTATES OF DECEASED PERSONS. In the case of estates
of deceased citizens or residents of the United States a
specific exemption is allowed, in addition to the other
deductions, during the period of administration or set-
tlement. That is, from the net income of each year
during which the estate is in the course of settlement,
and is consequently taxed as an entity, a specific ex-
emption of $3,000 may be deducted in addition to all
other deductions, for the purpose of assessing the 1916
normal tax and $1,000 the purpose of assessing 1917 tax.
TRUSTS AND OTHER ESTATES. Trusts or other estates
of citizens or residents of the United States are required,
through the trustees, to pay a tax upon all undistributed
income. From the amount of such undistributed income,
may be deducted a specific exemption of $3,000, for
the purpose of assessing the 1916 normal tax and $1,000
for the purpose of assessing the 1917 normal tax.
HEAD OF FAMILY. This phrase in the law is defined
to include any person who actually supports and main-
tains one or more individuals who are closely connected
with him (or her) by blood relationship, relationship by
marriage, or by adoption, and whose right to exercise
family control and provide for these dependent indi-
viduals is based upon some moral or legal obligation. 26
25 T. D. 2427.
CITIZENS AND RESIDENTS OF UNITED STATES 39
Such head of a family is entitled to the same personal
exemption as married persons. As indicated by the
above definition the head of a family may be a single
or married person, a widow, widower, brother, sister or
other relative by blood, marriage or adoption.
HUSBAND AND WIFE. A husband and wife living
together are entitled under the 1916 Law to an exemp-
tion of $4,000 only, and under the 1917 Law to an
exemption of $2,000 only, from the aggregate net in-
come of both. 86 If they live apart each may claim the
exemptions allowed to single persons. The personal
exemption may be claimed in a separate return of either
husband or wife, the other claiming no exemption; or
may be prorated between the two. 27
r
STATUS OF CLAIMANT. The status (single, married or
head of a family) of the person claiming the personal
exemption is determined as of the close of the year. 88
Thus where either husband or wife dies during the year,
the survivor, in making a return at the end of the year,
will be allowed *the exemption applicable to single per-
sons or heads of families, and the executor or adminis-
trator of the deceased, in making a return for the de-
ceased, may claim the exemption according to the status
of the deceased at the time of his death, from the net
income received between the first of the year and the
date of death no matter how short the period. 89 The
personal exemption is not prorated where a return is
made for a period shorter than the full year.
Beg. 33, Art 10.
*7T. D. 2137.
28 Reg. 33, Art. 10.
WT. T>. 2090, T. D. 21 3ft
40 FEDERAL INCOME TAX
NOT APPLICABLE TO SUPERTAX. The personal exemp-
tion is not to be deducted from the net income of the indi-
vidual in assessing the supertax. 30
Tax Not Withheld at Source. The tax is not with-
held at the source on payments to citizens and residents.
A provision of the law requires withholding at the source
in the case of corporate bonds and mortgages containing
a so-called "tax-free covenant." This, however, is not
intended as a provision requiring withholding, but is
intended to require the corporation to assume the burden
of a part of the tax for the bondholder. Consequently
in such cases no tax is actually deducted, but the cor-
poration assumes for the bondholder the payment of one
2% normal tax, which amount the bondholder reports as
though the tax had been actually withheld. The other
2% normal tax being reported as not having been with-
held. For a further discussion of collection at the source
see the chapter on that subject. 31
'
Duty in Making- Payment of Income. All citizens
and residents are subject to the provisions of law re-
quirirg the reporting of names and addresses of individ-
uals to whom fixed and determinable income is paid.
For a further discussion of the duties in this connection
see the chapter on Information at the Source. If pay-
ments of fixed or determinable income are made to non-
resident aliens, the normal tax imposed by the 1916 Law
is required to be withheld. 38
30 Cohen v. Lowe, 234 Fed. 474.
31 See Chapter 41.
32 See Chapters 40 and 41.
CHAPTER 5
NON-RESIDENT ALIENS
The law imposes a tax on the entire net income re-
ceived "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." l The term "non-
resident alien" as used in several places in the law
is not defined therein, but clearly refers to individuals
only, and not to partnerships, corporations or associa-
tions. Ordinarily it is a simple matter to determine
whether an individual is or is not a non-resident alien ;
he falls into that class if he is neither a citizen nor
a resident. Difficulty may arise where a non-resident
citizen, naturalized or native, has resided abroad for
a period so long as to raise a presumption that he has
abandoned his citizenship, 8 and again where an alien
has resided in this country for a period so long as to
raise a presumption of residence. In either of these
cases the intent of the individual is important. The
Treasury Department holds that the status of a non-
resident native or naturalized citizen remains unchanged
until some affirmative action is taken, or the right to
I Act of September 8, 1916, 1.
8 The Act of March 2, 1907, provides, briefly, that any American
citizen becomes an alien by becoming naturalized in a foreign state
or taking an oath of allegiance to any foreign state. A naturalized
41
42 FEDERAL INCOME TAX
citizenship is forfeited by some overt act. 3 The mere
fact of continued absence from this country does not,
for purpose of income tax, necessarily establish any
presumption of expatriation.
On the other hand, an alien coming to the United
States with the intention of becoming a resident within
the meaning and intent of the income tax statute, may
indicate that fact and thereupon will be taxed as a
resident, regardless of the length of time he has been
here. 4 Where the expectation or intention of an alien
is to leave the United States upon the termination of
the employment, or accomplishment of the purpose,
which necessitates his presence in this country, he will
be considered as a non-resident alien although he may
temporarily reside here for a season or other similarly
definite term. 6 The length of residence is in itself no
determining factor, and he may under the present
regulations remain in this country during an entire
citizen, residing for two years in the country from which he came,
or for five years in any other foreign country, is presumed to
have renounced his American citizenship in the absence of satis-
factory evidence to the contrary. A woman assumes the nationality
of her husband, but may resume her original citizenship on be-
coming a widow; she assumes or retains her American citizenship
as a widow if, living abroad, she registers with a United States
consul, or without formal action if she resides here. 'Minor chil-
dren of naturalized citizens are deemed to be citizens from the
time they begin to reside permanently in this country. Children
born outside of the United States of citizens, and continuing to
reside abroad must at the age of 18 declare their intention as to
citizenship. Determination of citizenship by the State Department
under this Act is mot conclusive upon the Treasury Department ;
other factors may also be Considered, as indicated in the text.
3T. D. 2135.
4 T. D. 2242. See Chapter 2 for status of resident aliens.
5 T. D. 2242.
NON-RESIDENT ALIENS 43
tax year without necessarily losing his status as a non-
resident alien. Should he go to the extent of locating
his priucipal business establishment here or accept occu-
pation or employment of a permanent character in this
country lie will be held to be a resident, although his
domicile may be witnout the United States. 6
Extent to Which Non-Resident Aliens Are Taxable.
The 1916 Law provides that non-resident aliens shall
pay the normal tax and supertax thereby imposed 7 on
their entire net income received from all sources within
the United States, including interest on bonds, notes
or other interest-bearing obligations, of residents, corpo-
rate or otherwise. 8 The 1917 Law imposes no normal tax
on non-resident aliens, but imposes a supertax. At
present, therefore, a non-resident alien is subject to
a normal tax of 2% and two supertaxes that of the
1916 Law and that of the 1917 Law on income received
from sources within the United States.
Income from Sources Within the United States. The
words "sources within the United States" are not defined
6T. D. 2242.
7 See Chapter 1 for the rates.
8 The 1913 Law which was repealed by the 1916 Law, imposed
a tax on the net income of non-resident aliens "from all property
owned and every business, trade or profession carried on in the
raited States." This language was held, under two opinions of
the Attorney General, not to include interest or dividends received
by non-resident alien investors from domestic corporations, but
on March 21, 1916 the Treasury Department reversed this holding
and thereafter claimed the tax from non-resident aliens on the
classes of income in question. T. D. 2313. In DeGanay v. Lederer,
239 Fed. 568, the District Court held a non-resident alien taxable
on such income if the stock certificates and bonds were kept in
this country, as then they acquired a situs here for purpose of
the income tax. The language of the 1916 Law expressly includes
such income, regardless of whero the securities may be kept.
44 , FEDERAL INCOME TAX
in the law and their interpretation raises many difficult
questions. The term is very broad and was intended
to include income of all kinds from sources over which
this country has jurisdiction. No cases as yet have
arisen in the courts involving construction of the phrase
and the Treasury Department has not issued any com-
prehensive ruling defining "source." The term "in-
come" includes any income, gains or profits from prop-
erty owned or business, trade or profession carried on
in this country, dividends, interest, royalties, income
from property held in trust, income from partnership
profits, income from profits or gains on the sale of prop-
erty, and as further defined in the 1916 Law. Non-
resident aliens are not taxed on income specified in
the law as exempt. 9
INCOME FROM BUSINESS BRANCHES. Where a non-
resident alien establishes a branch of his business in
this country the net income of that branch is subject
to tax, and this would seem to be true even though a
portion of that income may have been received by the
branch from business done in foreign countries, although
the precise point is as yet unsettled. If two or more
branches are established here, the total net income from
all is taken together for purpose of assessment. The
income of all branches should be reported by the prin-
cipal branch in its district, the other branches not being
assessable in their respective districts. 10
DIVIDENDS. Non-resident aliens are not subject to the
normal tax on income in the form of dividends of cor-
9 See the Chapters on Income.
10 Generally, the rules applying to foreign corporations as to
Income from business done in this country apply equally to non-
NON-RESIDENT ALIENS 4">
porations taxable under the law on their net incomes,
if a return of annual net income is filed, but the amount
of such dividends must be reported in the return. If
the total income of all kinds from sources within the
United States, including dividends, exceeds $5,000 the
supertax imposed by the 1917 Law must be paid at
the prescribed rates, and if it exceeds $20,000, the super-
tax imposed by the 1916 Law must also be paid at the
prescribed rates. 11 The exemption of dividends from
the normal tax applies not only to dividends received
direct from the corporation, but also to dividends re-
ceived through the medium of fiduciaries or partner-
ships. 12 Dividends of foreign corporations are not
taxable in the hands of non-resident aliens, even though
the dividends may be payable in this country. 18 In
two provisions of the 1916 Law u non-resident aliens
are excepted from the requirements to make reports
of, or pay supertax on, "such income [income derived
from dividends on the capital stock or from the net
earnings of any corporation] derived from sources
without the United States." The language quoted has
not been construed by the courts or in any regulation
of the Treasury Department. It undoubtedly applies
to dividends received from foreign corporations where
the earnings of the corporation are derived from sources
without the United States even though the dividends
resident alien individuals. See Chapter 14 on Foreign Corpora-
tions.
11 Sec riuiptor 2 for rates.
12 Sec riin] tor 2:5 for further discussion of this subject.
13 T. D. 2012, T. D. 2030, T. D. 2:513, T. P. 2325. Letter from
Treasury Department dated April 5, 1916; I. T. S. 1917, 169.
Exemption is claimed from withholding of the tax by using Form
1071 (T. D. 2325) or by using Form 1063 (T. D. 2012).
1*51 (b) and J8 (f).
46 FEUEKAL INCOME TAX
are payable in this country, and there seems to be
ground for the contention that it applies with equal
force whether the corporation be foreign or domestic. 15
INTEREST. Non-resident aliens are taxable on all in-
terest on bonds, notes or other interest-bearing obliga-
tions of residents in this country whether the debtor
is a corporation, partnership, or an individual, citizen
or alien. Interest received from a non-resident citizen
is not taxable. Whether or not interest received from
a domestic corporation located entirely outside of this
country is taxable is a question still before the Treasury
Department for determination. 16 The extent to which
15 Whether Congress intended to give the non-resident alien an
exemption from tax on dividends to the extent that such dividends
are earned by domestic corporations outside the United States, is
not clear, but the language quoted above seems open to a broad
construction. The English law recognizes the situation where a
British company has permanently located its business and seat of
management abroad, and taxes it only with respect to the profits
oi' the English shareholders. Eelatively few American corporations
are formed to operate entirely outside of the United States, but
there are cases where not only does the corporation operate entirely
abroad, but also all of its stockholders, directors and creditors
are non-resident aliens. It seems reasonable to infer in the absence
of express language, that Congress did not intend the tax to apply
to the stockholders of such corporations.
16 This point involves the question of residence of the corpora-
tion. Generally speaking, under the laws of this county a corpo-
ration is a resident of the state in which it is incorporated and
cannot migrate to another jurisdiction. If however the word
' ' residence ' ' is given its ordinary meaning, a domestic corporation
having its business and seat of management permanently located
abroad would seem to be a "non-resident." The Treasury De-
partment has defined the term "non-resident alien corporation"
with respect to certain requirements of the law, to cover all corpo-
rations authorized or existing ui>der the laws of a foreign country
and having no office or place of business in the United States,
NON -RESIDENT ALIENS 47
a non-resident alien is taxable under the law on interest
received from a "resident alien corporation," that is,
a foreign corporation having a branch office or place
of business in this country has not been decided. If
the interest is paid by the office in this country from
funds earned here it may be taxable, but if paid from
the home office in another jurisdiction it does not seem
that it would be, even though paid out of funds arising
in whole or in part from sources within this country,
since this country would have no jurisdiction over the
parties or the income. Interest paid by non-residents
whether citizens or aliens, corporations or partnerships,
or by foreign governments, is not taxable by reason
of the fact that the interest may be paid in this country.
The residence of the debtor, not the place of payment
of the interest, determines its taxability. When interest
on the bonds of foreign corporations or governments is
payable in this country, the non-resident alien may pre-
vent withholding at the source by filing with the paying
agent a certificate prescribed by the Treasury Depart-
ment for that purpose. 17
INTEREST ON BANK DEPOSITS. Where banking houses
in this country, carrying deposits for non-resident aliens,
credit such accounts with interest thereon, such interest
must be included in the recipient's income tax return
for the year during which he received the interest, or
in which it was credited to an account against which
T. D. 2401, but has made no definition with respect to residence of
domestic corporations.
17 T. D. 2325. The official title of this form is Form 1071. It
was .Irafted originally for the use of banks acting as agents, but
may be modified to show personal ownership and, thus modified,
may be executed by the non-resident alien himself. Letter from
Treasury Department dated June 13, 1916; I. T. 8. 1917, 1 122.
48 FEDERAL INCOME TAX
he might draw. The bank, however, is not required to
withhold the tax on such interest or to make any return
covering the amount of interest paid to any depositor. 18
SALARIES PAID BY RESIDENT EMPLOYERS. Under the
1913 Law it was held that compensation paid to non-
resident aliens for services rendered in a foreign coun-
try, including business and travel expenses, was not
taxable. 19 The 1916 Law, by imposing a tax on "income
from all sources within the United States," raises a
question as to the taxability of such compensation, a
question which is still before the Treasury Department
for decision. 20
INCOME RECEIVED PROM TRUSTEES, EXECUTORS OR
OTHER FIDUCIARIES. Where a non-resident alien is the
beneficiary of a trust, or of the estate of a deceased
person, or is the recipient of income from any property
held by another, such income is taxable to the extent
that it arises from sources within the United States.
The intervention of an agent, trustee or other fiduciary
between the non-resident alien and the source of the
income does not make income subject to taxation, which
18 Letter from Treasury Department dated June 29, 1917; I.
T. S. 1917, If 2256.
19 T. D. 2152.
20 The Treasury Department has indicated an intention to hold
the non-resident alien, to be not taxable if the employer derives
all his income from the foreign jurisdiction, but to hold him tax-
able if the major or principal part of the business is carried on
in this country and the non-resident alien is employed in foreifi^i
jurisdictions as incident to the main business in this country. This
distinction is artificial and will lead to many difficulties. A fair
rule would seem to be to hold that the source of the income of
non-resident alien employees is in the country where the services
are performed even though payment is made from this country.
NON-RESIDENT ALIENS 49
otherwise would not be taxable, nor does it serve to
relieve from taxation income which otherwise would
be taxed. 81 Dividends, for instance, would not be sub-
ject to the normal tax for the reason that they are paid
to a trustee and by him distributed to non-resident
aliens. 88 Similarly, exempt income is not made tax-
able by passing through the hands of a fiduciary to
the beneficiary. 88 One important class of exempt income
from estates is gifts, legacies, bequests, etc., the prin-
cipal sum being exempt, but the income therefrom being
taxable. 84 Where a non-resident alien is a trustee, or
other fiduciary, of an estate deriving income from
sources within the United States, he is charged with
the duty of making a return of such income, and the
normal tax is withheld at the source on payments of
fixed and determinable income made to him by persons
in this country. 85
INCOME FROM PARTNERSHIPS. Non-resident aliens, who
are members of partnerships deriving all their income
from sources within this country, are taxable on their
entire distributive shares. 88 If a partnership derives
only part of its income from sources within the United
States, non-resident alien partners are taxable only on
that part of their respective shares of the profits which
21 Letter from Treasury Department dated March 25, 1915;
I. T. S. 1917; 1189 and 90.
22 Letter from Treasury Department dated April 5, 1916; I.
T. S. 1917, If 42.
23 Exempt income is not reported by the fiduciary, as income
riccruing to the estate, for the purpose of the tax.
24 See Chapter 25.
25 Letter from Treasury Department dated December 28. 1916;
I. T. 8. 1917, 1 1963. See Chapter 9.
26 See Chapter 10 on partnerships.
F. T. Tax. 4
50 FEDERAL INCOME TAX
represent income of the partnership from such sources. 27
This would seem to be true although the partnership had
its principal place of business here from which the opera-
tions abroad were directed.
PROFITS ON THE SALE OF PROPERTY. Non-resident
aliens are taxable on profits and gains from the sale of
real or personal property located in the United States. 28
Where sales of intangible personal property, for example,
stocks, bonds, notes, etc., of domestic corporations or
residents are made in the United States, the profit is
held to be taxable and the custodian of the securities
here is charged with the duty of reporting the profit of
the non-resident alien, for which purpose he must place
himself in possession of all the facts necessary to an ac-
curate determination of the amount of profit or loss in
the transaction. 29 If a sale of such intangible personal
property is made in a foreign country by a non-resident
alien, it does not seem that the seller would be taxable
on the gain or profit therefrom.
OTHER INCOME. Gains or profits and income derived
from any source whatever in the United States (except
exempt income) are taxable. 30 The questions which arise
27 This is one of the many questions on which the Treasury De-
partment has not as yet made any public statement of its position.
The status of a partner differs from that of a stockholder in a
corporation since in the case of a partnership there is no separate
entity interposed between the recipient of the income and its
original source.
28 See Chapter 20 for method of computing taxable gains on the
srile of property.
29 Letter from Treasury Department dated May 31, 1916; I.
T. S. 1917, U 86.
30 Act of September 8, 1916, 1, 2 and 4.
NON-RESIDENT ALIENS 51
in this connection are with respect to the source of the
income, rather than with respect to its character. .Many
of the questions will be settled only by the slow and
gradual process of development of the law, through liti-
gation and by specific rulings of the Treasury Depart-
ment on cases brought to its attention. 31
Deductions Allowed in Computing Net Income. A
non-resident alien is required to report all his taxable
income from sources within this country, but from the
gross amount so reported is entitled to make certain de-
ductions before the tax is assessed on the remainder.
The deductions are similar in kind to those allowed to
residents and citizens but, in general, are confined to
expenditures made with respect to the income subject to
tax or limited by the proportion of the individual's in-
come derived from sources within this country. An ex-
tended discussion on deducfions is contained in other
chapters, the discussion in this chapter being limited to
the provisions which apply particularly to non-resident
aliens. 32
EXPENSES. All necessary expenses actually paid in
carrying on any business or trade conducted within the
United States may be deducted, but not including per-
31 This development of the law may be hastened l>y action of
Congress in making amendments more clearly defining taxable
sources. At present there is not only uncertainty as to the mean-
ing of the law as it stands, but also a need for amendment. The
phrase "sources within the United States" is too broad ami in-
definite for practical certainty and it naturally results in imposing
tin- tax on incomes in cases where there is serious question as to
the moral right or economic wisdom of so doing.
32 The deductions allowed to a non-resident alien are set forth
at length in the 1916 Law, 5 6.
52 FEDERAL INCOME TAX
sonal living or family expenses. Where the business
or trade carried on in this country is by means of
separate and distinct branches the expenses are readily
determined. Where the accounts are kept at, and the
business is under the supervision of, the home office
abroad, the home office expenses connected therewith,
if segregated, may be included. If not segregated, the
Treasury Department has permitted the deduction of
such proportion of the entire expenses of the business
as the gross income from this country bears to the entire
gross income from business done both within and with-
out the United States. 33
INTEREST. The proportion of all interest paid within
the year by a non-resident alien on his indebtedness,
(except on indebtedness incurred for the purchase of
obligations or securities the interest upon which is
exempt from taxation as income under the 1916 Law)
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
may be deducted. For instance, if half of the indi-
vidual 's gross income for the year is from sources within
the United States, he may deduct one-half of the entire
amount of interest he has paid during the year on his
indebtedness. To obtain this deduction it is required
that the claimant report the entire amount of interest
paid during the year and his entire gross income from
all sources, so that the Treasury Department may cal-
culate the amount of deduction to which he is entitled. 34
33 See Chapter 28 for general discussion of deduction of busi-
ness expenses.
34 See Chapter 29 on deduction of interest.
NON-lU;sil)KNT A 1. 1 1 V- 53
TAXES. Subject to the limitations applicable to all
classes of taxpayers, the non-resident alien may deduct
all taxes imposed by the authority of the United States
or its territories, or possessions, or under the authority
of any State, county, city, school district, and other
taxing subdivision of any State, and paid within the
United States. The general limitations are discussed in
a subsequent chapter. 85
LOSSES INCURRED IN TRADE. Losses incurred in the
non-resident alien's business or trade may be deducted,
if actually sustained during the year and incurred in
business or trade conducted within the United States.
Losses of property within the United States arising from
fires, storms, shipwreck or other casualty, and from theft,
may also be deducted to the extent that such losses are
not compensated for by insurance or otherwise. 36
Loss NOT INCURRED IN TRADE. In the case of losses
in transactions entered into for profit but not connected
with his business or trade, the losses actually sustained
during the year may be deducted to an amount not ex-
ceeding the profits arising therefrom in the United States.
The profits arising from such transactions must be re-
ported as income, and the losses sustained therein may
be deducted, to an amount not exceeding the income so
reported. It seems that the tax is imposed on the net
profits of the year on a series of such transactions taking
place in this country, the loss in one transaction being
set off against the gain in another. But if the entire
series of transactions results in a loss, that loss may not
be set off against income from busines or trade in this
35 See Chapter 30 on deduction of taxes.
36 See Chapter 31 for general discussion of losses.
54 FEDERAL INCOME TAX
country. What constitutes losses not incurred in trade
is explained in another chapter. 37
BAD DEBTS. Debts, arising in the course of business
or trade conducted by him within the United States,
due to the taxpayer, actually ascertained to be worthless
and charged off within the year, may be deducted. 38
DEPRECIATION. A reasonable allowance for the ex-
haustion, wear and tear of property within the United
States, arising out of its use or employment, is granted
under the same rules and regulations as apply to resi-
dents. 39
DEPLETION OF NATURAL RESOURCES. A reasonable
allowance is permitted for the depletion of oil and
mineral deposits, if the property is within the United
States. This depletion allowance is granted under cer-
tain rules and restrictions more fully discussed in the
chapters dealing with that subject. 40
DIVIDENDS.. Taxable dividends received from; this
country must be reported. They are excluded from the
net income for the purpose of computing the normal tax,
but included for the purpose of computing the super-
taxes.
TAX WITHHELD AT THE SOURCE. As the law requires
the normal tax to be withheld by the one in this country
37 See Chapter 4 for definition of losses not incurred in trade.
38 See Chapter 31 for general discussion of deduction of bad
debts.
39 See Chapter 32 on depreciation.
40 See Chapter 33 and Chapter 34 on depletion.
NON-RESIDENT ALIENS 55
who pays fixed or determinable income to a non-resident
alien,* 1 a due credit for the amount so withheld is allowed
to be claimed in filing the annual return. The non-
resident alien should therefore keep a record of the
amount of tax withheld at the source from time to time
on payments made to him, and should report the aggre-
gate sum so withheld in his annual return, in order
that the normal tax may not be twice collected with
respect to the same income.
PERSONAL EXEMPTION. Under the 1916 Law, non-
resident aliens were entitled to claim the same amount
of personal exemption as residents or citizens, provided
they filed the annual return, but by the amendment of
October, 1917, this privilege was revoked. 48 The tax is
now assessed upon all of the non-resident alien's net
income from sources within this country.
Return of Annual Net Income. A non-resident alien,
either personally or through his agents in this country,
is required to file a return of annual net income on or
before March 1 in each year, if his net income from
sources within the United States is $1*000 or over during
the year. 43 He may file the return, although his net
41 See Chapter 41 on collection at the source.
48 The privilege did not exist under the 1913 Law, as construed
hy the Treasury Department, so permission to claim the personal
exemption was extended to non-resident aliens only in the year 1916.
43 The law is obscure on this point. The 1916 Law, 58 (b), re-
quires a return by every person having a net income of $3,000 or
over for the taxable year; the 1917 Law, 3, requires a return
from unmarried persons if the net income is $1,000 or over, and
from married persons if the net income is $2,000 or over. These
amounts are predicated' on the personal exemption allowed to un-
married and married persons, respectively, an exemption to which
56 FEDERAL INCOME TAX
income is less than $1,000, if he desires to claim the
deductions and credits allowed him under the law. 44
Thus, a non-resident alien may have had the tax on all
his income from this country withheld at the source,
although he may be taxable on a lesser -amount by rea-
son of deductions for expenses, interest, losses, etc. Only
by filing a return may he claim those deductions, and
upon so doing, the amount withheld, in excess of his
tax liability, will be returned to him. For the purpose
of obtaining such refund, he should attach to his return
a statement giving the names and post-office addresses
of all persons, firms or corporations who have withheld
the tax on income paid to him during the year, and the
amount of tax withheld by each respectively. The Trea-
sury Department will thereupon order the withholding
agents to release the excess withheld. 45 Non-resident
aliens are entitled to extensions of time for filing returns,
and are subject to penalties for failure to file returns,
under the same provisions of law as apply to citizens. 46
In case a non-resident alien fails to file a return, the
non-resident aliens are not entitled. However, it seems clear that
the law does not require a return of individuals in any case where
the income for the year is less than $1,000, and it would seem
that Congress did not intend to allow a married non-resident alien
any greater exemption because of his married status.
44 The same form (Form 1040) is prescribed for use of all in-
dividuals, residents and non-residents. A non-resident alien pre-
paring the return on this form should bear in mind that it covers
in his case only income from sources in this country, and make
such changes as are necessary to indicate that fact. The additional
information required in order to compute the amount of deductible
interest should be made on a supplementary statement attached to
the return.
46 Telegram from Treasury Department dated January 25, 1917 ;
I. T. S. 1917, If 1997.
46 See Chapter 35 and Chapter 37.
XON -RESIDENT ALIENS 57
collector may assess the tax on information from other
sources, and all property of such alien in this country
will be liable to distraint for the tax. 47 The return is
filed in the district in which the non-resident alien has
his principal place of business in this country, or if he
has none, then with the Collector of Internal Revenue at
Baltimore, Maryland. If the return is filed by an agent
in this country, the place of filing may be either the
district in which the agent resides or the district in which
he has his principal place of business. It should be
borne in mind that a non-resident alien may have an
agent in this country, for the purpose of the income
tax, without having appointed one. The fact that $1,000
or more of income of a non-resident alien is in the
custody or control of a resident of this country, makes
that resident an agent, charged with the duty of making
an annual return and collecting the tax. A non-resident
alien may, therefore, have several agents in this coun-
try, each responsible for the income passing through
his hands. To avoid having a return filed by each, the
non-resident alien may make one return covering all of
his income, or designate one of the agents to make such
return, in which case he must inform the agent so
designated of all his taxable income from sources within
this country. The other agents should also be notified
of the action taken and instructed not to file returns.
The duties and responsibilities of such agents are more
fully discussed in a subsequent chapter.* 8
Paying the Tax. The tax is due on June 15 following
the filing of the annual return, and penalties accrue if
47 Act of September 8, 1916, 6 (c), as amended by Act of
October 3, 1917.
*SSee Chapter 6 on Resident Agents.
58 FEDERAL INCOME TAX
it is not paid within ten days after notice and demand
therefor. 49 If the return is not filed on time, the tax is
due immediately upon assessment, and penalties accrue
if not paid within ten days after notice and demand.
Penalty and interest for delay in payment are added,
as in the case of delinquent residents or citizens. 60 As
to the form in which to make payment see the chapter on
assessment and payment of the tax. 51
Abatement and Refund of the Tax. If upon the
filing of the annual return, it appears that the non-
resident alien is liable for less tax than the amount which
has been withheld at the source, the Treasury Depart-
ment will issue instructions to the withholding agents
(whose names and addresses should be given by the non-
resident alien on his return) to release at once the proper
amounts. 62 After the tax has been assessed against the
withholding agents by the Government, abatement may
be claimed, and after the tax has been paid, refund may
be claimed, in the manner outlined in a later chapter. 63
49 See Chapter 36.
soid.
slid.
52 Telegram from Treasury Department dated January 25, 1917 ;
I. T. S. 1917, If 1997.
53 See Chapter 39 on Abatement and Refund.
CHAPTER 6
RESIDENT AGENTS FOB NON-RESIDENT ALIENS, FOREIGN COR-
PORATIONS AND FOREIGN PARTNERSHIPS
As set forth in another chapter l the law expressly
provides for the collection at the source of the tax on
payment of certain specified forms of income to non-
resident aliens and non-resident foreign corporations.
The persons required to withhold and account for the
tax are designated in the regulations as withholding
agents. The Treasury Department has, in addition,
evolved a method of collecting the tax on income which
may pass out of its jurisdiction, by impressing upon
residents, under certain circumstances, the duty of filing
returns and accounting for the normal tax and the super-
tax on any and all income of non-resident aliens and non-
resident foreign corporations over which they have cus-
tody or control. 2 Such persons are held to be agents of
the non-residents and to stand in the place of their prin-
cipals. 8 One who is a withholding agent under the pro-
visions for collecting the tax at the source may, or may
not, (depending on the circumstances) also be an agent
within the meaning of this chapter. Agents for foreign
1 See Chapter 41 on collection at the source.
2 The Department evidently bases its authority for this on 5 9
(g), of the 1916 Law which provides that the tax shall be paid
by the owner of the income "or the proper representative having
the receipt, custody, control or disposal of the same. " T. D. 24f>2.
3T. P. 2m.
60 FEDERAL INCOME TAX
partnerships are not required to make any returns or pay
any tax for the foreign partnership unless and until they
are so instructed by the Commissioner of Internal Reve-
nue. 4
Definition. In order to simplify the discussion in the
following pages of this chapter the term "non-residents"
will be used to include non-resident aliens, foreign cor-
porations having no office or place of business in this
country, and foreign partnerships having no office or
place of business in this country. 6
Who are Resident Agents. A resident corporation,
partnership or individual, may be an agent within the
meaning of this chapter. Any residents acting by power
of attorney for non-residents are such agents. Re-
sponsible heads or representatives who are in charge of
property owned or business carried on by non-residents
in this country are such agents. 6 Resident nominal
stockholders who hold stock in their names for non-resi-
dent actual owners are such agents. 7 Residents having
custody of securities of non-residents, on which they
collect the income, are agents not only with respect to
the income, but also with respect to any profits made
from the sale of the securities of which they are cus-
todians, and for the purpose of reporting the latter they
are required to obtain all facts necessary to ascertain
4 T. D. 2401. This is because a partnership is not itself subject
to a tax or required to make returns. See Chapter 11 on foreign
partnerships.
5 For definition of ' ' foreign corporations ' ' as used in this book
see Chapter 14. For definition of foreign partnership as used in
this book see Chapter 11.
6 Reg. 33, Art. 8; T. D. 2313.
7 See Chapter 7 on nominal stockholders.
RESIDENT AGENTS FOR NON-RESIDENT ALIENS 61
the profit in any transaction. 8 Residents, purchasing
patent rights from non-residents and paying royalty
thereon, are held to be agents. 9 Real-estate agents who
manage buildings owned by non-residents are such
agents. 10
Who are Not Such Agents. Corporations paying in-
terest on their own bonds, or dividends on their own
stock, to non-residents, bondholders or stockholders, are
not held to be agents within the meaning of this chapter,
although they are withholding agents for the purpose
of collection at the source. Resident debtors, individual
or partnership, are not held to be agents, but are required
to withhold to tax at the source on interest paid to non-
resident aliens. Banks are not agents for their non-
resident depositors, where the relation is merely that of
bank and depositor u and the same has been held where
a bank received interest and dividends direct from
domestic corporations to be credited to the accounts of
non-resident depositors. 18 A bank holding, for account
of foreign banks and bankers, securities on which it
collects interest and disburses the same to the foreign
banks and bankers, has not been held to be an agent, 18
but where a bank acts as custodian of securities for non-
Letter from Treasury Department dated May 31, 1916; I.
T. S. 1917, f 86.
T. D. 2137.
10 Letter from Treasury Department dated January 19, 1915 ;
I. T. S. 1917, H 80.
11 Banks are not held to be withholding agents with respect to
interest paid on deposits. Beg. 33, Art. 67.
18 Letter from Treasury Department dated February 8, 1917;
I. T. 8. 1917, f 2003.
13 Letter from Treasury Department dated April 10, 1916 ; I.
T. 8. 1917, t 120.
t>2 t'JSDEKAL, 1JMUUME TAX
residents other than banks, the rule seems to be that it
is an agent. 14
Duties and Liabilities of Resident Agents. The duty
of a resident agent for a non-resident alien individual
or non-resident foreign corporation is to account for all
income passing through his hands, in an annual return
to the local collector, and to pay all taxes assessed
thereon. 14 * He is under no duty to inquire into or report
any income of the non-resident principal received from
other sources in this country, but may, if authorized by
the non-resident principal, make a complete return of
all income from this country. Where the same non-
resident has several agents, none of whom is authorized
and enabled to make a return of all the principal's in-
come, each agent reports separately the income coming
into his hands, and the Treasury Department takes into
consideration the aggregate amount of net income,
covered by all of the returns, in assessing the tax, giving
credit for the amount assessed on each return, and mak-
ing a further assessment to cover the supertax which
may be due on the aggregate income in the case of in-
dividuals. 16 Of course, if the non-resident principal files
a return of all his income from sources within this
country, the agents are not also required to file returns.
Resident agents should, therefore, ascertain in due time
14 The rulings are not clear or consistent on this point, but it
seems that the rulings bear out the conclusions in the text.
l* a It is uncertain under the language of the 1917 Law whether
or not a resident agent can be required to file a return for a non-
resident principal if the amount of income in his custody is less
than $1,000 during any year. A ruling on this point will be
necessary.
15 Letter from Treasury Department dated March 6, 1917; I.
T. S. 1917, If 2112.
KESIDENT AGENTS FOR NON-KES1DENT ALIENS 63
what their non-resident principals intend to do as to re-
porting and paying the tax, and govern themselves ac-
cordingly.
Procedure in Collecting Income for Non-Residents.
In collecting income subject to withholding of the tax
at the source, the resident agent should execute the own-
ership certificate required of his non-resident principal,
signing it with the name of the principal and affixing
his own signature as agent. 16 In brief, with respect to
such income, he should proceed as is required of the non-
resident principal, in whose place he stands for the pur-
pose of the income tax. The fact that the non-resident
has an agent here does not relieve his income from with-
holding at the source when paid to such agent.
Making Returns for Non-Resident Principal. In
making the annual return for his non-resident principal
the resident agent should use the same form as would
be used by the principal 17 and follow the provisions of
the law and the regulations relating to non-resident
aliens or foreign corporations, as the case may be, in
claiming deductions. At present the same forms are
used for residents and non-residents alike, and, when
used by or for a non-resident alien, require certain
changes in wording, such as a statement at the beginning
that the return covers only income from sources within
the United States. In the affidavit at the end of the
individual's form, to be executed by the agent, a state-
ment should be made that the return covers only the
18 See Chapter 41 on collection at the source.
17 Form 1040, in the case of individuals; Form 1030 or 1030A,
in the case of insurance companies, and Form 1031, in the case
of other corporations.
64 FEDERAL INCOME TAX
income received by the agent, or that it covers all of
the income of the principal from sources within the
United States, as the case may be. The affidavit on the
corporation's form is prepared for execution by two offi-
cers of the corporation. When the return is signed by
an agent for a foreign corporation, an affidavit that he
is the properly authorized agent, and that the report
covers income from all sources within the United States,
or income passing through his hands, as the case may
be, should be attached to the return and duly executed.
The return may be filed in the district in which the
agent resides or has his principal place of business.
Paying the Tax for Non-Resident Principal. After
filing the return, the agent will in due course receive a
notice of assessment showing the amount of tax assessed
on the income reported. 18 The tax becomes due and pay-
able at the same time and in the same manner as the
tax assessed on the income of a resident, and may be
paid in the same way. 19 Upon paying the tax, the agent
may demand a separate receipt for the amount paid on
behalf of his non-resident principal, and such receipt is
sufficient evidence to justify the agent in withholding
the amount therein expressed from his next payment to
the principal, if he has not already withheld a sufficient
18 A special ruling was made to cover cases in 1916, where the
agent for a non-resident alien had received income from corporate
interest or dividends and paid the same over to his principal prior
to September 8. In such cases, if the agent did not have, between
September 8 and the end of the year, any income of the non-
resident alien from which to pay the tax he was relieved from
liability, leaving the tax a charge against the non-resident alien
to be collected direct from him by the Treasury Department. T. D.
2402.
19 See Chapter 36 on assessment and payment of the tax.
RESIDENT AGENTS FOR NON-RESIDENT ALIENS 65
amount to satisfy the tax. The principal may demand
this receipt from the agent upon giving him a full writ-
ten receipt acknowledging the payment of the tax as a
satisfaction of the agent's debt to that extent. 20
Abatement and Refund. Taxes improperly or ille-
gally assessed or collected may be abated or refunded
in the manner indicated in the chapter dealing with that
subject. 81
20 Act of September 8, 1916, 17.
21 See Chapter 39 on refund and abatement.
F. [.Tax. 5
CHAPTER 7
NOMINAL STOCKHOLDERS
For convenience in handling financial transactions,
stock certificates are sometimes issued in the names of
persons other than the actual owners of the stock. The
persons so holding the nominal title to the stock are
known as nominal stockholders, or stockholders of rec-
ord, and, of course, are agents for the actual owners
within the meaning used in the preceding chapter, when
the actual owners are non-resident aliens or non-resident
foreign corporations. Nominal stockholders, acting by_
arrangement between the parties, are, of course, aware
of the name and status of the actual owner, but in some
cases one may become a nominal stockholder without any
knowledge of who the actual owner is. Thus, stock cer-
tificates, endorsed in blank by an actual owner and sold
on the market, may pass by delivery to several consecu-
tive purchasers before the stock is transferred on the
books of the corporation. In such cases, the original
transferor remains the record owner until the transfer
is made on the corporate books, and, as such, is presumed
to be the real owner of the dividends declared on the
stock, unless he proves that actual ownership of the stock
does not rest in him. If, however, the record owner has
not only parted with his certificate endorsed in blank,
but has also given the corporation a "dividend order"
to pay the dividends to another, his responsibility for
the tax on such dividends ceases, and the one to whom
66
NOMINAL STOCKHOLDERS 67
the corporation pays the dividends becomes liable for
any tax thereon, unless he in turn shows that actual own-
ership does not rest in him. Where the stockholder of
record continues to receive the dividends and subse-
quently pays them over to the one claiming to be the
actual owner, or agent for the actual owner, he should
ascertain the name and address of the one to whom
the payment is made, and, if such payee is not a non-
resident alien or a non-resident foreign corporation, the
nominal stockholder is under no further duty than, per-
haps, to report the name and address of the payee under
the provisions of law requiring information at the
source. Thus, if a nominal stockholder pays over the
dividend to a resident, even though he knows such resi-
dent to be the agent of a non-resident alien, he is under
no duty as agent, since it is the one who collects the
dividend for a non-resident or who finally pays it over
to a non-resident, who has impressed upon him the duty
of agent within the meaning of the preceding chapter.
Procedure When Actual Owner Is a Resident or
Citizen. The Treasury Department has as yet issued
no regulation requiring the nominal or record owner of
stock to disclose the names of actual owners who are resi-
dents or citizens. 1 The primary purpose of requiring
disclosure of the actual owner is to assist in administer-
ing that provision of the 1916 Law which makes divi-
dends on domestic stocks taxable when paid to non-resi-
dent aliens and requires withholding when paid to non-
n -si dent foreign corporations. 8 The actual owner is, of
l The rulings on this subject have not always been consistent
but it seems that the statements contained in this chapter represent
the present attitude of the Treasury Department.
8 Letter from Treasury Department dated November 21, 1916;
I. T. S. 1917, If 183. %
68 FKUEKAL INCOME TAA
.ourse, in all cases under the duty of reporting the divi-
dends and paying tax thereon, if he is liable; the
nominal stockholder is under no duty to report the divi-
dends as his income, but should be prepared, if question
arises, to show that the actual ownership does not rest
in him.
Procedure When Actual Owner Is Non-Resident.
Where the nominal stockholder is a resident of this
country and is acting for, or paying the dividends to
an actual owner who is a non-resident alien individual,,
or a foreign corporation or partnership having no office
or place of business in this country, a certificate 3 should
be obtained by the nominal owner from the actual owner,
disclosing the facts of such ownership, which certificate
is required to be forwarded by the nominal owner to the
collector of internal revenue in the manner stated below.
A certificate of actual ownership once filed is held to be
sufficient until ownership changes, when it is necessary
to disclose the new actual owner, as in the first instance.
In such cases, the nominal stockholder is deemed to be
an agent in this country for the non-resident actual
owner and will be required to make a return of net in-
come and to pay any tax due on the dividends which pass
through his hands, just as other agents for non-resident
aliens are required to do under the law.* The certificates
disclosing actual ownership should be attached in such
cases to the return of income filed for the actual owner.
If the amount of income is so small that no annual re-
turn is required, the certificates disclosing actual own-
3 This certificate is officially known as Form 1087.
* See Chapter 6 for duties of agent as to making returns and
paying tax for non-resident aliens and non-resident foreign corpo-
rations.
NOMINAL STOCKHOLDER <>!
ership should nevertheless be filed with the local collector
as proof of the fact that the nominal stockholder is not
the actual owner of the stock. If the actual owner is a
non-resident alien partnership, the nominal owner is re-
quired to make no return and account for no tax unless
and until he is so instructed by the Commissioner of In-
ternal Revenue; certificates disclosing the actual owner-
ship skould, however, be obtained by the nominal stock
holder and transmitted to the local collector. 5
Procedure When the Nominal Stockholder Is a Non-
Resident Alien. When the record owner of stock of
domestic or resident corporations is a non-resident alien
individual or partnership, he or it should disclose the
actual owner, or the tax will be assessed on the basis of
apparent ownership. When the actual ownership is dis-
closed, the Commissioner of Internal Revenue will make
such assessments and issue such instructions to the pay-
ing corporations in this country as will insure the proper
collection of the tax in accordance with actual tax
liabilities. The certificates disclosing ownership should
l>e filed by non-resident alien individuals and partner-
ships with the Collector of Internal Revenue at Balti-
more, Maryland, being attached to the return of annual
not income of the nominal stockholder, if such a return is
filed. In case the non-resident nominal stockholder is a
corporation or organization against which the tax will be
withheld at the source on payments of dividends, tbo
i-orlificate disclosing actual ownership may be filed with
the corporation paying the dividend or its paying agent
in the United States, 8 and upon the filing thereof, the
T. D. 2401.
6T. D. 2452. The form to he used is Form 10.17 striking out
tin- words "to be filed with representative in the United
70 FEDERAL INCOME TAX
paying corporation will not withhold the tax upon such
amounts as are shown by the certificates disclosing actual
ownership to be owned by others than non-resident
foreign corporations or organizations subject to with-
holdirg. If the certificates disclosing actual ownership
indicate that the actual owner is a non-resident foreign
corporation, the corporation paying the dividend will
deduct the tax on the amounts of dividends paid to the
nominal stockholder for the account of such non-resident
foreign corporation. 7 There is no duty on the part of
a non-resident nominal stockholder to file any return or
account for any tax on behalf of the actual owner. That
duty is imposed only when the nominal stockholder is a
resident of this country. 8 A foreign partnership, al-
though not itself subject to tax, should file certificates
disclosing the actual ownership of stock standing in its
name, in order to re^ase its individual members from
the tax liability which would otherwise attach on their
distributive shares of the partnership profits by reason
of the apparent ownership.
Dutch Administration Offices. A special ruling has
been made with respect to the so-called "Administra-
of such foreign principal" in the capt'on and the words "in the
United States" in the body of the form, and executing the certifi-
cate as the representative of the actual owner in the space provided
for signature.
7 Letters from Treasury Department dated October 6, 1917, and
October 23. 1917; I. T. S. 1917, H 2466 and 2467.
8 T. D. 2452 ?eems to" impos" such a duty on non-residents, hut
a subsequent letter from the Treasury Department dated April
7, 1917 (T. T. S. 1917, If 2187), states that the requirements Pet
forth in that T. D. to the effect that the nonrnal owner will be
required to render annual returns for and in behalf of the actual
owner applies only to such nominal owners as are residents of the
United States.
NOMINAL STOCKHOLDERS 71
tion Offices" in Holland, which has application to many
similar situations in foreign countries. It appears that
the Dutch Administration Offices are the registered
owners of large blocks of American stocks, against which
they have issued bearer certificates, with coupons at-
tached. These coupons on presentation and surrender
entitle the bearer to dividends declared on the stock. The
Administration Offices are held to be agents for the
holders of the bearer certificates and are prima facie
liable for the tax on all dividends paid on the stock
standing in their names, unless they disclose the names
of the actual owners by use of the proper certificates. 9
They are required to make returns of income and pay
the tax on all dividends received, except such amounts
as are shown by certificates disclosing actual ownership
to have been received for the account of non-resident
alien individuals. Such certificates should be attached
to the return when filed. 10
Bearer Certificates. When stock of an American cor-
poration is floated in some European countries, where
investors are accustomed to bearer stock certificates, a
block of the stock is sometimes issued to a trust com-
pany in this country which in turn issues bearer cer-
tificates entitling the holder to certificates of stock for
the number of shares designated, upon the surrender of
the bearer certificate, and to any dividends which may
Fonn 1087.
10 T. D. 2386. The Treasury Department also provided in this
treasury decision for the appointment of an agent in this country
by such Administration Offices, upon doing which the tax will not
be withheld at the source. It seems, also, that by filing certificates
disclosing actual ownership with the paying corporation withhold-
ing at the source may be avoided to the extent indicated in T. D.
2452.
72 FEDERAL INCOME TAX
be declared on such shares while the bearer certificate
is outstanding. The bearer certificates pass by delivery,
the dividends being claimed through foreign banks by
presentation and surrender of numbered coupons at-
tached thereto. In such cases the trust company is in
the position of a resident nominal stockholder and to
avoid liability for the tax on dividends received by it
on such stock, should obtain and file certificates disclos-
ing actual ownership and proceed in other respects as
Indicated above.
CHAPTER 8
FIDUCIARIES
The law provides that ' ' Guardians, trustees, executors,
administrators, receivers, conservators, and all persons,
corporations, or associations, acting in any fiduciary
capacity, shall make and render a return of the income
of the person, trust, or estate for whom or which they
act, and be subject to all the provisions of this title
which apply to individuals." 1 For the purpose of dis-
cussion in this book fiduciaries are divided into
two classes, this chapter dealing with the subject in
general and with the particular provisions applicable
to domestic fiduciaries, that is, those which reside in this
country or have an office or place of business here and
consequently are within the jurisdiction of this Govern-
ment. Foreign fiduciaries, which subject is treated in
the following chapter, are defined for the purpose of
this book as fiduciaries who neither reside in this coun-
try nor have an office or place of business here, that is,
those who are not within the jurisdiction of this Gov-
ernment. A non-resident citizen acting as a fiduciary
would, it seems, be entitled to be classed with the do-
mestic fiduciaries since the United States has some
measure of jurisdiction over him as a citizen, and since
the withholding provisions of tho law do not apply to
non-resident citizens.
I Art of September 8, 1916, 8 (c).
73
74 FEDERAL INCOME TAX
Who Are Fiduciaries. It will be noted by the pro-
vision of the law quoted in the preceding paragraph
that an individual, a corporation or an association may
be a fiduciary under the law. A fiduciary for income
tax purposes is one who holds in trust an estate to
which another has the beneficial title or in which an-
other has a beneficial interest, 2 or receives and controls
the income of another as in the case of receivers.
AGENTS. An agent, as such, is not a fiduciary for
his principal even though he may have complete charge
of the property of his principal. 3 There may be a
fiduciary relationship between an agent and a principal
but the word "agent" does not denote a fiduciary
within the meaning of the law. 4
POWER OP ATTORNEY. A person cannot, by power
of attorney, appoint another to act as a fiduciary. A
person acting under a power of attorney in the man-
agement of property, having no title thereto, but with
full authority to deal with the property as he sees fit, is
merely an agent. A power of attorney does not constitute
a fiduciary relationship, and, in all cases where no legal
trust has been created in the estate controlled by the
agent and attorney, the liability under the law to make
returns and pay the tax rests with the principal. 5
GUARDIANS. A legal guardian is a fiduciary but it
does not seem that a natural guardian comes within the
definition. It has been held by the Treasury Depart-
2T. D. 2090.
3T. D. 2135.
4T. D. 2090.
5T. D. 2137.
FIDUCIARIES 75
ment that where a minor child is in receipt of income,
the father, his natural guardian, cannot make a return
covering the income of the child but should include the
income of the minor as a part of his (tlje father's) in-
come for the year. 6 The income of a minor child can be
reported separately only when a separate legal estate has
been created.
TRUSTEES. Trustees are expressly specified in the law
as fiduciaries. They are required to report the income
of the trust and the distributive interests therein of
the beneficiaries. If a part of the income of the trust
for any year is not distributed or distributable the in-
come tax, both normal and supertax, on that part, as an
entity, must be reported by the trustee and the tax paid
by him.
EXECUTORS AND ADMINISTRATORS. Executors and ad-
ministrators are fiduciaries with respect to the estate of
the deceased person under their control. They are sub-
ject to certain special duties with respect to reporting
income of the deceased and reporting and paying the
tax upon the entire income of the estate during the
period of administration or settlement, as more fully
indicated in the following paragraphs.
RECEIVERS. A receiver for an individual is a fiduci-
ary but a receiver for a corporation is not. 7 It is especi-
ally provided that receivers, trustees in bankruptcy,
Letter from Treasury Department dated October 30 1916,
I. T. S. 1917, U 248. To hold otherwise would, of course, give eud-
less opportunity for evasion of the law.
7 Letters from Treasury Department dated February 27, 1915,
and June 22, 1916; I. T. S. 1917, ff 597 and 598.
76 FEDERAL INCOME TAX
or assignees operating the property or business of a
corporation shall make returns of the income in the
same manner and form as is required of corporations,
and the tax w^ll be assessed and collected in the same"
manner as if assessed directly against the corporation of
whose business or properties they have custody and
v control. 8
TEMPORARY RECEIVER HELD TO BE FIDUCIARY. One
appointed under interlocutory orders of the United
States District Court to act as receiver of an individual
in a proceeding wherein certain persons complaining
as creditors were seeking to have the property of the
individual distributed among them, was held to be a
fiduciary, notwithstanding that title to the property
in question (cash and securities) remained in the indi-
vidual sued and that his position and right to deal with
the same was only suspended. The receiver having
received income from the property in his possession
was required to file a return as a fiduciary. 9 On the
amount reported in the return as income, a tax would
be paid as in the case of undistributed net income of
estates.
COMMITTEE FOR AN INCOMPETENT. The committee for
an incompetent person is regarded as a fiduciary. 10
Who Are Beneficiaries. A beneficiary within the
meaning of the law and the regulations, and in the
sense used in this book, is the ward, cestui que trust,
8 Act of September 8, 1916, 13 (c).
9 Letter from Treasury Department dated January 22, 1917.
10 Letter from Treasury Department dated February 21, 1916;
I. T. S. 1917, 1ffl 605 and 606.
KUHTIAKIKS 77
legatee, distributee, creditor, or other person entitled
to any part of the net income of a trust or estate in
the charge of a fiduciary. The trust estate itself is
called a beneficiary with respect to the undistributed
income of the estate.
Duties of Fiduciaries Generally. Fiduciaries are re-
quired by the law to "make and render a return of
the income of the person, trust, or estate for whom
or which they act, and be subject to all the provisions
of this title which apply to individuals. ' ' n Where
income has been received by an estate or from any
kind of property held in trust, the tax is to be assessed
against the fiduciary, unless (a) the income is returned
for the purpose of the tax by the beneficiary or (b)
the income is to be distributed annually or regularly
between existing beneficiaries, in which case the rate
of tax and method of computing the same is based
ii|Miii the amount of the individual shares to be
e.
Distribution of Income of Trust Estates. When any
part of the net income of a trust estate for any year
is distributed to beneficiaries, the fiduciary is required
to report the respective amounts paid or credited to
each beneficiary. The beneficiaries are required to
report such amounts in their personal returns and add
the same to income from other sources in order to
determine their respective tax liabilities. If a bene-
ficiary is a non-resident alien the normal tax must be
withheld at the source and the fiduciary will also be
required to account for the supertax, and to make
returns for the non-resident alien beneficiary in the
same manner as other resident agents for non-resi-
dent aliens are required to do. 27 If the beneficiary
is a minor, or is incompetent, the fiduciary will be
required to make the return for him and to pay the
tax for him as his agent.
INCOME NOT ACTUALLY PAID TO BENEFICIARIES IN
YEAR. Fiduciaries having control of income accruing
during the year to a known beneficiary, whether or not
actually distributed or paid to the beneficiary during
the year, are required to report the name of the bene-
ficiary to whom such distributive interest accrues, and
in all such cases the tax is assessed to the beneficiary
on the basis of his taxable status. Where the tax on
such annual income has been paid, it is not again pay-
able when later that income is actually turned over to
27 See Chapter 6 for duties of resident agents for non-resi-
dent aliens.
j-imvi \i;n> S")
the beneficiary. 88 The theory seems to be that such
income is separated from the estate when it is credited
to the bi'iit'firiary, the fiduciary thereafter holding it,
not as fiduciary, but as agent for the beneficiary.
DISTRIBUTION OP INCOME OP SEVERAL YEARS. Where
a decedent died in 1913, leaving a will devising a part
of his estate in trust to pay the income therefrom to
one beneficiary during life, and other parts to be divided
among other beneficiaries, and it was impracticable for
the executors to complete distribution of the estate or
determine the amount of net income until 1916, at which
time an account was prepared showing the net income
accruing to each beneficiary during the last three months
of 1913 and during the years 1914 and 1915, a large
part of the accumulated income being distributed in
1916, it was held that the executors should make a fidu-
ciary return for each of the years 1913, 1914, 1915 and
1916, reciting therein the respective beneficiaries and
their interests, and the beneficiaries could make amended
returns for such of those years in which they would be
taxable by reason of the amount so distributed. 89 In
this case, apparently, the respective shares of the bene-
ficiaries were known at all times, but the amount of net
income of the estate was not determinable until 1916.
Where the interests of the beneficiaries are not deter-
minable, but the income is, the rules discussed in the
following paragraphs apply.
Undistributed Income of Trust Estates. The 1913
Law was silent as to the taxability of undistributed
28 T. D. 2289, Reg. 33, Art. 75.
29 Letter from Treasury Department dated March 24, 1917;
I. T. S. 1917; U2172.
86 FEDERAL. INCOME TAX
income of trust estates. It was first held by the Treas-
ury Department that if income was added to the corpus
of the estate, under a provision of the will or under
a statute, no tax would accrue with respect thereto,
but later, under that Law, it was held that such income
was taxable, as an estate could not be without a bene-
ficiary for income tax purposes. Where the beneficiaries
and their beneficial interests were known the income was
to be reported as accruing to them and the estate itself
was to be listed as a beneficiary as to any of its income
not otherwise beneficially assigned or accounted for. 30
In the case of decedents' estates, however, it was still
held that the executor of the estate was required to
make no return for the estate until the settlement thereof
had reached a stage where the beneficiaries and their
respective interests in the income were determinable,
at which time returns should be made showing the
annual accrual, a separate return being required for
each tax year involved. 31 These rulings, however, do
not apply under the express provisions of the 1916 Law
discussed in the following paragraphs.
INCOME RECEIVED DURING SETTLEMENT OF DECEDENT'S
ESTATE. "Income received by estates of deceased per-
sons, during the period of administration or settlement
of the estate, shall be subject to the normal and addi-
tional tax," the tax to be assessed against the executor
or administrator and paid by the estate, except when
the income is returned for the purpose of the tax by
the beneficiary. If the income is to be distributed
30 T. D. 2231.
31 Letter from Treasury Department dated March 4, 1916;
I. T. S. 1917, 1f576. See also 11575; T. D. 2289; T. D. 2231 and
T. D. 1943.
FIDUCIARIES 87
annually or regularly among existing heirs or legatees,
or beneficiaries, and the latter report their respective
shares, the estate is not taxed, the rate of tax and method
of computing the same being then based in each case
upon the amount of the individual share to be dis-
tributed. 88 Thus, where a specific legacy is contained
in a will, the legatee has a vested interest and is entitled
to the income therefrom during the period of admin-
istration and settlement of the estate. The amount of
such income is reported by the fiduciary as accruing
to the legatee and is not taxed as a part of the income
of the estate during the period of settlement.
INCOME OP ESTATES OB PROPERTY HELD IN TRUST. The
1916 Law provides that "income of estates or any kind
of property held in trust," received during the period
of administration or settlement, "including such income
accumulated in trust for the benefit of unborn or
unascertained persons, or persons with contingent inter-
ests, and income held for future distribution under the
terms of the will or trust," shall be subject to the
normal and additional tax and be taxed to the estate,
"the tax in each instance, except when the income is
returned for the purpose of the tax by the beneficiary,
to be assessed to the * * * trustee." Where, how-
ever, the income is to be distributed annually or regu-
larly among existing heirs, legatees, or beneficiaries, the
rate of tax and method of computing the same shall
be based in each case upon the amount of the individual
share to be distributed.
Procedure in Reporting Undistributed Income. It
seems from the provisions of the 1916 Law and the
32 Act of September 8, 1916, 5 2 (b).
88 FEDERAL INCOME TAX
rulings which have been made from time to time under
the 1913 Law, that all of the net income of an estate,
for each calendar year, shall be accounted for and be
subject to tax. If the income is distributed to or set
aside for the beneficiaries, they will report the amount
of their respective shares as a part of their income.
If the beneficiaries are known, and the intent of the
will or deed of trust is that the income shall be dis-
tributed annually or regularly among them, such bene-
ficiaries, their respective shares of such income being
determined, should add the amount thereof to their
other income for the year and pay the tax accordingly,
whether or not their respective shares are actually paid
to them. The trustees, in such cases, will report that
the shares have been credited to the beneficiaries and
treat the amounts in the same manner as though actually
paid out. If any part of the income is not distributed
annually, because the various interests therein are not
known, the estate, as an entity, will be reported as the
beneficiary of that portion of the net income and the
tax will be paid thereon by the fiduciary. Where estates
are administered for the purpose of accumulating income
for minor beneficiaries, or other persons with contingent
interests, the annual income will be considered as income
of the estate, from year to year, assuming thereupon
the status of capital or corpus of the estate. If the
final disposition of each year's income is certain, that
is, the identity of .the beneficiaries who will receive it
is known, so that their respective shares of such income
can be segregated and set aside, for income tax purposes,
the returns may be made, and the tax paid, in accord-
ance with the respective tax liabilities of such bene-
ficiaries. In short, the purpose of the 1916 Law is to
tax the estate, as an entity, on all of that income for
FIDUCIARIES 89
any year which cannot be definitely and legally assigned
to some beneficiary as his income. For the purpose of
t he income tax, an accumulation of income,- in the hands
of a trustee, which cannot be taken or treated by some
taxable person as his income, is income to be taxed to
the estate. 33 If the net income is, and legally can be,
returned for the purpose of the tax by a beneficiary
other than the estate or trust, it is taken out of the class
of undistributed income.
RECEIVER. A receiver in partition proceedings is re-
quired to report at the close of each year during the
pendency of the partition suit, the net income collected
from the property during such year, and pay the tax
thereon. 84 Where an executor under a will is also re-
ceiver in partition proceedings the income accruing to
him as receiver should be reported separately and not
added to the income received by him as executor, if the
receivership is separate and apart from the matter of
administration and settlement of the estate.
Specific Exemption to Trust Estates. Before assess-
ing the tax on undistributed net income received during
the period of administration or settlement of the estate
of a deceased citizen or resident of the United States,
or on the undistributed income of trust or other estates
of citizens or residents of the United States, the sum of
$3,000 is allowed under the 1916 Law, and $1,000 under
the 1917 Law, as a specific exemption, in addition
to the deductions provided by law for determining the
33 See T. D. 2231, and letter from Tn-nMirv D.-partment dated
October 19, 1915, I. T. 8. 1917, 1581.
34 Letter from Treasury Departim-nt -hired March 14, 1917;
I. T. S. 1917, "2171.
90 FEDEKAL INCOME TAX
net income. 35 This specific exemption, it seems, is ap-
plicable to all trust estates where the decedent was a
resident or citizen of this country, or the trust was
created by a resident or citizen of this country, and is
not dependent upon the status of the persons who may
have a contingent interest in the undistributed net
income. "Where the beneficiaries are known, the guar-
dian, trustee or other fiduciary, making a return for the
beneficiary, is allowed to claim the same personal exemp-
tion on behalf of each beneficiary as the beneficiary
would be entitled to claim if the return were made by
him.
Returns by Fiduciaries. Fiduciaries are required to
make the return of annual net income on or before
March 1, in each year, covering the income received by
the trust estate during the preceding calendar year.
This return is required to state the total amount of
income received, (except exempt income) the allowable
deductions claimed against such income, the net in-
come, and the respective amounts distributed to the re-
spective beneficiaries or retained by the estate as un-
distributed income. 36
BY WHOM FILED. The return is filed by the fidu-
ciary having charge of the trust estate. In making the
return, and in all other respects, he is subject to all
the provisions of the law which apply to individuals.
Where there are two or more joint fiduciaries of a trust
estate, the return may be made by one of the fiduciaries
35 Act of September 8, 1916, 7, as amended by Act of October
3, 1917, and 3, Act of October 3, 1917.
36 Act of September 8, 1916, 8 (c), as amended by Act of
October 3, 1917. See also Form 1041, prescribed for use of
fiduciaries.
FIDUCIARIES 91
and such a return is a sufficient compliance with the re-
quirements of the act. 37
WHEN A RETURN Is REQUIRED. A return is required
whenever the income payable to any one beneficiary in-
cluding dividends exceeds the minimum specified by
law. 38 The 1916 Law provides that no return of income
not exceeding $3,000 shall be required "except as in this
title otherwise provided." The 1917 Law provides that
a return shall be required in case of net incomes of
$1,000 or over, in the case of unmarried persons, and
$2,000 or over in the case of married persons. No ruling
has yet been issued construing these provisions. Under
the 1913 Law a fiduciary return was required where
any beneficiary's interest was $3,000 or over, and it
would seem that under the present law a return is re-
quired whenever any beneficiary's interest, or the amount
of the undistributed income, exceeds $1,000. 39 In the
1913 Law there was no specific provision taxing the un-
distributed income of decedents' estates, and it was held
that no return need be made by fiduciary until the
settlement of the estate had reached a stage where the
beneficiaries thereof and their respective interests in the
income of the estate were determinable, and thereafter
a fiduciary was required to file a return on or before
March 1st of each year. 40 The present law requires a
return annually while the estate is in process of settle-
ment and the payment of the tax by the estate on the
undistributed income received during that period.
37 Act of September 8, 1916, 8 (c), as amended by Act of
October 3, 1917.
38 Letter from Treasury Department dated January 4, 1917;
I. T. S. 1917, U 1971.
39 Telegram from Treasury Department dated February 1, 1916;
I. T. 8. 1917, 1H637 and 638.
40 T. D. 1943.
92 FEDERAL INCOME TAX
FIDUCIARIES ACTING IN MORE THAN ONE ESTATE.
Where a fiduciary acts for a beneficiary in more than
one estate or trust each estate requires a separate re-
turn 41 unless the creator of the trust in each instance
is the same person and the trustee in each instance is the
same person, in which case, the trustee may make a
single return for all the trusts in his hands, notwith-
standing the fact that they arise from different instru-
ments. This ruling is based on the identity of the
creator and the identity of the trustee of the various
trusts, and not upon the identity of the beneficiaries. 42
WHERE FILED. The return of annual net income
should be filed in the collection district in which the
fiduciary resides or has his place of business, regardless
of the residence of the beneficiaries. Where an estate
has two or more joint fiduciaries the return may be
filed by one of them, in the district where he 'resides,
such filing being sufficient compliance with the law. 43
WHEN FILED. The annual return must in all cases
be filed on or before March 1 of the year following that
for which the income is reported. Although a fiduciary
may be a corporation, no privilege is extended for the
filing of the return for any other period than the calen-
dar year. The same general rules applicable to the
filing of returns by individuals apply to the returns by
fiduciaries. The same extension of time may be granted,
and the same penalties are imposed for failure to file
returns. 44
41 T. D. 2090.
42 T. D. 2137.
43 Act of September 8, 1916, 8(c), as amended by Apt of
October 3, 1917.
44 See Chapter 35.
FIDUCIARIES Ho
OF A N N i \L RETURN. The annual return
of a trust estate is prepared in the manner indicated
on the form supplied by the Government. No special
rules are applicable to fiduciaries, except that where the
fiduciary .still retains income received during the year,
and the beneficiary is known, the return should show
the amount actually paid to the beneficiary during the
year and separately the amount to which the beneficiary
is entitled, but which has not actually been paid over. 46
How SIGNED AND SWORN TO. The law provides that
the fiduciary shall make oath that he has sufficient
knowledge of the affairs of such person, trust, or estate
to enable him to make such return and that the same is,
to the best of his knowledge and belief, true and cor-
rect. 46 When the return is signed and sworn to by an
individual as a fiduciary his full address must be stated.
If the fiduciary is an organization, the return shall be
signed and sworn to by the president, secretary or
treasurer. 47
Returns for Beneficiaries. As a general rule the
fiduciary is not required to make any return for and
on behalf of his beneficiary. If, however, the fiduciary
has-been legally authorized to act as agent for the Ix-nr
ficiary, or as attorney-in-fact, he may also make ami
file the personal annual return of the beneficiary in the
same manner as any other duly authorized agent may
do. 48 If the beneficiary is incapable of making his u\\ u
46 Letter from Treasury Department dated February 18, 1916;
I. T. S. 1917, t 639.
48 Act of September 8, 1916, (8 (c), as amended by Act of
October 3, 1917.
47 Reg. 33, Art. 73.
48 KI-JT. ::::. Art. ?L'.
94 FEDERAL INCOME TAX
return, or is a non-resident alien, the fiduciary is re-
quired to make the personal return for him, as indi-
cated in the following paragraphs.
FOR MINOR OR INSANE PERSON. Where the. fiduciary
acts for a single beneficiary who is a minor or an insane
person, he is not required to file a fiduciary return for
the trust estate but will make a personal return for his
ward on the form prescribed for individuals. If, how-
ever, a fiduciary has more than one ward by reason
of the same estate or trust, he makes the fiduciary re-
turn, and also a separate return for each ward having a
net income of $1,000, if unmarried, or $2,000, if mar-
ried. 49 In all cases where fiduciaries act for minors
or incompetents they are held for the purpose of the
income tax to be acting as the agents of such minors
or incompetents and must pay all tax, normal and addi-
tional, chargeable on such income in their hands, as
though the persons for whom they act were acting for
themselves. 50 In the year in which a minor becomes of
age, the guardian should make a fiduciary return for
the period between the beginning of the year and the
day on which the beneficiary becomes of legal age. At
the close of the year the beneficiary makes his own re-
turn including therein the amount of income received
from the fiduciary during the year.
FOR NON-RESIDENT ALIEN BENEFICIARIES. When
there is only one beneficiary, who is a non-resident
alien, the fiduciary files only one return, that is. the
personal annual return for and on behalf of the non-
49 T. D. 2090.
50 T. D. 2231.
FlDUCIAiU-fcS ( J5
resident alien, 51 signing the same as agent, reporting
therein as income of the non-resident beneficiary the
amount received by the estate or trust. If there are
two or more beneficiaries, or if a part of the income
accruing to the trust or estate is not distributed, the
fiduciary is required to make a return as fiduciary
and a separate personal return for each non-resident
alien beneficiary. 58 The fiduciary must account for
the normal and additional tax of non-resident alien
beneficiaries in the same manner as any other agent
for a non-resident alien is required to do. 63
Income to Be Reported by Beneficiary. As stated in
the foregoing part of this chapter unless the beneficiary
is under some disability which requires a fiduciary to
act, the beneficiary makes his own personal return and
accounts for the tax upon his entire net income, in-
cluding that which has been received from the estate. 54
The fiduciary is not under any duty to account for or
pay the tax on amounts distributed to beneficiaries
where the beneficiary is capable of making his own re-
turn and is not a non-resident alien. The beneficiary
reports the income for the year in which it is received
by him or credited to him. The amount to be reported
by the beneficiary, as his income from the trust estate,
is the amount actually received from the fiduciary or
actually credited to him, as his income, by the fiduciary,
that is, the actual amount of income to which he ob-
tains legal title during the year. 55
61 Form 1040 is the form to be used for this purpose.
62 T. D. 2313.
63 See Chapter 6.
64 T. D. 2090.
66 Act of September 8, 1916, 82 (b).
96 FEDERAL INCOME TAX
Withholding at the Source Against Fiduciaries. The
provisions with respect to withholding the tax at the
source apply in the case of payments to fiduciaries in
the same manner as in the case of payments to indi-
viduals. There is, generally speaking, no withholding
at the source on payments to citizens and residents of
this country and, it follows, there is no withholding at
the source in the case of a fiduciary who is a citizen or a
resident, or has an office or place of business in this
country. The one exception to this rule is the with-
holding of one 2% normal tax on interest paid on obli-
gations of corporations containing a tax-exempt cove-
nant. In such cases the tax is in theory withheld, but
not in actual fact, since the paying corporation assumes
the burden of the tax, paying the interest in* full to its
bondholder. Although the fiduciary may be a corpora-
tion, in its capacity as fiduciary, it is subject to the pro-
visions of law applicable to individuals and not to cor-
porations, hence on payments of such interest as that
referred to in the preceding sentence, the paying cor-
poration will be required to treat the corporation fidu-
ciary as an individual and assume the burden of the
2% tax. 56
Withholding at the Source by Fiduciaries. A fidu-
ciary is under the same duty to withhold the tax at
the source as is an individual, partnership or corpora-
tion, that is, the tax is withheld at the source upon
all annual or periodical payments of fixed and deter-
minable income to non-resident aliens in the manner
required by the law. 57 No withholding by a fiduciary
56 See Chapter 41 on collection at the source.
57 Id.
FIDUC1AHIKS !7
is required in the case of payments to citizens or resi-
dents of this country or to corporations or partnerships.
Information at the Source. The fiduciary is subject
to all the provisions of the law requiring information
at the source. These requirements are discussed in full
in a subsequent chapter. 68
68 See Chapter 40 on information at the source.
F. I. Tax 7
CHAPTER 9
FOREIGN FIDUCIARIES
The law provides that "guardians, trustees, executors,
administrators, receivers, conservators, and all persons,
corporations, or associations, acting in any fiduciary
capacity, shall make and render a return of the income
of the person, trust, or estate for whom or which they
act, and be subject to all the provisions of this title which
apply to individuals." 1 The law implies that foreign
fiduciaries shall be subject to its provisions to the same
extent as non-resident alien individuals. The term
"foreign fiduciaries" is defined, for the purpose of this
book, as fiduciaries who neither reside in this country
nor have an office or place of business here, that is, those
who are not within the jurisdiction of this Government.
The preceding chapter contains the general rules relating
to fiduciaries. This chapter treats of the application of
those rules to foreign fiduciaries. As to who are fidu-
ciaries and who are beneficiaries within the meaning of
the law, and as to the special duties of executors, ad-
ministrators and receivers see the preceding chapter.
Trust Estates. The trust estate under the control of
a foreign fiduciary is subject to tax on net income de-
rived from sources within this country. Net income from
lAct of September 8, 1916, 8 (c), as amended by Act of
October 3, 1917.
KOKKIUN FIDUCIARIES 99
within this country is determined under the
same rules as apply to non-resident aliens. 2 The deduc-
tions claimed by the foreign fiduciary are governed by
the rules relating to fiduciaries in general, except so far
as they are limited by rules relating to deductions of
non-resident aliens.
Distribution of Income of Trust Estates. A foreign
fiduciary having charge of an estate or trust, the net
income of which is distributed annually or periodically
among non-resident alien beneficiaries, is required to
execute the same annual return 3 as is required of domes-
tic or resident fiduciaries and a personal return * on be-
half of each non-resident alien beneficiary. 6 If the
foreign fiduciary has only one beneficiary who is a non-
resident alien to whom all of the income is distributed
annually it is necessary to file only the personal return
on behalf of the beneficiary and not a return for the trust
estate. If the foreign fiduciary acts for beneficiaries
who are citizens or residents of this country no personal
return need be filed on behalf of such beneficiaries, but
a return of the trust estate must be filed, showing the
names of such beneficiaries, among others, and amounts
of income distributed to them during the year. The
discussion in the preceding paragraph on the subject of
distribution of income of trust estates should be read in
this connection.
Undistributed Income of Trust Estates. For the
meaning of the term undistributed income of trust estates
8 See Chapter 5.
3 Form 1041.
4 Form 1040.
6 Letter from Treasury Department dated December 28, 19J6;
I. T. S. 1017,
100 FEDERAL INCOME TAX
see the discussion in the preceding chapter. If a foreign
fiduciary has charge of an estate in process of adminis-
tration or settlement, or a trust estate in which net in-
come from sources within the United States remains
undistributed at the close of the calendar year, a return
is required 6 listing the estate as beneficiary of such un-
distributed net income. The tax will thereupon be as-
sessed on the undistributed income against the estate as
an entity and the fiduciary will be required to pay both
normal and supertaxes thereon. 7 If the estate was
created by a citizen or resident of this country, the non-
resident alien may claim a specific exemption from the
net income thereof, as indicated in the preceding chap-
ter, but if created by anyone not a citizen or resident, no
such exemption may be deducted.
Return of Annual Net Income. Foreign fiduciaries
are required to make a return of the annual net income
of the estate from sources within this country, on or
before March 1 in each year covering the income re-
ceived by the trust estate during the preceding calendar
year. This return is required to state the total amount
of income received from sources within this country (ex-
cept exempt income,) the deductions claimed against
such income, the net income, and the respective amounts
distributed to the beneficiaries or retained by the estate
as undistributed income.
BY WHOM FILED. The return is filed by the fiduciary
having charge of the trust estate. In making the re-
turn he should comply with the law and regulations
6 Letter from Treasury Department dated December 28, 1916;
I. T. S. 1917, f 1963.
7 See Chapter 10 on undistributed income of trust estates.
FOREIGN FIDUCIARIES 101
respecting returns by non-resident aliens. Where there
are two or more joint fiduciaries of a trust estate the
return may be made by one of the fiduciaries. 8
WHEN A RETURN Is REQUIRED. It seems that the law
requires a return whenever the net income from sources
within this country payable to any beneficiary, or remain-
ing undistributed at the end of the year is $1,000 or
over. 9
WHERE FILED. In the case of foreign beneficiaries the
return should be filed with the Collector of Internal
Revenue at Baltimore, Maryland.
WHEN FILED. The annual return must in all cases be
filed on or bofore March 1 in the year following that for
which the income is reported. The same general rules
are applicable to the filing of returns by non-resident
aliens and by foreign fiduciaries. The same extension of
time may be granted and the same penalties are imposed
for neglect or failure to file. 10
Withholding at the Source Against Foreign Fiduci-
aries. The provisions with respect to withholding the
tax at the source apply, in the case of payments to
foreign fiduciaries, in the same manner as in the case
of payments to non-resident aliens. A foreign fiduciary
cannot claim exemption from withholding of the tax at
the source, 11 but may claim the benefit of deductions
8 Act of September 8, 1916, 8 (c), as amended by Act of
October 3, 1917.
9 See the discussion under this heading in Chapter 5.
10 See Charter 35 on return of annual net income.
11 Letter from Treasury Department dated December 28, 1916;
I. T. S. 1917, 1 1963.
102 b'KDEKAL, INCOME TAX
and credits, and obtain a refund of any amounts with-
held in excess of the tax liability of the estate, in the
same manner as is prescribed with respect to non-resident
alien individuals. 12
Withholding at the Source by Foreign Fiduciaries.
Since a foreign fiduciary is not personally within the
jurisdiction of this Government it seems that the re-
quirements imposed upon others to withhold the tax in
paying net income to non-resident aliens, do not apply
to such fiduciaries. A foreign fiduciary is required to
report the names of the beneficiaries of the trust estate
upon which information the Government will collect the
tax from the beneficiary.
Information at the Source. It does not seem that a
foreign fiduciary is under any duty to supply the Gov-
ernment with information at the source as to payments
made to others, except so far as information is supplied
with respect to beneficiaries by the return of annual net
income. In any event there is no duty imposed upon the
foreign fiduciary until demand is made by the Commis-
sioner of Internal Revenue for such information.
12 See Chapter 5.
CHAPTER 10
PARTNERSHIPS
The law provides for the taxation of individuals and
corporations. Partnerships, as such are not taxable, but
persons carrying on business in partnership are liable
for the income tax, in their individual capacity, on the
share of the profits of the partnership to which they
are or would be entitled as partners, whether the profits
are divided or kept in the business. 1 Section 10 of the
1916 Law, imposing the tax on corporations, expressly
excludes partnerships. This, however, has been held
by the Treasury Department to mean only general part-
nerships such as were known to and existed under the
common law. All other forms of partnerships are taxed
in the same manner as corporations. For the purpose
of the discussion in this and the following chapter,
general partnerships are divided into two classes, domes-
tic and foreign. A domestic partnership is defined as
one which has its principal place of business in this
country and directs all or the greater part of its business
from its office or offices in this country, whether or not
the partners are citizens or aliens, residents or non-
residents. The definition of "foreign partnership" is
found in the following chapter.
Limited Partnerships. Limited partnerships are held
to be in the same category as corporations or associa-
1 Act of September 8, 1916, as amended, 88. Subdivision (e) :
T. D. 1957.
I OH
104 FEDERAL INCOME TAX
tions and subject to the income tax imposed on such
entities. The profits of limited partnerships so report-
ing are treated as dividends and are not subject to the
normal tax in the hands of the partners receiving them. 8
A limited partnership is a form of business organiza-
tion created by statute in many of the United States,
wherein the liability of certain special partners, who
contribute a specific amount of capital, is limited to
the amount so contributed, while the general partners
of the same partnership are jointly and severally
responsible as in ordinary partnerships. The purpose
of a limited partnership is to protect the special partner
and to enable him to employ his wealth in trade without
risking more than he originally contributed. As thus
defined, a limited partnership has always one or more
partners who have contributed the capital to the firm,
and are therefore entitled to receive a portion of the
profit, yet who are unknown in the management, 'and,
so far as the conduct of the business is concerned, may
be said to occupy a position analogous to that of stock-
holders in corporations. In such limited partnerships
there exists no element of principal or joint agency so
far as the special partner or partners is concerned and
the only element of agency found in the business is
among the general partners. The Treasury Department
therefore holds that a limited partnership may very
properly be classed as a quasi-corporation or association
within the meaning of the law. 3
2 Keg. 33, Art. 86; T. D. 2137. Under the 1909 Law it was
held that a limited partnership was liable for the tax, if organized
for profit and having a capital stock represented by shares,
although no "certificates of stock" were issued. (Op. Atty. Gen.
Feb. 14, 1910.)
3 In a letter dated January 19, 1916, written with particular
reference to limited partnerships of the type created under the
PABTNERSHIPS 105
DIVIDENDS FROM LIMITED PARTNERSHIPS. Since a lim-
ited partnership is treated as a corporation and is
required to make returns in the same manner as cor-
porations, its profits should be treated by the members
of the partnership the same as dividends of corpora-
tions.* Members of limited partnerships should there-
fore ascertain if the partnership is paying a tax
according to this requirement and if so the normal tax
should not again be paid on -their shares of the profits.
PARTNERSHIP ASSOCIATIONS. Under the Corporation
Excise Tax Law of August 5, 1909, the Attorney General
held that partnership associations organized under the
laws of Pennsylvania, possessing every privilege and
New York Statute, Laws of 1897, Ch. 427, 3D, the Treasury
Department gives its reasons for classing limited partnerships
with corporations. After quoting the language of what is now
10 (a) of the Act, which imposes a tax on "every corporation,
joint stock company or organization or insurance compnny
* * * but not including partnerships" the letter states that
the term "partnership" as there used is a common law term and
applies only to such partnerships as were known to the common
law. A limited partnership is a distinct creature of the statutes
of the several states and while it possesses some of the character-
istics of the common law partnership, it possesses other distinct
characteristics which render it more in the nature of an associa-
tion that is a corporation in form, without a specific charter.
Corporations, joint stock companies, associations and limited part-
nerships are all held to be entities and only those entities which
are specifically enumerated in the Act as exempt from its require-
ments can be relieved from liability under the law. Since Con-
gress had in mind, evidently, only common law partnerships in
providing for the exemption of th's class of business organ : zat r ons
it fol'ows that any other organization, particularly such an entity
as exists by rea c on of statutory provision, does not come within
the exemption provided.
4T. D. 2137.
106 FEDERAL INCOME TAX
power essential to a corporation were properly taxable
as corporations. 5 Such associations have capital con-
tributed by the partners, who are not individually liable
beyond the unpaid capital subscribed by each. The
other characteristics which are more in the nature of
a corporation than of a partnership are that the word
"Limited" must be a suffix to the name, the interest
of a partner may be transferred and new partners may
be taken in by vote of a majority of the partners, and
the association may sue or be sued in the association
name.
PRIVATE BANKS. Private banks which transact busi-
ness not in the name of the bank but in the name of
individuals who compose the firm are held to be copart-
nerships and as such are not required to make returns.
If, however, the bank has the form of a corporate
organization, elects officers and a board of managers,
has a distinct name, a fixed situs, and distributes its
net earnings upon the basis of the amount of capital
invested by the members or owners, it is held to be an
association within the meaning of the law and is required
to make returns as such, unless the bank is owned entirely
by one man, in which case it is treated as the business
of an individual. 6
General Partnerships. A general partnership, or
what is known as a common law partnership, which
Congress clearly intended to be exempt from the require-
ments of the income tax law, is one which does not have
a separate entity, but is composed of two or more indi-
viduals associated together for the purpose of parrying
528 Op. Atty. Gen. 189 (1910).
6T. D. 2137.
I'AKTNKKSl HI'S 107
on a given business or transaction. Such a partnership
li;is been defined by the courts as "a business organ ix.;i
lion in which every partner possesses full power and
absolute authority to bind all the partners by his acts
or contracts in relation to the business of the firm, in
the same manner and to the same extent as if he held
full power of attorney from them." Among the prin-
cipal elements of a general partnership are community
of ownership of the partnership property, mutual respon-
sibility and powers in the conduct of the partnership
business, mutual liability, joint and several, for the
debts of the partnership and mutual interest in the
profits of the same. Such partnerships are not subject
to the tax, but the partners are taxed on their respective
shares of the profits. 7
Partnerships Operating Abroad. No distinction is
niiidc in the law or regulations between domestic part-
nerships which operate entirely within this country
and those which operate partly abroad. A partner's
share of the net profits of the partnership is in all cases
taxable in full if the partner is a resident or citizen
of this country. If a partner is a non-resident alien
many questions arise as to the extent to which he is
properly taxable on the gains from business of the part-
nership conducted abroad. If the partnership is a lim-
ited partnership association under the provisions of some
statute, the Government will undoubtedly hold that the
partner is taxable to the same extent as though it were
a corporation, but if it is a general partnership operat-
ing partly in a foreign country, the entire income there-
from can scarcely be considered as income arising within
the United States even though the partnership has an
7 Reg. 33, Art. 94.
108 FEDERAL INCOME TAX
office in this country and the income is paid to the
partner from that office, since a general partnership is
not a separate entity interposed between the individual
and the source of the income.
Procedure in Collecting Income. A domestic part-
nership is not subject to the withholding at the source,
since it is not the income of the partnership but the
income of the respective partners which is subject to
tax. Therefore the provisions of law relating to collec-
tion at the source do not apply to partnerships, except
to the extent that a partnership may be required to
establish its identity and status by filing a certificate or
statement showing it to be a partnership, upon the filing
of which no tax will be withheld. 8 Partnerships as well
as all other recipients of income will be required to
disclose their identity in the case of receiving fixed and
determinate income from another under the provisions
of law as to Information at the Source. 9
Duty in Paying Out Income. A partnership is under
the same duty in paying out income as is an individual
or a corporation, that is, in all cases required by law
the tax must be withheld upon payments to non-resident
aliens and information as to the name and address of
the recipient must be obtained upon payment* to other
individuals or corporations and partnerships. 10
Net Income of Partnerships. While the law is silent
as to the manner of computing the net income of part-
8 T. D. 1957 ; T. D. 1998. See Chapter 41 on Collection at the
Source.
9 See Chapter 40 on Information at the Source.
10 See Chapters on Collection at the Source and Information
at the Source.
PARTNERSHIPS 109
nersKips it follows that since the partners are subject
to tax on the distributive shares of the profits, the net
income should be ascertained in general under the same
rules as apply to individuals. 11
Deductions. The deductions to which a partnership
is entitled are not stated in the law, but it would seem
%
that deductions of expenses, interest, taxes, losses, depre-
ciation and depletion should be made by general partner-
ships under rules applicable to individuals. In the
case of limited partnerships reporting as corporations,
the deductions should be made under the rules applicable
to corporations. Such special rulings as have been made
with respect to deductions of partnerships are given
below.
PROFIT SHARING. Where a partnership agreed with
an expert to take charge of one of its departments upon
a participation of profits basis by which the expert
served without salary and received his compensation in
the form of 20% of the net profits of the department
at the end of the year, it was held that this arrangement
established the relation of employer and employee, not
that of partner, and that the amount of compensation
paid to the expert constituted a proper item of business
expense to be deducted in computing the taxable income
accruing to the partnership members. 18
INSURANCE PREMIUMS. Premiums paid on life insur-
ance policies covering the lives of partners or employees
11 This manner of determining net income is expressly required
of partnerships in making the special returns which the law
authorizes the Commissioner of Internal Revenue to demand at
any time. Act of September 8,^1916, $8 (e).
12 Letter from the Treasury Department dated June 30, 1916;
I. T. S. 1917, 1 512.
110 FEDERAL INCOME TAX
are not permitted to be deducted in computing the
profits of a partnership for the purpose of determining
the distributive shares of the partners. 13 On the
maturity of such policies the amounts of premiums so
paid (if not deducted from the net income of the years
in which paid) will be a proper deduction from the
amount of the policy, the remainder constituting the
taxable portion of the amount received.
INTEREST. Partnerships may deduct interest paid
during the year to the same extent as individuals, and
subject to the same limitation in the case of interest
paid on money borrowed for the purchase of bonds the
interest on which is exempt as income. 14
Distribution of Partnership Profits. The law has not
been construed at any time to require the collection of
the tax at the source on the distribution and payment
of profits of a partnership to the partners. No ruling
has yet appeared requiring such deduction on payments
to non-resident alien partners. 16
Profits to Be Reported by Partners. The annual net
profits of a partnership when divided and paid to the
13 Act of September 8, 1916, as amended by Act of October 3,
1917, 32. Under the 1916 Law prior to this amendment the
Treasury Department permitted such premiums on life insurance
to be deducted from year to year as paid and required the amount
of the policy to be included in gross income in the year in which
the policy matured and such amount was received. (T. D. 2090.)
14 See Chapter 29.
15 If a non-resident alien partner fails to pay the tax on his
share of the profits, the partnership might be held liable as a
resident agent having custody and control of such income, but the
Treasury Department does not seem so far to have required any
PARTNERSHIPS 111
members should be included by each individual partner
receiving the same in his annual return and the tax
paid thereon as required by law. Both normal and
supertaxes must be paid, except as noted below. When
the annual profits are not distributed and paid to the
partners, the respective interests of each partner in
the undistributed profits for the year should be ascer-
tained and the partners entitled thereto should include
the amount of their respective interests in their annual
returns as if the profits had been distributed and paid
to them. 16 Such undivided annual profits of partner-
ships having been reported by the individual members
thereof and the tax having been paid thereon, are not
again taxable to the partners when actually distributed
at a later date. 17 The distributive interests of the part-
ners in the firm's net income should be the amount
shown by the books when closed and not their dis-
tributive interests in the amount of income of the part-
nership represented by actual cash receipts, unless the
partnership keeps its books on the basis of cash receipts
and disbursements. Where accounts" receivable, for
instance, are entered on the books of the partnership
as income and the amounts thereof are treated as debts
due from customers or clients, the partners' returns
are required to be based on the total sum of such
accounts receivable and not on the amount thereof that
has actually been paid. 18
action to be taken to withhold the tax at the time of payment.
See I. T. S. 1917, 1 2282.
16 R 0} r. ::;;. Art, 13.
17 Reg. 33, Art. 14.
1 Letter from Treasury Department dated February 28, 1916;
F. T. 8. 1917, 1521.
112 FEDERAL INCOME TAX
INTEREST ON NATIONAL BONDS. A partner may de-
duct from his net distributive interest in the partner-
ship a proportionate amount of the income received by
the partnership on the obligations of the United States,
if and to the extent that it is provided in the act
authorizing the issue of such obligations that they are
exempt from taxation. This provision is no doubt
intended to grant the same exemption to partners as
is granted to individuals under the provision of Sec-
tion 4 of the 1916 Law as amended. That section, how-
ever, permits the deduction of interest on the obligations
of the United States whether or not the act creating
the obligation provides that the obligation shall be
exempt from tax, except in the case of obligations issued
after September 1st, 1917. Congress undoubtedly had
in mind that partners should be allowed to deduct the
interest on obligations of the United States issued prior
to September 1st, 1917, whether or not the act authoriz-
ing such issue' specified that the obligations would be
exempt, although a strict construction of the provision
applying to partnerships would seem to prohibit the
deduction in all cases unless the authorizing act con-
tained a clause exempting the interest. 19
INTEREST ON BONDS OF THE STATES, POSSESSIONS AND
POLITICAL SUBDIVISIONS. The interest received by the
partnership on the obligations of a state or any political
or taxing subdivision thereof and upon the obligations
of the possessions of the United States may be deducted
by a partner in proportion to his share of the total
partnership profits. This is undoubtedly intended to
giye the partner the benefit of the same exemption as
19 Act of September 8, 1916, as amended by Act of October 3,
1917, 8, Subdivision (e).
PARTNERSHIPS 113
is accorded to individuals or corporations under Section
4 of the 1916 Law, although that section refers only to
"political subdivisions' while the provision relating to
partnerships refers to "political and taxing subdivi-
sions." However, political subdivision has been con-
strued to mean any subdivision of a state having the
power to levy taxes so that the inclusion of the phrase
"taxing subdivision" does not seem to extend any
greater exemption to partners than to others. 20
DIVIDENDS. For the purpose of computing the normal
tax a partner is allowed a credit for his proportionate
share of the income derived by the partnership from
dividends. 21 Although this provision of the law seems
to permit a credit of all dividends, it is undoubtedly
intended to be limited to dividends on the stock of
corporations subject to this tax, since the credit to be
allowed is that provided by section 5, subdivision (b),
of the same act which is specifically limited to such
dividends. The rate of supertax on dividends depends
on the year in which the profits were earned by the cor-
porations. 22
Fiscal Year. A partnership has the same privilege
of fixing and making returns upon the basis of its own
fiscal year as is accorded to corporations. If a fiscal
year ended during 1916 or ends during a subsequent
calendar year for which there is a rate of tax different
from the rate of the preceding calendar year, the rate
for the preceding calendar year applies or shall apply
80 See Chapter 29 on Deduction of Interest.
21 Act of September 8, 1916, 8, Subdivision (e), as amended
by Act of October 3, 1917.
S3 See Chapter 23.
P. I. Tax. 8
114 B^EDERAL INCOME TAX
to an amount of each partner's share of such partner-
ship profits equal to the proportion which the part of
such fiscal year falling within such preceding 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 of such profits. 23 As an illus-
tration of this provision, assume that a partnership
closed its fiscal year on June 30, 1916. In such case
after each partner has determined the share of the
profits to be reported he will be permitted to divide
the amount by two (since one-half of the fiscal year
was in 1916 and one-half in 1915) and pay at the 1915
rates on one-half and at the 1916 rates on the other
half. Similarly in the case of a fiscal year ending in
1917 the 1916 rates will apply to such proportion of
the profits as the part of the fiscal year in 1916 bears
to the whole fiscal year. Prior to this amendment of
the statute the Treasury Department held that where the
fiscal year of a partnership ended at any time other
than December 31st the total profits of the partnership
were required to be reported as income for the calendar
year in which the fiscal year of the partnership ended.
Profits Earned Prior to March 1, 1913. In a case
arising under the 1913 Law it was contended that where
the fiscal year of a partnership ended between March 1,
1913, and December 31st of the same year, the equitable
method would be to apportion the profits for the fiscal
year in equal monthly instalments and allot to the
period preceding March 1st its proper proportion, mak-
ing the partners taxable only on their respective shares
in the remainder. The court held that the plaintiff
23 Act of September 8, 1916, 8 (e), as amended by Act of
October 3, 1917.
I'AHTNKKSIIll'S 115
in this case failed to show that profits were earned by
the partnership prior to March 1, 1913, and in what
sum, and in the absence of such showing the court
assumed that the tax was legally coHected. 2 * The Treas-
ury Department held under the 1913 Law that the entire
amount of profits accruing to a partner at the close of
the fiscal year of the partnership were taxable in the
calendar year in which the fiscal year ended, 28 although
a part of the fiscal year may have covered a period
prior to the incidence of the tax.
Net Losses of Partnership. Where the books of a
partnership show a loss for a year in accordance with
the actual facts, the respective members of the partner-
ship should include as a deduction such amount as is
charged against them respectively, as the loss of a part-
nership is considered to be a loss incurred in trade by
the individual members. The partner may deduct the
loss whether he is compelled to make good his propor-
tionate share by payment of money to the partnership
or whether the loss is charged against profits accrued
to his account in preceding years. 88 If the loss occurs
in a fiscal year covering a period in which there is a
change of tax rates it does not seem that the loss should
be pro-rated although the income if any would be, since
a loss is deductible in the year in which it is actually
sustained. 27
Returns by Partnerships. Partnerships as such are
not required to render returns of annual net income.
8* Cohen v. Lowe, 234 Fed. 474.
86 T. D. 2090.
86 Letter from Treasury Department dated February 12, 1!H."". :
I. T. S. 1917, 1 522.
87 See Chapter 31 on Losses.
116 FEDERAL INCOME TAX
They are, however, required to report annually the
amount of tax withheld on income paid to non-resident
aliens under the provisions of law requiring collection
at the source, 28 and to file such annual returns as are
required under the provisions relating to information at
the source. 29
Special Returns. Any partnership when requested
by the Commissioner of Internal Revenue or any col-
lector is required by law to make a correct return of
its earnings, profits and income, showing the gross
income and the deductions and credits allowed by the
law and the names and addresses of the individuals who
would be entitled to the net earnings, profits and income
if distributed. It is not required in such special re-
turns that the partnership report income exempt under
Section 4 of the 1916 Law. 30
ft-
28 See Chapter 41 on Collection at the Source.
29 See Chapter 40 on Information at the Source.
30 Act of September 8, 1916, 8 (e) ; Reg. 33, Art. 12. A
special return from partnerships was required generally in 1913,
but no return was required for the year 1914 or for subsequent
years, except in instances where it was specifically requested by
the Commissioner of Internal Revenue or a collector.
CHAPTER 11
FOREIGN PARTNERSHIPS
The law expressly mentions foreign partnerships in
only one provision l that which requires the withhold-
ing of the tax on payments of income from interest upon
bonds and mortgages or deeds of trust or similar obliga-
tions of domestic or other resident corporations, to non-
resident alien firms and copartnerships not engaged in
business or trade within the United States and not
having any office or place of business therein. By impli-
cation, however, the income of a foreign partnership
from sources within the United States is taxable in the
hands of the non-resident alien partners, to the extent
included in the distributable share of each, and such is
the ruling of the Treasury Department. 8 If the partner
is a citizen or resident of this country, he is of course
subject to tax upon his entire distributive share of the
profits of any partnership of which he may be a member.
Definition. No definition of the words "alien part-
nership" appearing in the section of the law referred
to in the preceding paragraph, is to be found in the law
or the regulations. The law refers to "non-resident
alien firms" and to "non-resident alien copartnerships"
1 Act of September 8, 1916, as amended, 13, Subdivision (e).
8 Letter from Treasury Department dated April 7, 1917; I. T. 8.
1917, t 2287.
117
118 FEDERAL INCOME TAX
synonymously, and applies the term without regard to
whether or not the firm or copartnership is engaged in
business or trade within the United States or has an
office or place of business in this country. The term
apparently has reference to the status of the partners
composing the firm, and in this respect it is indefinite,
as a firm may be composed of non-resident aliens and
resident aliens or citizens. For the sake of clearness
in discussing the subject of this (chapter, the term
"foreign partnership" as used herein is defined as a
partnership or firm, whether composed of aliens or
citizens, residents or non-residents, which has its prin-
cipal place of business in a foreign country and directs
all or the principal part of its business from its office
outside the jurisdiction of the United States.
Limited Partnerships. If the foreign partnership is
one of the kind which, if it were domestic, would be
treated as a corporation or association, it seems -that it
should report its net income and pay the tax according
to the provisions of the law and regulations applicable
to foreign corporations. Having done so, its partners
should treat their net distributive shares of the profits
as dividends. Since non-resident alien stockholders of
a non-resident foreign corporation are not taxable to
any extent on the dividends of such corporation, it
would follow that the partners of a non-resident foreign
partnership or association which is required by the regu-
lations to report and pay the tax as a corporation, would
not be subject to any tax on their net distributive
shares of the profits. For a statement of the rulings
bearing on the subject of partnerships required to pay
the tax in the manner of corporations see the preceding
chapter on partnerships.
FOREIGN PARTNERSHIPS 119
General Partnerships. If the foreign partnership is
a general partnership, not having the characteristics
which would require it to pay the tax in the manner of
corporations, it is not, itself, subject to the tax on
income derived from sources within this country, but
each of its individual members is subject to the tax on
such part of his distributive share of the partnership
profits as is composed of income from this country. 8
RESIDENT FOREIGN PARTNERSHIPS. A foreign part-
nership which is engaged in business or trade within the
United States and has an office or place of business
herein is a resident foreign partnership. Being within
the jurisdiction of this Government the tax is not %
withheld at the source upon any payments made to it.
For the purpose of establishing its identity and status
a form has been provided which may be used to ac-
company coupons from bearer bonds in order to claim
exemption from withholding of the tax at the source.*
XON- RESIDENT FOREIGN PARTNERSHIPS. A non-resi-
dent foreign partnership is defined as a foreign part-
nership which does not have any office or place of busi-
ness within the jurisdiction of the United States. Such
partnerships are subject to having the tax withheld or.
interest from investments in the bonds or similiar obli-
gations of domestic and resident corporations. 6 A
3 Letter from Treasury Department dated December 6, 1916:
I. T. S. 1917, 1 554.
4 Form to he used is known as Form 1086; T. D. 2374.
* Act of September 8, 1916, as amended, 813, Subdivision
Although this provision, as amended, has been held not to require
withholding against foreign partnerships, since the tax specified
therein is not applicable to partnerships, the subject is discussed
here on the assumption that Congress will speedily remedy the
120 FEDERAL INCOME TAX
strict interpretation of the provision of the act which
requires such withholding would seem to make it apply
only in cases where a partnership had no office or place
of business in this country and the members of the part-
nership are non-resident aliens. The Treasury Depart-
ment however has not so construed the language of the
law but requires withholding regardless of the status
of the partners, if the partnership has no office or place
of business here. 6
Collection of the Tax at the Source. The law does
not require the withholding of the tax on payments of
income to non-resident foreign partnerships, except in
are subject to a lien for the payment of taxes pro-
vided the corporation has not been dissolved, and all its
assets distributed, prior to the time the list of assess-
ments get into the hands of the collector.
COLLECTION OF TAX FROM ASSETS. Section 3186 of
the Revised Statutes, as amended, provides generally
with reference to internal revenue taxes that "If any
person liable to pay any tax neglects or refuses to pay
20 Reg. 33, Art. 85; T. D. 2090. It was held under the Corpo-
ration Excise Tax Law of 1909 that a corporation could not evade
liability for the tax by dissolving before the time when it \v.-i-
tvquired to make a return. United Stati-s v. (Jeneral Inspection
& Loading Company, 192 Fed. 223.
1 T. D. 2137.
2ia Letter from Treasury Department dated November 17,
1917; T. T. 8. 1917, <[ 2496. Brady v. Anderson, 240 Fed. 665.
132 FEDERAL INCOME TAX
the same after demand, the amount shall be a lien in
favor of the United States from the time when the assess-
ment list was received by the collector, except when
otherwise provided, until paid, with the interest, penal-
ties and costs that may accrue in addition thereto, upon
all property and rights belonging to such person." The
1916 Law provides (Sec. 22) that "all administrative,
special and general provisions of law, including the laws
in relation to assessment, remission, collection and re-
fund 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. " Under the Income Tax Law it is the duty of
the Commissioner of Internal Revenue to send to each
collector a list of the companies liable for the tax in his
district showing the. amounts for which they are liable
within such time that the collector may give the required
notice of assessment on or before the first day of June,
and upon such lists the collections are made. Under the
provisions of Section 3186 above quoted the lien is fixed
upon the assets of the corporation when this list comes
into the collector's hands. Therefore, if the corporation
has distributed all of its assets and become dissolved.,
in the manner provided by law, prior to that time there
is nothing upon which the lien can attach, and conse-
quently no lien exists to secure the payment of the tax
which may be due from the corporation. Notwithstand-
ing this particular provision for collecting the tax, the
remedy is not exclusive, and the Government may resort
to the common law method of collecting the same. 22 The
dissolution of a corporation does not extinguish its lia-
22 Dollar Savings Bank v. IT. S., 19 Wall 227.
CORPORATIONS 1 !!
bilities and through the courts of equity creditors may
pursue its assets into the hands of any person who is
not a bana fide purchaser. The sale of the entire capital
stock of a corporation and the distribution of the pro-
ceeds of the sale among the stockholders will not defeat
or impair the remedy of creditors, if any debts remain
unpaid, as the creditors in that event may pursue the
proceeds of the sale in the hands of the respective
stokholders and compel each one to contribute prorata
toward the payment of the debts to the extent of the
moneys received on the distribution. 83 This remedy is
open to the Government in the same manner as it is
to any other creditor. 84 But if a corporation has gout'
out of business leaving assets which have been distributed
among the stockholders, such assets are not available
for collection of the penalty for failure to file returns. 28
Income Subject to Tax. Corporations are subject to
tax on income received from all sources, except income
exempt from the law under the provisions of Section 4
of the 1916 Law, as amended, such as the interest upon
obligations of a state or any political subdivision thereof
or upon the obligations of the United States or its posses-
sions or securities issued under the provisions of the
Federal Farm Loan Act. It would soem also that under
the present income tax laws a corporation is exempt
from tax on the value of property acquired by gift
23 Railroad Company v. Howard, 7 Wnll 392.
8428 Op. Atty. Gen. 241. In the case of U. S. v. General
Insertion and Loading Company (192 Fed. 223, 204 Fed. 657
judgment was entered for tax, penalty and interest under the
1909 Law, notwithstanding the corporation had been previously
dissolved.
26 T. D. 1852.
134 b'EDERAL, INCOME TAX
although it was held under the 1913 Law that the exemp-
tion of gifts did not apply to corporations. There is
this important difference in the provisions of the two
laws relating to gifts namely, that the 1913 Law provided
for the exemption of gifts under a provision applicable
to individuals only and made no mention of such exemp-
tion in the provisions applicable to corporations, while
the 1916 Law provides for the exemption of the value of
gifts in a section which applies with equal force to cor-
porations and individuals. 26 A corporation reports all
of its net income to the collector of the district in which
its principal place of business is located and pays the
tax in the same district regardless of the fact that it
may be doing business in other districts in the states,
territories, or possessions of the United States. Where
a corporation is engaged in carrying on more than
one class of business the gross income derived from the
different classes is ascertained according to the rules
applicable thereto and the gross income of all classes
of business in which the corporation is engaged is taken
to be the gross income of the corporation. Thus the
gross income of manufacturing companies consists of
the total sales of manufactured goods during the year,
increased or decreased by the gain or loss as shown by
the inventories of finished and unfinished products, raw
material, etc., at the beginning and end of the year; and
mercantile companies proceed similarly in determining
their gross income by inventory, adding in each case the
income from all other sources. 27 Insurance companies
determine their net income by special provisions relating
to that class of business, which provisions are discussed
26 Compare 4, Act of September 8, 1916, and 11 B, Act of
October 3, 1913.
27 Keg. 33, Arts. 104 and 105.
CORPORATIONS 135
in the following chapter. The general provisions as to
income applicable both to corporations and individuals
are discussed in succeeding chapters on income 28 and
only the special provisions applicable to corporations are
referred to in this chapter. All receipts by a corporation
are not income as is indicated in the following para-
graph and also in the chapters on income.
SALE OP CAPITAL STOCK. The amount received by a
corporation in exchange for its capital stock is held to
be capital of the corporation, whether or not the amount
received is equal to or greater than the par value. Such
transactions are purely capital transactions and the in-
come is not increased by reason of the sale of the stock
at a price greater than its par value. 29
Deductions from Gross Income Allowed by Law.
The statute specifies particularly the deductions which
may be made from gross income in ascertaining the net
income subject to tax. These deductions are four in
number as specified in Section 12 of the 1916 law. The
ireneral discussion of the deductions allowed to taxpayers
is found in the chapters on that subject. 80 In this chap-
ter reference is made to those provisions having applica-
tion only to corporations
Ordinary and Necessary Expenses^ A corporation
is allowed to deduct all the ordinary and necessary ex-
penses 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
See Chapters 16 et teg.
*T. D. 2090.
30 See Chapters 27 et tteq.
136 FEDERAL INCOME TAX
condition to the continued use or possession of property
to which the corporation has not taken or is not taking
title, or in which it has no equity. It will be noted that
the expenses permitted by this provision of law are only
the ordinary and necessary expenses. Extraordinary ex-
penses are not deductible under this head and if they
do not fall under one of the other deductions allowed by
law may not be permitted in computing net income, al-
though they may be deductions recognized in accounting
practice as a proper charge against the income for the
year.
ORGANIZATION EXPENSES. The Treasury Department
holds that organization expenses of corporations such as
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 a com-
pany constitute a capital investment, such assets 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
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 "expenses" authorized by the law to be
deducted. 81
PAYMENTS IN LIEU OF RENT. This item includes all
royalties or other charges, including any interest pay
ment which the corporation is required to make for the
31 T. D. 2499. This ruling is not in accordance with account-
ing practice, which recognizes the propriety of charging off
organization expenses against income over a period of four or
five years.
CORPORATIONS 137
right to use and possess property in which it has no con-
trol, interest or equity.
Losses. The second deduction specified in the law
permits an allowance for 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 and a
reasonable allowance for reduction in flow of oil and gas
wells and depletion of mining deposits. This allowance
is similar to the allowance permitted to individuals and
is discussed in the chapters on deduction. 88 One ruling
on losses, having application only to corporations, is
given below.
REDEMPTION OP PREFERRED STOCK. Where a corpora-
tion issued preferred stock at par redeemable at 110, the
difference appearing on the books of the corporation as
a reduction of undivided profits, the transaction has been
held to be 'a capital transaction in which there could be
no gain or loss to the corporation and, therefore, the
difference between the selling price of the stock and the
price at which it was redeemed could not be deducted as
a loss. 83
INSURANCE COMPANIES. The special provisions allow-
ing deductions by insurance companies under this head-
ing are treated in the following chapter.
Interest. There may be deducted, in the case of cor-
porations, the amount of interest paid within the yt>;ir
32 See Chapters 31 to 34.
33 Letter from Treasury Department, l;it-m-
panics Horded the earnings and actually used them in
making extensions and improvements and in furtherance
of their business. 60
< J 1 1 TS TO SUBSIDIARIES. In cases where holding com-
panies have made "gifts" to their subsidiaries to make
up a deficit at the end of the accounting period of th< i
subsidiary it has been held by the Treasury Department
that such "gifts" were not a proper deduction from the
net income of the holding company and were not exempt
when received by the subsidiary. This ruling was sup-
ported by the provision of the 1913 Law relating to the
exemption of gifts, but seems to have no application to
the 1916 Law in which the provision as to exemption is
much broader. The 1913 Law allowed gifts to be de-
ducted from the net income of individuals while the
present law includes gifts among the other classes of
income which are exempt from the law, such as interest
on state, national and municipal bonds, etc. 61
Lessor and Lessee Corporations. The fact that a cor-
poration may have leased all of its property to another
under a contract whereby the lessee corporation pays the
rent direct to the stockholders and bondholders of the
60 T. D. 2137. This ruling does not seem to be in accordance
with the rule frequently announced by the courts that mere book-
keeping entries do not constitute income.
1 Compare Act of October 3, 1913, t B, and Act of September
8, 1916, 4.-
150 FEDERAL INCOME TAX
lessor does not operate to relieve the lessor corporation
of liability to the tax on the rental which the lessee pays
to such stockholders. Where under the terms of a lease
a lessee agreed to pay the interest upon and discharge
the bonds issued by the lessor, to maintain the right of
way and buildings, and to pay direct to each stockholder
of the lessor dividends at the rate of eight per cent, per
annum, it was held that the amounts paid to the creditors
and stockholders of the lessor were rents or compensa-
tion to the lessor for the use and occupation of its prop-
erty and constituted net income to it. It was held to be
immaterial that the dividends paid to the stockholders of
the lessor were fixed as to amount by the lease and
paid direct to such stockholders. It was also held to
be immaterial that the lessor was not possessed of money
or other cash revenues with which to pay the tax. The
lessor could not exonerate itself from liability for the
tax subsequently imposed under a law thereafter enacted
by making a lease of its property which provided for
the payment of all its surplus revenues direct to its
stockholders. 62 The notion that a corporation is an
artificial entity distinct from the members who com-
pose it is a fiction of the law which the courts recognize
for some purposes and disregard for others. Thus the
fact that a lessee corporation pays the rent not to the
lessor corporation but to its stockholders and bond-
holders, cannot prevent the lessor corporation from being
taxable. 63
LESSEE CORPORATIONS. A railroad company operating
leased or purchased lines is required to include all re-
62 Rensselaer & Saratoga Bailroad Company v. Irwin, 239 Fed.
739 ; Eeg. 33, Art. 80 ; T. D. 2090.
63 Anderson v. Morris & Essex Eailroad Company, 216 Fed. 83.
CORPORATIONS 151
ceipts derived therefrom, and if the bonded indebtedness
of such lines has been assumed the operating company
may deduct the interest paid thereon to the extent of
the limit allowed by law. Corporations operating leased
lines should not include the capital stock of the lessor
corporations in their own statement of capital stock out-
standing at the close of the year. The indebtedness of
the lessor corporation should not be included in the
statement of the indebtedness of the lessee unless the
lessee has assumed the same. 64
LESSOR CORPORATIONS. A corporation which has leased
its properties in consideration of a rental equivalent to a
certain rate of dividends on its outstanding capital stock
and the interest on bonded indebtedness, and such rental
is paid by the lessee direct to the stock and bond-
holders, should, nevertheless, make a return showing the
rental so paid as having been received by the corpora-
tion. 66
TREATMENT OF INCOME BY STOCKHOLDERS OF LESSOR.
Where the lessor corporation is required to report as its
own income the amount paid to its stockholders and
bondholders by the lessee the stockholders should treat
the amounts received from the lessee as dividends on
the stock by which they hold in the lessor company. In
paying direct to the stockholders the lessee is held to be
acting as the agent of the lessor and the amounts re-
ceived by the stockholders are in effect and in fact divi-
dends received out of the earnings of the lessor and con-
sequently not subject to the normal tax. 66 Similarly
. 33, Art. 82.
65 Reg. 33, Art 80.
86 T. D. 2090.
152 FEDERAL INCOME TAX
bondholders of the lessor company should treat the
amounts received from the lessee as interest upon the
indebtedness of the lessor.
Receivers for Corporations. The 1916 Law provides
that in cases where receivers, trustees in bankruptcy, or
assignees are operating the property or business of a
corporation such receivers, trustees, or assignees shall
made returns of net income as and for such corporation
in the same manner and form as is required in the case
of corporations generally. Any income tax due on the
basis of such returns made by receivers, trustees or as-
signees shall be assessed and collected in the same man-
ner as if assessed directly against the corporation. 67
Receivers of corporations are not fiduciaries within the
meaning of the law and are not governed by the same
rules as are made applicable to receivers for individuals.
The receiver of a corporation stands in the same posi-
tion as the officers of a solvent corporation and upon him
devolve all the duties of such officers as to the making
of returns and payment of tax. The fact that the busi-
ness and property of the corporation are temporarily
in the hands of a receiver does not alter the fact that
the corporation is none the less the beneficiary of the
income arising and accruing. If there is net income it
is taxable, and the custodian of such income is liable for
the tax assessable thereon. Under the 1913 Law, as well
as under the 1909 Law, there was no express provision
in the statute taxing corporations in the hands of re-
ceivers. Several cases under the 1909 Law held that
that act did not impose a tax on such corporations or
any duties tm the receivers thereof. The 1909 Law was
a tax on corporations doing business and it was held in
67 Act of September 8, 1916, 13, If (e).
CORPORATIONS 153
M-\rral eases that a corporation in the hands of receivers
\\ ;is not one doing business within the meaning of those
words as used in that act. Only one decision seems to
have been rendered under the 1913 Law and in that case
it was held that receivers were not subject to the income
tax where the court took possession of the property of
an insolvent railroad company and operated the rail-
road. The funds in the hands of the receivers, repre-
sented by the net proceeds in conducting the operation
of the road, over and above the authorized expenditures
paid out by them, were held not to be subject to the tax
as ' ' net earnings. ' ' 68 The question is no longer open
under the express provisions of the 1916 Law.
Fiscal Year. Corporations are required to make re-
ports and pay the tax for the calendar year unless they
have duly designated a fiscal year in which case the
68 Equitable Trust Company v. Western Pacific Railway Com-
pany, et al., 236 Fed. 813. This case was decided on the authority
of Pennsylvania Steel Company v. New York City Railway Com-
pany, in which case the question came up two successive times in
tin- District Court and once on appeal in the Circuit Court of
Appeals.
On appeal by the Government, the Circuit Court of Appeals
in affirming the lower court held, First, that the taxation of
business done and income received by receivers was not contem-
plated by the Act, receivers not being mentioned; Second, there
<-;iii he no doubt that the tax provided for by the Act was imposed
as a tax upon doing business in a corporate capacity; Third, th<-
Act in all its provisions clearly contemplated the tax was to be
paid by a corporation which was actually engaged in business
as an actively operating concern; Fourth, it was manifest that
the functions of the company, as a corporation, were superseded
when all its property was placed in the hands of receivers by a
<-ourt of equity in order that it might be saved for the benefit
of all its creditors. (198 Fed. 774; 117 C. C. A. 556.)
154 FEDERAL INCOME TAX
returns may be made and the tax may be paid upon the
basis of such fiscal year. The privilege of making a re-
turn of income on the basis of the fiscal year is limited
to corporations. 69
REQUIREMENTS AS TO FISCAL YEAR. The fiscal year
must be a period of twelve months. It cannot exceed
that length of time. In case a corporation designates a
fiscal year ending on a date more than twelve months
subsequent to the last day of the calendar year or fiscal
year for which it made its last report, two reports are
required within that period ; the first report to cover that
'period of time from the last day of its former accounting
period up to the day twelve months prior to the ending
of the new fiscal year. The fiscal year must end upon the
last day of some calendar month, as expressly provided
in the law. 70 No return rendered for a period ending on
any date other than the last day of some month will be
accepted unless it is a "final return" and made to the
day the corporation ceased business. 71 In the case where
a corporation designates the calendar year as its fiscal
year no notice or formality is required ; where the fiscal
year ends upon the last day of some month other than
December, notice of the adoption of such fiscal year
must be duly filed with the local collector.
How DESIGNATED. The fiscal year may be designated
by giving notice of the day which has been chosen as the
closing of the fiscal year to the collector of the district
in which the corporation files its return 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
69 T. D. 2090.
70 Act of September 8, 1916, 13, 1 a.
71 Mimeograph letter to Collectors No. 1148.
CORPORATIONS 155
the basis of the calendar year. Thus, for instance, a
corporation at present reporting for the calendar year
may adopt a fiscal year by giving notice to the collector
at any time not less than thirty days prior to March 1
of the year following. Thereafter, on or before March
1. it will file a return of net income for the period be-
irinning January 1 of fhe preceding year and ending the
day preceding the first day of the new fiscal year, unless
such period is more than twelve months, in which case a
return is required for the preceding calendar year and
another return for the part of the following year up to
the beginning of the fiscal period. That portion of the
vi-iir preceding the beginning of an established fiscal year
is held to be a fractional portion of the calendar year and
the return therefor is not required to be filed before
March 1st of the year following, but it may be filed at
any time after the closing of the period. 78 A return for
the fiscal year will not be accepted unless such fiscal
year has been properly established according to the law
and the rulings of the Treasury Department. 73 If due
notice has not been filed with the collector at least thirty
days prior to March 1, a return for the preceding calen-
dar year must be filed although the corporation has in
fact established its accounting period on the basis of a
fiscal year, other than such calendar year.
NEW CORPORATIONS. The rulings as to fiscal year
apply to corporations which begin business within the
jrear, as well as to those which were in existence and
transacted business throughout the year. In the case of
a nr\v corporation the first return may be made for a
72 T. D. 2029.
73 Mimeograph letter to Collectors No. 1148, I. T. S. 1917.
1.V52.
156 FEDERAL INCOME TAX
tiseal year if it has duly filed a notice designating the
same, provided the period intervening between the date
of the organization and the close of the fiscal year does
not exceed twelve months. If such period exceeds twelve
months, the corporation will be required to make a re-
turn for the portion of the calendar year preceding the
beginning of the fiscal year, which return must be filed
on or before March 1st next following the calendar year
of which it is a part. Corporations partially organized
are required to file a return for the period ending De-
cember 31, unless they have established a fiscal year
for this purpose. 74
NOTICE. The notice must be in writing, setting forth
that the corporation has designated the last day of some
month in the year (other than the last day of December)
as the day of the closing of its fiscal year, and that from
the date so designated its books have been or will be kept
on the basis of such designated fiscal year. 75 The notice
should be signed by the president or other principal
officer of the corporation or by the treasurer, that is, by
at least one of the officers required to sign the return of
annual net income and preferably by both of them. It
may be given in the form of a letter addressed to the
local collector and may be filed at any time after the
fiscal year has been established.
CHANGING FROM FISCAL YEAR TO CALENDAR YEAR. A
corporation which has adopted a fiscal year and there-
after desires to change from the fiscal year back to the
calendar year may do so by designating the calendar year
as its new fiscal year, and filing a notice accordingly.
74 T. D. 2001; T. D. 2137.
75 T. D. 2090.
UUKl'OKATiONS 157
Return of Annual Net Income. The duty to make u
return depends upon the corporate existence and not
upon the receipt of income. Every corporation not
specifically enumerated as exempt is required to make
a return whether or not it has any income liable to tax 76
or whether or not it is subordinate to or controlled by
another corporation.
WHEN FII^ED. Unless a corporation has duly desig-
nated a fiscal year, the return must report the net income
received within the preceding calendar year and must
l>e filed on or before the 1st day of March of the year
following. If it has duly designated a fiscal year, tin*
return may be filed within sixty days after the close of
such fiscal year. 77 The time for filing returns may be
extended as stated in the chapter containing the general
provisions relating to returns.
WHERE FILED. The return should be filed with the col-
lector of the district in which is located the principal
office of the corporation where are kept its books of ;ir
count and other data from which the return is prepared.
If a domestic corporation keeps its books of account and
other data in a foreign country, the return should be
made to the collector of internal revenue in the district
in which the company has its branch office in this coun-
76 Reg. 33, Art. 80; T. D. 2090. Under the 1909 Law it :-
held that corporations of all kinds specified in the Act as subject
to the tax were bound to file returns though their not profits \\vrr
not sufficient to render them liable to the tax (U. S. v. Military
<'i instruction Co., 204 Fed. 153,) and that the duty to m:ik.-
returns was not limited to those the net profits of which were
sufficient to render them liable to the payment of the tax. (U. 8.
v Acorn Roofing. Co., 204 Fed. 157.)
77 Act of September 8, 1916. 113 (In.
158 FEDEKAL INCOME TAX
try, if it has such branch office; otherwise it should be
made in the district in which is located the statutory
office of the corporation, that is the office required to be
maintained in the state of incorporation in accordance
with the statutes of that state. 78 It is to be noted that
the return is not to be filed in the district in which is
located the statutory office unless the corporation has
no principal business office or branch office from which
the return can be filed. The purpose of designating the
principal business office is for the convenience of the
Treasury Department in examining the books of the cor-
poration and verifying the return. Since the statute
now expressly designates the principal business office
and describes it as the place where the books of account
are kept, the filing of a return from another office may
not be considered as a proper filing. The 1913 Law was
less explicit and might have been held to justify the
filing of the return from some other office but the 1916
Law is open to no such construction. Subsidiary com-
panies are required to file their returns in the district
in which they have their principal accounting office,
regardless of where the parent company may make its
return. If, however, subsidiary companies do not keep
separate books of account they will be required to file
their returns in the same district as the parent company,
but will nevertheless be required to make separate re-
turns. 79 Parent companies are required to file with their
returns a list of all subsidiaries, with the location of the
principal place of business of each.
BY WHOM FILED. The responsibility for filing the
annual return rests, of course, upon the principal officers
78 T. D. 2137.
79 T. D. 2137.
CORPORATIONS 159
of the Corporation, although there is 110 penalty oil such
ni'ii.-.'rs personally, for failure to file returns. The only
personal penalty on officers is for making a false or
fraudulent return. In the. case of corporations in the
hands of receivers, the return is made by the receiver
and in the case of dissolved corporations it is made by
the directors or other persons in charge of the winding
up of the corporation. Under the Corporation Act of
New Jersey, which provides that corporations however
dissolved are "continued bodies corporate for the pur-
pose of prosecuting and defending suits by or against
them and of enabling them to settle and close their
affairs," and constitutes the directors trustees to settle
the business, the officers of a corporation which had been
dissolved after becoming subject to the tax on its income
of the preceding year, who were also its directors, were
held to have authority and to be under the duty of
making the return of such business required by the 1909
Law. 80
How PREPARED. All questions on the returns should
be answered either by the insertion of figures or the in-
sertion of the word "none." In answer to question No.
1 the corporation should state the total par value of its
stock, both common and preferred outstanding at the
close of the year. Stock outstanding at the close of the
year and upon the basis of which dividends are or may
be paid, is held to be paid up capital stock within the
meaning of the law. For this purpose it is immaterial
whether the stock be paid for in cash, promissory notes
or other assets. The fact that notes are given in payment
of stock issued and that the notes have not been paid in
U. 8. v. General Inspection & Loading Co., 192 Fed. 223.
160 FEDERAL INCOME TAX
full at the time the return is made is immaterial. 81 The
unissued or treasury stock should not be included, but
only such stock 'as has been actually issued and is out-
standing at the close of the year, for which payment has
been received. Where the stock issued is payable in in-
stalments or assessments, only so much of it as has been
actually paid in instalments and assessments should be
reported. In case no stock is issued, there should be
reported the amount of capital, not including interest-
bearing indebtedness, actually employed in the business
and property of the company at the close of the year.
BONDED AND OTHER INDEBTEDNESS. Indebtedness to be
included under item 2 of the return is all interest-bear-
ing indebtedness except that wholly secured by collateral
the subject of sale in the ordinary business of the cor-
poration. The amount outstanding at the close of the
year should be reported whether the interest accrued
upon such indebtedness was actually paid within the
year or not. 82
SUPPLEMENTARY STATEMENT. The supplementary
statement must be filled out in detail and. no return
which is not substantially correct in this respect will be
accepted, 83 However, the division indicated in the sup-
plementary statement on the corporation forms has been
said by the Treasury Department to be merely suggestive.
It desires information so far as possible in detail as to
what items go to make up the general expense and if this
information is sufficiently given in detail in a statement
filed by the corporation with the Public Service Coni-
81 T. D. 2137.
82 T. D. 2137.
83 Mimeograph letter to Collectors No. 1148.
CORPOEATIONS 161
mission of its state the Treasury Department has no
objection to such statement being attached to the return
in liou of filling out the supplementary statement. 8 * If
the books of any corporation are kept in such mariner as
to make it very difficult to give the information in the
exact form called for in the supplementary statement a
reasonble explanation in detail of the manner of arriving
at gross income and expenses will be accepted. However
the information should be furnished in such manner
that the returns can be intelligently audited by the
Government. 85
INCOME PROM STATE, NATIONAL OR MUNICIPAL BONDS.
Although a corporation is not subject to tax on interest
received from state, national or municipal bonds, as such
income is exempt, the Treasury Department requires the
corporation to report the interest received from such
bonds in the supplementary statement on the back of
the annual return. This is required under the provision
of the law which calls for returns by corporations in
such form as the Commissioner of Internal Revenue,
with the approval of the Secretary of the Treasury, may
prescribe. If a corporation fails to report this species of
income it will be held by the Treasury Department to
not have fully complied with the requirements of the
law and to have failed to make a true and correct return
such as the law, the regulations and the prescribed forms
require. There is no specific provision of the law where-
by a corporation is required to list its holdings of such
bonds, but the regulations of the department and the
* Letter from Treasury Department dated January 6, 1916;
I. T. S. 1917, f 1589.
85 Letter from Treasury Department dated January 29, 1915;
r. T. 8. 1917, If 1595.
F. T. Tax. 11
162 FEDERAL, INCOME TAX
form itself, which have the force and effect of law, do
require it and the requirements should be complied
with. 86
How SIGNED AND SWORN To. The return is required
to be sworn to by the president, vice-president or other
principal officer of the corporation and by the treasurer
or assistant treasurer, and must be verified under the
oath of such officers, except in the cases where the return
is filed by a receiver, trustee or assignee, or directors in
the case of insolvency, in which cases the affidavit on the
return should be changed in accordance with the facts.
As to the general provisions respecting the oath or af-
firmation see the chapter on reports. 87
Special Returns by Corporations. In addition to the
return of annual net income required to be filed by
every corporation several special returns are required
annually or at such times as the Commissioner of Internal
Revenue may request.
REPORT OP DIVIDEND PAYMENTS. Every corporation,
when called upon by the Commissioner of Internal
Revenue, is required to render a correct return, duly
verified under oath, of its payments of dividends, whether
made in cash or stock, including the names and addresses
of stockholders and the 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 Treasury Depart-
ment. This return is for the purpose of supplying the
86 Letter from Treasury Department dated March 6, 1916;
I. T. S. 1917, H1598.
87 See Chapter 35.
COKI'OKATJONS 163
Government with information against which the annual
returns of stockholders may be compared, and is more
fully covered in the chapter on Information at the
Source. 88
REPORT OF INCOME PAYMENTS. All corporations i"
whatever capacity acting, including lessees or mortgagors
of real or personal property, trustees, executors, ad-
ministrators, receivers, conservators, and employers,
making payment to any person, corporation or partner-
ship of interest, rent, salaries, wage's, premiums, annui-
ties, compensation, remuneration, emoluments, or other
fixed or determinable gains profits and income (other
than dividends and the payments described in the fol-
lowing section) of $800 or more in any taxable year, are
required to make returns in regard thereto to the Com-
missioner of Internal Revenue under regulations of the
Treasury Department, setting forth the amount of pay-
ments and the names and addresses of the recipients.
In the case of payments of interest upon its bonds,
mortgages or deeds or trust or similar obligations, such
return is required from the corporation regardless ..f
the amount paid. This return is for the purpose of sup-
plying the Treasury Department with information to be
used in auditing the returns of the taxpayers to whom
the income is paid, and is more fully discussed in the
i-hapter on Information at the Source. 89
REPORTS BY BROKERS. Every corporation doing busi-
ness as a broker on any exchange or board of trade or
similar place of business is required, when called upon
by the Commissioner ef Internal Revenue, to make a
8* See Chapter 40.
891,1.
164 FEDERAL INCOME TAX
returji showing the names of customers with such details
as' to profits, losses or other information which the Com-
missioner 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. This report is
for the purpose of information at the source and is more
fully covered in the chapter on that subject. 90
SPECIAL REPORT OF UNDISTRIBUTED PROFITS AND NAMES
OF SHAREHOLDERS. When a corporation has permitted
its gains and profits to accumulate and become surplus
to such an extent that the Secretary of the Treasury
certifies that in his opinion such accumulation is unrea-
sonable for the purpose of the business it may be required
by the Commissioner of Internal Revenue or any col-
lector to file 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. 91 This return is required under that
provision of the 1916 Law which is intended to prevent
the creation or use of corporations for the purpose of
fraudulently preventing the imposition of the supertaxes,
through the medium of permitting the gains and profits
to accumulate instead of being divided or distributed.
The fact that a corporation is a mere holding company
or that the gains and profits are permitted to accumulate
beyond the reasonable needs of the business are prima
facie evidence of a fraudulent purpose to escape such tax,
but the Secretary of the Treasury must first certify that
in his opinion such accumulation is unreasonable for the
purposes of the business. When the accumulation has
90 See Chapter 40.
91 Act of September 8, 1916, 3.
CORPORATIONS 165
been so certified to be unreasonable the respective stock-
holders will be required to include in their personal
returns the share of such profits to which they would
be entitled if they were divided and distributed.
Withholding the Tax at the Source. Xo withholding
takes place on payment of income to domestic corpora-
tions. Such corporations are required to withhold the
tax on payments of fixed or determinable annual or
periodical income to non-resident aliens, and on pay-
ments of bond interest and dividends to non-residWt
foreign corporations as indicated in the chapter on collec-
tion at the source. 92
W See Chapter 41.
CHAPTER 13
SPECIAL PROVISIONS APPLYING TO INSURANCE COMPANIES
In the case of insurance companies, both domestic and
foreign, certain special provisions govern the reporting
of income and the making of deductions. 1 In general
domestic insurance companies are subject to the same pro-
visions as other domestic corporations and foreign insur-
ance companies are subject to the same provisions as other
foreign corporations. The foregoing chapter should be
consulted as to the general provisions relating to cor-
porations and the following chapter should be consulted
as to the special provisions applicable to foreign cor-
porations. Two special forms for making the return of
annual net income are provided for insurance companies,
one to be used by mutual insurance companies other than
mutual life and mutual marine, and the other to be used
by all other insurance companies including mutual life
and mutual marine.
Gross Income. The gross income of insurance com-
panies consists of the total revenue derived from the
operation of the business including income, gains and
profits from all other sources, except as modified by the
express exemptions in the statute. The statements on the
return of annual net income should conform with the re-
ports of the same years made to the state insurance
1 Act of September 8, 1916, 12.
Kifi
PROVISIONS APPLYING TO INSURANCE COMPANIES 167
departments. Reinsurance and return premiums should
not be included in the gross income or deductions of an
insurance company.
Expenses. The same allowance for expenses is per-
mitted as in the case of other corporations. Insurance
companies will be permitted to add to expenses, in lieu
of depreciation of furniture and fixtures, the actual cost
of repairs, replacements and renewals on such furniture,
as is reported to the state insurance department, pro-
vided that in the case of an original investment, the cost
shall be charged to the capital account.
Deduction of Net Addition to Reserve Funds. In the
case of all insurance companies, the net addition, if any,
required by law to be made within the year to reserve
funds may be deducted. The net addition may be based
upon the highest authorized reserve required by the
statutes of any state in which the company does business,
but having adopted the requirements of one state the
company cannot base its reserve upon the requirements
of another state for subsequent years. 2 Legal reserve
funds are those sums required by state laws to be main-
tained by an insurance company to secure its liabilities
upon policies written. They are accumulated out of the
income of the company and are in reality simply its in-
vested assets, approved securities sufficient in amount to
meet its liabilities. This reserve is not intended to
cover the company's liability with respect to the in-
surance written, but is a fund providing against loss in
case the company should go out of business. It does
not secure all the creditors or claimants of the company.
The computation of the amount is ascertained upon a
2T. D. 1727
168 FEDERAL INCOME TAX
hypothetical basis, and the rules governing it are arbi-
trary. The laws of the states, probably without excep-
tion, require the maintenance of this reserve and the
insurance companies for years have recognized the wis-
dom of its existence.
Loss and unpaid liability claims afford an exact basis
for computation, and the reserves maintained cover the
liability therefor. The state statutes most generally re-
quire the maintenance of a reserve to cover each class of
this particular kind of insurance, but an insurance com-
pany cannot expand this privileged deduction to include
all liabilities. Unpaid taxes, unpaid salaries, brokerage,
and agents' commissions are current expenses; they are
essential items of expense in the daily, monthly, and
yearly conduct of the company's business; the amount
and date of payment is fixed and determined; they de-
pend for liquidation solely upon the company's earning
capacity as the business progresses. Apparently no state
law requires the maintenance of a reserve to secure these
payments. A permanent reserve for taxes is not neces-
sary or required by law, and they are not properly in-
cluded in the net additions required by law to reserve
funds. The income tax law specifically limits the de-
ductions to sums required by law, not such reservations
as business prudence may suggest, and the express pro-
visions of the law fix the determining basis. 3
RESERVES REQUIRED BY LAW. Only those reserves which
are "required by law" may be deducted. Under the
laws of Pennsylvania reserves against unpaid losses are
required by law of casualty companies, but not of fire
and marine insurance companies. Hence, the latter can-
not deduct reserves against losses, although the In-
3 Maryland Casxialty Co. v. U. 8., Court of Claims, T. D. 2451.
PROVISIONS APPLYING TO INSURANCE COMPANIES 169
surance Commissioner of Pennsylvania may require such
reserves under a practice of his office established for
many years and relied upon as an administrative inter-
pretation of the law of that state. 4
RELEASED RESERVES. Where there has been a decrease
in reserve funds the amount of the decrease is commonly
called released reserve, and is to be treated as income
for the year in which the reserve is released. Released
reserves though not mentioned in express terms in the
law have been held to be income and taxable for the year
in which released. 5
ASSESSMENT INSURANCE COMPANIES. In the case of
assessment insurance companies, whether domestic or
foreign, the actual deposits of sums with state or terri-
torial officers, pursuant to law, as additions to guaranty
or reserve funds shall be treated as being payments re-
quired by law to reserve funds. 8
Payments on Policies. All insurance companies may
deduct the sums, other than dividends, paid within the
year on policy and annuity ^contracts. Under this item
on the return of annual net income may be included all
death, disability or other policy claims, including fire,
accident and liability losses, matured endowments, pay-
ments on instalment policies, surrender values and all
claims actually paid under the terms of policy contracts.
In the case of life insurance companies amounts paid as
* McCoach v. Insurance Company of North AnnTir.-i. L'-^ I", s.
'_'!.-,.
5 Maryland Casualty Company v. U. 8., Court of Claims, T. D.
2451.
? Act of September 8, 1916, $ 12, Subdiv. (c).
170 FEDERAL INCOME TAX
consideration for supplementary contracts, and applied
surrender values, should be separately reported. 7
Mutual Fire Insurance Companies. Companies of
this character are required to report under a special pro-
vision of the 1916 Law which provides that such com-
panies requiring their members to make premium
deposits to provide for losses and expenses shall not re-
turn as income any portion of. the premium deposits re-
turned to the 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 re-
serves. Under this provision the Treasury Department
has prescribed a special form for such companies. 8
CAPITAL EMPLOYED IN BUSINESS. The capital em-
ployed in business by such companies is held to be the
capital invested in real estate and other assets.
INDEBTEDNESS. The interest-bearing indebtedness of
such companies is required to be reported. The amount
should include all such indebtedness for the payment
of which the company or its property is bound, but not
indebtedness wholly secured by collateral the subject of
sale or hypothecation in the ordinary business of the
company.
PREMIUMS. The amount to be reported as premiums
includes the net amount received from the policyholders
after deducting therefrom the premiums returned and
7 Instructions on Form 1030.
8 Form 1030 A.
l'Ko\|S|(i\> UTI. VINU TO INSURANCE COMPANIES 171
siieh portion of the premiums as is retained for the pay-
nt of losses, expenses and reinsurance reserves. Only
that jiiirt of tin- premiums retained for any other pur-
pose i> taxahle income ajul should he returned as such.
PROFIT^ON SALE OK MATURITY OF LEDGER ASSETS. The
profit or income to be returned in the event of sale or
maturity of capital assets should be determined in the
same manner as in the case of other corporations. The
profit or income may, for the purpose of the tax, be re-
duced by the amount of any loss resulting from the same
source and ascertained in the same manner. In no event
can a loss resulting from the sale or maturity of capital
assets exceed the profit within the year from like trans-
actions.
RENTALS. Rentals to be reported as income include
the net amount of all payments received in cash or its
equivalent, as rent on buildings or other property owned
or controlled by the company making the return, after
deducting rents paid by the company and also such
amounts of repairs and expenses, including taxes, as have
lice n expended on the property from which the rental
iiieoine reported was derived.
INTEREST ON BONDS. The interest received on bonds
to he reported as income does not include interest exempt
from tax under the 1916 Law.
COMMISSIONS ON REINSURANCE. Commissions received
for reinsurance to be reported as income should be the
net amount after deducting the amount of reinsurance
commissions actually paid within the year.
172 FEDERAL INCOME TAX
DEDUCTIONS. No deductions are permitted to be made
from the amount of income reported by mutual fire in-
surance companies. The amount of premiums, assess-
ments, fees, etc., reported as income is such an amount as
is retained for purposes other than the payment of
losses, expenses and reinsurance reserves hence the ex-
penses of doing business of the company are deducted
from the amount of such premiums before the sum is
reported in the return. Similarly the amount received
as rent on buildings owned by such companies is the
net amount after deducting rentals paid by the company
on buildings which it may occupy as a tenant, taxes paid
by the company on buildings which it owns, and repairs
and expenses incident to the operation of buildings
which it owns. Thus it will be seen that the report for
mutual insurance companies is a report of net income
in the true sense of the word, the gross income not being
reported except so far as is required for purposes of in-
formation in fhe supplementary statement on the back
of the return.
Mutual Employers' Liability Insurance Companies
The 1916 Law included companies of this class in the
same class as mutual fire insurance companies and the
statement in the preceding paragraphs regarding such
companies applies equally to this class of companies.
Mutual Workmen's Compensation Companies. The
1916 Law included companies of this class in the same
class as mutual fire insurance companies and the state-
ment in the preceding paragraphs regarding such com-
panies applies equally to this class of companies.
Mutual Casualty Insurance Companies. The 1916
Law included companies of this class in the same class
no\ ISIo.\> UTI.YIM; TO INS! UAXCE COM1'\MI.> IT.'!
as mutual fire insurance companies and the statement in
the preceding paragraphs regarding such companies ap-
plies equally to this class of companies.
Mutual Marine Insurance Companies. Mutual marine
insurance companies are required to include in their
return of gross income gross premiums collected and re-
ceived by them less amounts paid for reinsurance, but
are entitled to include in the deductions from gross in-
come amounts repaid to policyholders on account of
premiums previously paid by them, together with in-
terest upon such amounts between the ascertainment
thereof and the payment thereof. 9 In other respects
the companies of this* class proceed in the same manner
as insurance companies generally.
Life Insurance Companies. Life insurance com-
panies, including stock and mutual companies, do not in-
clude 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
within the year. 10 In so far as "deferred dividends"
payable at a stated period represent "a portion of any
actual premium received," they may be omitted from
LM-oxs income for the year in which they were actually
l>;iiayini:
for storage room therefor, delivering it to customers, purchasers
thereof, soliciting contract by agents for the purchase and supply
FOKKItiN rHo i id i ugly exempt to the same extent as dividends of
do.nestic corporations. Interest on the obligations of
Mh-li corporations would seem to be taxable in the hands
of non-resident aliens and subject to deduction of the
tax when paid to non-resident foreign partnerships or
corporations. 12 The term "resident foreign corpora-
tint is" is used in this book to indicate corporations of
tliis class.
Non-Resident Alien Corporations. The term "non-
ri-sident alien corporations" covers all corporations or-
ganized, authorized or existing under the laws of a
foreign country and having no office or place of business
in the United States. 13 Such corporations are subject to
the tax on all income from sources within the United
States, and are required to file annual returns disclosing
Mich income. Since such corporations are outside of the
jurisdiction of this country, the act provides expressly
that the tax on income from interest on bonds and divi-
dends on stock of resident corporations shall be withheld
at the source before the income leaves this jurisdiction.
Provision is also made for collection of the tax by
impressing a duty upon those in this country who have
control, custody, receipt or disposal of the income of such
'or| (orations, as indicated in the following paragraphs.
The term "non-resident foreign corporations" is used in
this book to indicate corporations of this class.
Collection of the Tax at the Source. In the case of
non-resident alien corporations as defined above, the
1* Act of September 8, 1916, 8 1 and 8 13 (e) as amended.
Residence within the meaning of these provisions will probably
!( held to cover only cases where the principal business of the
foreign corporation is transacted in this country, and payment of
the interest is made here.
13 T. D. 2401.
182 FEDERAL INCOME TAX
normal tax is withheld at the source on all interest upon
the bonds and mortgages or deeds of trust or similar obli-
gations of resident corporations and upon all dividends
upon the capital stock or from the net earnings of res-
ident corporations. Such corporations cannot by filing
any certificate or claim for exemption prevent the with-
holding of such tax, but may upon the filing of an annual
return, which must include the amount of income on
which the tax has been so withheld, claim a deduction of
the amount so withheld and if the return discloses the
fact that more tax has been withheld than is assessable
against the corporation, the Treasury Department will
order a refund of the excess amount withheld. For this
purpose the return of the foreign corporation should
have attached thereto a statement giving the names of
the withholding agents and the amounts withheld re-
spectively. For a further discussion of collection at the
source see the chapter on that subject. There is no
collection of the tax at the source on payments other
than those described above, and in no case on payments
made to resident alien corporations.
Nominal Stockholders. Where stock of domestic cor-
porations stands in the name of nominal stockholders
and the actual owners are non-resident foreign corpora-
tions, that fact must be disclosed. In cases where such
corporations are nominal stockholders, withholding of
the tax may be avoided by disclosing the actual owners.
This subject is discussed in a preceding chapter. 14
Resident Agents for Foreign Corporations. In addi-
tion to the provisions prescribed by the law for collection
of the tax at the source on bond interest and dividends
14 See Chapter 7.
FOREIGN CORPORATIONS 183
paid to non-resident foreign corporations, the Treasury
Department has evolved a method of collecting the tax
by impressing upon residents of this country, under cer-
tain circumstances, the duty of filing returns and ac-
counting for the tax due from foreign corporations on
the income which passes through their hands. A general
discussion of the duties of such agents and their relation
to the foreign-corporation principal is contained in a
preceding chapter on Resident Agents for Non-resident
Aliens and Foreign Corporations. 16
Income Subject to Tax. The gross income of foreign
corporations is all taxable income received from all
sources within the United States, whether or not the cor-
poration does business in this country or receives income
from investments of any kind. From the amount of such
gross income may be subtracted the sum of the deduc-
tions enumerated in the act, which deductions are similar
to those allowed to domestic corporations, but limited
to expenses or allowances properly chargeable against
the income from this country.
t
STEAMSHIP COMPANIES. Where a foreign steamship
company has steamers which touch American ports and
\\hich carry therefrom freight and passengers the return
should show as gross income the total receipts from all
outgoing boats whether freight or passenger. With the
gross income thus ascertained, the ratio existing between
it and the gross income from all ports both within and
without the United States should be determined as the
basis upon which deductions may be computed. 16
18 See Chapter 6.
16 Letter from Treasury Department dated July 18, 1916.
I. T. 8. 1917, f 1114.
184 FEDERAL INCOME TAX
FOREIGN CORPORATIONS HAVING BRANCH OFFICES IN
THIS COUNTRY. Where a foreign corporation has one or
more branch offices in this country the return should
include the income of all the branches, including
branches in the Philippines and Porto Rico. The princi-
pal branch office determines the district in which the
return should be filed and the tax should be paid. Where
branches in this country transact business in foreign
jurisdictions, the net income accruing to the branch
here, it seems that the income derived from such business
in foreign jurisdictions should be treated as income from
sources within this country since the management ami
conduct of such business is directed from within this
jurisdiction and the foreign corporation eventually re-
ceives its net income from a source within this country,
namely the branch conducting such business.
INCOME FROM INVESTMENTS. Income from invest-
ments of all kinds in property located within this coun-
try is subject to the tax under the broad provisions of
the law which provide for the taxation of the total net
income from all sources within the United States. 17
17 Under the 1913 Law, the tax was imposed only upon such
foreign corporations as were doing business and had capital
invested in this country. The Treasury Department construed
this to mean that the tax applied if a foreign corporation was
either doing business or had capital invested here and held that
money invested in the securities of American corporations was
capital invested in the United States regardless of the domicile of
the securities or that of the corporation owning them. (Letter
from Treasury Department dated June 6, 1916; I. T. S. 1917,
If 1505.) In DeGanay v. Lederer, 239 Fed. 568, it was held that
the income tax properly, applied to income on domestic securities
owned by a non-resident alien, which securities were kept in this
country.
FOREIGN CORPORATIONS 185
Deductions from Gross Income Allowed by Law. The
Irt I notions from the gross income of a foreign corpora-
tion should as nearly as possible represent the actual ex-
penses and authorized charges incident to the income de-
rived from this country and must not comprehend either
directly or indirectly any expenditures or charges in-
curred in the transaction of business or the investment
or capital without the United States. 18 The principle
followed by the Treasury Department is that all allow-
able deductions shall be computed upon a basis which
recognizes that the income arising and accruing from
business done in and from this country shall bear its
share, and no more, of expense incident to the earning
or creation of such income in the ratio that the gross
income arising in and from this country bears to the en-
tire gross income arising from business done both within
and without this country. 19
WHEN INCOME Is DERIVED FROM INVESTMENTS ONLY.
A corporation deriving its sole income from this country
in the form of dividends or interest on domestic stocks
iiiid iKmds is permitted to deduct from the income so
received such items of disbursement, loss, etc., as would
be properly deductible were the income derived from any
other source. The deduction shall comprehend only such
\l"'iiditures, losses, etc., as are incurred in or are in-
riilriital to the creation of the income against which they
are charged and in all cases the amounts must be within
tin- limits fixed by law. 20
18 Reg. 33, Art. 157.
1 Letter from Treasury Department dated July 18, 1916;
I. f . 8. 1917, 1 1114.
20 Letter from Treasury Department dated June 6, 1916;
I. T. S. 1917, K1505.
186 FEDERAL INCOME TAX
ORDINARY AND NECESSARY EXPENSES. A foreign cor-
poration may deduct all the ordinary and necessary ex-
penses actually paid within the year out of earnings in
the maintenance and operation of its business and prop-
erty within the United States, including rentals or other
payments required to be made as a condition to the con-
tinued use or possession of property to which the cor-
poration has not taken or is not taking title, or in which
it has no equity. This chapter contains only the rulings
applicable to foreign corporations. The chapter on do-
mestic corporations should be read as well as the chapters
discussing the general provisions relating to deductions.
Where certain expenses such as coal, ships stores, etc.,
in the ease of foreign steamship companies, cannot be
segregated the total expenses of the foreign corporation
for such items should be pro-rated in such proportion as
the gross income of the corporation from sources within
the United States bears to the gross income derived from
all sources both within and without the United States,
that is to say, if one-half of the gross income of the for-
eign corporation is from this country one half of such
expenses would be proper, deduction. 21
LOSSES. All losses actually sustained within the year
in business or trade conducted by the foreign corporation
within the United States and not compensated by in-
surance or otherwise may be deducted including a rea-
sonable allowance for the exhaustion, wear and tear of
property arising out of its use or employment in the
business or trade, within the limits permitted to domestic
corporations. It should be noted that losses which may
be deducted a.re those sustained in the business conducted
21 T. D. 1675; Reg. 33, Art. 116; Letter from Treasury Dt>i:irt
ment dated December 8, 1916.
FOREIGN CORPORATIONS 187
in the United States and depreciation may be deducted
only on property used in connection with such business.
The general rulings relating to losses and depreciation
are discussed in the chapters on deductions. 28 No
rulings or decisions especially applicable to foreign cor-
porations have been made with reference to these deduc-
tions.
DEPLETION OP NATURAL RESOURCES. Foreign corpora-
tions owning mines or oil and gas wells in this country
are entitled to the same allowances for depletion of the
natural resources as are permitted to domestic corpora-
linns and individuals. For a discussion of these allow-
ances see the chapters on depletion. 23
DEDUCTIONS FROM INCOME OP FOREIGN INSURANCE
COMPANIES. The special deductions allowed in the case
of insurance companies, domestic and foreign, are treated
in the foregoing chapter.
INTEREST. Foreign corporations are permitted to de-
duct a part of the interest paid during the year under
the following rules. The amount of indebtedness
on which the interest may be deducted must be an
amount not in excess of the entire amount of the paid
up capital stock outstanding at the close of the year, or
if no capital stock, the entire amount of the capital em-
ployed in the business at the close of the tear plus one
half of its interest ^bearing indebtedness then outstand-
ing. that is to say. the greatest amount of interest which
a foreign corporation can deduct is limited in the same
way as in the ease of domestic corporations. The dis-
Chapters 31 and 32.
83 See Chapters 33 and 34.
188 FEDERAL INCOME TAX
cussion of this limitation in the Chapter on Corporations
applies equally to domestic and foreign corporations. 24
If the foreign corporation does all its business in the
United States the interest on the amount of indebtedness
ascertained as above may be deducted. If it does only a
part of its business in the United States there may be
deducted only the interest paid on such proportion of
the amount of indebtedness ascertained as above as 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. As in the
case of all other taxpayers, foreign corporations are not
permitted to deduct the amount of interest on indebted-
ness incurred for the purchase of obligations or securities
the interest upon which is exempt from the income tax.
INTEREST ON INDEBTEDNESS SECURED BY COLLATERAL.
The provision of law permitting a deduction to domestic
corporations of the full amount of interest paid on in-
debtedness secured by collateral the subject of sale or
hypothecation in the ordinary business of the corpora-
tion is not allowed by the law to foreign corporations.
INTEREST PAID BY BANKS ON DEPOSITS. A foreign
bank, banking association, loan or trust company, or
branch thereof, may deduct in full the 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, bank association, loan
or trust company or branch thereof. Interest so paid
to citizens and residents being taxable as income to them
24 See Chapter 12.
KOKEION COKHOKAT1ONS 189
is properly deductible from the income of the foreign
corporation.
TAXES. A foreign corporation may deduct taxes paid
within the year imposd by the authority of the United
States (except income and excess profits taxes) or its
territories or possessions or under the authority of any
state, county, school district or municipality or other
subdivision of any state, paid within the United States,
not including those assessed against local benefits. This
allowance for taxes is the same as that allowed to do-
mestic corporations and to individuals except that it is
expressly limited to cases where the tax is assessed by
a governmental authority within the jurisdiction of the
United States and the tax paid within the United States.
For a general discussion of the extent to which taxes may
be deducted see the Chapter on Deduction of Taxes. 26
Duty of Foreign Corporations in Paying Out Income.
Where a resident alien corporation pays out income to
others subject to the tax it is subject to all the duties
and responsibilities imposed upon domestic corporations
as to withholding the tax at the source or reporting the
names of the persons to whom such income is paid. For
a further discussion of this subject see the Chapter on
Collection at the Source and the Chapter on Information
at the Source. Non-resident alien corporations are under
no duty in paying out net income to others whether or
not such payees aro citizens or residents of this country.
Return of Annual Net Income. Foreign corporations
f
individuals, losses need not be "charged off" except in
the case of worthless debts. The latter seems to be the
only item of income or deduction expressly required by
the law to be evidenced by book entries in the case of
individuals. The Treasury Department, however, in-
sists upon book entries of other deductions before allow-
ing the same. If the individual keeps books of account
it is no doubt within the power of the Treasury Depart-
ment to require entries of deductions to be made for
the purpose of record, but a taxpayer, not keeping
books, is not for that reason precluded from claiming
the deductions specified in the law, except in the case
of worthless debts, as noted above. No particular sys-
tem of bookkeeping or accounting is required by the
department, but the business transacted by the tax-
payer should be so recorded that each and every item
set forth in the return of annual net income may be
readily verified by an examination of the books of ac-
count. 10 The books of a corporation are assumed to
reflect facts as to its earnings, etc., hence they will be
taken as the best guide in determining the net income,
and, except as the same may be modified by provisions
of the law wherein certain deductions are limited, the
net income disclosed by the books and verified by the
annual balance sheet, or the annual report to stock-
holders, should be the same as that returned for taxa-
tion. 11 Where an individual or a corporation elects to
report on the basis of its books, and not on the basis
of actual receipts and disbursements, the books must be
10 Keg. 33, Art. 182; T. D. 2161.
"Rg. 33, Art. 183.
F. I. Tax 14
210 FEDERAL INCOME TAX
kept according to standard accounting systems. This
basis is more fully discussed in the latter part of this
chapter.
Book Value of Assets. Neither the Government nor
the taxpayer is bound by valuations entered on the
books of the taxpayer. 12 Where property is carried at
nominal value on the books of the taxpayer, and the
Government seeks to assess a tax on the basis of that
value, the taxpayer may prove, by other evidence, the
true value of such property. 13 A book value increase
in the value of capital assets due to a re-appraisal of
property is not income within the meaning of the law. 14
A book entry reflecting only an enhanced value of assets
during the year evidences an increase in the net worth
of the corporation or individual for that year, an in-
crease which, under adverse conditions, may disappear
the next year. An increase in value thus evidenced is
intangible, unstable and is not such income as the law
contemplates shall be returned for the purpose of the
tax. 15 Returnable and taxable income is that actually
realized during the year, evidenced by the receipt of cash
12 Doyle v. Mitchell, 235 Fed. 686.
13 U. S. v. Guggenheim Exploration Company, 238 Fed. 231.
In this case the value at which the property was acquired, the
declaration of tho board of directors as to such value, at the time
of acquisition, and statements in the annual reports, were held
to overcome in weight the alleged admission against interest in
placing the valuation of the property on the books at a nominal
amount.
14 T. D. 2005, Baldwin Locomotive Works v. MeCoach, 221
' Fed. 59.
15 Letter from Treasury Department dated August 14, 1914;
I. T. S. 1917, 1f260.
INCOME IN GENERAL 211
or its equivalent. Hence mere book entries of an appre-
ciation in the value of capital assets will be disregarded. 16
. Inventory. Taxpayers engaged in manufacturing or
mercantile businesses usually determine their net income
by inventory, purchases during the year plus the stock
on hand at the beginning of the year, being subtracted
from sales during the year plus stock on hand at the
close of the year, or vice versa, to ascertain the gain or
loss. The Treasury Department recognizes this system,
but requires that in every case where the annual gain 6r
loss is determined by inventory, the merchandise must
be inventoried at cost price, as any loss in salable value
will ultimately be reflected in the sales during the year
when the goods are disposed of. Overhead charges are
not to be included in inventory. 17
Income Received in Kind. When income is received
in kind, that is, in produce, crops, or other property
having no definite money value, the tax is assessible in
the year in which such income is reduced to money or a
money equivalent. 18 If property is exchanged or bar-
tered for other property, neither having a fixed or de-
terminable money value, and the exchange is not made
on the basis of money value, no taxable income arises
from the transaction. Thus, an exchange of one horse
for another horse, does not create taxable gain to either
party to the transaction though each may feel convinced
he is the richer by the deal. If either party subsequently
sells the horse received by him in the exchange, his
profit will then be the difference between the selling
18 Letter from Treasury Department dated August 14, 1914;
I. T. 8. 1917, H1249.
17 See instructions on hack of Form 1031.
11 T. D. 2153.
FEDERAL INCOME TAX
price of that horse and the cost to him of the horse
he first owned. Eulings on this point have not been very
well defined by the Treasury Department up to the pres-
ent time. It has held, however, that "if assets are ex-
changed for other assets of a like character, and no ac-
count is taken of the 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 continuing one, no profit or loss to be taken into
account until the assets are disposed of for cash or its
equivalent. ' ' 19
Income Received in the Equivalent of Cash. The law
expressly provides that stock dividends shall be taxable
to the same extent as though the surplus they represent
had been distributed in cash. Salaries, wages or com-
pensation for personal services of whatever kind "and
in whatever form paid" are taxable income. These are
the only instances in which the law expressly imposes
a tax on income received in any form other than cash.
The Treasury Department, however, has ruled in a num-
ber of cases that income may be taxable without neces-
sarily being received in the form of cash. Thus, it
has held in some cases that payment made by the issue
of stock of a corporation is equivalent to payment in
cash, but the rulings on this point are not yet very
well defined. The transactions with respect to which
such rulings have been made involve two points: (a)
whether the transaction is one in which any income
can be said to have arisen, and (b) whether the con-
sideration received has a sufficiently fixed and definite
money value to be considered the equivalent of cash.
19 Letter from Treasury Department dated August 3, 1917;
I. T. S. 1917, H 2281.
INCOME IN GENERAL
The difficult questions arising in this connection are
discussed in the following paragraphs.
CHANGE OP INVESTMENTS. Where a broker induces
a customer to change his investments, on the basis of
market prices at a certain time, the difference in prices
being adjusted by cash payment, such a transaction
seems clearly to be one in which each party is able to
compute in money values his gain or loss. Thus, as
an illustration, Jones may have purchased a bond for
$900, and Smith may have purchased ten shares of
stock for $850. The market for each investment having
gone up ten points, Jones and Smith exchange invest-
ments, Smith paying $50 additional in cash. As a result,
Jones is in possession of stock having a market value
of $950^ and $50 in cash, while Smith has a bond with
a market value of $1,000, but his amount of cash is
reduced by $50. Upon analysis it is seen that the trans-
action is in fact a double one equivalent to each party
having paid the other in cash the full market value of
the security, and having purchased from the other, for
cash, a new security. Each has clearly realized a gain
of $100 and, with respect to each, the transaction is a
closed and completed one. It seems clear, therefore,
that each should report income of $100 in his annual
return. It would also seem that the same rule applies
upon the exchange of any property having a definite
and generally recognized money value, and the exchange
is made on the basis of such money value. Whether or
not it can properly be applied to an exchange of prop-
erty, where the value is a matter of speculation, has not
been determined, but it seems that a transaction under
such conditions is not contemplated by the law to be
capable of producing taxable income.
214 FEDERAL INCOME TAX
STOCK RECEIVED IN EXCHANGE FOR SERVICES. An
early ruling of the Treasury Department, under the
1913 Law, held that commissions allowed salesmen, paid
in stock, might be deducted as expense, if so charged
on the books of the corporation, at the actual value of
such stock. 80 This is apparently on the theory that
the transaction was equivalent to the salesman receiv-
ing payment for his services in cash and immediately
investing the sum in stock. Conversely, the Treasury
Department would no doubt hold, in order to be con-
sistent, that the value of the stock would be income to
the salesman as a payment in the equivalent of cash.
It would seem to be more sound, however, to argue that
the salesman received for his services merely the right
to share in the future profits of the company, and in
its assets upon dissolution, and received no present tax-
able consideration, especially if the stock had no definite
market value. Of course, adopting this theory, the sales-
man would be taxable upon the entire amount received
in case any of the stock should be sold, since the stock
would be held to have cost him nothing, while if he
reports the value of the stock as income at the time of
receiving the stock, that amount may be deducted from
the selling price in computing the taxable profit on a
subsequent sale of the stock. In the absence of more
definite rulings on this point, it would seem that the
transaction could be handled according to the intent
of the parties, since, as a practical matter, if a corpora-
tion deducts the value of the stock so paid for services,
the employee receiving the stock should report the sum
as income, and, conversely, if the corporation does not
deduct the value of the stock as an expense, the employee
should not be required to include it as income. It is
20 Reg. 33, Art. 117.
IMOM1-; IN liENEKAL 215
entirely a question of who should assume the burden
of the tax.
STOCK RECEIVED IN EXCHANGE FOR PROPERTY. If an
individual conducting business by himself decides to
incorporate and legally transfers his property to a cor-
poration in exchange for its stock it does not seem that
he should be taxed on the theory that he has received
payment in the equivalent of cash, since he cannot
possibly be any richer as a result of the transaction,
and his apparent profit, if any, is a mere ' ' paper profit, ' '
not an actual profit. It is argued, on the other hand,
that he has gone through all the legal forms of a sale
and that the legal form must govern, but it does not
seem, nevertheless, that he is in receipt of actual income
such as the courts indicate the law attempts to reach.
The conclusion would not appear to be different if sev-
eral individuals pool their property and form a cor-
poration, since where property is transferred to a new
corporation in exchange for its stock, the transaction is
essentially a contribution of property to the common fund
in anticipation of receiving a definite proportion of the
profits resulting therefrom. The transactions are con-
fusing because of the legal theory that a corporation is
an entity separate and apart from its shareholders, and
such transactions, wherefoy property is contributed to a
corporation, usually take the form of a sale between t\\<>
separate entities. The attitude of the Treasury Depart-
ment indicates that such transactions will be considered
as sales between separate entities and held to be com-
pleted and closed transactions with respect to the stock-
holders. The second difficulty involved in such transac-
tions is that it is impossible, in many instances, to deter-
inino with any degree of certainty the money value of the
216 FEDERAL INCOME TAX
stock received. A custom has grown up in this country
of placing high valuations on property contributed to a
corporation, in order that a greater par value of stock
may be issued therefor without subjecting the stock-
holder to liability for unpaid stock. The expected value
of the property after a period of development is often
capitalized, and future earnings are anticipated. We
capitalize our corporations at a par which we hope to
reach, instead of at a par representing the present value,
consequently property is often transferred to corpora-
tions upon a valuation fixed by the directors in such
sums as to create a tremendous "paper profit" to the
stockholders who contribute property in exchange for
the stock. As a practical matter, such transactions are
"not considered by the parties thereto as "closed and
completed" within the sense that the phrase is used
in the income tax regulations. The forms observed in
the transaction and the seeming profit creates a prob-
lem which the Treasury Department has proceeded to
solve in the cases that have come before it in such way
as to create revenue, as is indicated in the following
paragraphs.
REORGANIZATION OF CORPORATIONS. It has been held
"that in all cases wherein a corporation sells and trans-
fers its assets to another corporation, the amount received
by the selling corporation in excess of th'e cost of the
property sold will be considered income to such selling
corporation. ' ' 21 This, of course, is true but the Treas-
21 Letter from Treasury Department dated September 9, 1916 ;
I. T. S. 1917, If 1218. The original rulings of the Treasury Depart-
ment were to the effect that upon a reorganization where a new
corporation was formed with a larger par value, the transfer of
the assets from the old to the new and the exchange of stock by
1NGOMK IN GENERAL 217
ury Department implied in this ruling that payment
in stock was to be considered equivalent to payment
iii cash, and stated that if the shares of stock received
by the selling corporation were distributed to its stock-
holders, the amount so distributed in excess of the stock
(meaning apparently par value) held by them in the
selling company would be considered income to the
stockholders, to be returned as dividends. In later
rulings it was held as indicated below.
WHERE EXCHANGE Is PAR FOR PAR. Where in the
case of reorganization new stock is acquired by a stock-
holder in exchange for old stock and both are of the
same par value no income arises at the time of exchange,
but when the new stock is sold the gain must be based
upon the cost of the old stock or its value on March 1,
1913. 28 Where upon reorganization of a company stock
of the new company is issued in exchange for shares
of the old, the new company taking over the property
the stockholders of the old for a greater par value of stock of
the new, did not create taxable income. Letter from Treasury
Department dated May 3, 1915; I. T. S. 1917, 11211; letter from
Treasury Department dated April 1, 1915; I. T. S. 1917, U266;
in the latter ruling it was said, "In this transaction there is noth-
ing to indicate that the two shares of stock in the B Company
of a par value of $100 each, had a value in cash or its equivalent
in excess of the value of the stock in the A Company. There is no
evidence other than the difference in the quantitative par value
of the shares of stock, that any gain, profit or income was reali/o.l
from the exchange of the shares of stock. It is therefore the
opinion of this office that no accounting of income will be required
until such time as the individual in question seljs the stock of
the B Company at a price in excess of the capital which he
originally invested in the stock of the A Company."
** Letter from Treasury Department dated March 8, 1017;
I. T. 8. 1917, 12121.
218 FEDERAL INCOME TAX
of the old, no income accrues if the exchange of stock
is share for share of like par value even though the
property of the first corporation has increased in value
over a period of years since its stock was first issued.
Where the stock of both corporations is of like par
value and predicated upon exactly the same assets the
transaction results in no gains, profits or income to
either the first corporation or its stockholders. If the
stock of the first company at the time of the transaction
was worth "double par" the stock of the second com-
pany, 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. It is
simply an exchange of assets of like character and like
value. 83 Where an exchange is made of stock of one
corporation for bonds in another corporation, the par
value of the stock being equal to the par value of
the bonds, no taxable income is held to result from the
transaction, the transaction being- an exchange of assets
of a different form but of equal value. 24
WHERE THE EXCHANGE Is FOR A GREATER PAR VALUE.
Where the assets of one corporation are transferred
to another, the stockholders of the first receiving in
exchange for their stock a greater amount of stock, par
value, in the new corporation, the attitude of the Treas-
ury Department seems to be that the par value of the
new stock is to be considered as the equivalent of cash
and taxable to the extent that it exceeds the cost of the
old. Where the stockholders of a. corporation sur-
23 Letter from Treasury Department dated March 8, 1917 ;
I. T. S. 1917, H 2119.
24 Letter from Treasury Department dated August 3, 1917;
T. T. S. 1917, 1f2281.
INCOME IN GENERAL 219
rendered their stock for stock of less par value, they were
permitted to claim a loss on the difference between the
cost of the old and the par of the new. 88
WHERE THE NEW STOCK HAS A MARKET VALUE.
Where a stockholder holding shares in a company
receives upon reorganization the same number of shares
of the new company, and an equal amount in bonds,
the bonds having a ready market value of par, and the
stock a value of 50% of par, it was held that the exchange
constituted a closed and completed transaction, in that
the old stock had been disposed of for a readily deter-
minable value, namely, the par value of the bonds and
half the par value of the stock, hence the stockholder
had realized on his original investment a profit of 50%,
which was required to be returned as income for the
year in which the transaction took place. In this par-
ticular case it was also held that if the stockholder later
on sold the bonds at par, and retained the stock, no
income would be realized, and none would be realized
until the stock retained had been sold or disposed of
for a price or value greater than 50% of its par, which
amount was returnable as income under the first
transaction.**
M Letter from Treasury Department dated March 9, 1917;
I. T. S. 1917, 1 2122.
28 letter from Treasury Department dated August 3, 1917 :
I. T. S. 1917, 12281. It is to be noted that none of these rulings
on the question of taxable income arising in the exchange of
stock have heen embodied in formal treasury divisions. They arc-
all contained in letters answering specific questions, but it is a
fact, nevertheless, that the Treasury Department is proceeding on
the theory that taxable income does arise, and is imposing the
tax on such transactions. The only reference to this subject
which th> author has IMHMI able to find in any of the cases i- ;i
220 FEDERAL INCOME TAX
WHERE SURPLUS OF ONE CORPORATION Is CONVERTED
INTO CAPITAL OF ANOTHER. Whether or not the rulings
indicated in the preceding paragraphs on exchange of
stock will be upheld by the courts, it seems that it would
be sound to take the position, in the case of a reorganiza-
tion, that if the old company had surplus or undivided
profits, which would be taxable if distributed by it as
dividends, such surplus and undivided profits would
also be taxable if the entire assets were turned over
to a new corporation which treated the surplus and
undivided profits as being converted into capital and
issued its stock to represent the same in an exchange
with the stockholders of the old corporation. In such
cases the surplus is converted into capital and stock
is issued to represent such new capital, thus bringing
the transaction within the provisions of the law relat-
ing to stock dividends. But even so, the transaction
does not come literally within the provisions of law
relating to stock dividends, as a stock dividend is defined
to be a distribution of profits or surplus payable in
stock of the corporation which earned the surplus.
However, it would seem that the transaction here
described is tantamount to distribution of a stock divi-
dend and should properly be held to be taxable as such.
Payment in Notes. For income tax purposes, where
there is an actual sale and transfer of real estate, profit
will be considered as realized even though payment is
to be made in instalments, as notes for deferred pay-
remark of the lower court in the case of Sargent Land Company
v. Von Baumbach, 207 Fed. 423, as follows: "The mere change
of form of ownership from that of these individuals to that of a
corporation owned by the same individuals cannot produce such
large profits as are claimed here."
INCOME IN GENERAL 221
raents are secured by the title to the property, and pre-
sumably bear interest, and are held to be worth, in
cash, their face value. 87 In determining the amount
of income to be accounted for on this basis, the. seller
is required to consider mortgages, mortgage notes or
any other credits received in payment of the property
as though they were cash. If the purchaser should
later default in payment, the seller will be permitted
to take credit, as a loss, for the amount of loss actually
sustained by reason of the default. 28 In case of default
on instalment payments, there may be charged off as
bad debts the amount of such unpaid instalments, less
the salvage value of the real estate repossessed. 29 A
promissory note in settlement of an action, or in pay-
ment of an indebtedness or of interest, is considered
to be the equivalent of cash and so much of such note
as represents net income is subject to tax as of the year
in which the note is received. 30 This ruling seems
hardly supported by the decisions of the courts on what
constitutes income. A note is a mere promise to pay,
and, at least until the note is discounted, the payee has
not in fact received income any more than he has from
an unpaid account receivable. To require him to include
the amount of notes received in transactions not a part
of his business or trade, is unjust, as in case of default
he would be entitled to deduct the loss only, to a very
limited extent or, depending on circumstances, not at all.
Living Quarters, Board or Lodging. In cases where
salary, rent, or other income is received in some form
7T. D. 2090.
88 T. D. 2137.
W T. D. 2090.
30 Letter from Treasury Department dated March 1. 1915;
I. T. 8. 1917,1242.
222 FEDERAL INCOME TAX
other than cash, the cash value of such consideration,
it is held, should be computed and returned as income.
Thus where living quarters are furnished in addition
to salary, the rental value of such living quarters should
be reported as salary, 31 and where board, lodging, or
other consideration is received in lieu of cash, the value
thereof should be included as rent or salary, as the case
may be. 32 The law expressly provides that salaries,
wages, or compensation for personal services shall be
taxable "in whatever form paid," but does not so
provide with respect to rent. These rulings would
be applicable to any payment required by contract to
be made in some form other than cash, but it does not
necessarily mean that because an employee occupies,
rent free, a house owned by the employer, he must
return the rental value as income. If it was not stipu-
lated in the contract of employment that such living
quarters should be furnished as a part of the salary or
wages, the privilege of occupying the house is in the
nature of a gift and no taxable income arises. Similarly
where an employee uses his employer's property, horses,
automobile, etc., by permission, and not by legal right,
as a part of his compensation for services, no income
arises to him on the ground that he is receiving value
for which he would otherwise have to pay. If a person
receives a fixed allowance to cover traveling or other
expenses and expends less than the sum so received,
the excess should be treated as income.
Receipts Representing in Part a Return of Capital.
In many cases receipts of money represent in part a
return of capital and in part income or profit. Instal-
31 T. D. 2090.
38 T. D. 2135.
l\< o.ME IN (itNLUAl. 223
inent payments for goods sold is an instance. This
subject is discussed in full in a subsequent chapter. 83
Income Taxable in Year Received. Unless the tax-
payer keeps his books on a basis other than that of
actual receipts, and reports accordingly, he should report
as income all amounts received in the year in which
payment is actually made. Thus dividends and inter-
est, salaries, professional fees of lawyers, physicians, and
the like 3 * need not be returned as income in the year
in which they become due or are earned, but should
be returned as income in the year in which the pay-
ments are received. It is immaterial that the services
for which payment may be made have been performed
for a period extending over several years, the entire
payment is taxable in the year in which received, and
may not be pro-rated. 86 In one case it was argued on
behalf o an agent of a foreign insurance company,
under a contract by the terms of which he should receive
compensation on premiums of policies to the extent of
certain specified percentages for a term aggregating
twenty years from the date of each policy, that all of
the labor creating such income had been performed prior
to the incidence of the tax, but the court held that
fact to be immaterial and sustained an assessment on
the entire income for the year in which it was received. 88
Accounts Receivable. Accounts receivable are con-
sidered income for the year in which the account is
MSee Chapter 26.
3* Letters from Treasury Department dated February 18, 1915,
and March 1, 1915; I. T. 8. 1917; HI 184, 185 and 228.
MT. D. 2135.
88 Edwards v. Keith, 231 Fed. 110.
224 FEDERAL INCOME TAX
created, since the Treasury Department holds that the
net income of taxpayers in manufacturing or mercan-
tile businesses should be ascertained from their books
and from the actual inventory of merchandise in accord-
ance with the established procedure in such businesses. 37
Receipt by Agent Is Receipt by Principal. ' A system
of accounting adopted by an insurance company, which
allowed a period of two months to local agencies in
which to report their cash premium receipts to the
home office, was held, in view of the rules and regula-
tions of the Commissioner of Internal Revenue, not to
"clearly reflect" the company's income. A payment
to the agent was held to be payment to the principal,
and the company was required to include such pay-
ments in the return for the year in which they were
received by the agent. The provision of the 1916 Law,
permitting a corporation to report according to. its books,
was held not to justify the system followed by the
corporation in this case, as the system adopted must be
such as to " clearly reflect its income. ' ' 38
Income from Foreign Countries. Where income has
accrued in a foreign country on foreign investments
but has not been remitted to the owner here, being placed
to his credit in the foreign country, he should include
the same as income for the year in which it is placed
to his credit, computing the amount in United States
money by using the rates of exchange prevailing at
the time the amounts were credited abroad. 39
37 Letter from Treasury Department dated March 31, 1915;
I. T. 8. 1917, 11 241.
38 Maryland Casualty Company v. U. S., Ct. Cls., T. D. 2451.
39 Letter from Treasury Department dated January 11, 1916;
I. T. S. 1917, If 230.
1NCOMK IN GENII, I
Income Received from Porto Rico or the Philippines.
A corporation or individual whose return under the
law IK specifically required to be filed with the collector
of one of the districts of the continental United States
would not be taxable in Porto Rico or the Philippines,
although a portion of the income received might be
derived from business carried on in one or both of those
jurisdictions. Although the law provides that income
collected in those jurisdictions "shall accrue intact to
the general governments thereof," this refers only to the
tax legally assessable therein, and does not alter the
general rule that all of the tax shall be paid in the dis-
trict in which the taxpayer resides or has his or its prin-
cipal place of business.*
Gross Income. The Treasury regulations and rulings
refer to gross income generally as the income of the tax-
payer before making the deductions and allowances per-
mitted by law. The statute does not use the phrase gross
income but in prescribing the deductions allowed to cor-
porations makes use of the phrase "gross amount" of its
income. Gross income is not synonymous with gross
receipts.
Net Income. The phrase "net income" as used by the
Treasury Department seems to mean the amount re-
maining after subtracting from gross income the deduc-
tions allowed by law. In the case of individuals the net
income includes the amount received as dividends and
the amount of the personal exemption, that is, these
amounts are not subtracted from gross income in arriving
at what is termed net income but they are subtracted
*0 Letter from Treasury Department dated April 4, 1917.
P. I. Tar. 15
FEUEKAL INCOME TAX
from net income only in arriving at the net taxable
income for the purpose of the normal tax.
Exempt Income. The act specifically prescribes the
income which is exempt from tax. The intent seems to
be that the income shall be exempt (with four excep-
tions) regardless of the status or character of the recip-
ient. The four exceptions are (a) proceeds of life insur-
ance policies; such proceeds are exempt only if paid to
individual beneficiaries, not to corporations or partner-
ships; (b) compensation of the President of the United
States; (c) compensation of the Federal Judges, and
(d) compensation of officers and employees of a state or
political subdivision thereof. In the case of the last
named class it is held by the Treasury Department tbat
"officers or employees" refer only to individuals. The
other provisions as to exempt income have no limitation
with respect to the character or status of the recipient
and the income would seem to be exempt whether re-
ceived by an individual, a partnership or a corporation.
Such income' is as follows : the amount received by the
insured as a return of premium or premiums paid by
him under life insurance, endowment, or annuity con-
tracts, either during the term or at the maturity of the
term mentioned in the contract- or upon tha^ surrender of
the contract ; the value of property acquired by gift, be-
quest, devise, or descent ; interest upon the obligations of
a state or any political subdivision thereof or upon the
obligations of the United States, (but, in case of the obli-
gations of the United States issued after September 1,
1917, only if and to the extent provided in the act author-
izing the issue thereof) or its possessions or securities
issued under the provisions of the Federal Farm Loan
INCOME IN GENERAL, 227
Act of July 17, 1916.* 1 A more complete discussion of
this class of income is contained in the several chapters
dealing with the respective kinds of income enumerated.
Reporting Income on Basis of Book Entries. The law
provides that ;m individual or a corporation keeping
accounts upon any basis other than that of actual re-
ceipts and disbursements, unless such other basis does
not clearly reflect his or its income, may make returns
upon the basis upon which the accounts are kept, in
which case the tax shall be computed upon the income
as so returned. This privilege is subject, however, to
regulations made by the Commissioner of Internal Rev-
enue, which regulations may limit the right as the Com-
missioner sees fit.* 2 Taxpayers who do not keep books in
accordance with standard systems of accounting will
be required to report their net income on the basis of
actual receipts and payments, but where books are kept
in accordance with standard systems of accounting, or in
conformity with the requirements of some federal,
state or municipal authority having supervision over the
taxpayer, returns may be made on the basis on which
such books are kept, provided the books are so kept and
the return so made as to reflect the true net income of
the corporation for each year. 43
41 Act of September 8, 1916, 4, as amended by Act of Octo
her 3, 1917.
4Act of September 8, 1916, 88 (g) and 813 (d).
*3 T. D. 2433. In this ruling the Treasury Department ha*
placed certain limitations upon the extent to which reserves may
be set up and deducted. These limitations are discussed in the
chapters on deductions. While the language of the ruling refers
particularly to corporations, there seems to be no reason why it
should not be applicable to individuals as well.
228 FEDERAL INCOME TAX
SAME BASIS MUST BE USED CONSISTENTLY. "Where a
taxpayer adopts a system of reporting according to his
books, he must report consistently on this basis. He may
not claim a right to report on the cash basis in part and
the accrual basis in part. The two systems cannot over-
lap. 44
ACCRUED CHARGES. Under this provision, it is per-
missible for a corporation which accrues on its books,
monthly or at other stated periods, amounts sufficient to
meet fixed annual or other charges, to deduct the amount
so accrued, provided the accruals approximate as nearly
as possible the actual liabilities for which the accruals
are made, and income from fixed and determinable
sources accruing to the corporation is returned on the
same basis. 45
44 Maryland Casualty Company v. U. S. (Ct. Cls.) T. D. 2451.
45 T. D. 2433.
CHAPTER 17
INCOME FROM PERSONAL SERVICES
The law expressly provides that the net income of a
taxable person shall include gains, profits, and income
derived from salaries, wages, or compensation for pe'r-
sonal services of whatever kind and in whatever form
paid, or from professions or vocations. It is to be noted
that salaries, wages, or compensation for personal serv-
ices are taxable income "in whatever form paid." This
is one of the two cases in which the law expressly specifies
that the tax shall be based upon payments other than
in cash, the other being the provision relating to stock
dividends. Payment of salaries, wages, etc. in the form
of living quarters, board or lodging, is referred to in the
preceding chapter under the head of income received
in the equivalent of cash.
Salaries. Salaries should be reported in the year in
which they are received and not in the year in which
earned, unless also received in that year. Where a part
of the compensation of an employee is in the form of a
salary payable monthly, and a part in the form of a bonus
not fixed and determined until on or after January 1, of
the year following that in which the services were ren-
dered, the fixed salary should be reported in the year in
which it is received and the bonus should not be reported
until return is made for the year in which that is re-
ceived. Thus, one receiving a bonus in January, 1918,
230 FEDERAL INCOME TAX
for services rendered in 1917, should not report the
amount of bonus as income until he files his return on or
before March 1, 1919. A salary paid by a corporation
which is itself exempt from the income tax is neverthe-
less subject to tax in the hands of the employee. 1 In
the case of corporations, so-called "salaries" of stock-
holders, if based on the amount of stock held, are con-
sidered to be distribution of the net profits of the corpor-
ation, not deductible as a business expense of the corpor-
ation, and, therefore, not subject to the normal tax in
the hands of the recipient. 8 .
Bonuses and Profit Sharing 1 . Where employees re-
ceive bonuses, or are entitled to a share of the profits of
the employer the amount so received should be included
as income, provided the same is paid under a contract,
express or implied, or a long time practice, regularly
employed, which constitutes a condition, if not a con-
tract, under which the employees may reasonably expect
additional pay for the greater or better services which
they render. Such payments are income to the em-
ployee if they are of such character that the employer
is entitled to deduct the same as an expense of doing
business. If the bonus is a mere gift, the employer
having the right to pay or not pay as it suits his
pleasure, the employee should not treat the amount as
income, since gifts or gratuities are not taxable, and
the employer is not entitled to deduct the amount from
his income as an expense of doing business. The rules
governing the deduction of bonuses and profit sharing
payments are more fully treated under the heading of
1 T. D. 2135, T. D. 2090.
2 This point is more fully discussed under the head of deduc-
tions in Chapter 28.
I\'X)ME FROM PERSONAL SERVICES
deductions, which should be read in this connection. 8
The rule to be followed by the employee is that if the
employer is entitled to deduct the amount as an ex-
pense of doing business, the employee should return
the amount as income, and, vice versa, if the employer
is not entitled to deduct the amount as expense, the
employee should not return the amount as income, other-
wise the same sum of income would be taxed twice. If
so-called bonuses or profit sharing are paid to stock-
holders of corporations, which are in fact distributions
of net profits based on stock holding, they will be con-
sidered as dividends and held to be taxable as such.
Salaries of Partners. As a general rule members of a
general partnership are not entitled to salaries, and the
Treasury Department will not recognize the payment
of salary to a partner unless such salary is provided for
in the articles of partnership or by express contract.
The question is not of very great importance under the
income tax law as partnerships are not taxed as entities,
but assumes importance under the excess profits tax law.
Voluntary Offerings Received by Clergymen. Al-
though as a general rule gifts and gratuities are not
income, yet Easter offerings, and fees received by clergy-
men for funerals, masses, marriages, baptisms, etc. are
considered income, because though in the form of gifts
tlit-v are in fact payment to the clergymen for services
rendered. Christmas gifts to clergymen do not come
within this category.* The rule to be observed is
whether or not the money is actually a gift or merely in
the form of a gift.
See Chapter 28.
4 T. D. 2090.
232 FEDERAL INCOME TAX
Commissions. Commissions paid to salesmen are in-
come, which should be accounted for in the return of the
person receiving the same in the year in which received. 6
Compensation for Services Extending Over a Year.
When money in payment of services extending over a
year is received at the close of the period all of it be-
comes income for the year in which it is received. Thus,
if no determination has been made of the amount due
the trustee of an estate, as compensation for his services
over a period of years, until the trust is terminated, the
amount allowed him should be returned in full as in-
come for that year, and it should not be pro-rated over
the length of time the services were rendered. 6
Compensation to Federal Government Officers and
Employees. Compensation received by Federal officers
and employees is subject to tax whether paid in cash or
in other forms. The entire sum received, however, is not
necessarily taxable as will be indicated in the following
paragraphs. 6 *
LIVING QUARTERS. Commutation of quarters and the
money equivalent to quarters furnished in kind should
be returned as income. "When quarters are furnished
in kind of a less number of rooms than the number
allowed by law, the money equivalent only of the number
of rooms actually assigned should be returned as income.
"When quarters are furnished of a greater number of
rooms than the number allowed by law, it is to be as-
sumed that the excess number is assigned for the conven-
5 T. D. 2090.
6 T. D. 2135.
8 See T. D. 2079.
INCOME FROM PERSONAL SERVICES 233
ieuce of the Government, and the money equivalent only
of the number of rooms allowed by law should be re-
turned as income.
HEAT AND LIGHT. Amounts received by, or paid for,
an officer for heat and light should be returned as in-
come. This includes the money equivalent, as h'xed by
the Government, of heat and light furnished to an officer
occupying public quarters. Amounts expended for heat
and light are in the nature of personal living expenses
and differ in this respect from amounts furnished for
mileage, the latter being in the nature of a business ex-
pense or an expense of the employer rather than of the
employee.
MILEAGE. Mileage, as such, is not income to an officer
or employee, as he is required to pay his actual expenses
while traveling under mileage orders. The difference
between the amount received as mileage and the amount
of actual necessary expenses incurred on a journey
should, however, be returned as income. The actual
expenses to be deducted by the individual before ascer-
taining his income on account of mileage are the expenses
for which reimbursement would be made by the Govern-
ment if he had traveled on an actual expense basis in-
stead of a mileage basis.
REIMBURSEMENT FOR ACTUAL EXPENSES. Amounts
paid by the Government in the nature of reimbursement
for subsistence and other items of actual expense in-
curred while absent on business for the Government are
not required to be returned as income.
PER DIEM ALLOWANCES. Per diem allowances in lieu
of subsistence while traveling under orders are not in-
234 FEDERAL INCOME TAX
come except to the extent that the per diem allowance
exceeds the amount of actual necessary expenses in-
curred while so traveling.
Compensation of Officers and Employees of a State or
Political Subdivision Thereof. The compensation of all
officers and employees of a state, or any political subdi-
vision thereof, is exempt from tax, 7 except when the
compensation is paid by the United States Government. 8
This exemption applies to officers and employees of the
state and of its counties, municipalities, townships and
other political subdivisions. The salaries of public school
teachers come within this class. 9 The exemption does
not include an individual who enters into a contract
with a state for the construction of public works, as such
person is neither an officer nor an employee. 10 It has
also been ruled that where a real estate corporation is
employed by a city to appraise the value of property, it
cannot claim exemption as an employee. Officials of the
governments of the District of Columbia, Porto Rico and
the Philippine Islands, or the political subdivisions
thereof, do not come within this class and the compensa-
tion paid to them is not exempt. 11 It seems, also that
the officers and employees of a Territory, or any political*
subdivision thereof, are not entitled to this exemption,
since the law does not include them and there is not the
same constitutional objection to taxing them as exists
in the case of State employees.
7 This exemption rests 06 the theory that Congress has no
power, even by an act taxing all incomes, to levy a tax on salaries
of state officers. See Collector v. Day, 11 Wall. 113.
8 Act of September 8, 1916, 4.
9 Reg. 33, Art. 5.
10 T. D. 2152.
11 Act of September 8, 1916, 23.
INCOME FROM PERSONAL SERVICES 235
Compensation of Federal Judges. The salaries of
Judges of the Supreme Court and inferior courts of the
United States, in office at the time the law was passed,
are exempt from the tax, but this does not include the
salaries of such judges as have been appointed subse-
quent to the passage of the law or of judges who have
been retired. 18
Compensation of the President of the United States.
The compensation of the President of the United States
in office at the time the law was passed is exempt from
the tax during the term for which he was elected. 18 ,
Professions and Vocations. Incomes from professions
and vocations are taxable as is income from any other
source. No rulings are specially applicable to these
forms of income. Such income is taxable in the year in
which it is received, not necessarily for the year in which
it is earned. Rulings as to this point are general and are
discussed in the preceding chapter.
18 Act of September 8, 1916, 4; T. D. 2090. This exemption
\\;i> inserted in view of the provision of the Federal Constitution,
Art. .'!, 1, which guarantees that the compensation of Federal
judges shall not be diminished during their continuance in office.
See Opinion of Justice Field in Pollock v. Farmers Loan & Trust
Company, 157 U. S. 429; and 13 Op. Atty. Gen. 161.
13 Act of September 8, 1916, 4. In an opinion of the Attorney
General in 1869 it was held that a specific tax by the United
States upon the salary of the President in office at the t'me the
act was passed, to be deducted from the salary which otherwise
would be paid him, would be a diminution of his compensation in
contravention of Article 2, Section 1, Clause 7, of the Federal Con-
stitution, which provides that the compensation of the President
shall neither be increased or diminished during the period for
which he shall have been elected. 13 Op. Atty. Gen. 162. This
consideration no doubt moved Congress to grant the exemption in
the present law.
CHAPTEE 18
INCOME FROM BUSINESS, TRADE OR COMMERCE
Income from this source is, as indicated in the title,
the income derived by an individual or a corporation
from business, trade or commerce in which he or it is
engaged. "With respect to this class of income the phrase
gross income has a meaning which differs from that of
gross receipts as indicated in the following paragraphs.
Gross Income in Manufacturing Businesses. The gross
income of a manufacturing business consists of total sales
of manufactured goods during the year covered by the
return, increased or decreased by the gain or loss as
shown by the inventories of finished or unfinished prod-
uts, raw material, etc., at the beginning and end of the
year. 1 A manufacturer may include as an element of.
the cost of manufactured products, the cost of the raw
material, the cost of labor of the men who actually work
on such products, as well as the. cost of supervisory, or-
what may be denominated as "unproductive" labor,
such as that of the foreman, inspectors, overseers, etc.,
provided such expenditures are not separately deducted
from gross income in the return of annual net income. 2
Gross Income in Mercantile Businesses. The gross
income of a mercantile business should include the total
1 Reg. 33, Art. 104.
8 T. D. 2152.
236
INCOME FKOM BUSINESS, TRADE OR COMMERCE 237
merchandise sales during the year, increased or de-
creased by the gain or loss as shown by the inventories of
merchandise at the beginning and end of the year for
which the return is made. 3
Inventory. Where, in order to arrive at the correct
amount of 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 year shall be
made in order to determine the gross income or to de-
termine the expense of operation, a physical inventory
is at all times preferred by the Treasury Department.
Where a physical inventory is impossible and an equiva-
lent inventory is equally accurate, the latter will be
accepted. An equivalent inventory is an inventory of
materials, supplies, and merchandise on hand taken from
the books of the taxpayer.* The Treasury Department
requires inventories to be taken at the cost price. 5
Gross Income of Insurance Companies. Special rules
are applicable to ascertaining the gross income of insur-
ance companies. These rules are discussed in the chap-
ter on insurance companies. 8
Gross Income Generally. The gross income of the
taxpayer is, generally speaking, his total income derived
from the operation and management of his or its busi-
3 Reg. 33, Art. 105.
4 Reg. 33, Art. 161.
6 Although the Department is positive in its stand on this point,
it seems to have issued no express ruling or regulation, the only
express reference to the requirement that inventory be taken at
cost being in the instructions on the back of the form of return
of net income of corporations. 8e Form 1031.
Chapter 13.
238 FEDERAL INCOME TAX
ness and property, together with all amounts of in-
come from all other sources. It embraces, of course,
not only the income of a manufacturer or dealer from
his business, but also income from all other sources such
as rentals, royalties, interest, dividends, and profits
from the sale of assets. 7
Income of Contracting 1 Companies. Where a con-
tracting company has contracts which may run for a
period of several years, it may prepare its return in
such manner that its gross income 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. If the gross income is arrived at by this
method, the deductions from gross income should be
limited to the expenditures made on account of such
completed contracts. 8
Income from Export Business. Income from the
business of exporting goods is held to be taxable by
the Treasury Department. It has also been held that
a tax on such income is not a tax on the articles ex-
ported, and therefore not unconstitutional in that
regard. 9
Accounts Receivable. Accounts and bills receivable
of a business concern are treated by the Treasury
Department as income for the year in which they are
created; that is, in the year in which the accounts
7 Keg. 33, Arts. 106 and 107.
8 T. D. 2161.
9 Peck v. Lowe, 234 Fed. 125. It was so held by the District
Court in which the case was first decided. At the present time
the case is before the Supreme Court on appeal.
INCOME FROM BUSINESS, TKADE OR COMMERCE 239
are set up on the books or the bills receivable are
accepted. 10
Goods Sold on Approval. Where goods are sold on
approval, tb.e purchaser paying the full price at the
time of sale, but having the privilege of returning
the goods within a certain period, the amount received
upon the sale should be included as income. Subse-
quently if the goods are returned and the purchase
price refunded the refund may be deducted as a loss
or the sum may be treated as a "purchase during the
year" by the seller. This procedure would seem to
be proper in any case where the transaction is in the
course of the taxpayer's business or trade. Where,
however, an individual sells property in a transaction
not connected with his business or trade, with the privi-
lege on the part of the buyer of returning the property
within a certain period and receiving back the pur-
chase price, the transaction should not be considered
as closed and completed until the period during which
the property may be returned has expired. Otherwise
if the taxpayer includes the profit on such transaction
in his income for the year he may not be able to avail
himself of the loss of that profit if the refund takes
place in a subsequent year, since the loss can be offset
only against gains in similar transactions during the
latter year. The proper method of handling such tni in-
actions would seem to be to hold the payment "in sus-
pense" until the title has passed without condition from
the seller to the buyer, and to enter the profit on the
transaction as income for the year in which that takes
place.
10 Letter from Tr.-.-i-iny l>.-|.;irtnnMit .l:it-r a discussion of income received in the equivalent
of i-asli, see chapter on income in general. 17
16 Letter from Treasury Department, dated November 21, 1916;
I. T. S. 1917, H273.
16 T. D. 2130.
"See Chapter 16.
CHAPTER 21
INCOME FROM RENT
Rent is returnable as income in the year in which
it is received, and not necessarily in the year in which it
becomes due. Thus, where a tenant pays part of his
rent for the preceding year on the second day of Janu-
ary of the following year, the amount so paid is income
to the landlord for the year in which it is received,
and not the year which it covers. 1 This rule, how-
ever, is not absolute, as the landlord may, if he keeps
his books accordingly, report the rent for the year in
which the income accrues and charge against it the
deductions for the same period.
Value of Improvements Made by Tenant. Where,
under the terms of a rental or lease contract, a tenant
agrees to erect a building or to expend during the
rental period a certain fixed sum in making improve-
ments upon the freehold oL the lessor, it is held for
income tax purposes that the building or permanent
improvement becomes a pa*rt of the realty unless other-
wise agreed between the contracting parties; and, as
such, must be accounted for as gain or profit to the
lessor at the time the lease is terminated, whether
terminated by expiration or otherwise. The amount
1 Letter from Treasury Department dated February 9, 1915;
I. T. 8. 1917, If 226.
050
INCOME PROM RENT 253
of the gain or profit to the lessor at the termination of
the lease is the difference between the cost of the
building or improvement so made by the tenant and a
reasonable allowance for depreciation during the period
of its life under the lease. 8
Lessor Corporations. Where a corporation leases all
of its property to another and specifies that the consid-
eration therefor shall be paid direct to its stockholders
and bondholders or creditors the lessor corporation is,
nevertheless, held to be the proper recipient of the in-
come and must report, as rent, the amount so paid to its
stockholders, bondholders or creditors by the lessee. 8
Payments by Tenant on Behalf of Landlord. Where
under the terms of a lease a tenant pays taxes or interest,
or makes any other payments for and on behalf of the
landlord, the amount of such payments constitutes income
to the landlord and should be reported by him as such.
The theory covering these transactions is that the tenant
is acting merely as agent for the landlord in making
such payments. The expenses are the landlord's, which
he may deduct from his net income, and the amounts
used to defray such expenses must be included by the
landlord as his net> income. Such payments may be
deducted by the tenant as rent in the year in which
they are paid.
*T. D. 2442. It necessarily follows that the tenant may con
sider the cost of the building as a part of his rental payments and
may deduct such amount as an expense, pro-rating the original
cost over the number of years constituting the term of the lease.
See Chapter 28.
For a further discussion of this subject see sub-heading
t-ntitlod Lessor and Lessee Corporations in Chapter 12.
254 FEDERAL INCOME TAX
Receipt of Rent in Kind. Where rent is received in
the form of produce, as for instance, a share of the crops
of a farm, the amount realized on the sale of such share
must be included as income in the year in which the
share is disposed of or reduced to money or its equiva-
lent. Where board or lodging is given as the equivalent
of rent, the value of such board or lodging is required to
be included.*
4 See Chapter 16 for statement on receipt of income in kind or
in the equivalent of cash.
CHAPTER 22
INCOME PROM INTEREST
Income derived in the form of interest is taxable in
the hands of citizens and residents and domestic cor-
porations, whether received from debtors in this coun-
try or debtors in foreign countries. Interest is taxable
in the hands of non-resident aliens and foreign corpora-
tions when derived from interest bearing-obligations of
residents, corporate or otherwise. 1
Interest Exempt from Tax. The Act expressly pro-
vides that interest upon the obligations of a state, or
any political subdivision thereof, or upon the obligations
of the United States (with certain exceptions noted be-
low), or its possessions, or securities issued under the
provisions of the P^ederal Farm Loan Act of July 17,
1916, shall be exempt.
INTEREST ON OBLIGATIONS OP THE UNITED STATES. The
interest received on obligations of the United States is
exempt in the case of all obligations issued on or before
September 1, 1917. In the case of obligations issued
after that date the interest is exempt only if and to the
extent provided in the Act authorizing the issue thereof. 8
1 Act of September 8, 1916, 81 (a).
8 Under earlier income tax laws interest upon the obligations
of the United States was expiessly included as taxable income.
(See Act of March 2, 1867). Under the 1909 Law the Attorney
255
256 FEDERAL fNCOME TAX
SECOND LIBERTY LOAN BONDS. The Act authorizing
the issue of the Second Liberty Loan Bonds provides 3
that the bonds and certificates issued thereunder "shall
be exempt, both as to principal and interest, from all
taxation now or hereafter imposed by the United States,
or any State, or any of the possessions of the United
States, or by any local taxing authority, except (a)
state or inheritance taxes, and (b) graduated additional
income taxes, commonly known as surtaxes, and excess
profits and war-profits taxes, now or hereafter imposed
by the United States, upon the income or profits of in-
dividuals, partnerships, associations, or corporations.
The interest on an amount of such bonds and certificates,
the principal of which does not exceed in the aggregate
$5,000, owned by any individual, partnership, associa-
tion, or corporation, shall be exempt from the taxes pro-
vided for in Subdivision (b) of this section." It will
be noted that bonds of this issue are not subject to the
normal tax nor to the income tax of 6% if held by cor-
porations. Where a husband and wife each own in
his or her own right bonds of this issue not exceeding
$5,000, each is entitled to exclude the income therefrom
in computing the tax on their joint incomes. Minor chil-
dren having separate estates are also each entitled to
the same exemption. 4 A taxpayer holding bonds and
certificates of indebtedness issued under this Act is en-
General held that interest on National Bonds should be included
as income of corporations, since the tax was not a tax on property,
but a tax on the privilege of carrying on business. (28 Op. Atty.
Gen. 138).
3 Act of September 24, 1917 (Public No. 43), 7.
4 Letter from Treasury Department dated October 8, 1917; I.
T. 8. 1917, If 2439.
INCOME PROM INTEREST 257
titled to the exemption on $5,000 of his aggregate hold-
ings, not on $5,000 of each class of obligations.**
OBLIGATIONS OP THE POSSESSIONS OP THE UNITED
STATES. Interest paid on the obligations of possessions
of the United States is exempt. Interest on the obliga-
tions of the territories, or political subdivisions thereof,
can be considered as exempt only \>n the ground that
the territories are possessions of the United States, since
the law does not expressly include territories in the
exemption provision.
INTEREST ON THE OBLIGATIONS OP A STATE. The same
principle which denies to a state power to raise revenue
by taxation on federal property, or sources of revenue,
or means of carrying on its duties, forbids taxation of
state revenue for federal purposes. 6 Therefore the
I'nited States has no power under the Constitution to
tax either the instrumentalities or the property of a
state. 6 A municipal corporation is a portion of a
sovereign power of a state and is not subject to taxation
by Congress upon its municipal revenue. 7 But the ex-
emption of state agencies does not extend to those used
by the state in carrying on an ordinary private business.'
Interest on the obligations of a state is, therefore, ex-
pressly exempt. The 1909 Law, however, being an excise
tax and not an income tax, was valid although measured
by income which included interest from state securities. 9
*T.D. 2585.
Collector v. Day, 11 Wall. 113; Ambrosini v. U. 8. 187 U. 8. 1.
Pollock v. Trust Company, 157 U. 8. 429, 584.
" I". S. v. Railroad Company, 17 Wall. 322.
South Carolina v. U. 8. 199, U. 8. 437.
Flint v. Stone Tracy Co., 220 U. 8. 107.
F. T. Tax. 17
258 FEDERAL INCOME TAX
POLITICAL SUBDIVISION OF A STATE. Difficulty is some-
times encountered in determining whether bonds issued
by districts or divisions of a state are exempt under this
phrase. The Attorney General has held that special
assessment districts created for a public purpose, such
as the improvement of streets and public highways, the
provision of sewage, gas and light and the reclamation,
drainage, or irrigation Of land are districts for public
use, and consequently political subdivisions of the state,
within the meaning of the law. 10 Levee and school dis-
tricts lawfully created and authorized by the state to
levy a tax to meet the obligations of such district are
also held to be political subdivisions of the state. In
general the term ''political subdivision" includes special
assessment districts or divisions created by proper
authority of the state acting within its constitutional
powers and under its general laws, for the purpose of
carrying out a portion of those functions of the state
which by long usuage and inherent necessities of govern-
ment have always been regarded as public. 11
MORTAGE ASSUMED BY MUNICIPALITY. Although in-
terest on municipal bonds are exempt from the tax, yet
where a municipality has purchased a public utility sub-
10 Opinion of Attorney General dated January 30, 1914. In
the course of his opinion the Attorney General said: " * *
where the power to levy a tax is given a district by the state,
presumptively that district is created for a public use, and is
exercising a public function. * * * Nor does it make any
difference that the tax is measured by the benefit conferred. ' ' But
he refrained from expressing any opinion whether assessment dis-
tricts might not be created for a purely private purpose so as to
bring them within the principles laid down in the South Carolina
Dispensary case, 199 U. S. 437, rather than within those which
governed U. S. v. Eailroad Company, 17 Wall. 322.
11 T. D. 1946.
INCOME FROM INTEREST 259
ject to a mortgage, and the mortgage retains its original
character, even though the municipality assumes the
mortgage indebtedness and pays the interest thereon,
the mortgage does not become an obligation of the munici-
pality within the meaning of the law and the interest
thereon is not exempt. 18
Interest on Bonds of Exempt Organizations. Al-
though a corporation may under Sec. 11 of the 1916 Law
be exempt from a tax on its income, yet interest on the
bonds of such an organization is taxable income to the
bondholder. 13
Accrued Interest on Obligations at Time of Purchase.
Where a purchaser pays the price of the security pur-
chased and an additional sum representing accrued in-
terest, the amount of interest received on the next in-
terest date should not be reported in full. The amount
of accrued interest at the time of purchase represents
the return of capital to the purchaser and he should
deduct such amount from the interest received, and re-
port the remainder only. The seller of the security
should account in his return for the accrued interest
received at the time of sale, since to him that amount is
income. 14
18 T. D. 2090.
13 Letter from Treasury Department dated July 30, 1914; I.
T. S. 1917, f 1222.
1* Letter from Treasury Department dated February 5, 1915;
I T. S. 1917, f 232. In a later ruling the Treasury Department
declined to permit the taxpayer in such a case to report all of the
interest received as income and to deduct the amount of accrued
interest paid at the time of purchase as an expense or as interest
paid by the purchaser. Letter dated March 8, 1915, I. T. 8. 1917,
J237.
260 FEDERAL INCOME TAX
Interest on Bank Deposits. Interest on bank deposits
or on certificates of deposit, credited to the account of
the depositor by the bank, is income for the year in which
the credit is made. 16
Interest Received and Paid by Brokers. AVhere the
customers of a brokerage house buy securities, paying
only a part of the purchase price and paying interest
on the balance, and the brokerage house buys such se-
curities from others, paying only a part of the purchase
price and paying interest on the balance, the brokerage
house must include in its return as gross income the in-
terest received from the customers and may deduct as
interest the amount of interest it pays on such purchases
limited, in the case of corporations, to the amount of in-
terest which may be deducted under the law. 16
Interest Accruing Prior to March 1, 1913. Where
interest became due prior to March 1, 1913, and funds
have been on hand to pay the same since the due date
the amount is not taxable, since it represents income
that was due and payable and could have been reduced
to possession on demand prior to the incidence of the
income tax. Even where interest has been in default
since a time prior to March 1, 1913, and funds to pay
the same have accrued since that date, it has been held
that the interest represents income accrued to the owners
of the bonds prior to the incidence of the tax, and hence
15 Reg. 33, Art. 67; Letter from Treasury Department dated
February 18, 1915; I. T. S. 1917, H 240.
16 Altheimer and Eawlings Investment Co. v. Allen, T. D. 2441.
This case was decided under the 1909 Law but the principle seems
to apply to the language of the present law. Interest would be
deducted in full if paid on collateral the subject of sale in the
ordinary course of business.
INCOME FROM INTEREST 261
does not constitute taxable income when received there-
after. 17
17 Letter from Collector at Cincinnati dated March 16, 1915,
embodying decision of the Treasury Department; I. T. S. 1917,
If 332.
CHAPTER 23
INCOME FROM DIVIDENDS
The law expressly states that the net income of a
taxpayer shall include gains, profits and income derived
from dividends. 1
Definition. The term "dividends" as used in the law
is defined therein to mean any distribution made or
ordered to be made by a corporation, joint stock com-
pany, association, or insurance company, out of its earn-
ings or profits accrued since March 1st, 1913, and pay-
able to its shareholders, whether in cash or in stock of
the corporation. 2 It is to be noted that under this defini-
tion any distribution which is made or ordered to be
made by a corporation is a dividend. It need not neces-
sarily be called a dividend or be made in the ordinary
course of business. A distribution of assets at the time
of liquidation of a corporation would be a dividend
to the extent that the assets so distributed included earn-
ings or profits accrued since March 1st, 1913. On the
other hand, if the distribution is not out of its earn-
ings or profits accrued since March 1st, 1913, it does
not become a dividend within the meaning of the law
by reason of the fact that it is called a dividend by the
corporation making the distribution.
1 Act of September 8, 1916, 2 (a).
2 Act of September 8, 1916, as amended by Act of October 3,
1917, 31.
262
INCOME PROM DIVIDENDS 263
DIVIDENDS ON LIFE INSURANCE POLICIES. It is a cus-
tom of insurance companies to return each year a portion
of the premium paid by the insured. The amount so
returned is usually designated as a "dividend" and is
either received in cash by the insured or applied by
him to the reduction of the next annual premium. Such
"dividends" are not considered taxable income under
the law and should not be included in th'e annual return.
Where, however, dividends are received on a paid-up
policy the amount must be included and should be con-
sidered the same as dividends from corporations, 3 unless,
of course, the dividend was not paid by the insurance
company out of earnings or profits accrued since the
incidence of the tax.
DIVIDENDS PROM ASSOCIATIONS. Since limited part-
nerships, associations, joint stock companies and insur-
ance companies (whether incorporated or not) are
treated as corporations, the net earnings of such organ-
izations should be considered as dividends.* Thus pri-
vate banks, which have the form of corporate organiza-
tion, are required to make returns as corporations, and
the owners of the bank are authorized to treat as divi-
dends the earnings which they receive therefrom. 6 The
recipient of profits of associations or limited partner-
ships should, therefore, ascertain whether the association
or partnership is reporting its income as an entity.
and in such event should treat the net profits of the
association as dividends.
* T. D. 2137.
*T. D. 2152. See Chapter 12 for definition of the term "cor-
porations. ' '
6T. D. 2137.
264 FEDERAL INCOME TAX
Extent to Which Dividends Are Taxable. The extent
to which a dividend is taxable depends upon the status
of the corporation paying the same, and upon the status
of the recipient of the dividend. 6 *
DIVIDENDS OP DOMESTIC CORPORATIONS. In the case
of dividends declared and paid by a domestic corpora-
tion, which is taxable upon its net income under the
law, the dividend is not subject to the normal tax if
received by an individual. If the individual is a non-
resident alien, exemption from the normal tax on such
dividends will be allowed only in case he files a return
of his total net income, received from all sources in the
United States, in the manner prescribed by law. If
such dividend is received by a corporation, domestic
or foreign, it is subject to the 2% tax imposed by the
1916 Law, but is not subject to the 4% tax imposed by
the 1917 Law.
DIVIDENDS OP NON-RESIDENT FOREIGN CORPORATIONS.
Dividends of "a non-resident foreign corporation, if paid
out of its earnings or profits accrued since March 1st,
1913, are taxable when received by a citizen or resident
of this country, and must be reported for the purpose
of both the normal tax and the supertaxes. When
received by a domestic corporation such dividends are
taxed under the 1916 Law and the 1917 Law. Such
dividends received by non-resident aliens or foreign
corporations are subject to no tax, although the divi-
dend may be paid by the paying agent for such cor-
poration at a place within the United States.
DIVIDENDS PAID BY RESIDENT FOREIGN CORPORATIONS.
When a foreign corporation derives its entire income
5a The rate depends upon the year in which the profits were
accumulated by the corporation. See p. 267.
INCOME PROM DIVIDENDS 265
from business done wholly within the United States, and
pays the income tax upon its entire net income, divi-
dends declared by it should be treated in the same man-
ner as dividends from domestic corporations. 6 It seems,
also, that if a foreign corporation pays the income tax
on a part of its net income, the dividends it pays should
l>e treated, to that extent, as dividends of domestic cor-
porations are treated. Thus, if a foreign corporation
pays the income tax on half of its income, half of its
dividends should be free from normal tax when paid
to individuals, and from the 1917 tax when paid to
corporations.
DIVIDENDS RECEIVED BY CITIZENS AND RESIDENTS.
When dividends are received by individuals who are
citizens or residents of this country, they must be in-
cluded in the return of annual net income; but for the
purpose of assessing the normal tax under each of
the present laws, the amount of dividends received from
the net earnings of any corporation taxable upon its
net income, as indicated in the foregoing paragraphs,
may be excluded. For the purpose of assessing the
supertaxes under each of the present laws, such divi-
dends must be included. The same rule applies where
dividends are received by the estate of a deceased citi-
zen or resident or by a trust estate created by a citizen
or resident. The fact that an individual may not have
legal title to the stock on which the dividends are de-
clared does not alter the rule, if he is the actual bene-
ficial owner. Therefore, the amount which may be
received by a trustee in the form of dividends may
lf treated as dividends by the beneficiary in making
his return : and similarly dividends received by a part
8T. D. 2090.
266 FEDERAL INCOME TAX
nership are treated as dividends received by the partners,
when the partners make their personal returns of their
net distributive shares in the profits of the partnership.
DIVIDENDS RECEIVED BY NON-RESIDENT ALIENS. A
non-resident alien is subject to the normal tax on divi-
dends of domestic corporations, unless he files or causes
to be filed a return of annual net income showing his
total income received from all sources, corporate or
otherwise, in the United States, in the manner prescribed
for non-resident aliens. By so doing he is entitled to
claim exemption from the normal tax on the amount
of dividends received from any corporation taxable upon
its net income. 7 Although this exemption from normal
tax may be enjoyed by a non-resident alien only by
filing a return of annual net income, the normal tax
is, nevertheless, not deducted at the source upon pay-
ments of dividends to non-resident aliens, since the sec-
tion of the law providing for deduction at the source
expressly declares that it shall not apply to income
derived from dividends on capital stock, or from the
net earnings of a corporation which is taxable upon its
net income. 8 Dividends received by a non-resident, alien
from the net earnings of foreign corporations are not
income from sources within this country, even though
the dividend is paid in this country.
DIVIDENDS RECEIVED BY CORPORATIONS. With respect
to the 2% tax imposed by the 1916 Law, a corpora-
tion must include in its taxable income all dividends
7 Act of September 8, 1916, 6 (c), as amended by Act of
October 3, 1917.
8 Act of September 8, 1916, 9 (b), as amended by Act of
October 3, 1917.
INCOME PROM DIVIDENDS 267
received from corporations of which it may be a stock-
holder, whether the paying corporation is taxable on
its net income or not. For the purpose of computing
the 4% tax imposed by the 1917 Law, a corporation
may exclude the amount it receives as dividends upon
the stock of any other corporation, which is taxable upon
its net income. 9
DIVIDENDS RECEIVED BY NOMINAL STOCKHOLDERS.
When a dividend is received by one who is not the
actual owner of the stock, but is the owner of record,
he is not required to include the amount in his own
income tax return, 10 but should proceed in accordance
with the rules stated in the chapter on nominal stock-
holders. 11
DIVIDENDS ON STOCK OP FEDERAL RESERVE BANKS.
Dividends or income derived from the stock of Federal
Reserve Banks is exempt from* the tax on the theory
that the exemption provided for in the Federal Reserve
Act attaches to and follows the dividends into the hands
of the member banks holding the Federal Reserve Bank
stock."
Dividends from Profits or Surplus of Prior Years.
The rate of tax on dividends received in 1917 or sub-
sequent years, depends upon the year in which the
amount distributed as dividends was earned by the
paying corporation. The law provides expressly that
Act of October 3, 1917, Title I. f 4.
10 Letter from Treasury Department dated November 21, 1916;
I. T. S. 1917, 1 183.
11 See Chapter 7 on Nominal Stockholders.
18 Federal Reserve Bulletin, April 1, 1916.
268 FEDERvVL INCOME TAX
the dividends shall be a part of the annual income
of the distributee for the year in which received, but
shall be taxed to the distributee at the rates prescribed
by law for the years in which such profits or surplus
were accumulated by the corporation. 13 The language
of this provision is obscure, but it seems to mean, for
instance, that if an individual receives a dividend from
profits or surplus accumulated by the corporation in
1916, he will add it to the amount of his income reported
for 1916 and pay the supertax thereon at the 1916 rates ;
and similarly with respect to dividends from profits or
surplus accumulated in 1915, 1914, or 1913. When such
dividends are received by a corporation, the computation
is more simple, as there is no graduated tax to be taken
into consideration. Thus, a corporation receiving $30,000
in dividends in 1917, $10,000 of which is from surplus
earned in each of the years 1914, 1915 and 1916, will pay
1% on $20,000 (the rate for 1914 and 1915) and 2% on
$10,000 (the rate for 1916).
Dividends Deemed to Be from Most Recently Ac-
cumulated Profits or Surplus. Any distribution made
to stockholders in 1917, or thereafter, shall be deemed,
under the express provisions of the law, to have been
made from the most recently accumulated undivided
profits or surplus. This provision would seem to have
reference^o the profits and surplus in existence at the
time of the declaration of the dividend, and not the time
of payment. It would seem that a dividend declared
in the current, year would not be considered to be out
of that year's earnings, unless the books of a corpora-
tion, at the time the dividend was declared, had been
13 Act of September 8, 1916, 31, added by Act of October
3, 1917.
INCOME FROM DIVIDENDS 260
and showed undivided profits or surplus for the
current year. The language used in the law is that
the dividends "shall be deemed to have been declared
from the most recently accumulated undivided profits
or surplus," regardless of what the actual facts may
be. Thus, the corporation may actually intend to make
a distribution in the form of dividends out of some
fund other than the most recently accumulated profits
or surplus, but, nevertheless, the law deems such pay-
ment to have been made from the most recently accu-
mulated profits and surplus and the dividend will be
taxable on that basis. This provision does not apply,
however, to any distribution made prior to August 6,
1!H7, out of earnings or profits accrued prior to March
1, 1JU3. 1 *
Dividends from Earnings or Profits Accrued Prior to
March 1st, 1913. When a dividend is declared from
earnings or profits accrued prior to March 1st, 1913,
the recipient, whether individual or corporation, is liable
for no tax thereon. Such earnings or profits, however,
can be distributed only after all of the earnings and
profits of the corporation accrued since March 1st, 1913,
have first been distributed. 16
JMK*ff t
1* t'nder the 1916 Law, the Treasury Department ruled that
ilividends could be declared from any specified fund, that is, a
iiv'nlend could be declared from surplus accumulated prior to
Marrh 1, 1913, and consequently be free from tax in the Bands of
the stockholders, although the corporation had surplus and un-
divided profits accumulated since that date sufficient to pay the
llvi.lond. This ruling is annulled by the amendment of October
:'.. I'.UT, oxccj.t as indicated in the text.
15 Act of September 8, 1916, 31 added by Act of October 3,
1917. There is conflict in the cases under the 1913 Law as to the
taxability of dividends distributed subsequent to the incidence of
270 FEDERAL INCOME TAX
SUCH DIVIDENDS EXEMPT ONLY TO STOCKHOLDERS OF
FIRST CORPORATION. Where dividends are declared from
surplus accrued prior to March 1, 1913, they are free
from tax in the hands of the stockholder, but if such
stockholder is in turn another corporation, upon the
distribution to its stockholders of the sum so received
as dividends, the fund becomes taxable to the stock-
holders of the second corporation as, to the holding
company, such sum did not represent earnings or profits
accrued prior to March 1, 1913. While the law pro-
vides for the exemption of dividends from corporate
the tax from earnings which accrued prior thereto, the law being
silent on that point. The Circuit Court of Appeals declared in
the case of Lynch v. Turrish, 236 Fed. 653, that a sum-received
by a stockholder in excess of the par value of his stock, exclusively
from the increase in value of his stock prior to March 1st, 1913,
on account of the gradual advance in the value of the property
of the corporation prior to that date, was not income when dis-
tributed by the corporation after the incidence of the tax. In a
case decided at the same time, Lynch v. Hornby, 236 Fed. 661, the
same court held that dividends received by a stockholder from the
conversion of property into money and a distribution after the
incidence of the tax was not taxable where the dividend represented
the value of property owned by the corporation on March 1st, 1913,
including the increase of the value of its timber lands and surplus
from its business operations, the court announcing as its opinion
that no property held by the corporation or the stockholder, whether
original capital or previously earned surplus income, gains or
profits, was intended to be made, or was made, taxable as indoine
by the 1913 law, so far as it represented the value of such property
on March 1st, 1913. In a later case, Southern Pacific Company
v. Lowe, 238 Fed. 847, the District Court, for the southern district
of New York, held that dividends from surplus accumulated prior
to March 1st, 1913, were not taxable, if the surplus represented an
increase in the value of the assets of the corporation, but were
taxable, if the surplus was accumulated from earnings or profits
of the corporation prior to the incidence of the tax. The question
is now before the United States Supreme Court for final decision.
INCOME PROM DIVIDENDS 271
funds earned prior to March 1, 1913, it does not pro-
vide for tracing the identity or character of such divi-
dends after the receipt thereof by the stockholders of
the corporation which earned the fund prior to the
incidence of the tax. 16
DIVIDENDS RECEIVED BY AN ESTATE. Dividends re-
ceived by an estate are not exempt because paid from
surplus accrued prior to the creation of the estate, but
are taxable as are dividends received by other tax-
payers, that is, either to the beneficiaries if the income
is distributed, or to the estate if it is not distributed, 17
unless the dividends were declared from earnings or
profits which accrued to the corporation prior to March
1, 1913.
Dividends from Reserves for Depreciation or Deple-
tion. It is the practice of some corporations to declare
dividends out of reservas set aside to meet depreciation
and depletion. Such dividends are held taxable to the
stockholders if declared out of reserves accumulated
since March 1, 1913. 18
Cash Dividends. Where a dividend is paid in cash,
or by check, which is the equivalent of cash, the divi-
dend becomes taxable to the recipient in the year in
which it is received, not necessarily in the year in
which it is declared. In such cases it should be reported
1 Letter from Treasury Department dated July 23, 1917;
I. T. 8. 1917, fl 2277.
17 Letter from Treasury Department dated October 19, 1915 ;
I. T. 8. 1917, H 669. The principle of the decision in Matter of
Osborne, 209 A. D. 450 (N. Y.) was referred to in this letter and
held to have no application to the income tax law.
1 T. D. 2540.
272 FEDERAL INCOME TAX
as income for the year in which the cash or check is
received. 19
Scrip Dividends. When a dividend is paid in scrip it
is held to be equivalent to a payment in cash and an
investment of the cash in the scrip. The dividend, there-
fore, must be included in the return at the face value
of the scrip. 20 If at a later date the face value of the
scrip is not realized in cash a loss may be claimed in
/the year in which the stockholder parts with the scrip.
Dividends Paid in Equivalent of Cash. Very few
rulings have been made on the subject of distribution of
the net earnings in property other than cash or stock
of the corporation. When distribution is made in prop-
erty which has no fixed money value, it would be diffi-
cult to determine the amount, if any, of earnings or
surplus in such distribution. Although the law, in its
definition of the term "dividends," expressly states
that a dividend shall be a payment in cash or in stock
of the corporation, it does not seem to be the intent
thereof that no tax shall accrue if the payment is made
in the equivalent of cash. Where, for instance, the
corporation uses its surplus and undivided profits in
purchasing securities and thereafter distributes such
securities among its stockholders as a dividend, it would
19 Letter from Treasury Department dated February 18, 1915;
I T. S. 1917, 1 178. This rule is not changed by the amendment
of October 3, 1917, which expressly provides that in the case of
distribution in 1917 or subsequent years the amount distributed
shall be considered as a part of the annual income of the dis-
tributee for the year in which it is received.
20 Letter from Treasury Department dated January 19, 1915 ;
I T. S. 1917, H 168. Scrip dividends were held taxable under the
Act of June 30, 1864. Bailey v. Railroad Company, 106 U. S. 109,
INCOME PROM DIVIDENDS 273
seem clear that the value of the securities, either at
the time of purchase or at the time of the distribution,
would measure the money value of the dividend. The
time at which the corporation acquired the securities
would seem to be the proper time at which to determine
the money value of such a dividend, since any increase
in the value above the cost of such securities, at the
time of distribution, had not been realized as earning
or profit of the corporation, and, it must be borne in
mind, a dividend is taxable only to the extent that it
represents earnings or profits of the corporation.
DIVIDENDS PAID IN LIBERTY BONDS. The fact that
dividends are paid in Liberty Bonds does not make
that income exempt from tax. The tax is upon the
income itself as an entirety and not upon the specific
articles into which this income is finally transmuted.
When Liberty Bonds are used as a medium of payment,
whether in discharge of a private debt or a corporate
dividend, profit or gain to the recipient is nevertheless
subject to income tax. 81
TAXES PAID FOR SHAREHOLDERS TO BE CONSIDERED AS
DIVIDENDS. Where a corporation, such as a bank, pays
taxes assessed upon the respective interests of its share-
holders, under laws which require the corporation to
pay such taxes on behalf of its shareholders, the pro
rata amount so paid on his shares should be reported
21 Letters from Treasury Department dated June 30, 1917, and
June 22, 1917; I. T. S. 1917, 112257 and 2258. The second of
these letters is based upon an opinion on the subject obtained
from the Attorney General by the Treasury Department. The
Unction was raised by reason of the language of the Act authoriz-
ing the first issue of Liberty Bonds, which exempted the principal
and income from taxation.
F. I. Tax. 18
274 FEDERAL INCOME TAX
by the stockholder as a dividend. The same amount
may also be deducted as a tax of the stockholder paid
for him by the corporation as his agent. The net result
of reporting such amount as a dividend, and claiming
the same amount as a deduction, is that the amount of
tax is offset against the stockholder's income from other
sources in assessing the normal tax. 22
Stock Dividends. The 1916 Law expressly provides
that stock dividends shall be taxable. It defines a stock
dividend as a distribution by a corporation out of its
earnings or profits accrued since March 1st, 1913, and
payable to its shareholders in stock of the corporation.
It also provides that such stock dividends shall be con-
sidered income, to the amount of the earnings or the
profits so distributed. 23 A stock dividend is only tax-
able where a cash dividend would be taxable. Any
distribution made in the form of a stock dividend, which
would not be taxable if made in the form of a cash
dividend, is not made taxable by reason of the distribu-
tion being made in stock.
RULE UNDER 1913 LAW. The 1913 Law was silent
as to stock dividends, and it was at first held by the
Treasury Department that such dividends were not sub-
ject to tax, on the theory that the additional shares of
stock issued to the stockholder represented no more
than the same interest in the identical property repre-
sented by his stock before the dividend. The Treasury
22 For a further discussion of this subject see Chapter 30 on
Deduction of Taxes.
23 Act of September 8, 1916, 31, added by Act of October 3,
1917. The 1916 Law prior to the amendment contained substan-
tially the same definition of stock dividends.
INCOME PROM DIVIDENDS 275
Department subsequently changed its attitude and held
stock dividends to be the equivalent of cash and to con-
stitute taxable income under the same conditions as
cash dividends. 84 Only one case has been decided under
the 1913 Law, and in that case the District Court held
a stock dividend to be taxable. 26 The court said in part :
"I can give little weight to the argument that the
issue of a stock dividend did not affect the market value
of the plaintiff's aggregate holdings and that the dis-
tribution of 50% more stock to the stockholders lessened
the market price of their original stock %&%%. This
would be true in case of any cash dividend extraordi-
nary, or even ordinary. The cash distributed, plus the
market value of the stock after the dividend was paid,
would ordinarily be equivalent in value to the stock
before the dividend. But the objection seems impressive
that the transaction in nowise, affected what the stock-
holder already had except to give him additional pieces
of paper evidencing his ownership. He does, however,
have something different before and after receiving the
additional stock. What was before a mere chance that
he might receive his share of the surplus in cash divi-
dends, and a vague right to secure them if the directors
withheld them in a way and to an extent that indicated
bad faith, is now converted into a permanent interest
in the capitalized surplus. He has lost the chance of
cash dividends and gained an interest in the corporate
enterprise that cannot be taken away. This interest
24 T. D. 2274, dated December 22, 1915.
88 Towne v. Eisner, U. 8. D. C. 8. D. N. Y. 242 Fed. 702. In this
case it was also held that the dividends were subject to tax although
declared from surplus, all of which was earned prior to January
1, 1913, and paid January 2, 1914. The case U now before the
Supreme Court on appeal.
276 FEDERAL INCOME TAX
is derived from earnings and may be really of much
greater advantage to the stockholder than the possi-
bility or right which he has lost. It becomes capital
of the corporation, but in his hands it is income and
in many respects resembles the common extraordinary
cash dividend accompanied by a right to subscribe for
additional stock at par to an amount equivalent to the
dividend in cash. To say that this distribution is not
income because he received no cash and the interme-
diate step is not taken is, to my mind, quite to dis-
regard the real nature of the transaction. * . * *
"The real stumbling block which affects everyone
* * * is the taxation of very large accumulations
of earnings distributed by corporations after the passage
of the Act. Certainly the mere matter of size can make
no difference in determining whether the property
taxed is income or not. .The doubt I have felt in reach-
ing my conclusion has not been due to the nature of
stock dividends, but to the difficulty * * * in de-
termining whether Congress intended to tax earnings
at all which had accrued in the hands of the corpora-
tion prior to the passage of the Act, but were distributed
later." The 1916 Law "providing that a cash or stock
dividend payable out of earnings since March 1, 1913,
shall be considered income has no bearing upon this
case. It may be argued that it was a limitation or an
extension of the income taxable by the Act under con-
sideration, but in neither event can it be held to define
the income which was theretofore taxable. ' ' 86
26 As a practical matter it seems absolutely necessary that the
law should tax stock dividends, otherwise the supertaxes could be
avoided by individuals forming corporations to hold their personal
estates and reinvesting the earnings from year to year, the yearly
surplus in each case being converted into capital by a distribution
of stock dividends.
INCOME FROM DIVIhKNDS 277
MMNKY VAM-K DF STOCK DIVIDEND. The present law
provides that a stock dividend shall be considered income
' to the amount of the earnings or profits so distributed. "
Prior to the amendment, the 1916 Law provided that
a stock dividend should be taxable "to the amount of
its cash value." Both phrases are construed to have
the same meaning. The value of each share of the
stock dividend, for the purpose of the income tax, is
determined by dividing the amount of earnings, profit,
or surplus distributed, by the total number of shares
constituting the stock dividend. In other words, the
amount which the stockholder would have received had
payment been made in cash, is the amount to be reported
as income. 87 The par value of a stock dividend usually
indicates the amount to be reported as income. The
fact that the stock dividend may have a market value,
at the time it is received by the stockholder, greater
or less than its proportionate value as a part of the
surplus of profits distributed, does not alter the rule.
In a subsequent sale of the dividend stock, the value
at which it was reported as income when received as
a dividend is to be considered as its cost, and the profit
or loss realized from the sale should be figured accord-
ingly, as in the case of any other sale of property. 88
87 Letter from Treasury Department dated October 30, 1916;
I. T. S. 1917,1164.
2* letter from Treasury Department dated March 24, 1916;
I T. 8. 1917, 1466.
CHAPTER 24
INCOME FROM ROYALTIES
The Treasury Department expressly requires that
royalties from mines, oil wells, patents, franchises, or
other legalized privileges shall be separately reported by
the individual, but not by corporations. No particular
rules have been issued with respect to royalties and with
respect to income from royalties, except to hold that
where royalty is received in exchange for a right to man-
ufacture and sell an article under a patent, the amount
of the royalty received is income. 1 In the case of mines
operated by a lessee on a royalty basis, the amount of
royalty received by the lessor is income. 2
Royalties from Mines. In has been contended that
royalties received under mining leases and oil leases are
in fact not income but payments of instalments on the
purchase price of the natural deposit. The nature of
such leases has been the subject of some difference of
opinion in the courts. It has been held that the leases
are such in name only, and are in fact conveyances of the
ore body in place as a part of the realty, and that the
so-called royalties merely represented payments for so
much land and were in no just sense income, but mere
1 Letter from Treasury Department dated January 24, 1916;
I. T. S. 1917, H 1187.
2T. D. 2152.
278
INCOME FROM ROYALTIES 270
conversions of the capital. On the other hand, it has
been held that such leases do not constitute a sale of
any part of the land and further, that ores or other
materials derived from the usual operation of open mines
or quarries, constitute the rents and profits of the land.
The United States Supreme Court in a case arising
under the 1909 Law reviewed the conflicting authorities,
and held that under the language of that law royalties
received under mining leases were income. 3 Under the
present law such royalties are treated as income, against
which the owner of the property may claim an allowance
for depletion of the natural resource.
Royalties from Patents and Copyrights. Taxpayers
receiving royalties from patents, copyrights, or other
similar forms of property, may deduct from each pay-
ment a proportionate part of the cost thereof as repre-
senting, a return of capital. This is more fully
in a subsequent chapter.*
3 Von Baurabach v. Sargent Land Company, 242 U. S. 503.
4 See p. 294.
CHAPTER 25
INCOME FROM MISCELLANEOUS SOURCES
After specifying a number of sources of income, the
act provides that the net income of the taxpayer shall
include gains or profits and income derived from any
source whatever. In this chapter are set forth the
rulings on income from sources not covered by the pre-
ceding chapters.
Alimony. Alimony is not income, as it does not arise
from any business transaction, and is not founded on
any contract, but on the natural and legal duty of the
husband to support the wife. 1 It follows that the hus-
band cannot deduct the amount he pays as alimony from
his income for the purpose of the tax.
i
Accident Insurance. Money paid to a person insured
by an accident insurance policy, on account of accident
sustained, is income (to the extent that the amount
exceeds the aggregate premiums paid) but amounts re-
ceived from a railroad company, by way of reimburse-
ment for expenses incident to an accident, are not con-
sidered income. The proceeds of accident insurance
policies paid to an individual beneficiary, upon the
1 Gould v. Gould, U. S. Supreme Court, Case No. 41, October
Term, 1917, not yet officially reported. This decision reversed the
ruling of the Treasury Department.
280
INCOME FROM MISCELLANEOUS SOURCES 281
of the person insured/are not income to the bene-
ficiary. 8
Assessments on Stock. Assessments paid by stock-
holders on stock are not income of the corporation, nor
is a voluntary contribution on the part of the stock-
holders, to make good a deficit of the corporation. 8
Damages. An amount received as the result of a suit
or compromise for "pain and suffering" is held to be
income.* The law imposes the tax on income from all
sources, but it seems unjust to tax one who receives in a
lump sum an amount as damages to compensate him for
a period of years on account of disability resulting
from injury. In other words, he receives several years'
income at one time and the supertax takes more than a
just portion thereof, while the law does not even permit
him to deduct the expenses of surgical and medical at-
tendance from the gross amount of damages he may
receive.
Increment to Sinking Funds. Where a sinking fund
is set aside for the purpose of meeting obligations at a
future date, all increment to that fund as a result of
investments is income to the creator of the fund. Where
a sinking fund, controlled by trustees, has been invested
in the bonds of the corporation which created the fund,
and the corporation pays the trustees interest on such
bonds, the amount of interest may be deducted, the sam--
as payment to any other bondholders, and within the
T. D. 2135.
8 Letter from Treasury Department dated February 21, 1916;
1. T. S. 1917, H1196.
4T. D. 2135.
282 FEDERAL INCOME TAX
limitation fixed by law, but the same amount must be
included as income to the corporation from the sinking
fund. 5
Legacies. A legacy is a gift and the value thereof
is not considered income to the recipient, but all income
created by the legacy is taxable. Unless clearly incon-
sistent with the intention of the testator, a legacy is
held to be vested rather than contigent, and where there
is a vested interest the income therefrom, whether dis-
tributed or not by the executor or administrator, is sub-
ject to the tax from the time of death of the testator, as
income of the legatee. 6
Pensions. Pensions paid by the United States Gov-
ernment are subject to the income tax, 7 as also are pen-
sions paid by any other government, or by any private
interest, under any contract express or implied. If,
however, a so-called "pension" is a mere gratuity or
gift it is not taxable as income to the recipient.
Proceeds of Life Insurance Paid to Individual
Beneficiaries. When the proceeds of a life insurance
policy are paid to an individual beneficiary upon the
death of the insured, the amount of the policy is exempt
and need not be included as gross income of the indi-
vidual, 8 and this is true whether the payments of such
proceeds are made in a lump sum at the death of the
insured, or in instalments thereafter, or as annuities. 9
If the instalments are not paid in accordance with the
5 T. D. 2161.
6T. D. 2090.
7T. D. 2090.
8 Act of September 8, 1916, 4, Keg. 33, Art. 5.
9 Letter dated December 29, 1913; T. T. S. 1917, If 301.
INCOME FROM MISCELLANEOUS SOURCES 283
terms of the policy, but under agreement made between
the insurance company and the beneficiary, any amounts
of accretion to the sum payable under the terms of the
policy will be taxable as income.
Proceeds of Life Insurance in Favor of Corporations.
Where a corporation has insured the life of an officer
or employee or other person in favor of the corporation
it is not allowed to deduct as an annual expense the
amount of premium paid, but such annual payments of
premium will be considered as investment of capital and,
when the policy is paid at maturity, the aggregate
amount of the premiums paid during the term of the
policy may be deducted from the proceeds of the policy,
the remainder being income for the year in which it is re-
ceived. 10
Property Acquired by Gift. The value of property
acquired by gift, bequest, devise or descent (but not
the income from such property) is exempt. Such prop-
erty need not be reported as income by the recipient. 11
It was held under the 1913 Law that gifts to corporations
were not exempt, but this ruling does not apply under
the 1916 Law, since the provision of the former law
exempting income of this character was contained in
the subdivision applying particularly to individuals,
while in the latter it is placed in a section having general
reference to all taxpayers. It would seem under the
present law that income of this character is exempt
from the tax regardless of the status of the recipient. 18
10 T. D. 2519. Act of September 8, 1916, 32, added by Act
of October 3, 1917.
11 Reg. 33, Art. 5.
18 Compare Act of October 3, 1913, 1 B and Act of September
8, 1916, 4.
284 FEDERAL INCOME TAX
DEFINITION. Christinas presents, gratuities, volun-
tary contributions and donations are considered as gifts
and should not be reported as income by the recipient.
An exception, however, is made in the case of clergymen ;
Easter offerings, and fees received by them for funerals,
masses, marriages, baptisms, etc., while in the form of
gifts, are in fact payment for services and should be
reported as income. 13 Special payments made by an
employer as extra compensation to employees are some-
times called bonuses or gifts, but if made as compensa-
tion for services rendered, and paid in pursuance of a
contract, express or implied, they are in fact not gifts
but income from services, and taxable to the recipient. 14
Where the salary of an employee is paid for a limited
period after his death to a relative or dependent, in
recognition of the services rendered by the employee,
no services being rendered by the recipient, the payments
are gifts and exempt from taxation. 15 Of course, any
amount paid by one person out of his income to another,
as a gift, is not deductible from the net income of the
giver. 16
SALE OF PROPERTY ACQUIRED BY GIFT. When prop-
erty acquired by gift is thereafter sold, the value of the
property at the time the gift was made is deducted from
the amount received on the sale thereof and the remain-
der is taxable as income of the seller.
Recoveries on Bad Debts. Where a bad account has
been charged off to profit and loss and subsequently
1ST. D. 2090.
14 T. D. 2152. See Chapter 17.
15 T. D. 2090, Reg. 33, Art. 6.
16 See Chapter 27 on Deductions.
INCO.MK I KOM MISCELLANEOUS SOURCES 285
the money is recovered, the sum so recovered must be
treated as income whether or not the bad debt was
charged off prior to the incidence of the tax or subse-
e properly acknowledged by the corporate officers and
so entered on the books of the corporation as to con-
stitute a liability against the assets. Except as the
same may be modified by the provisions of the act,
limiting certain deductions and authorizing others, the
net income as returned by a corporation for the pur-
pose of the tax should be the same as that shown by
the books or the annual balance sheet. 8 No special
'system of bookkeeping has been required, nor any spe-
cific method prescribed in rulings or regulations by
which the net income should be determined. 4 As to
taxes, the Department held in the past that the tax
must be actually paid, and not merely entered as a
charge, in order to be deducted, and in the case of
losses the loss must be actually sustained and not
merely charged off. As to taxes, the rule seems to be
changed in the case of corporations electing to report
according to their books, as indicated in the following
paragraph.
ACCRUALS. Corporations which accrue on their books,
monthly or at other stated periods, amounts sufficient
to meet fixed annual or other charges, may deduct
from their gross income the amount so accrued, pro-
vided such accruals approximate as nearly as possible
reason why an individual should not be permitted to avail himself
of the same privilege of reporting on a basis other than that of
actual receipts and disbursements, since the law extends the
privilege to both in identical language.
3 Reg. 33, Art. 158.
*T. D. 2161.
300 FEDERAL INCOME TAX
the actual liabilities for which the accruals are made,
and provided that in cases wherein deductions are made
on the accrual basis, income from fixed and determinable
sources accruing to the corporation is returned, for the
purpose of the tax, on the same basis. 6
RESERVES TO MEET LIABILITIES. Where pursuant to
the consistent practice of accounting of a corporation,
or pursuant to the requirements of the Interstate Com-
merce Commission or of any federal, state or municipal
supervising authority, corporations set up and main-
tain reserves to meet liabilities, the amount of which,
and the date of payment or maturity of which is not
definitely determined or determinable at the time the
liability is incurred, the amount credited to such reserves
may be deducted, provided the amounts deductible on
account of the reserves approximate as nearly as can
be determined the actual amounts which experience
has demonstrated will be necessary to discharge the
liabilities incurred during the year, for the payment
of which additions to the reserves are made. If it is
found that the amount credited to any such reserve
is in excess of the reasonable or probable needs for
which the reserve was created, the excess will be dis-
allowed as a deduction and restored to income for the
purpose of the tax. In no event will sinking funds
or other reserves set up to meet additions, betterments
or other capital obligations be allowed as deductions.
Reserves to meet losses contingent upon shrinkage in
values, losses from bad debts, losses from capital invest-
ments, etc., are not allowed as deductions, since such
losses are only deductible when definitely determined
6 T. D. 2433.
DEDUCTIONS IN GENERAL 301
as a result of a closed or completed transaction and
actually charged off. 8
Additions and Betterments. The law provides ex-
pressly in the case of individuals and corporations that
no deduction shall be allowed for any amount paid out
for new buildings, permanent improvements, or better-
ments made to increase the value of any property or
estate, and no deduction shall be made for any amounts
of expense in restoring property or making good the
exhaustion thereof for which an allowance is or has
been made. 7 Amounts expended for additions and bet-
terments are considered as a capital investment. 8 Thus,
expenditures of a railroad for sidings or spur tracks
are additions and betterments and therefore not deduct-
ible. 9 If expenditures are made for permanent improve-
ments and betterments they are treated as any other
investment of capital, that is, if the asset in which the
capital is invested is one on which depreciation may be
claimed, the amount expended for the permanent addi-
tion or betterment is added to the cost of the property
for the purpose of determining the annual depreciation
allowance thereafter. The statute merely intends to pro-
hibit the deduction of the entire amount in the year in
which the expenditure is made.
PUBLIC UTILITIES. In a decision under the 1909 Law
it was held that the fact that, under the laws of Cali-
fornia, a public utilities corporation is not the owner
6T. D. 2433.
7 Act of September 8, 1916, 85, 6 and 12.
Reg. 33, Art. 118.
9 Grand Rapids and Indiana Railway Company v. Doyle, T. D.
2210.
302 FEDERAL INCOME TAX
of the property, but merely intrusted with the use
thereof, did not entitle it to more favorable treatment
than other corporations. Money received from the con-
sumers to pay for service connections to be laid in public
streets was held to be income on which the corporation
was liable to pay a tax, notwithstanding that all or
nearly all of the sums so received may have been ex-
pended in betterments and extension of its system.
Moneys expended for service connections and pipe
extensions are invested in permanent improvements,
and do not come within any of the permitted classes of
deductions mentioned in the statute. 10 They are not
in the nature of improvements made merely to facili-
tate the transaction of a growing business, the expenses
of which have been held deductible. 11
Expense of Restoring Property. Expense of restoring
property or making good the exhaustion thereof is not
an allowable deduction where a depreciation allowance
is or has been made for the purpose, that is, where an
annual allowance has been claimed for depreciation of
property subject to wear and tear, the expense of restor-
ing such property may not again be deducted, but must
be taken out of the sum so set aside for depreciation.
Voluntary Destruction of Property. Losses due to
voluntary removal of buildings, etc., incident to improve-
ments, are not allowed as a deduction. It is presumed
10 Union Hollywood Water Co. v. Carter, 238 Fed. 329. It would
seem, however, that it is unjust in a case like this to tax the
company on its receipts where the money is for improvements and
betterments to property which it does not own.
11 See Mutual Benefit Life Ins. Co. v. Herold, 198 Fed. 199,
referred to in Chapter 28.
DEDUCTIONS IN GENERAL 303
that depreciation up to the time of the removal has been
covered by previous depreciation charges and the
residuary value of the building removed is considered
a part of the cost of the new building, that is, as a
<;ipital investment to be added to other items of cost\
on the aggregate of which depreciation of the new
building may be based. 18
Special Assessments for Local Benefits. The law ex-
pressly provides that assessments against local benefits
shall not be deducted as taxes, although frequently
referred to as taxes and imposed by local governments.
Such assessments as, for instance, for paving, curbing,
installing sewage and water systems, etc., are held to
be expenditures which add to the value of the property
and should be capitalized, that is, added to the cost of
the property for the purpose of determining the loss
or gain in a subsequent sale of such property. 18
18 Reg. 33, Art. 127.
13 Letter from Treasury Department dated December 22, 1914;
I. T. S. 1917, 11 1342. See Chapter 20.
CHAPTER 28
DEDUCTION OF BUSINESS EXPENSES
The law permits to individuals the deduction of the
necessary expenses actually paid in carrying on any
business or trade (limited in the case of non-resident
aliens to business conducted within the United States)
and in the case of corporations all the ordinary and
necessary expenses paid within the year in the main-
tenance and operation of the business and properties
of the corporation, including rentals or other payments
required to be made as a condition to the continued
use or possession of property to which the corporation
has not taken, or is not taking, title, or in which it has
no equity (limited in the case of foreign corporations
to business and property within the United States).
The special provisions applicable to each of these four
classes of taxpayers are discussed in the chapters on
citizens and residents, non-resident aliens, corporations
and foreign corporations, respectively. The discussion
in this chapter is limited to the rules applying generally
to all taxpayers. As a general rule, the expenses which
may be deducted are those necessary for the creation
of the income which is taxed. It should be noted, how-
ever, that the language of the law contains some express
limitations, which are more fully discussed in the fol-
lowing paragraphs.
Deductions Not to Be Duplicated. Where a deduction
may, or should be, claimed as one of the items spe-
304
DEDUCTION OF BUSINESS EXPENSES 305
cifically stated in the law, such deduction should not
also be included under the head of business expense.
Thus, where a deduction is claimed for depreciation,
or loss, the same amount should not also be deducted
as expense, or if the cost of tools or small articles has
been charged to expense, depreciation should not be
claimed thereon, as it would result in allowing the same
deduction twice. Interest paid by a corporation con-
stitutes a separate deduction and should not be taken
into account as a part of the cost of manufacture. 1
Expenses Incurred in Earning Exempt Income. 'Ex-
penses incurred in earning income which is not subject
to tax do not constitute allowable deductions in com-
puting net income from other sources which are taxable. 2
Expenses of Operation. Expenses of operation in-
clude all expenditures for material, labor, fuel, and
other items entering into the cost of the goods sold
or inventoried at the end of the year, and all other
expenses incurred in the operation of the business,
except such as are required by the act to be segregated
in the return, 8 or have been considered in determining
the cost of purchases during the year. Payments for
labor and materials which go into the actual operating
of a railroad and its properties are deductible. 4
Cost of Manufacturing Products. One engaged in
manufacturing may include as an element of the cost of
manufactured products, the cost of raw material, the
i T. D. 2137.
8 T. D. 2137.
3 Reg. 33, Art. 114.
* Grand Rapids & Indiana Ry. Co. v. Doyle, T. D. 2210.
F. I. Tax. 20
306 FEDERAL INCOME TAX
cost of labor of the men who actually work on such prod-
ucts as well as the cost of supervisory labor such as that
of foremen, inspectors, overseers, etc., provided such ex-
penditures are not separately deducted from gross income
in the return of annual net income. 8 This ruling permits
certain items of wages and salaries to be included in the
cost of the manufactured product, or to be separately
listed as labor, wages, commissions, etc. The items
however, should not be listed under both heads, as this
\vould constitute double deduction of the amounts.
Sums Expended for Materials Used and on Hand.
Where a business carries materials and supplies on
hand for use, the cost thereof, to be included as an
expense for the year, should be only the amount paid for
the materials which are actually disbursed and used in
operation during the year. 6 Amounts expended for
materials to be used in subsequent years are proper de-
ductions in the year in which the materials are used.
Commissions. Commissions paid to a real estate
agent for collecting rents and managing property are
allowed as a business expense to the owner. Commis-
sions paid to salesmen as a part of the expense of con-
ducting business are also allowed as deductions. 7
COMMISSIONS PAID IN STOCK. Commissions allowed to
salesmen, paid in stock, are deductible as an expense,-
if so charged on the books, at the actual value of such
stock. 8
5 T. D. 2152.
6 Beg. 33, Art. 123.
7T. D. 2090.
8 Beg. 33, Art. 117.
IH.IM .\ UK HfSlNKSS K.Xl'KNSKS :{(7
Entertainment Money. So-called spending or treat-
ing money actually advanced by business enterprises
to their traveling salesmen, as a part of the selling ex-
pense nl' their product, is a proper deduction. There
must, however. In- some showing that all of the allow-
ance claimed as a deduction was actually expended for
the purpose for which the allowance was made, namely,
the selling of the product in question. 9
Contributions for Campaign Expenses. Such contri-
butions, and sums of money expended for lobbying pur-
PONCS. arc held not to be ordinary and necessary expenses
of corporations and are therefore not deductible. 10
Customs Duties. Customs duties may be either de-
ilucted as taxes or may be included as a part of the cost
price of the goods, if the taxpayer is engaged in the
importation of goods and merchandise. 11 Such duties
of course should not be both included as cost of the poods
and deducted as taxes.
Discounts. Discounts, other than bank discounts on
notes executed by a corporation, were required, under
the 1909 Law, to be segregated from the interest item
on the return and to be included under expenses. 18
Accounts Payable. Accounts payable actually
charged into the expense account and so entered on the
1 looks as to constitute a liability against the asset > >\'
T. D. 2090.
10 T. D. 2137.
11 Letter from Treasury Department dated December 22, 1914;
I. T. S. 1917, 1358.
12 T. D. 1675.
308 FEDERAL INCOME TAX
the company, and so treated in the preparation of the
return of annual net income that they will not be in-
cluded in the deductions of the year in which they are
actually paid, may be deducted from the gross income
of the year in which the expenses were incurred. This
ruling applies only to accounts payable representing
ordinary and necessary expenses of maintaining and
operating the business, that is, such expenses as are
incurred in producing the gross income which it is re-
quired to return. 13
Expenses of Maintenance. Maintenance means the
upkeep or preserving of -the condition of the property to
be operated and does not mean additions to the equip-
ment, additions to the property or improvements of
former condition of the property. 1 * Expenses of main-
tenance are deductible.
Improvements. In the case of a railroad where old
rails are replaced with new and heavier rails, wooden
bridges and culverts with concrete and steel bridges and
culverts, the rule is that the cost of renewals with like
kind and quality is allowable, but excess cost is not
allowable as a deduction. 16
Repairs. Incidental repairs made to the business
property of a taxpayer which neither add to the value of
the property nor appreciably prolong its life, but keep
it in an operating condition, are expense. 16 Incidental
13 Letter from Treasury Department dated March 2, 1915 ; I. T.
S. 1917, If 1267.
14 Grand Eapids & Indiana Ry. Co. v. Doyle, T. D. 2210.
15 Grand Rapids & Indiana Ey. Co. v. Doyle, T. D. 2210.
16 Reg. 33, Art. 131.
DEDUCTION OF BUSINESS EXPENSES
repairs are only those repairs which will not if con-
tinued, as the component parts wear out and are
restored, make permanent the property. Expenditures
for replacing worn out parts such as gears, bolts,
nuts, valves, etc., so long as such replacements are not
pursued to the extent of, and for the purpose of, finally
restoring the machinery or equipment as a whole, con-
stitute incidental repairs and are deductible as operating
expenses. In addition, depreciation on the property
so repaired may be claimed in order to replace the ma-
chinery, equipment or building when, as an entirety, it
is worn out or is worthless for the purpose for which
it is intended. 17
Office Furniture and Equipment. An ordinary amount
expended for renewal of office f nrniture and equipment,
and charged to expense, was held not to be invested in
assets, but to be a proper expense of maintenance of the
business of an insurance company, which it was entitled
to deduct in ascertaining its taxable net income under
the 1909 Law. The company had expended in one year
$1,213 for ordinary renewals of office furniture, in
another year $1,379, and an additional sum of $1,808
for ordinary renewals of attendants' uniforms, door mats,
window shades, awning, small hardware, oils and other
articles of like character and also the sum of $2,244 for
ordinary renewals of office equipment, consisting of
lamps, alterations of fixtures, shades, meters, fans, plugs,
wirings, etc., and these expenditures were no greater
than the average of similar expenditures for other years
and did not exceed 5% of the cost of all the plaintiff's
existing furniture and equipment similar to the articles
n Letter from Treasury Department dated September 19, 1916;
I. T. 8. 1917, ft 1363 and 1364.
310 FEDERAL INCOME TAX*
detailed, and none of the items was considered in the
corporation's books or statement as assets because of
their rapid depreciation. It was held that the articles
mentioned were of a perishable and transient nature,
and properly charged to expense of maintenance, since
they apparently did no more than maintain in proper
condition and repair the ordinary equipment of office
furniture and supplies. 18
Expenditures for Alterations. In the case of a com-
pany which expended approximately $5,000 for altera-
tions in its home office, apparently solely with a view of
facilitating the carrying on of its business, it was held
under the 1909 Law that such amount was properly
deducted as an expense. The Court said in part: "It
should be remembered, also, that in these days of up-to-
date business method requirements it often becomes
necessary for business concerns to change the lay-out
and appointments of the places wherein they carry on
business, with a view to economy in space, a saving of
unnecessary labor, and the bettering of working condi-
tions of employees, to the end that a net saving of run-
ning expenses will result. In view of the consistent
expansion of the plaintiff's business, which the evidence
shows, it would seem that the amount expended for
the changes made in the office ought not, under the cir-
cumstances, to be considered unreasonable or unusual,
and that, therefore, the amount claimed might well
have been allowed as an item of deduction. It seems
to the court that business concerns, in matters of this
kind, should be allowed a reasonable discretion, and the
law so enforced as to help rather than to hinder them
in making reasonable progress in the development of
18 Mutual Benefit Life Ins. Co. v. Herold, 198 Fed. 199.
DEDUCTION OP BUSINESS EXPENSES 311
their business, for it must appear to anyone giving the
matter a moment's consideration that the more success-
ful a business the larger the results, even from the stand-
point of taxes accruing to the government." 19
Payment in Lieu of Rental. Where a leasehold is
purchased and paid for in one sum at the beginning
of the lease the amount so paid may be divided by the
number of years constituting the life of the lease and a
deduction made annually of a proportionate amount,
such item to be claimed as a payment made in lieu of
rental. 80
Repairs and Improvements Made by a Tenant.
Where a lease requires the tenant to make all necessary
repairs or improvements, which repairs or improve-
ments revert to the landlord at the expiration of the
lease, the tenant may charge the cost of all such repairs
and improvements to the expense of doing business. If
the improvements are somewhat permanent in character,
the expense should not be all deducted in one year, but
should be pro-rated over the number of years constituting
the term of the lease, and the amount deductible from
gross income of each year would be the aliquot part of
such cost. 81 Taxes or other expenses paid by the tenant
for the landlord should be deducted by the tenant as
expense.
Cost of Buildings Erected by Tenant Under Terms
of Lease. Where, under the terms of a rental or lease
19 Connecticut Mutual Life Ins. Co. v. Eaton, 218 Fed. 206.
20 Letter from Treasury Department dated February 27, 1917:
1. T. S. 1917,^2068.
21 T. D. 2137.
312 FEDERAL INCOME TAX
contract, a tenant agrees to erect a building, or to ex-
pend during the rental period a certain fixed sum in
making improvements upon the freehold, it is held that
the building or permanent improvements become a part
of the realty, unless otherwise agreed upon between the
contracting parties. As the use of the building or per-
manent improvement by the tenant, during the term of
the lease, is a part of the consideration of the contract,
the cost of such buildings or improvements may be
pro-rated by the tenant over the leased term and be
deducted, at an annual rate, as a part of the necessary
expenses actually paid in carrying on any business or
trade. The tenant may also deduct the cost of incidental
repairs and maintenance to such buildings and improve-
ments, 22 If the building is erected, or permanent im-
provements are made after the lease is partially expired,
the cost thereof may be divided by the number of years
the lease then has to run. and if the life of the lease is
longer than the estimated life of the building or im-
provements, the cost may be divided by the number of
years such building or improvements are expected to
last, instead of the number of years constituting the
life of the lease. 23
Insurance Premiums. Where premiums are paid for
insurance on property used for business purposes, or
rented or leased to secure an income, the amount so paid
constitutes an allowable deduction. 24
LIFE INSURANCE PREMIUMS. Premiums paid on life
insurance policies covering the lives of officers, em-
22 T. D. 2442, Eeg. 33, Art. 115.
23 Letter from Treasury Department dated February 27, 1917;
I. T. S. 1917, If 2064.
24 T. D. 2090.
DEDUCTION OF BUSINESS EXPENSES 313
ployees, or those financially interested in any trade or
business conducted by an individual, partnership, or
corporation may not be deducted as a part of the annual
expenses. 26
PREMIUM ON FIDELITY BOND. Where an employee is
required to furnish a bond and pay the premium
thereon, as a necessary incident to his employment, the
amount so paid may be deducted by him as an expense. 26
If the employer pays the premium it may be included
in his business expense.
RESERVES FOR INSURANCE. Funds set aside by a cor-
poration for insuring its own property are not a proper
deduction as a business expense, but any loss actually
sustained may be deducted although actually paid out of
a fund so set aside. 27
Salaries. As a general rule, it may be stated that
any salary paid in good faith under contract, express
or implied, for services actually rendered is an allow-
able deduction as a business expense of the employer.
Inordinate salaries paid by an individual employer to
relatives or others would no doubt be disallowed on
the ground that they were not paid in good faith, and
86 Act of September 8, 1916, 32, added by Act of October 3,
1917. Prior to the passage of this provision it was held by the
Treasury Department that such premiums were deductible (T. D.
2090) but later this ruling was reversed and it was held there-
after that premiums were not deductible (T. D. 2519, dated
August 30, 1917). It seems, from the language of this latter
Treasury Decision, that it is not intended to have a retroactive
effect for years prior to 1917.
W T. D. 2090.
87 Reg. 33, Art. 122.
314 FEDERAL INCOME TAX
were in effect a method of distributing income so as
to avoid the supertaxes. In the case of corporations,
any salary paid to an employee who is not a stock-
holder would be a proper deduction unless the payment-
could be attacked for lack of good faith. Where the
employee is also a stockholder, the salary deduction
will be scrutinized with greater care, and in such cases
it is important that the following rules be observed :
(a) the services must be actually performed; (b) the
amount must be no more than a fair and reasonable
compensation for services rendered, and (c) the com-
pensation should not depend upon the employee's inter-
est in the corporation as a stockholder, or vary from
year to year with the earnings of the corporation. 2 *
Under the 1909 Law it was held that in addition to
the foregoing rules it was necessary that the salary paid
to an officer who was also a stockholder should be
authorized by the board and made a matter of record
on the minute book of the corporation, in order to be
an allowable deduction, 29 but this has not been required
by any ruling under the present laws. It seems reason-
able that an officer or employee of a corporation should
be entitled to compensation for the services he actually
performs, in addition to his dividends as a stockholder,
since as a stockholder he is under no duty to devote any
part of his time to the business of the corporation.
What constitutes a reasonable salary is a question of
fact, and it would seem that a fair criterion is the
amount which similar services would command if the
officer or employee were not a stockholder, or which he
could get by rendering the same services to another
28 T. D. 2152; letter from Treasury Department dated Feb-
ruary 2, 1915; I. T. S. 1917, If 1284.
29 T. D. 1742.
DEDUCTION OF BUSINESS EXPENSES 315
employer. When the sum paid him exceeds such amount,
the question will arise as to the propriety of deducting
the salary as a business expense. It is conceivable, of
course, that an individual may render services of great
value to a corporation of which he is the chief stock-
holder, and if such services can be shown to be reason-
ably worth the salary paid, the courts will probably
sustain the deduction as a proper expense, but the bur-
den would be upon the corporation to prove that the
payment was not compensation based on stockholding.
COMPENSATION BASED ON STOCKHOLDING. Where
amounts paid as compensation or additional compen-
sation to officers or employees are based upon the stock
holdings of such officers or employees, such amounts
are not allowed to be deducted as a business expense,
but are held to be dividends even though paid in lieu
of salaries or wages. 30 Where a company was composed
of two stockholders who divided the net profits between
them, calling it compensation, it was held that the money
paid out was equivalent to a dividend and must be
treated as such. 81
SALARIES PAID TO ENLISTED MEN. A corporation con-
tinuing to pay an employee his salary, or part thereof,
during his services in the United States Army is per-
mitted to deduct the amount as an expense. 88
Bonus and Profit Sharing Payments. Special pay-
ments made by a corporation as extra compensation to
30 Reg. 33, Art 119.
31 Jacobs and Davies (Inc.) v. Anderson. L'L'8 Fed. 50f>, T. D.
B68.
32 Letter from Treasury Department, ilateil ()rtol>er 4, 1916:
T. T. S. 1917, H 1286.
316 FEDERAL INCOME TAX
certain of its employees may be deducted as an expense,
if it is clearly shown that such payments are made as
compensation for services rendered and are paid in pur-
suance of a contract, express or implied. 33 If, however,
there is no contractual relation between the employee
and the employer by reason of which the employee could
enforce his claim for the additional compensation, such
payments will be held to be gratuities and not allow-
able as expense. 34 Such payments as extra compensa-
tion, when added to the salary received by the employee,
.must not exceed a reasonable compensation for the serv-
ices rendered. A long time practice regularly employed
of paying the 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 are reasonable in amount they
may be treated as expense. The payments must be con-
ditioned upon the services rendered by the employees,
and not upon the earnings of the corporation. If
dependent upon the earnings of the corporation, 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 a thank-offering because
of a prosperous year, the payments will be held to be
gratuities. 35
GIFTS OR GRATUITIES TO EMPLOYEES. Gifts or gra-
tuities made by an employer to his employees are not
33 T. D. 2152.
34 Letter from Treasury Department dated June 25, 1914;
I. T. S. 1917, 1 1293.
35 Mimeograph letter to collectors No. 1314.
DEDUCTION OF BUSINESS EXPENSES 317
proper deductions as an expense. Even where such a
payment is called extra compensation, if it is a gratuity
or voluntary payment for which no service is rendered,
its character as a gift is not changed. The custom of
paying bonuses or Christmas gifts to employees, even
though it has been the practice of the employer for a
long time to make such gifts, does not make the amount
so paid proper deductions as expense so long as the
gifts are voluntary and gratuitous. 36
Pensions. Amounts paid as pensions to retired em-
ployees, or their families, or others dependent upon
them, or paid on account of injuries received by
employees, are ordinary and necessary expenses, 37 but
where the salary of an employee is paid for a limited
period after his death to a relative or dependent, in
recognition of the services rendered by the employee,
no service being rendered by the recipient, the pay-
ment is held to be a gratuity, and not allowed as an
expense of the business. 88
Donations. Donations by business concerns may or
may not be held to be proper deductions as expense.
There must be a consideration in some form to take
the donation out of the class of gratuities. It has been
held that a corporation engaged in the agricultural
business cannot be allowed to make deductions on account
of donations to fairs, churches and associations; such
donations, although made for the purpose of obtaining
and preserving the good will of the farmers, being mere
36 T. D. 2090; T. D. 2152; mimeograph letter to collectors
No. 1314.
37 T. D. 2090.
38T.D. 2090.
318 FEDERAL INCOME TAX
gratuities. When a donation legitimately represents a
consideration for a benefit flowing, directly or indirectly,
to the donor, as an incident of its business, it is an
allowable deduction. Thus, a donation to a hospital,
under agreement that employees of the donor are to
have a ward for their use in case of accident or illness,
is a proper deduction. Donations made for purposes
connected with the operation of the business, when lim-
ited to charitable institutions, hospitals or educational
institutions, conducted for the benefit of employees or
their dependents, are within this class. 39
Lessees of Mines. Where x an individual or a corpo-
ration operates a mine under a lease on a royalty basis,
the lessee "may deduct all royalties paid to the owner.
If, in addition to royalties, the lessee has paid a stipu-
lated sum for the right to explore, develop and operate
a mine the amount so paid may be ratably distributed
over the life of the lease, or the probable life of a mine
under ordinary operating conditions, and the lessee may
deduct annually as a rental payment an aliquot part of
the amount of the bonus so paid, until such amount
has been extinguished. If the annual deduction of the
bonus is based on the probable life of the mine, under
ordinary operating conditions, it seems that the lessee
may compute the annual deductions of the bonus pay-
ment on the same basis as the owner computes depletion. 4 *
Farmers. A farmer is permitted to deduct all legiti-
mate expenses incident to the production of the year,
or future years, although the products to which such
expenses and deductions are incidental may not have.
39T.D. 2090.
40 T. D. 2446. See Chapters 33 and 34 on depletion.
DKDfCTION OK IM'slNKSS EXPENSES MM
l)een sold.* 1 For example, the cost of a supply of fer-
tili/.er sufficient to last for several years may be deducted
in full in the year in which purchased. A farmer may
deduct as business expense the cost of ordinary tools,
but not the cost of farm machinery of a more perma-
nent character. Such farm machinery, however, is sub-
ject to depreciation as is other property subject to wear
and tear.
Public Utility Under Contract with a State. In the
case of a public utility constructed, operated or main-
i allied under any contract with any city, state or ter-
ritory or the District of Columbia, where a portion of
the not earnings of such public utility is payable, under
the 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 its business.* 8
This deduction is allowed under an express provision
(' the statute.* 3
*1 T. D. 2153. A different rule seems to be applied in the case
of manufacturers where it has been held that the cost of materials
and supplies should be included only to the extent that thr ma-
terials and supplies are actually used in the operations for the
year. Reg. 33, Art. 123.
M T. D. 2090.
43 Act of September 8, 1916, $ 11 (b).
CHAPTER 29
DEDUCTION OF INTEREST
The law provides in the case of citizens and residents
that all interest paid within the year may be deducted.
In the case of a non-resident alien there may be deducted
such proportion of all interest paid within the year by
such person on his indebtedness as 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 is allowed only if
such person includes in his return of annual net income
all the information necessary for its calculation. In the
case of a corporation there may be deducted the amount
of interest paid within the year on its indebtedness to an
amount of such indebtedness not in excess of the sum of
(a) the entire amount of the paid-up capital stock out-
standing at the close of the year, or, if no capital stock,
the entire amount of capital employed in business at the
close of the year, plus (b) one half of its interest-bearing
indebtedness then outstanding. It is further provided,
as to corporations, that in case of indebtedness wholly
secured by property collateral tangible or intangible, the
subject of sale or hypothecation in the ordinary business
of such corporation, as a dealer only, in the property
constituting such collateral, or in loaning funds thereby
procured, the total interest paid by such corporation
within the year on any such indebtedness may be de-
320
DEDUCTION OF INTEREST 321
ducted as a part of its expense of doing business, but in-
terest on such indebtedness shall only be deducted to an
amount of such indebtedness not in excess of the actual
value of such property collateral. 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, may be deducted in full. Foreign
corporations are allowed to deduct the amount of in-
terest paid within the year under the same limitation as
imposed on domestic corporations and in such proportion
as the gross amount of income for the year from business
transacted and capital invested within the United States
bears to the gross amount of income derived from all
sources within and without the United States. The
privilege of deducting the total amount of interest paid
on indebtedness secured by property collateral is not
allowed to foreign corporations, but the privilege of de-
ducting all of the interest paid by a bank, banking as-
sociation, loan or trust company, is extended to foreign
corporations or the branches thereof to the extent that
the interest is paid on deposits by or on moneys received
for investment from either citizens or residents of the
United States. The special rules applicable to each of
the four classes of taxpayers enumerated above are dis-
cussed in the chapters relating to each. 1 In all cases in-
debtedness incurred for the purchase of obligations or
securities, the interest upon which is exempt, may not be
deducted.
1 As to citizens and residents see Chapter *; as to non-resident
aliens see Chapter 5; as to domestic corporations see Chapter
12; as to foreign corporations see Chapter 14.
F. I. Tar. 21
322 FEDERAL INCOME TAX
Indebtedness Incurred for the Purchase of Tax Ex-
empt Securities. Prior to the amendment of October
3, 1917, it was held under the 1916 Law that interest
paid on indebtedness could be deducted regardless of
whether or not the indebtedness was incurred for the
purchase of bonds, the interest upon which was exempt
from taxation. This ruling in effect permitted a double
deduction, that is, the interest paid on the money so
borrowed could be deducted and the income derived from
the money so borrowed and invested could also be de-
ducted. The 1917 Law does not permit the deduction of
interest paid on indebtedness incurred for the purchase
of obligations or securities the interest upon which is
exempt from taxation as income under that law. The
phrase "obligations or securities" means only such
securities as bear interest which is exempt from the in-
come tax. State and municipal bonds are securities
which would fall into this class. National bonds issued
prior to September 1, 1917, would also fall into this class.
But the limitation applies only where the interest on the
securities so purchased is wholly exempt. Interest on
indebtedness incurred for the purchase of Liberty Bonds
'of the second issue (the interest on which is not exempt
from the supertax) may be deducted regardless of this
limitation. 13
Interest Paid Within the Year. The 1909 Law pro-
vided for the deduction of ' ' interest actually paid with-
in the year" and it was contended by the Treasury De-
partment that this provision required that the interest
should be both accrued and paid within the same year.
It was held by the Circuit Court of Appeals, however,
that interest actually paid within the year although pre-
laT. D. 2541.
DEDUCTION OF INTEREST 323
viously accruing should be permitted as a deduction. 8
The 1913 Law provided for the deduction of interest
paid within the year by individuals, and "interest ac-
crued and paid within the year" by corporations. In a
ruling appearing under that law it was held that in the
case of corporations the deduction should be limited to
interest which had both accrued and been paid within
the same year. 8 The present law permits the deduction
of interest paid within the year in all cases and it does
not seem essential that the interest should have accrued
or become payable in the year in which it is paid.
Interest paid by Corporations. The limitations on
the amount of interest which may be deducted by cor-
porations is referred to in the chapters on corporations
and foreign corporations respectively.
Interest Paid by Banks. Interest paid by banks,
I tanking associations, loan or trust companies on deposits
may be deducted in full. For a discussion of the ruling
on this point see the chapters on corporations and foreign
corporations respectively.
Anderson v. 42 Broadway Company, 213 Fed. 777. The
Supreme Court in reversing the court on another point did not
pass on the question of deducting interest accrued in one year
and paid in another.
3 T. D. 1960.
CHAPTER 30
DEDUCTION OF TAXES
In the case of individuals and domestic corporations
the provisions for the deduction of taxes are the same.
In the case of non-resident aliens and foreign corpora-
tions the taxes which may be deducted are limited to
those assessed by the United States or its teritories or
possessions or under the authority of any state, county,
school district or municipality or other taxing subdivision
of any state, paid within the United States, within the
year, except such taxes as are not deductible by any class
of taxpayers. For the special rulings applicable to non-
resident aliens and foreign corporations see the respec-
tive chapters on those subjects.
Taxes Paid Within the Year. Under the 1913 Law
and the 1916 Law the provisions for deducting taxes
expressly limited deductions to taxes paid within the
year. It was held by the Treasury Department that re-
serves for taxes could not be established as only such sums
as were actually paid within the year could be deducted,
that is, the aggregate of the amounts actually paid as
shown by the cash book. 1 The provision of the 1-916 Law
allowing individuals and corporations to report on a
basis other than that of actual receipts and disburse-
ments, and the rulings by the Treasury Department there-
1 Reg. 33, Arts. 156, 158.
324
DEDUCTION OF TAXES
imdrr, would seem to permit, in the case of individuals
or corporations reporting on an accrual basis, the de-
duction of the amount of taxes accrued on their books
or the amounts reserved for the payment of taxes pro-
viding such amounts did not exceed the actual liability
incurred during the year. 8
Taxes Not Deductible. The law expressly provides
that the taxpayer shall not deduct the amount of income
taxes paid within the year under the 1916 or 1917 Laws
and the amount of excess profits taxes paid to the Federal
Government. 3 It is provided, however, that in assessing
the tax for any year the Commissioner of Internal
Revenue shall deduct the amount of the excess profits
tax assessed for the year from the net income of that
year before assessing the income tax.* The Act also pro-
vides that taxes assessed against local benefits shall not
be deductible and that taxes paid by a corporation pur-
suant to a "tax-free" contract in its mortgages or bonds,
shall not be deducted. In addition the Treasury De-
partment holds that inheritance taxes are not deductible
and taxes paid by a corporation for its stockholders have
been held by the courts to be not deductible.
INCOME AND EXCESS PROFITS TAXES. Prior to the
amendment of October 3, 1917, it was held that the in-
come tax paid on income of one year, whether paid by
tin- taxpayer or withheld at the source by the withholding
was properly deductible from the net income of
T. D. 2433.
Act of September 8, 1916, 885, 6, 12 (a) and 12 (b), as
amended by Act of October 3, 1917.
*Act of September 8, 1916, 29, added by Act of October 3,
1917.
326 FEDERAL INCOME TAX
the following year. 6 The 1917 Amendment however,
expressly provides that the Federal income taxes and the
Federal excess profits taxes shall not be allowed as a
deduction. Income taxes, or other taxes, levied by any
state or government, other than the Federal Government,
are proper deductions. In assessing the income tax,
however, the net income embraced in the return is
credited by the Commissioner of Internal Revenue with
the amount of any excess profits tax imposed by Act of
Congress and assessed for the same calendar or fiscal
year upon the taxpayer, and, in the case of a member of
a partnership, with his proportionate share of such
excess profits tax imposed upon the partnership. 6
TAXES ASSESSED AGAINST LOCAL BENEFITS. Taxes paid
pursuant to assessments levied by special districts, such
as irrigation, reclamation, and drainage districts, for
sidewalks in cities, street extension, grading, paving,
etc., are held to be taxes assessed against local benefits
and not allowed as deductions. 7 The taxes contemplated
by the law as deductible are those which are paid to
defray the expense of running the government. Where
the taxpayer pays an assessment for something which
will directly benefit him or his property it is not con-
sidered to be a tax in the true sense but rather in the
nature of an investment in property.
TAXES PAID UNDER "TAX-FREE" COVENANTS. Where
a corporation pays taxes for its bondholders under stipu-
lations in bonds agreeing to pay the interest in full, re-
5 T. D. 2135.
6 Act of September 8, 1916, 29, added by Act of October 3.
1917.
7T. D. 2090; Reg. 33, Art. 153.
INDUCTION OP TAXES 327
gardless of any tax which it may be required to withhold
or deduct, the amount of taxes so paid on behalf of such
bondholders is not a proper deduction by the corpora-
tion. 8 The rulings on this point are contained in the
chapter on corporations. The bondholder may, however,
treat the amount so paid for him as his tax and deduct
the same, if it is a tax levied by a state ; if levied by the
federal government he cannot deduct the amount as the
law expressly prohibits deduction of the federal income
tax. On the other hand, the bondholder should report as
additional income the amount of tax so paid for him by
the corporation.
INHERITANCE TAXES. A collateral inheritance tax, such
as that levied under the laws of the State of New York,
being a charge against the corpus of the estate is not
considered to be such a tax as is allowed to be deducted
under this provision of the law, either in computing the
net income of the estate or the net income of the bene-
ficiary. 9 Whether or not under any conditions an in-
heritance tax may be deducted has not been decided,
but it seems that the theory adopted by the Treasury
Department is that an inheritance tax is not in a true
sense a tax which operates to reduce the income of the
taxpayer for the year, and is rather the taking of a
part of the corpus of the estate.
TAXES PAID BY CORPORATION FOR STOCKHOLDERS. Under
the statutes of many of the states taxes are assessed
against the stockholders of banks, the bank being re-
quired to pay the tax on behalf of its stockholders. Tn
T. D. 1948.
9 Letter from Treasury Department dated February 10, 191fi;
1. T. S. 1917. [352 and 661.
328 FEDERAL INCOME TAX
such cases it was held, under the 1909 Law, that the
bank was not entitled to deduct the amount of taxes
so paid as the tax was not a tax upon the bank or upon
its property. 10 This rule was continued under the 1913
Law and the present laws, such taxes being held to be
against the property of the private stockholders and not
against either the corporation or its property. 11 The
requirements of a state law that a bank shall pay for
the stockholder cannot be construed as authority under
which the bank may deduct the tax. 12 Where a statute
requires the bank to pay the tax and gives it a lien upon
the shares, the bank is not entitled to deduct the tax. 13
Where the statute gives the bank the option either to
pay the tax out of its general funds or to collect the same
from its stockholders, that fact does not change the char-
acter of the tax as a tax against the property of the indi-
vidual stockholders, and the bank cannot deduct. 14 Even
though the state statute makes no provision for recovery
from the several shareholders of their proportional part
of the amount so paid, the bank cannot deduct. 16 The
absence of an express provision in the statute does not
show that there is no such right of recovery, or that the
intention was for the tax to fall ultimately upon the bank
and not upon the stockholders. 16 As a general rule the
10 T. D. 1763.
11 The Northern Trust Company v. MeCoach, 215 Fed. 991;
T. D. 2135.
12 T. D. 2161.
13 Eliot National Bank v. Gill, 210 Fed. 833; aff'd 218 Fed.
600; National Bank of Commerce v. Allen, 211 Fed. 743; aff'd
223 Fed. 472; petition to the United States Supreme Court for
writ of certiorari denied October 25, 1915.
14 Northern Trust Company v. MeCoach, 215 Fed. 991.
16 First Nat Bank of Jackson, Miss. v. McNeel, 238 Fed. 559.
16 Home Savings Bank v. DesMoines, 205 U. S. 503.
DEDUCTION OF TAXES 329
amounts of taxes so paid by a corporation for its stock-
holders are not collected from the stockholders, the cor-
poration charging the taxes as an item of expense. Such
taxes, however, should be reported by the stockholders
respectively as taxes paid by them, according to their
proportionate interests in the corporation. 17 The amount
of the taxes so paid should also be treated as additional
income from the net earnings of the corporation. 18
Where shares of stock are sold after the tax has been
assessed, but prior to the time it is paid by the corpora-
tion on behalf of the stockholders, the one holding the
stock on the date when a tax' became due and payable
is the one entitled to report the amount as a dividend
and deduct the amount as a tax paid by him. 19
Bank Guaranty Fund. Banking corporations which,
pursuant to the laws of the state in which they are doing
business, are required to set apart an amount, levied
and assessed against them by the state authorities, as a
"depositor's guaranty fund" may deduct the same from
their gross income, provided the fund is set aside and
carried to the credit of the state banking board or other
duly authorized state officer, and may be withdrawn
upon demand by such board or state officer to meet the
demands of these officials in reimbursing depositors of
insolvent banks, and, provided further, that no portion
of the amount so set aside and credited is returnable,
17 T. D. 2135.
lSee Chapter 23.
19 Letter from Treasury Department dated February 25, 1916;
I. T. S. 1917, |357. An earlier ruling in a letter dated March
-, 1915, hold that the stockholder owning the stock at the time
tin' taxes were assessed was the one entitled to the deduction, but
the later ruling referred to above seems to indicate the present
attitude of the Treasury ^Department.
330 FEDERAL INCOME TAX
under the existing laws of the state, to the assets of the
banking corporation. In such cases the amount of the
guaranty fund is no longer an asset of the bank, but
is in the nature of a tax and as such is deductible. 20
Strictly speaking, such assessments are more properly
deductible as an expense of doing business or, perhaps,
as a loss, since the fund is intended to meet the losses of
the banking business as a whole.
Taxes Paid by a Tenant. Where a tenant pays the
taxes on property leased by him, he may consider the
amount so paid as an additional payment of rent and
may deduct it as an expense of carrying on his busi-
ness. 21 To the landlord the amount is equivalent to an
additional payment of rent and must be reported as
such, but he may also deduct the amount, as, to him,
it is a tax paid during the year by the tenant as his
agent. The transaction is tantamount to a payment of
the sum by the tenant to the landlord and a repayment
by the landlord to the tenant, as his agent, for the pur-
pose of satisfying the tax.
20 T. D. 2152.
21 T. D. 2090.
CHAPTER 31
DEDUCTION OF LOSSES
The law provides in the case of individuals that "losses
actually sustained during the year, incurred in business
or trade, or arising from fires, storms, shipwreck or
other casualty, and from theft, when such losses are not
compensated for by insurance or otherwise, may be
deducted, as also may debts due the taxpayer actually
ascertained to be worthless and charged off within the
year. In the case of the individual there is a limitation
as to the amount of loss which may be deducted in trans-
actions entered into for profit but not connected with his
business or trade. This limitation and a discussion of
losses incurred in trade is contained in the chapter on
citizens and residents. 1 The rules discussed in this chap-
ter are those applicable to corporations and individuals
generally. In the case of corporations all losses actually
sustained and charged off within the year and not com-
pensated by insurance or otherwise may be deducted. 8
Measure of Loss. In the case of loss of property or
assets the loss must be based upon the difference between
the cost value and the salvage value of the property or
assets, including in the latter value such amount, if any,
as has, in the current or previous years, been set aside
1 See Chapter 4.
* Act of September 8, 1916, 12 (a).
331
332 FEDERAL INCOME TAX
and deducted from gross income by way of depreciation. 3
When property is sold, the loss is the difference between
the selling price and cost where the selling price is less
than the cost. 4 In a case arising under the 1909 Law,
the court said : ' ' There seems to be no limitation pro-
vided in the act as to the amount of deductions to be
allowed for losses actually sustained from any source
during the year, and whether due to conditions of busi-
ness, the sale of property, or anything else, and the court
must, therefore, assume that the statute contemplated
that the full amount of all losses sustained within the
year would be allowed. ' ' 6
Losses Must Be Actually Sustained During Year.
The law provides in the case of individuals that the loss
must be ' ' actually sustained during the year ' ' and in the
case of corporations that the loss must be ' ' actually sus-
tained and charged off within the year. ' ' The Treasury
Department holds that a loss to be deductible must be
an absolute loss, actually sustained and ascertained dur-
ing the tax year for which the deduction is sought to be
made. It must be incurred in trade and be determined
and ascertained upon an actual, a completed, a closed
transaction. Losses sustained from the sale or dealings
in personal or real property growing out of the owner-
3 Beg. 33, Art. 124.
4T. D. 2090.
5 Connecticut Mutual Life Ins. Co. v. Eaton, 218 Fed. 206.
In this case the court required the corporation to report as income
all of its profits and permitted it to deduct all of its losses on
the sale of property during the year, regardless of the fact that
some of the property was purchased prior to the incidence of the
tax, it appearing that the result would be the same if the gains
and losses had been pro-rated as then required by the Treasury
Department.
DEDUCTION OP LOSSES 333
ship or use of, or interest in, such property will not be
deductible at all unless they are ascertained, determined
and fixed as absolute in the above sense within the tax-
able year in which the deduction is sought to be made. 6
The amount to be deducted as a loss should have in it no
element of "depreciation" or "allowance for wear or
tear'' or "compensation from insurance or otherwise."
The amount is to be an absolute and complete loss which
has been actually sustained. 7
Must Be Charged Off on the Books. In the case of
corporations the loss may not be deducted unless it is
actually sustained during the year and charged off on
the books. 8 This rule would seem to apply with equal
force in the case of an individual who keeps books, but
one who does not keep books is not thereby deprived by
the law of the right to claim a loss, except in the case of
worthless debts.
FLUCTUATIONS IN BOOK VALUES. Fluctuations during
the year in the value of capital assets, such as securities,
for instance, even though evidenced by book entries do
not constitute losses actually sustained. A loss may not
be deducted until as a result of a completed, a closed
transaction, the loss has been definitely ascertained and
the amount it represents has irredeemably disappeared
from the assets of the taxpayer. 9
Reserves for Losses. Reserves to take care of an-
ticipated or probable losses are not a proper deduction. 10
6T. D. 2005.
7 T. D. 2005.
Reg. 33, Arts. 124 and 158.
Letter from Treasury Department dated August 14, 1914;
I. T. S. 1917, 1 259.
10 Reg. 33, Art. 126.
334 FEDERAL INCOME TAX
On the other hand, loss actually sustained during the
year may be deducted although it is made good out of
a fund which has been accumulated as an insurance
reserve by the taxpayer. 11
Loss of Capital. What the law contemplates as a
deduction is the loss of capital, either by the sale of
property or by the destruction or disappearance of prop-
erty. It is, therefore, immaterial in what year the capi-
tal was created so long as the loss is actually sustained
in the taxable year. It does not seem that the loss need
necessarily be one connected with the business or trade
of an individual, except in the case of losses resulting
from sales or dealings in property, in which case the
law expressly provides as to individuals that the loss
must be incurred in his trade or business. Losses re-
sulting from the destruction or loss of property by fire,
storm or other casualty, or theft, seem to be deductible
under the present language of the law whether or not
the property is used in the taxpayer's business or trade. 12
Losses of Income. Loss of income is not, generally
speaking, a proper deduction. If, for instance, a debtor
defaults in payment of interest, or a corporation fails to
pay a regular dividend, or an employer fails to pay
commissions or salaries, the amount of such items may
not be deducted from other income during the year, as
the income is reduced by the mere fact that the such
sums are not included. If, however, the taxpayer has
reported any such amounts as income for the taxable
year, or a preceding year, as might be done in the case
11 Keg. 33, Art. 122.
12 See Act of September 8, 1916, 5 (a), language of fourth
deduction; also 6 (a), language of fourth deduction.
DEDUCTION OP LOSSES 335
of taxpayers reporting on a basis other than that of
actual receipts and disbursements, the subsequent failure
to collect the amounts so entered on the books may be
treated as a loss when it is determined that the amount
is not collectible. For a further discussion of this point
sec the paragraph below on worthless debts.
Losses in Business Transactions. The most frequent
deductions for losses are claimed as a result of the sale
of property. In such cases the loss occurs when the
selling price is less than the cost. This is the converse
of gain from the sale of property which is discussed in
a preceding chapter. 18 The cost of the property is
determined in the same manner whether the transaction
results in a loss or a gain and the same rules apply with
respect to property acquired prior to March 1, 1913.
Sale of Capital Stock. Where the capital stock of a
corporation is issued for less than par, the amount of
discount is not an allowable deduction to the corporation.
Such a transaction is purely a capital transaction and
the income of the corporation is not directly decreased
by reason of the sale of the stock at a price less than its
l;n- value. 14
Exchange of Stock. Where in a case of merger
stockholders of one corporation exchange their stock for
stock of the corporation resulting from the merger and
receive a par value less than the par value of the old
stock, it is held that the transaction constitutes a sale
for income tax purposes, and that a deduction may bo
i-ljii mod for any loss measured by the difference, between
IS See Chapter 20.
1*T. D. 2090.
336 FEDERAL INCOME TAX
the value of the old stock on March 1, 1913, (x)r the cost,
if purchased subsequent to that date) and the value
at which the same stock was given in exchange for stock
of the company resulting from the merger. If the stock
of the new corporation has a market value at or about
the time of the merger, it has been indicated that the
Treasury Department will hold the market value to be
equivalent of cash in determining the selling price.
Such losses of course, may be deducted, in the case of
individuals, only to the extent that they do not exceed
gains' from other similar transactions during the year. 16
Amounts Paid to Make Up Profits of Another Under
Agreement. Contracts guaranteeing the payment of
dividends or interest of one corporation by another are
frequently made between corporations having close busi-
ness relations. Whether or not amounts paid under
such contracts or guarantees may be deducted, as a loss
or as an expense of doing business, by the paying cor-
poration has not been determined by the courts in this
country. In England such payments have been held
properly deductible as sums expended for the purpose of
trade. 16 If the payment is made under an enforceable
15 Letter from Treasury Department dated March 9, 1917;
I. T. S. 1917, If 2122. See Chapter 16.
16 Moore v. Stewarts & Lloyds (1906) 8 Fraser 1129. In this
case it was observed that the question was one of fact rather
than of law. One company entered into agreement with another
whereby in return for the right to nominate a majority of directors
of the second company the first undertook to pay to the second
such sums each half year as might be necessary to make up any
deficit in the dividends on the latter 's preferred shares. The
court said, "If the agreement was entered into with a view to
profit, as I think it was * * * then the annual charge to the
respondent company is in my view a part of their business outlay
or expenditure and is not subject to assessment."
DEDUCTION OP LOSSES
contract there seems to be no reason why the amount
should not be deducted either as loss or expense.
Voluntary Payment by Stockholders of Loss of Cor-
poration. Assessments made by a corporation on its
capital stock are regarded as an investment of capital
and the amounts paid do not constitute allowable deduc-
tions to the stockholders. 17 This rule was held to apply
in a case where a corporation showed a deficit at the
close of the year and the stockholders agreed to make
it good by the payment of voluntary contributions. 18
Issue of Bonds Below Par. Where bonds are issued
for a price less than par and are redeemable at par, the
Treasury Department has held that the loss, which must
eventually be sustained on redemption of the bonds, may
be deducted by pro-rating the amount of the discount in
accordance with the life of the bond. 19 The intention
of this ruling is to allow corporations selling their own
bonds at a discount to pro-rate the discount over the life
of the bonds and to deduct from gross income each year
an aliquot part of the discount, determined in accordance
with the number of years which the bonds have to run
from the' date of issue. If, however, the bonds were
issued prior to the incidence of the tax and, at that time,
the entire amount of the discount was charged to profit
and loss, the issuing corporation may not claim a pro-
rata allowance for such discount for the years subsequent
to the incidence of the tax. 80 Charging oft* the discount
17 T. D. 2090.
1 Letter from Treasury Department dated February 21, 1916;
I. T. 8. 1917, If 340.
l Reg. 33, Art. 135.
20 T. D. 2161.
F. I. Tax. 22
338 FEDERAL, INCOME TAX
prior to the incidence of the tax constitutes a closed
transaction and such transaction cannot be re-opened for
the purpose of reducing the taxable income of the cor-
poration 21 The court has held that if a loss sustained by
a corporation selling its own bonds at a discount is an
expense, it will not be paid until the maturity of the
bonds and should, therefore, be pro-rated over the life
of the bonds, and not deducted in full in the year in
which the bonds were issued. 28
Purchase of Bonds for Retirement. Where bonds have
been issued at par, under the terms of an indenture re-
quiring the corporation annually to purchase and retire
a certain number of the bonds, and the corporation is
required to purchase such bonds for retirement in the
market, the difference between par value of the bonds
and the amount paid for the bonds on retirement is
deductible as a loss. If the bonds were issued at a
premium, the loss to be claimed should be the difference
between the price at which the bonds were issued
and the price at which they were purchased for retire-
ment, unless the amount of premium received on the
original sale of the bonds was accounted for as income
in the year in which the bonds were sold, in which case
the difference between the par value and the purchase
price may be deducted. In the event the bonds were
issued at a discount, and the discount was charged
against the earnings of the year in which issued, the
difference between the par and the purchase price may
be deducted as a loss ; but if the discount on the bonds
was pro-rated over the life of the bonds and the annual
proportion charged against the yearly income, tho
21 T. D. 2137.
22 Baldwin Locomotive Works v. McCoach, 221 Fed. 59.
DEDUCTION OF LOSSES 339
amount to be charged off, as a loss, should be the differ -
' IP r between the price at which the bonds were issued
.iinl i li<- pun-hasr price minus an allowance for the sums
that liav> been charged off annually on account of the
pro-rated discount. 23
Bonds Purchased Above Par. Where bonds have
lifcn purchased above par it seems, under the present
law, that no deduction can ordinarily be made for the
loss of the amount of the premium until the bonds are
itlier sold in the market before maturity, or until the
principal sum is received at the time of maturity. In
either case the losses will be the difference between the
amount paid and the amount received. Where, however,
a taxpayer reports on a basis other than of actual re-
ceipts and disbursements it seems that this sum may
properly be deducted in proportionate amounts each year
,is amortization. 8 *
<
Loss by Destruction or Disappearance of Property.
The' law expressly provides, in the case of individuals,
that the loss arising from fires, storms, shipwrecks, or
other casualty, or theft, may be deducted in the year in
\\liidi the loss is sustained. This kind of loss is allowed
to corporations without specific mention, as with respect
t. i orporations all losses are deductible. In the case of
non-resident aliens the law permits the deduction of all
Midi losses of property within the United States, and this
S3 Letter from Treasury Department dated March 2:1, l!)l.">:
I. T. S. 1917, J 1326.
** Under the 1909 Law it was held that where bonds were pur-
chased at a rate above par a proportionate amount of the premium
mitfht IK- deducted each year on account of amortization. T. D.
1727.
340 FEDERAL 'INCOME TAX
is apparently intended also in the case of foreign cor-
porations, although the language of that provision seems
to limit the losses to business or trade conducted by the
foreign corporation within the United States. 25 In all
cases the law provides that the deduction may be made
only when such losses are not compensated for by in-
surance or otherwise. The intent seems to be to permit
a deduction of the losses to the extent that the taxpayer
is not compensated by insurance or otherwise, and that
if he is compensated for part of such loss he may deduct
the part for which he is not so compensated. In claiming
a loss due to the destruction of property the salvage
value of the property must be considered as a partial
compensation to be deducted from or not included in the
amount claimed as deduction. Further, if depreciation
has been claimed from time to time upon the property
so destroyed, the aggregate amount of such depreciation
allowance should be deducted from the cost of the prop-
erty in ascertaining the amount of the loss. In this, as
in all other cases, the measure of the loss is the difference
between the cost of the property and the amount received
as compensation. The value of the property at the time
of the loss is not intended to be the measure of the loss,
and it is not clear whether or not the value on March 1,
1913, may be taken instead of the cost, where the prop-
erty was acquired prior to that date, as is expressly per-
mitted by law in sales of property. 26
Loss OF LIVE STOCK. Where a farmer has purchased
live stock which afterwards dies from disease or injury,
or is killed by order of government authorities, and the
25 See Act of September 8, 1916; 5 (a), 6 (a), 12 (a) and
12 (b).
28 See Chapter 20.
DEDUCTION OP LOSSES 341
cost thereof has not been claimed as an item of expense, 27
the actual purchase price of such stock, less any deprecia-
tion which may have previously been claimed, may be
deducted as a loss. Any other property destroyed by
order of government authorities may in a like manner be
claimed as a loss; but if in any case reimbursement f is
made by the government in whole or in part on account
of the stock killed or property destroyed, the amount
so received must be reported as income for the year in
which reimbursement is made, 28 that is to say, only net
loss is allowable as a deduction.
SHRINKAGE OR DETERIORATION IN STORAGE. Loss due
to shrinkage or deterioration of produce in storage is
not allowed as a deduction. Such shrinkage or deteriora-
tion is reflected in the selling price when the goods are
sold and correspondingly reduces the net income at that
time. 29
WORTHLESS STOCK. A loss is none the less actual be-
cause an individual cannot divest himself of the posses-
sion of worthless stock by sale, but that condition alone
does not give the loss in question such a character as
appears to the Treasury Department to have been con-
templated by the income tax law. 80 However, if the
stock has even the slightest value so that it may be sold
for any amount it seems the loss may be deducted as it
is then the result of a closed transaction. It seems, also,
that the loss would be properly deductible if the corpora-
27 A farmer may deduct as an item of expense the cost of lire
stock purchased for re-sale.
* T. D. 2153.
2T. D. 2153.
30 T. D. 2135.
342 FEDERAL INCOME TAX
tion has been dissolved, or if its charter has been for-
feited since then there is a final ascertainment of the
loss.
DISTRICT IRRIGATION BONDS. District irrigation bonds
as a rule, if not always, are a lien upon the real estate
affected by the irrigation project and until the corpora-
tion has taken such steps as are necessary to protect its
rights and enforce the collection of the bonds it does
not appear that the corporation would be warranted in
writing out of its assets and deducting from income, as
a loss, the face value or any other arbitrarily ascertained
amount representing a loss or shrinkage in the value of
such bonds. 31
Worthless Debts. For the purpose of deduction as
losses, debts are divided into two classes, (a) those which
represent to the creditor a return of capital and (b)
those which represent unpaid income. The former may
be deducted regardless of when the debt became due and
payable, but the latter, such as uncollected wages,
salaries, rents, interest and items of similar taxable
income, may not be deducted, if the debt became due
on or after March 1, 1913, unless the amount thereof
has been reported as income ; but if the debt became due
and payable prior to March 1, 1913, it may be deducted
in any event. 32 The losses which may be deducted are
losses of capital; income on which the tax has been
assessed assumes the status of capital, and income which
became due and payable before the incidence of the tax
is capital to the taxpayer although it may be received
thereafter. The mere failure to receive income does not
31 T. D. 2152.
32 T. D. 2224.
DEDUCTION OP LOSSES 343
warrant a deduction, as the omission of such amounts
operates, in itself, as a reduction of the tax.
.Mi ST BE CHARGED OFF ON BOOKS. The law expressly
provides in the case of individuals that worthless debts
must have been "charged off" in the year in which they
are claimed as a deduction. In the case .of corporations
such deduction must also be evidenced by entry on the
books, as must all losses. 88
WHEN DEBTS MAY BE CONSIDERED WORTHLESS. Where
the debtor is an individual, it is not necessary that an
unsatisfied judgment shall exist or a judicial determina-
tion be reached in order that the creditor may secure the
benefit of a deduction on account of a debt which he con-
siders worthless and uncollectible; but taking into con-
sideration the time the debt is over-run 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. If the debtor is a corporation, possessed
of assets, the debt cannot be claimed as a deduction except
for the year in which the debtor corporation's affairs
are finally closed and its receiver in bankruptcy dis-
charged. Where in any case a creditor to protect him-
self from total loss enters into a compromise agreement
under the terms of which he accepts a part payment of
the debt and releases the debtor from payment of the
balance, the unpaid portion may be claimed as a deduc-
tion. 8 * Whenever the debtor is legally discharged from
his obligation either by the running of the statute of
* Act of September 8, 1916, 85 5 (a^ :iml PJ (a). R'tf. :3,
Art. 125.
3* Letter from Treasury Department rtnted Octohor 16,' 1917:
F. T. 8. 1917, R DEPRECIATION 347
nual net income for the purpose of the income tax is not
to be confused with the deduction for loss. The de-
preciation permitted to be taken as a deduction is the
value assigned to the deterioration of physical improve-
ments or assets such as are susceptible of having their
value lessened through wear and tear. 8 Assets of any
character which are not affected by use and wear and
tear are not subject to the depreciation authorized by the
law. 4
Loss IN RENTAL VALUE OP BUILDINGS. The allowance
for depreciation is to make good the wear and tear
suffered by property during the tax year which, in the
case of a building, means the physical deterioration
thereof. It does not take into account depreciation in
value due to a loss in rental value because of the con-
struction of more modern buildings with improved facili-
r due to change in the neighborhood. 6
I\KAL ESTATE. Real estate, as such, and as distinct
from the improvements thereon, is not reduced in value
!'\ reason of wear and tear and an allowance for depre-
ciation in the case of real-estate does not apply to the
grounds, but is intended to measure the decline in the
value of the improvements due to wear and tear of such
improvements. In determining the cost of real estate,
in most cases, no segregation is made of the cost of the
Itnilding as separate and distinct from the cost of the
irronnd. In such cases the value of the ground should
!>< appraised and deducted from the total cost of thr
T. D. 2005.
4T. D. 2137.
5 Colu'ii v. Lowe, 234 Fed. 474.
348 FEDERAL INCOME TAX
property and the depreciation based upon the re-
mainder. 6
FARM BUILDINGS AND MACHINERY. Depreciation may
be claimed on farm buildings and farm machinery (but
not on the dwelling occupied by the owner) and also on
other physical farm property subject to wear and tear. 7
STOCK FOR BREEDING PURPOSES. A farmer may claim
depreciation on live stock purchased for breeding pur-
poses, but should not claim depreciation on stock raised
or purchased for resale, as the cost of the latter is an
expense of his business, while the cost of the former is
not deductible as an expense. 8
WEARING APPAREL. If costumes purchased by actors
and actresses are used exclusively in the production of
a play and are not adapted for occasional personal use,
and are not so used, deduction may be claimed on account
of such depreciation in their .value as occurs during the
year on account of wear and tear arising from their use
in the production of the play, or a loss may be claimed if
they become obsolete at the close of the production. 9
MERCHANDISE. Depreciation computed on total in-
voice value of merchandise in stock is not an allowable
deduction, since any loss due to shrinkage in the salable
value of the merchandise will be reflected in the sales
when the merchandise is disposed of, and inventory is
6 T. D. 2137.
7T. D. 2153.
8T. D. 2153.
9 T. D. 2090.
DEDUCTION OP ALLOWANCE FOB DEPRECIATION 349
required to be taken at cost. 10 This ruling is contrary
to the approved practice of taking inventory at cost or
at market prices, whichever is the lower. It seems that
the Government would not lose in the long run by recog-
nizing this accepted practice of conservative business
men, as the loss on account of marking down inventory
would result in a larger gain when the goods were sold.
Under the provision of the 1916 Law the Commissioner
has power to recognize such a practice and to permit tax-
payers to report on that basis.
GOOD WILL. Good will does not represent a value at-
taching to physical property, and is held to be an in-
tangible asset whose value, separate and apart from the
business with which it is connected, is not capable of
determination. For the purpose of the income tax, it
is capable neither of appreciation or depreciation, hence
no claim for depreciation can be made for the loss or
partial disappearance of good will. 11
STOCKS AND BONDS. Since there is no wear and l-ar
in the case of stocks and like securities, no deduction can
be made on account of fluctuations in their market
value. 18
No ALLOWANCE FOR OBSOLESCENCE. The deduction for
depreciation does not contemplate any provision for
obsolescence, but is limited to the creation of a reserve
fund out of which the loss due to use, wear and tear,
may be compensated. It is not possible in advance to
10 See Instructions on Form 1031, return of net income of
corporations.
11 T. D. 2137; Beg. 33, Art. 136.
1* T. D. 2005.
350 FEDERAL INCOME TAX
determine when a piece of machinery, equipment or even
a building will become obsolete. Since obsolescence can-
uot be anticipated, an annual deduction will not be per-
mitted to take care thereof. If it happens that the prop-
erty becomes obsolete or worthless before its estimated
probable life shall have expired a deduction representing
the difference between the cost of the property and
amount previously charged off on account of deprecia-
tion may be deducted, as a loss, in the year in which
the property ' is determined to be obsolete. 13 In the
earlier rulings the Treasury Department held that de-
preciation applied to tangible property subject to wear
and tear, exhaustion or obsolescence. 14 But it seems that
the position now taken is that obsolescence is not contem-
plated by the provision of the law relating to deprecia-
tion, and that no other provision of the law permits an
annual allowance with respect thereto, since neither the
time when property may become obsolete, nor the loss,
when the stage of obsolescence is reached, can be deter-
mined with any degree of certainty in advance.
Depreciation Based on Cost of Property. The amount
which may be claimed as the total allowance for deprecia-
tion, that is, the aggregate of the several annual allow-
ances is the cost of the property, not its value at any par-
ticular time. Unearned increment will not be considered
in fixing the value on which depreciation shall be based. 15
The theory on which depreciation is based is that the in-
dividual shall have returned to him at the time the
property is exhausted an amount equivalent to his in-
13 Letter from Treasury Department dated September 19, 1916:
T. T. S. 1917, Iffl 1365 to 1367.
14 Reg. 33, Art. 129; T. D. 2005; T. D. 2077; T. D. 2090.
15 Reg. 33, Art. 146.
M.IM t Tln\ of AlJjOWANCK Kok DWRECIATION 351
\i-tnient in such property, in the form of annual allow-
ances which have not been taxed. The cost of property
is a>ct;rtaiiK'l without difficulty in most instances, but,
where property has been taken over by a corporation in
exchange for stock a difficulty arises and it seems that
the ruling with respect to the sale of assets would apply,
namely, that where the property has been taken over in
exchange for capital stock of a par value greatly in
ezeeae of the true value of the property, or if the true
value of the property was greatly in excess of the par
value of the stock issued for it, a careful estimate of
the value of such property at the time is was acquired
may be fixed and set up as the value representing the
cost of the property. 16
VALUE OP PROPERTY AS OP MARCH 1, 1913. In claim-
ing depreciation the amount to be taken care of is
always the amount of capital invested in the particular
physical property, and the value of such property as of
March 1, 1913, or as of any other date, is not to be
taken into consideration. 17 The soundness of this ruling
may be questioned. In the case of the sale of property,
the law expressly provides that where the property was
acquired prior to March 1, 1913, the fair market price
or value of such property on March 1, 1913, shall be the
basis for determining the amount of the gain or loss
and the same basis is fixed by the law for claiming the
allowance for depletion. It seems that the rule
should apply with equal force in the case of depreciation
veil though the law is silent. If the property subject
to depreciation increased in value between the time of
' purchase and March 1, 1913, the taxpayer should be
iT. D. 2161.
"T. D. 2446.
352 FEDERAL INCOME TAX
permitted to add the increase in value to the original
cost and to compute depreciation on that basis, so that
he might have returned to him, at the time the property
is exhausted, an aggregate of allowances amounting to
the value of the property on that date, which value was
capital to him at the incidence of the tax. 18
BOOK VALUES. The book value of property has no
relation to the allowance which may. be claimed for de-
preciation, unless the book value states the cost of the
property. Fluctuations in book values cannot be taken
into consideration. Either the book value or the intrinsic
value of property on which depreciation is claimed may
increase or decrease without affecting the rate of annual
allowance. No depreciation may be claimed because of
arbitrary changes in the book value of securities and
like assets, the gain or loss with respect to which will
be determined only when such assets mature or are sold
or disposed of. 19 The fact that bonds and similar se-
curities have been written off at the direction of the
Comptroller of the Currency or a state banking depart-
ment is not material. A mere book entry does not con-
stitute either loss or gain for the purpose of the income
tax. The fact that bonds were written off does not neces-
sarily imply that they are a total loss nor is this act a
conclusive proof that any loss occurred during the year
for which the return is made. 20
18 See Act of September 8, 1916; 2 (c), 5 (a), 10, 12 (a)
and (b) ; also Doyle v. Mitchell, 235 Fed. 686; 149 C. C. A. 106.
19 T. D. 2077.
20 T. D. 2152. If, however, the taxpayer reports on a basis
other than that of cash receipts and disbursements it would seem
that the Commissioner of Internal Eevenue has authority to per-
mit the changes in book values of securities to be taken into con-
sideration as a part of the income or loss for the year.
INDUCTION OP ALLOWANHK !' >K DKI'KKCI \TION
Annual Allowances Measured by Life of Property.
After the cost of property subject to depreciation lias
lifcii ascertained, the annual allowance is determined by
dividing the cost by the probable number of years con-
stituting the life of the property, the result being the
amount which may be deducted annually. The life of
the property necessarily depends upon its character, the
use to which it is put and the conditions under which
it is used. These elements being taken into con-
sideration taxpayers are expected, as a result of ex-
perience and observation, very closely to approximate
the number of years constituting the life of the prop-
erty. 21 If, after property has been used for a certain
purpose, it is put to another use by which it deteriorates
more rapidly the allowance for depreciation may be in-
'ivased accordingly. In estimating the life of the prop-
erty it is assumed that the owner will make such repairs
and renewals as are necessary to prevent undue de-
le ri oration. In the case of a building, for instance, de-
I inflation is to be based upon the life' of the building
in the sense of the number of years the building will
remain in a condition to be habitable for the use for
\vhirh it was constructed and used, and not merely the
number of years it will stand without being condemned
and torn down. In determining the life of the building
it is assumed that the owner will keep it in good repair. 88
INCIDENTAL REPAIRS TO PROPERTY ox WHICH DEPRECIA-
TION is CLAIMED. Such ordinary incidental repairs as
keep the property in an operating condition should not
be charged to depreciation reserve, but the cost should
21 T. D. 2152.
** Cohen v. Lowe, 234 Fed. 474.
F. I. Tax. 23
354 FEDERAL INCOME TAX
be charged to expense. A building or a piece of ma-
chinery or other equipment, as a whole, may deteriorate
in value and usefulness by reason of wear and tear
regardless of the fact that certain minor component parts
may be renewed, restored or replaced. The depreciation
deduction contemplates the creation of a fund that will
renew, restore or replace the original property, when it
has become worn out or exhausted, regardless of the
renewal and restoration of parts that may have been
made in the meantime. Hence, in addition to the depre-
ciation deduction, the expense of incidental repairs which
do not add to the value of the property, but merely keep
it in an operating condition, may be deducted as expense
in the year in which the repairs are made. 23
RENEWALS TO PROPERTY. It is possible in some in-
stances that worn out parts of a machine or similar
equipment may be renewed, one after another, until the
original machine or equipment is swallowed up in the
renewed parts and the machine or equipment is then in
as good operating condition as it was originally. In such
cases, if the cost of renewed parts is charged to operating
expense, no deduction on account of depreciation should
be claimed as to such machine or equipment. Thus, in
the case of pipelines, by replacing one joint of pipe after
another all may be replaced and, if the expense of re-
placements is deducted as an operating expense, no
depreciation fund should be set up for the purpose of
restoring the pipeline as a whole. On the other hand, if
a reserve is set up to cover property that may be re-
newed or restored part by part until the whole is renewed,
23 Letter from Treasury Department dated September 19, 1916;
I. T. S. 1917, fH 1356 to 1358.
DEDUCTION OF ALLOWANCE FOR DEPRECIATION 355
the cost of the renewed part should be charged to the
depreciation reserve fund and not to expense. 24
Rate of Depreciation. The annual allowance for
depreciation, is required by law to be "resonable." No
fixed rates are prescribed. The rule which has been
established contemplates that the taxpayer shall deter-
mine his annual deduction by dividing the cost of the
property by the probable number of years constituting
its life, in the manner indicated above, the result being
the amount which may be deducted annually. 26
DEPRECIATION OF APARTMENT HOUSES. In the case of
an apartment house it was held by the court that where
the Government had allowed 3% of the cost as annual
depreciation the burden was on the owner to show that
the amount so allowed was too small, the court consider-
ing the rate to be reasonable in this case. 26
Annual Allowance Must Be Entered on Books. A
reasonable allowance for depreciation must be de-
termined upon a basis of the cost of the property and the
24 Letter from Treasury Department dated September 19, 1916;
I. T. S. 1917, UH 1359 to 1361.
25 T. D. 2152. A collector who told taxpayers in his district
that the amount of depreciation on frame buildings was limited
to 3%, and in case of brick buildings to 2%, was informed
by the Commissioner of Internal Revenue that while these rates
might not be far from a reasonable and fair measure of de-
preciation sustained on such buildings, the rates should not be
considered as the ' ' limit, ' ' as the probable number of years con-
stituting the life of the building might make the rate more or
less than the figures stated. Letter from Treasury Department
dated May 22, 1916; I. T. S. 1917, 11381.
W Cohen v. Lowe, 234 Fed. 474.
356 FEDERAL INCOME TAX
probable number of years constituting its life. The
amount of allowable depreciation deduction, thus ascer-
tained, should be credited to a depreciation reserve ac-
count, against which account will be charged the cost of
renewing or replacing the property with respect to which
depreciation is claimed. 27 Such depreciation liability
must be reflected in the annual balance sheet. 28 A
journal entry alone is not sufficient. 29 Neither the 1909
Law nor the 1913 Law required that in order to secure
a deduction for depreciation the amount claimed should
be written off. It was, nevertheless, held by the Treasury
Department that a depreciation deduction, in order to
be allowable, must be so entered upon the books of a
corporation as to constitute a liability against its assets.
Where a corporation had claimed depreciation without
writing off the amount on its books the corporation was
permitted to reopen its books, if it so desired, and make
such entries as would constitute the amount a liability
against the assets of the company, and a charge against
the income of the year in which the return was made.
Revenue agents were directed to give the taxpayer suf-
ficient time to make such correct entries before the claim
for depreciation was disallowed. If a corporation re-
fused or neglected to reopen its books and write off the
depreciation claimed in a return the amount claimed was
disallowed. If the correct entries were made for preced-
ing years, the amount entered for each year had to be
such as would have been entered at the time the books
27 Letter from Treasury Department dated September 19, 1916;
I. T. S. 1917, H1355; Reg. 33, Art. 130.
28 Letter from Treasury Department dated February 12, 1915;
I. T. S. 1917, f 1405.
29 Letter from Treasury Department dated May 18, 1916; T. T.
S. 1917, If 1428.
DEDUCTION OK \U.o\N.\.\CK F< >K DKI'KKCI ATI. i.N
were closed. 30 In a later ruling it was held that, under
these acts, writing off of depreciation would not be in-
sisted upon in the adjustment of returns filed for the
years 1909 to 1915 inclusive. 81 The 1916 Law does not
expressly require individuals to enter on their books the
annual allowance for depreciation but with respect to
domestic corporations it does expressly provide that all
losses, including the allowance for depreciation, must be
"charged off" within the year. 32 As to foreign corpora-
tions the Law is silent.
Reserves for Depreciation. In early rulings it was
held that depreciation set up on the books and deducted
from gross income could not be used for any purpose
other than making good the loss sustained by reason
of the wear and tear or exhaustion of the property and
that if any portion of the depreciation set up was
diverted to any purpose other than making good the loss
sustained by reason of such depreciation the amount
would be disallowed. It was also held that the invest-
so Letter to Collectors dated August 27, 1914; I. T. S. 1917,
1 1368.
31 T. D. 2481, dated April 10, 1917. In the meantime the
courts bad held, under the 1909 Law, that the contention that
no allowance for depreciation could he claimed unless it was
entered on the books of the company, recorded from time to time,
was without force (U. .8. v. Nipissing Mines Co., 202 Fed. 803)
nnd that the fact that a deduction was incorrectly carried on the
books in surplus account did not justify the Government in t' drilling wells, that is, such expenses as are paid for
\\;IL"'S. fuel, repairs, etc. Such expenses do not neces-
F. I. Tax. 24
370 FEDERAL INCOME TAX
sarily enter into and form a part of the capital invested
or property account and they may, at the option of the
one operating the property, be charged either to property
account or deducted from gross income as an operating
expense. The practice among many operators seems
to be to charge such expenses to property account until
the field begins to produce, and thereafter to charge
the cost of drilling additional wells in the same field to
expense, that is, so long as the property is not producing
income the expenditure is properly added to the property
account, and depreciation claimed in subsequent years
against the income of the property but after the prop-
erty commences to produce the amount is properly
charged against the current income from production.
The cost of drilling dry or non-productive wells may
be claimed as a loss. Depreciation may also be claimed
on the cost of all physical property connected with the
operation, such as rigs, tools, machinery of all kinds,
pipes, casing, and other equipment, unless repairs and
renewals are made each year to such an extent that no
depreciation occurs and such repairs and renewals are
charged to expense.
Statement to Be Attached to Annual Return. Where
depletion is claimed under the above rules there should
be attached to each return made by the individual or
corporation owning and operating oil or gas properties,
a statement showing; (a) the fair market value of the
property (exclusive of machinery, equipment, etc.) as
of March 1, 1913, if acquired prior to that date, or (b)
the actual cost of the property, if acquired subsequent to
that date ; how the fair market value of the property as
of March 1, 1913, was ascertained, the quantity of oil
or gas produced during the year for which the return
DEPLETION OP OIL AND GAS DEPOSITS 371
was made; the quantity produced during the year im-
mediately preceding ; how the depletion deduction
claimed in the return was computed, whether upon the
decline in flow and production of individual wells, groups
of wells, or the entire field; and any other data which
will be helpful in determining the reasonableness of the
depletion deduction claimed in the return.
Statement by Lessee. If the operator is a lessee,
that fact should be stated and an explanation given as
to the basis and property upon which any depreciation
deduction is claimed, that is, depreciation due to use,
wear and tear of physical property, the lessee not being
entitled to any deduction for depletion or exhaustion of
the oil or gas products, but being entitled to deduct an-
nually as a rental payment, an aliquot part of any
stipulated sum or bonus paid for the right to enter upon,
explore, develop and operate oil or gas territory, as well
as the royalty payments made to the lessor for the oil
or gas removed from such property, provided the entire
proceeds from the oil or gas produced during the year
are returned in the gross income of the operator. 9
Rule Under 1913 Law. The 1913 Law made no ex-
press provision for an allowance for depletion of oil and
gas wells and the Treasury Department made no rulings
outlining any method of claiming such depletion.
Rule Under 1909 Law. Under the 1909 Law, which
was silent on the subject of depletion, the Treasury De-
partment permitted allowances for depreciation of oil
wells. Owners were required to adopt an average value
per barrel of the settled daily production as the guide
T. D. 2447.
372 FEDERAL INCOME TAX
in determining the value of the property at the time of
the incidence of the tax or upon the date of commence-
ment of production. With this basis per barrel the value
of the property as a whole was to be determined by ap-
plying such unit value per barrel to the daily average
production for the month of December, or other repre-
sentative month in the year for which the return was
made, the representative month chosen being the same
in each year. The same unit value per barrel was to
be retained in computing all future deductions for
depreciation except where an additional production was
secured by drilling, or acquired by purchase, in which
case a new average rate per barrel based upon the actual
cash invested might be adopted. The amount of the al-
lowance each year was ascertained by multiplying the
unit value by the difference between the daily average
production in barrels during the representative month
of each year. It was considered that by following this
plan that the capital invested in the producing property
would be automatically and wholly extinguished coinci-
dent with the complete exhaustion of the product, with
the exception of such salvage as might remain after the
exhaustion. 10 In the case of gas wells the Treasury De-
partment permitted a deduction for depreciation on a
basis either of reduction of rock pressure or of reduction
of volume. The cost of drilling gas wells was permitted
to be charged to investment or to expense and the gen-
eral custom of natural gas companies in the distribution
of the cost of drilling wells was recognized. 11
10 T. D. 1755.
11 T. D. 1754.
CHAPTER 34
DEDUCTION OF ALLOWANCE FOB DEPLETION OF MINES
The 1916 Law provides that individuals and corpora-
tions may deduct a reasonable allowance for the deple-
tion 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 return and computation
are made. 1 The allowance is to be made under rules and
regulations to be prescribed by the Secretary of the
Treasury. The purpose of permitting the allowance is
to enable the taxpayer having capital invested in the
mining deposit to receive back the capital originally in-
vested, or in the case of purchase made prior to March
1st, 1913, the fair market value of the deposit, or his
interest therein, as of that date, and when the aggregate
of allowances reaches such sum no further allowance is
permitted. Under this provision of the law, the Com-
missioner of Internal Revenue, with the approval of the
Srnvtary of the Treasury, has made regulations which
;uv discussed in the following paragraphs.
Depreciation Not Included in Depletion. It should
be borne in mind that depletion is an allowance for the
wasting of the natural resources and does not include
iiny allowance for loss due to exhaustion, wear and tear
of physical property used in the discovery or removal
1 Act of September 8, 1916, I 5 (a) and i 12 (a).
373
374 FEDERAL INCOME TAX
of such natural resources. An allowance for depreciation
should be claimed separately and apart from the allow-
ance for depletion and should be determined according
to the rules laid down with respect to depreciation. 2
Depletion is a deduction allowed for the purpose of re-
turning the capital invested by a taxpayer in natural re-
sources at or about the time the natural resource is
exhausted. In addition to the deduction allowed to
measure the loss due to depletion the taxpayer will also
be allowed the usual depreciation of the machinery,
equipment, etc., used in connection with the operation
of removing the natural resource. 3
Who May Claim Deduction. The owner of the mine
content or of an interest therein is the one who may
claim the allowance for depletion. Ownership at the
time for which the computation is made is essentially
prerequisite. Lessees or operators are not entitled to
any allowance for depletion, if they have no capital in-
vested in the deposit, but they may, of course, deduct the
royalties or rentals paid from year Jo year to the owner.
If, however, a lessee has paid a fixed sum to the owner
for the right to explore, develop or operate a mine, the
amount so paid is capital invested by him and may be
ratably distributed, either over the life of the lease, or
the probable life of the mine under ordinary operating
conditions, whichever is the shorter, and he may deduct
annually, an aliquot part of the amount so paid, until
such amount has been extinguished.*
Basis of Deduction. The purpose of the deduction
is to permit the return to the taxpayer, free from tax, of
2T. D. 2446; see Chapter 32.
3 Beg. 33, Art. 143.
4T. D. 2446.
INDUCTION OP ALLOWANCE FOB DEPLETION OF MINES 375
either (a) the amount of capital invested in the mine
(not including the amount invested in mining machin-
ery, buildings or other physical property subject to de-
preciation) or (b) the fair market value of his interest
in the mine itself (that is, the mineral deposit not includ-
ing machinery, buildings, etc.) on March 1, 1913, if the
property was acquired prior to that date. When the
amount of capital invested, or value at the incidence of
the tax, has been extinguished by a series of annual
allowances, no further allowance will be permitted. For
this purpose the taxpayer is required to keep an accurate
ledger account showing the amount on the basis of which
he claims depletion and the amount of depletion de-
ductions allowed each year; when the account balances
no further deductions should be made. 'The amount of
invested capital once fixed is final, and a re-valuation
will not be allowed during the period of the ownership
under which it was determined, although it may later
develop that the estftnated quantity of the mineral de-
posit was understated at the time such amount was fixed.
If the property changes hands, the new owner, of course,
establishes a new basis, which will be the price he pays
for the mineral deposit. 5
CAPITAL INVESTED. This phrase, as used in the pre-
ceding paragraph, means the actual cost to the owner 6
and, it seems, should include not only the original cost
of the property (excluding physical appurtenances sub-
ject to wear and tear and consequently treated under the
head of depreciation) but also the cost of development
work to bring the property to an operating condition,
such as, wages, fees, taxes and other necessary
5 T. D. 2446.
T. D. 2446.
376 FEDERAL INCOME TAX
Amounts expended after the property begins to produce
income, should not be charged to capital if they are items
which may be deducted from net income for the year,
except to the extent that such expense of development
exceeds the income. 7
FAIR MARKET VALUE AS OF MARCH 1, 1913. If the
taxpayer acquired mineral deposit, or interest therein,
prior to March 1, 1913, the amount of capital invested,
which may be extinguished through annual depletion de-
ductions, is the fair market value of the deposit or in-
terest therein as of March 1, 1913. This value must not
be based upon the assumed salable value of the output
under current operative conditions less cost of produc-
tion, for the reason that the value under such conditions
would comprehend the earning capacity of the property.
Neither should the value fo speculative, but must be
determined upon the basis of the salable value en bloc
as of that date, of the entire deposit of minerals con-
tained in the property owned, exclusive of the improve-
ment and development work ; that is, the price at which
the natural deposits or mineral property, as an entirety,
in its then condition, could have been disposed of for
cash or its equivalent. The precise detailed manner in
which the estimated fair market value of mineral de-
posits as of March 1, 1913, shall be made, must naturally
be determined by the taxpayer. It must be on such basis
as will not comprehend any operating profits. The esti-
mate in all cases is subject to the approval of the Com-
missioner of Internal Revenue, and once the value has
7 Ascertaining the cost for purpose of depletion should ho gov-
erned by the same general rules as apply to ascertaining the cost
of assets for the purpose of computing the profit on the sale
thereof. See Chapter 20.
m:m-\ i>r \i.i.m\ \\CEFORDEPLETIONOPMINES 377
been fixed there can be no re-valuation if it should be
found that the estimated quantity of the mineral deposit
\\iis understated at tin- timr the value was fixed. If the
\alne as of March 1, 11)13, cannot be ascertained in any
more definite way, the original cost of the mineral de-
posit may be taken, allowance being made for minerals
which have been removed prior to that date. 8
Rate of Annual Deductions. The amount of allow-
ance for depletion, which may be deducted each year is
required by the law to be reasonable, and is held by the
Treasury Department to be such sums as will reasonably
amount, in the aggregate, to the capital invested at or
-about the time the deposit is exhausted. The annual
allowance is limited, however, to an amount not to exceed
"the market value in the mine of the product thereof
which has been mined and sold during the year. " 9 To
determine what is a reasonable amount and to fix the
limit of the annual allowance, the Treasury Department
has ruled that at the time of acquiring ownership, or as
of March 1, 1913, as the case may be, an estimate must
be made of the number of units (tons, pounds, etc.) in
the deposit. The capital invested (or the value of the
deposit on March 1, 1913) divided by this estimated
number of units will determine the per unit value of the
deposit in the mine, and this per unit value multiplied
ST. D. 2446.
9 A question arises here as to whether the product mined in our
year and sold in the next can be considered in fixing this limit.
It does not seem likely that Congress in using the phrase "mined
and sold" contemplated that both operations must take place in
the same year, but rather that the limit should be determined by
the pnxlin-t *<>ld during the year, mined on the particular property
r'nr which allowance is claimed.
378 FEDERAL INCOME TAX
by the number of units mined, and sold during the year
will fix the allowance for that year. 10
ILLUSTRATION. As an illustration of the method of
computing the annual deduction, suppose that the orig-
inal investment, or the value as of March 1, 1913, is
$50,000, and the estimated number of units is one million.
The per value unit will be five cents, and, if one hun-
dred thousand units are mined and sold during the
year, the annual allowance for that year will be $5,000.
Assume that the production and sale has been main-
tained at this rate for five years ; one-half of the original
cost will then have been returned to the owner. If at
that time the mine is sold for $50,000, and it is then
ascertained that 500,000 units still remain in place in
the deposit, the new owner may set up $50,000 as the
capital invested which, divided by 500,000 units will
allow him a per unit value of ten cents, to be multiplied
by the number of units mined and sold each year in
ascertaining the annual deduction thereafter. The
probable number of units in a deposit cannot always be
estimated with any degree of accuracy. If the number
is ascertained in good faith, and in the exercise of the
taxpayer's best judgment, supported by such reports of
engineers or mining experts as he may have, it would
seem to be sufficient. The law requires the annual allow-
ance to be ' ' reasonable ' ' and any reasonable method used
in estimating the extent of the deposit should suffice. It
does not seem to be contemplated that an expensive sur-
vey shall be undertaken in making the estimate. As the
per unit value determines the rate , at which depletion
may be claimed, it follows that the estimate should be
conservative, since a too liberal estimate of the extent
10 T. D. 2446.
DEDUCTION OP ALLOWANCE FOR DEPLETION OF MINES 379
of the deposit may find the owner unable to claim his
full allowance before the property is exhausted.
Allowance on Each Separate Deposit. Where a tax-
payer owns more than one mining property allowance
may be computed for each separate mine or deposit, and
the aggregate of such computations constitutes the allow-
ance to which he is entitled.
Statement to Be Attached to Annual Return. Where
depletion is claimed under the above rules there should
be attached to the return of annual net income of the
claimant a statement setting out whether the operator
is a fee owner or a lessee ; in the case of a fee owner, (a)
the fair market value of the mineral deposits as of March
1, 1913, if the property was acquired prior to that date,
(b) the cost of the mineral property if acquired subse-
quent to that date; the method by which the value as
of March 1, 1913, was determined in case the property
was acquired prior to that date; the estimated quantity
in units in the mine as of March 1, 1913, or at the date
of purchase, if acquired subsequent to that date; the
number of units removed and sold during the year for
which the return is made; and any other data which
would be helpful in determining the reasonableness of
the depletion deduction claimed in the return. In the
case of a lessee, the statement should show (a) the
amount of the bonus or other payment made for the
right to operate the mine ; (b) the period covered by the
lease. 11
Rule Under the 1913 Law. The 1913 Law provided
for an arbitrary deduction in the case of an individual
11 T. D. 2446.
380 FEDERAL INCOME TAX
or corporation for the depletion of mining deposits,
not to exceed 5% of the gross value at the mine of the
output for the year for which the computation was
made. 12 Under this law it was held that taxpayers oper-
ating mines or oil or gas wells upon a royalty only, could
not claim depreciation because of the exhaustion of the
deposit. 13 It was also held that in order to claim a de-
duction for depletion the amount of such deduction had
to be charged off on the books so as to constitute a
liability against the assets of the taxpayer. A general
ledger entry was required so that the amount charged
off would be reflected in the annual balance sheet. 14 It
was later held however, that failure to write off deple-
tion would not result in disallowing the deduction. 15
-f V '
Rule Under the 1909 Law. Under the 1909 Law the
Treasury Department allowed a deduction for deple-
tion on the unit value basis, 16 although the law was
silent. When a case involving the question came before
the Supreme Court it was held that the fact that the
revenues derived from operating mines resulted to some
extent in exhaustion of the capital, established, under
that law, no ground for deducting the value of the ore
from the gross income as depreciation, 17 and, further,
that Congress did not intend to cover the necessary
depreciation of a mine, by exhaustion of the ores, in
determining the income to be assessed under the statute,
12 Act of October 3, 1913 If B and IF G (b).
13 Reg. 33, Art. 145.
14 Letter from Treasury Department dated May 18, 1916; T. T.
S. 1917, H1428.
15 T. D. 2481. .
18 T. D. 1675.
17Stratton's Independence Ltd. v. Howbert, 231 U. S. 339, 34
Sup. Ct. 136; 58 L. Ed. 285.
ItFIHTTlOX OF Al.l.oW \\( I. I Hi; DKI'I.KTION OF MIM-> 381
liy including siu-h exhaustion within the allowance for
depreciation. 18 In a later case, decided in a lower court,
these decisions were held not to apply to a company min-
ing ore by stripping off the surface covering the deposit,
the court being of the opinion that where a company
i-ould strip the surface from a deposit and thua definitely
and certainly ascertain the extent or character thereof,
or ascertain it by means of test pits, shafts and drilling
from the surface, the owner or lessee could ascertain
with certainty the value of his property on January 1,
1909, and deduct that value from each ton in ascertain-
ing the net income -under the 1909 Law. 19
18 Von Baumbach v. Sargent Land Co., 242 U. 8. 503.
19 Biwabik Mining Co. v. TJ. S., 242 Fed. 9.
CHAPTER 35
RETURN OF ANNUAL NET INCOME
For the purpose of assessing the tax, a return of an-
nual net income is required, showing the gross and net
income for the taxable year. This chapter deals with
the general provisions relating to returns of annual net
income, and does not cover the annual or special returns
required with respect to withholding at the source, in-
formation at the source or other matters. For a discus-
sion of such returns attention is directed to the chap-
ters on the respective subjects.
By Whom Filed. The law requires the return of an-
nual net income to be filed by each person of lawful age
having a net income of $1,000 or over for the calendar
year, if the individual is unmarried, and $2,000 or over
if the individual is married. 1 Guardians, trustees,
executors, administrators, receivers and other fiduciaries
are required to make a return if the income of bene-
ficiaries is $1,000 or $2,000 as indicated above, and as to
undistributed income, it seems that a return is re-
lAct of September 8, 1916, 8 (b), provides for the filing of
returns by persons of lawful age having a net income of $3,000 or
over for the taxable year but this provision is superseded by the
Act of October 3, 1917, 3, which requires a return to be filed
under conditions indicated in the context. The 1917 Law will
govern the filing of returns until it is repealed or amended. As
to non-resident aliens, see Chapter 5.
382 '
RETURN OP ANNUAL NET INCOME 383
quired when such income is $1,000 or over for the tax-
able year. 8 Minors and incompetents are not required to
file returns but their fiduciaries are required to file re-
turns for them. A return is required from every corpo-
ration subject to the tax regardless of whether or not it
has been in receipt of any income during the taxable
year. 8 The term "taxable year" as here used means the
calendar year, except in cases where a corporation has
designated its fiscal year as such.
HUSBAND AND WIPE. If a husband and wife, liv-
ing together, have separate estates, the income from both
may be reported in one return, but the amount of income
of each, and the full name and address of both, must be
shown in such return. Ordinarily, the husband, as the
head and legal representative of the household, and gen-
eral custodian of its income, should make and render the
return of the aggregate income of himself and his wife.
If, however, the wife does not disclose her income to the
husband, each may make a return, in which case the per-
sonal exemption may be divided between the two in such
proportions as they agree upon. If either husband or
wife separately has an income equal to or in excess of
$2,000 a return is required under the law. If the aggre-
gate income of both is $2,000 or more, the Treasury De-
8 Act of September 8, 1916, 8(c), as amended by Act of
October 3, 1917, requires no return of net income not exceeding
$3,000, but this provision is superseded by 3, Act of October 3,
1917. The law is obscure as to returns of undistributed net income
of trust estates, but as the specific exemption under the 1917 Law
is only $1,000, a return will no doubt be required if such income
exceeds that amount.
3 Act of September 8, 1916, 13 (a).
384 FEDERAL INCOME TAX
partment requires a return, although neither may have
an income of $2,000. 4
AGENTS. When a return is made by any person acting
as agent for the taxpayer, the agent assumes the respon-
sibility of making the return and incurs the penalties
provided for erroneous, false or fraudulent returns. 6
When the required return has not been made by such
agent notice of failure to make the return will be served
upon him, and in answer thereto he will be permitted
to file evidence with the collector showing that the in-
dividual for whom he acts did not receive an income sub-
ject to tax during the year, or that the agent filed the
return with some other collector. 6 One who acts as agent
does not, however, assume any fiduciary relationship
within the meaning of the income tax law and, unless
otherwise provided, the principal and not the agent is
subject to the liability under the law. 7
Where Filed. The law permits the filing of the re-
turn by an individual in the district in which such
individual has his legal residence or principal place of
business, or, if he has no legal residence or place of busi-
ness in the United States, then with the Collector of
Internal Revenue at Baltimore, Maryland. 8 Although
4 This statement is based upon the ruling contained in Regula-
tions 33, Art. 10, which held under the 1913 Law that if either
husband or wife had an income of $3,000 a return should be filed
although the aggregate incomes of both might not be $4,000 and
if the aggregate income of both was over $4,000 a return should
be filed although the individual income of either one might not
amount to $3,000.
5 Act of September 8, 1916, 8 (b).
6 Reg. 33, Art. 18.
7 T. D. 2137.
8 Act of September 8, 1916, 8 (a).
RETURN OP ANNUAL. NET INCOME 385
the law permits the return to be filed in either one of the
two districts indicated above, the Treasury Department
desires for administrative purposes that the return be
filed in the district in which the individual resides. 9
Corporations are required to file their returns with the
collector of the district in which is located the principal
office of the corporation, where are- kept its books of
account and other data from which the return is pre-
pared, or, in the case of foreign corporations, with the
collector of the district in which is located the principal
place of business in the United States, or if thejj have
no principal place of business, office, or agency in the
United States, with the Collector of Internal Revenue
at Baltimore, Maryland. 10
When Filed. March 1st is the primary due date for
all returns of annual net income. This due date can be
changed by a corporation designating a fiscal year, in
which case the sixtieth day after the close of the fiscal
year becomes the primary due date on or before which
* Letter from Treasury Department dated December 17, 1914.
The Treasury Department recognizes that the individual has the
ri^ht to choose one of two districts, where he resides in one and
does business in another, and a filing in either district will be a
proper compliance with the law. For the year 191.1 the Treasury
I>-],;irtnient requested the filing of returns in the district in
which the individual's principal place of business was located.
This threw an undue burden on the collectors in the large cities,
ami the subsequent ruling was made in order to remedy this con-
dition.
10 Act of September 8, 1916, 813 (b). As stated in the chap-
ter on corporations the principal office here referred to is the
business office, not the statutory office in the state in which the
corporation is incorporated. The return may be filed from the
latter office only when a domestic corporation has no other office
or place of business in this country.
F.I. Tax. 25
386 FEDERA^ INCOME TAX
its return should be filed. Unless an extension of time
is obtained, the taxpayer will be held delinquent if his
return is not filed on or before the primary date and
will be subject to the 50% additional tax and penalty
of the law. 11
LAST DUE DATE.' These words are used to designate
the last day upon which a return may be filed without
penalty. 12 When the due date for a return falls on a
Sunday or a legal holiday, the last due date will be
held to be the day next following, and the return may
be filed not later than such following day without
penalty. 13
' MAILING RETURNS. If a return is made and placed in
the United States mails, properly addressed, and postage
paid, in ample time, in the due course of the mails, to
reach the office of the collector or deputy collector, on
or before the last due date, no penalty is held to attach
should the return not be actually received until a subse-
quent date. 14
Extension of Time by Collectors. Collectors, being
satisfied as to the merits of the claim, and in the reason-
able exercise of their judgment and discretion, have
authority to grant an extension of time not to exceed
thirty days in the case of "sickness or absence." 16 In
the case of corporations, the sickness or absence must
11 T. D. 2001.
12 Reg. 33, Art. 175.
13 Reg. 33, Art. 176.
14Rg. 33, Art. 174.
16 R. S. 3176; Reg. 33, Art. 17; T. D. 1950.
RETURN OP ANNUAL NET INCOME 387
be of an officer whose signature to the return is
required. 16
Extension of Time by Commissioner. In addition to
the limited extension of thirty days, which may be
granted by collectors, the Commissioner of Internal
Revenue has authority to grant a reasonable extension
of time in meritorious cases for filing returns of income
by persons, residing or traveling abroad, who are unable
to file the returns on or before March 1st. 17 The Com-
missioner of Internal Revenue also has authority in the
case of either corporations or individuals to grant a rea-
sonable extension of time in meritorious cases, as he may
deem proper, for any reason whatever. 18
Application for Extension of Time. A written appli-
cation for an extension of time should be made by the
individual to the collector or the Commissioner within
the period for which the extension is desired. 19 The
application need not be made prior to the primary due
date, but may be made at any time within the period
for which extendSn is desired, not to exceed thirty days
after the primary due date when application is made to
collectors.**
TENTATIVE RETURNS. Prior to the passage of the 1916
Law, extension of time could be granted only in case
of sickness or absence, but the Treasury Department
permitted foreign corporations, and domestic corpora-
tions doing business in foreign countries, who were un-
16 Reg. 33, Art. 173.
17 Act of September 8, 1916, 8 8 (b).
18 Act of September 8, 1916, 1 14 (c).
lReg. 33, Art. 23.
WReg. 33, Art. 173.
388 FEDERAL INCOME TAX
able to assemble their data in time to make their returns
of annual net income on or before the primary due date,
to file tentative returns approximating as nearly as pos-
sible the actual business transacted during the year.
Such tentative returns, were accepted subject to the
substitution later of true and correct returns, when the
necessary data to make the same had been received. 21
Under the 1916 Law, the Commissioner of Internal
Revenue has authority to grant unlimited extension in
meritorious cases, thus making unnecessary the filing of
tentative returns. 22
Forms. The law authorizes the Commissioner of In-
ternal Revenue, with the approval of the Secretary of
the Treasury, to prescribe the form on which the returns
shall be made. The forms have been changed from time
to time, and those for 1917 will contain much new
matter. The same form is prescribed for citizens, resi-
dents, and non-resident aliens, whether or not executed
by the principal or by an agent on his behalf. Separate
forms are prepared for use by fiduciaries, and corpora-
tions. The form for use by individuals is known as Form
1040. The form for use by fiduciaries is known as Form
1041. The forms for use by corporations are : Form
1030 for insurance companies (including mutual life and
mutual marine;) Form 1030a for mutual insurance com-
panies (other than mutual life and mutual marine;)
Form 1090 for railroad corporations, and Form 1031
for all other corporations. Forms are usually sent to
taxpayers, but failure to receive a form is no excuse
for not making the return. 23
21 T. D. 2137.
22 See T. D. 2561 and T. D. 2581.
83 Keg. 33, Art. 163.
RETURN OP ANNUAL NET INCOME
Verification of Returns. The annual return must
he verified by the oath of the person making the same.
The affidavit may be made before the collector of the
district or before any officer authorized by law to admin-
ister oaths. 2 * Revenue agents, inspectors and special
employees, 26 or any clerk in the office of the collector. 26
may, if commissioned as deputy collectors, take the oath
of taxpayers. If a return is executed before a notary
in a state where the law does not require the notary to
use a seal, and none is used, a certificate of a clerk of
court or other officer possessing a seal, showing that
he is duly commissioned and authorized to administer
oaths, should be filed with the Commissioner ; otherwise
the return will not be accepted, 27 unless, as may be done,
the collector waives this requirement in states where
jurats are accepted in the state courts either with or
without a seal, and without certificate showing author-
ity."
VERIFICATION ABROAD. An individual residing abroad
may acknowledge his return before any duly appointed
officer of the country in which he resides, authorized
to administer oaths and use an official seal. 29
VKKIFICATION IN ARMY AND NAVY. Any officer in the
Naval or Military service of the United States, within
or without the United States, who is authorized to ad-
minister oaths for the purpose of Military justice and
24 Reg. 33, Art. 22.
26 T. D. 2235, T. D. 2238.
WT. D. 2293.
87 T. D. 2090.
2ST. D. 2174.
29 T. D. 2090.
390 FEDERAL INCOME TAX
administration or Naval justice and administration, may
take the acknowledgments of persons in the Naval and
Military services. 298
Assistance of Collectors. Any assistance or infor-
mation, which may be needed in connection with the
preparing and filing of income tax returns, is required
to be furnished by the collector upon request. Questions
regarding the tax will be answered upon inquiry at the
Internal Revenue offices. When questions are directed
to the Treasury Department at Washington asking for
information which should be supplied by collectors, the
letters are referred to the collectors for reply and
the writers are advised accordingly. 30
Return Made by Collector. If the taxpayer fails to
file a return as required by law, but consents to disclose
the particulars of his income, it is the duty of the col-
lector or deputy collector to make the return, which,
being distinctly read and consented to, signed, and veri-
fied by the taxpayer, may be received as the return of
the taxpayer. 31 If the taxpayer neglects or refuses to
make the return, or makes a wilfully false or fraudulent
return, it is the duty of the collector, after due notice,
to make the return according to the best information he
can obtain by the examination of such person, or any
other evidence. When duly certified by the collector,
such return is treated as the return of the taxpayer
and the tax and penalty are assessed thereon. 32
29* T. D. 2534.
SOT. D. 1949, T. D. 1956.
31 Eeg. 33, Art. 20.
32 Keg. 33, Art. 21.
RETURN OP ANNUAL NET INCOME 391
Erroneous Returns. If a return is improperly pre-
pared, it is returned by the collector to the taxpayer
for correction, and the corrected return is accepted with-
out penalty, provided the incorrect return showing the
date of its receipt accompanies the corrected return. 33
Amended Returns. Where upon an audit of a return
of an individual, a fiduciary, or a withholding agent,
or as a result of an investigation made by a revenue
agent, an additional tax is assessed, it is not necessary to
file an amended return. Notice of the additional assess-
ninit will be given to the taxpayer by letter from the
Treasury Department. 34 Where a corporation is called
upon by a revenue inspector to make amended returns,
the officers of the corporation will be given the fullest
opportunity to make any investigation they may desire
prior to signing such amended returns, provided, of
course, such investigation does not cover an unreason-
able length of time. 86 In 1915 and 1916 it was the
practice of the Treasury Department to send out a letter
to corporations whenever items on the return were
reached, concerning which more detailed information
was sought, referring to the return and briefly request-
ing information regarding one or more items therein.
The letter ended with a statement that in the absence
of an explanatory affidavit, at the end of thirty days
from the date of the letter, the entire amount of the
33 Mimeograph letter No. 1160 to Collectors.
34 Mimeograph letter No. 1232 to Collectors.
36 Letter from Treasury Department dated February 2, 1915;
I. T. 8. 1917, HI 61 8.
392 FEDERAL INCOME TAX
deductions questioned would be suspended and an assess-
ment returned accordingly. 36
Notice of Failure to File Returns. When the col-
lector possesses any information which leads him to
believe that any person in his district was in receipt of
income for the year and did not make a return, he is
required to serve a notice calling attention to the failure
and to the fact that penalties for failure have been
incurred. The notice also calls attention to the fact
that if the return is not filed, within ten days from
the date thereof, the books and papers of the taxpayer
will be examined and a return prepared therefrom as
provided by law. 37
Inspection of Returns by the Public. The income tax
law is specific and mandatory in the matter of safe-
guarding from publicity the information acquired by
reason of its requirements relative to annual returns
of income. The law imposes on employees of the Gov-
ernment a penalty of fine, imprisonment, dismissal from
office and forfeiture of right to hold office, for making
known in any manner not provided by the law, the
amount or source of income, or any particulars thereof,
set forth or disclosed in an income return by any person.
All internal revenue officers are cautioned to preserve
as confidential all income tax returns. 38 The returns
361. T. S. 1917, H1623.
37 Keg. 33, Art. 196. This notice is sent out on Form 1045.
For the first year of the income tax, March 1 to December 31,
1913, the collector sent out an informal letter as a preliminary
to the formal notice. This letter invited the taxpayer to make
a return without penalty within ten days but the letter was not
used in subsequent years.
38 T. D. 2135, T. D. 1962.
KI.TI KN OK ANNUAL NET INCOME
<>ii which assessments have been made are filed in the
office of the Commissioner of Internal Revenue and con-
stitute public records and are open to inspection as
such, but only upon order of the President and under
rules and regulations prescribed by the Secretary of
the Treasury and approved by the President. 39 It was
held that a similar provision of the 1909 Law permitting
the inspection of returns was not unconstitutional. 40
Under date of July 28, 1914, the President issued an
executive order, that returns should be subject to inspec-
tion in accordance with certain rules and regulations
prescribed by the Secretary of the Treasury of the
same date.
RETURNS MUST BE INSPECTED AT WASHINGTON. Re-
turns can be inspected by the public only in the office
of the Commissioner of Internal Revenue in Washington.
No collector or any other internal revenue officer outside
of the Treasury Department in Washington is author-
ized to permit the inspection of any return, or to fur-
nish any information whatsoever relative to any return
or any information secured by him in his official capacity
relating to such return. No provision is made in the
law for furnishing a copy of any return to any person
or corporation and no copy will be furnished to any
other than the person or corporation making the return,
or their duly constituted attorney, except in the case
whore copies are furnished to officers of the Department
of Justice for use in suits. 41
RETURNS OP INDIVIDUALS. Returns of individuals are
not open to the inspection of any person other than the
39 Act of September 8, 1916, 14 (b).
40 Flint v. Stone Tracy Co., 220 U. 8. 107.
41 T. D. 2016.
394 FEDERAL INCOME TAX
proper officers and employees of the Treasury Depart-
ment, the person who made the return or his duly
authorized attorney, and are under no conditions made
public, except where such publicity results through the
use of such returns in any legal proceeding in which
the United States is a party. 42
RETURNS OP CORPORATIONS. The Secretary of the
Treasury, at his discretion, upon application to him,
setting forth what constitutes a proper showing of cause,
may permit the inspection of the return of any corpo-
ration by any bana fide stockholder thereof. Application
for such inspection must be made in writing to the Sec-
retary of the Treasury, setting forth the reasons why
inspection should be permitted. Attached to the applica-
tion should be a certificate signed by the president or
other principal accounting officer of such corporation,
countersigned by the secretary, under the corporate seal
of the company, that the applicant is a bana fide stock-
holder in the company. Where such certificate cannot
be secured, other evidence will be considered to deter-
mine the fact whether or not the applicant is a bona fide-
stockholder. Upon receipt of such application the cor-
poration, whose return it is desired to inspect, is notified
of the facts and given opportunity to state whether
any legitimate reason exists for refusing permission.
The privilege of inspecting the return of any corpora-
tion is personal to the stockholders, and the permission
granted by the Secretary of the Treasury to make such
inspection cannot be delegated to any other person. 43
A person who, as trustee or in any other fiduciary rela-
tion, has the ownership or possessory right to stock in
42 T. D. 2016.
T. D. 2016.
RETURN OP ANNUAL NET INCOME 395
a corporation, is considered as a stockholder in such
corporation. 44 Copies of returns on file in the Com-
missioner's office are not permitted to be sent to any
person, except the corporation itself, or its duly author-
ized attorney, and in no case may the original returns
be removed except upon order and by direction of the
Secretary of the Treasury or the President. 46
CORPORATIONS WHICH OFFER THEIR STOCK TO THE
PUBLIC FOR SALE. The returns of all corporations,
whose stock is advertised in the press or offered for
sale to the public by the corporation itself, may be
inspected by any person upon written application to
the Secretary of the Treasury, which application shall
set forth briefly and succinctly all facts necessary to
enable the Secretary to act upon the, request. In case
of doubt as to whether any company falls within this
classification, the person desiring to see such return
should support his application by advertisements, pro-
spectus or such other evidence as he may deem proper
to establish the fact that the stock of the corporation
is offered for general public sale. 48
CORPORATIONS WHOSE STOCK Is LISTED ON A STOCK
EXCHANGE. The returns of all companies whose stock
is listed upon any duly organized and recognized stock
exchange within the United States, for the purpose of
having its shares dealt in by the public generally, are
open to the inspection of any person upon written
application to the Secretary of the Treasury, which appli-
cation shall set forth briefly and succinctly all facts
4* Op. Atty. Gen. Dec. 27, 1910.
46 Reg. 33, Arts. 178 and 179.
46 T. D. 2016.
396 FEDERAL INCOME TAX
necessary to enable the Secretary to act upon the
request.* 7
Inspection of Returns by State Officers. The proper
officers of any state, imposing a general income tax,
may on request of the Governor thereof have access to
the returns of corporations, or to the abstracts of such
returns showing the name and income of each corpora-
tion, at such times and in such manner as the Secretary
of the Treasury may prescribe. A request for such
inspection must be signed by the Governor of the state
and sealed with the seal of the state and transmitted
to the Secretary of the Treasury for his consideration
and action thereon. 48
Inspection of Returns by Government Officers. Re-
turns of corporations (but not of individuals) may be
inspected by an officer or employee of any department
of the Government, on application to the Secretary of
the Treasury by the head of the executive department
in which such officer or employee is employed. If the
return of a corporation is desired to be used in any
legal proceedings other than those to which the United
States is a party, or to be used in a manner by which
any information contained in the return could be made
public, the application for permission to inspect the
return, or to furnish a certified copy, must be referred
47 T. D. 2016.
48 T. D. 2016. It is to be noted that the law permits inspec-
tion only by officers of states which have a general income tax.
This may not necessarily mean a tax on both corporations and
individuals, but the privilege to inspect returns applies only to
the returns of corporations.
RETURN OF ANNUAL NET INCOME 397
to the Attorney General for his recommendation before
transmission to the Secretary of the Treasury. 48
FOR USE IN GOVERNMENT SUITS. All returns whether
of persons or of corporations may be furnished, upon
approval of the Secretary of the Treasury, foruse in
any legal proceedings before any United States grand
jury or in the trial of any cause to which both the
United States and the person or corporation rendering
the return are parties, provided the return would con-
stitute material evidence in the prosecution, defense or
trial of such action or proceeding. In any case arising
in the collection of the income tax the Commissioner
of Internal Revenue may furnish for the use of the
proper officer either the original or certified copies of
returns, without the approval of the Secretary of the
Treasury. 80
T. D. 2016.
SOT. D. 2016; Reg. 33, Art. 180.
CHAPTER 36
ASSESSMENT AND PAYMENT OF THE TAX
All assessments are made by the Commissioner of In-
ternal Revenue. 1 After the return of annual net in-
come has been filed with the collector, it is sent to the
Treasury Department at Washington for assessment of
the tax. When the assessment has been made, the amount
thereof is reported to the local collector who notifies the
taxpayer, on or before June 1st, of the amount thereof.
The tax becomes due on the 15th day of June, but an
additional period of grace, being at least ten days after
June 15, is allowed before penalty or interest applies.
In the case of corporations reporting for their fiscal
years the return of net income, when filed, is immediately
forwarded to the Treasury Department at Washington
and the tax assessed thereon. The amount thereof is
reported to the local collector who notifies the corpora-
tion and payment is due 105 days from the date on
which the return of income is required to be made in
such cases, and after ten days notice and demand by the
collector. 2 If the tax is not paid within ten days after
notice and demand by the collector, which notice can-
not be given before the 15th day of June or before the
expiration of 165 days after the close of the fiscal year
of a corporation reporting on the basis of its fiscal year,
1 Act of September 8, 1916, 9 (a) and 14 (a).
2 Act of September 8, 1916, 14 (a).
398
ASSESSMENT AMI PAYMENT OP TIIK TAX 399
penalty and interest accrue. The Government may pro-
ceed by levying on and distraining the property of the
taxpayer if payment of penalty and interest is not made
within ten days from the date of the second notice and
demand for the tax. This drastic menu* of enforcing
payment is within the power of Congress since the power
to tax includes the power to undertake effectual means
to collect fhe tax. 8
Suit to Restrain Assessment or Collection. No suit
for the purpose of restraining the assessment or collec-
tion of any tax shall be maintained in any court.* The
constitutionality of a law cannot be inquired into in an
injunction suit against the government, 8 but may be in a
stockholder's suit to enjoin the corporation from volun-
tarily paying a tax charged to be unconstitutional. 6 An
injunction will not be granted at the instance of a stock-
holder to restrain the officers of a corporation from pay-
ing the tax, other than voluntarily, as that would, in
effect, be the same as an action to restrain the Govern-
ment. 7 Allegations that an assessment is irregular and
void do not constitute any ground for an injunction. 8 A
bill in equity will not lie to enjoin collection although the
SMcCulloch v. Maryland, 4 Wheat. 316; Flint v. Stone-Tracy
Co., 220 U. 8. 107.
4 R. S., 3224.
Delaware R. R. Co. v. Prettyman, 17 Int. Rev. Rec. 99; Allen
v. Pullman 's Palace Car Co., 139 U. S. 658 ; Dodge v. Brady, 240
122.
Pollock v. Farmers Loan & Trust Co., 157 U. 8. 429; Flint
v. Stone-Tracy Co., 220 U. S. 107; Brushaber v. Union Pacific
K. R. Co., 240 U. S. 1.
1 Strauss v. Abrast Realty Co., 200 Fed. 327.
8 Alkan v. Bean, 23 Ink Rev. Rec. 351.
400 FEDERAL INCOME TAX
tax is alleged in the bill to have been illegally assessed. 9
A collector cannot be restrained from collecting an assess-
ment by injunction. 10 It is contrary to every principle
of equity jurisprudence that the collection of taxes on
personal property should be stayed by injunction. 11 The
courts will not interfere by a mandamus with the execu--
tive officers of the Government in the exercise of their
ordinary official duties. 12 In matters which require an
executive officer to exercise judgment or discretion no
rule will issue for mandamus. 13 The inhibition of Sec-
tion 3224 applies to all assessments of taxes, made under
color of their offices, by internal revenue officers charged
with general jurisdiction of the subject of assessing the
income tax. The remedy of a suit to recover back the tax
after it is paid is provided by statute, and a suit to re-
strain its collection is forbidden. The remedy so given
is exclusive, and no other remedy can be substituted for
it. The system of administrative measures, not judicial,
to collect internal revenue taxes, with appeals to speci-
fied tribunals, and suits to recover back moneys illegally
exacted is a system of corrective justice intended to be
complete, and enacted under the right belonging to the
Government to prescribe the conditions on which it would
9 Snyder v. Marks, 10 U. S. 189; Dodge v. Osborn, 240 IT. S.
118.
10 State R. R. Tax cases, 92 U. S. 575; Keely v. Sanders, 99 U. S.
441.
11 Nye v. Washburn, 125 Fed. 818.
12 U. S. v. Black, 128 U. S. 40. The court in this case followed
an earlier decision of Decatur ?. Paulding (14 Pet. 497) and made
clear the distinction between the mere ministerial act of the exec-
utive officer, which may be controlled by the courts by mandamus,
and an act in the performance of which an officer is vested with
quasi-judicial discretion.
13 Carrick v. Lamar, 116 U. S. 423.
ASSESSMENT AND PAYMENT OP THE TAX 401
subject itself to the judgment of the courts in the collec-
tion of its revenues. 14
Notice of Assessment. When the assessment has been
made by the Commissioner of Internal Revenue the col-
lector is notified and he sends thejaxpayer a notice of
assessment, usually on or before June I. 16 This notice,
however, is not a demand for payment of the tax, but
is merely a notification of the amount which has been
assessed and the date on which the tax is due and pay-
able. Failure to pay the tax on receipt of this notice
does not make the taxpayer liable for penalty or interest.
In the case of a corporation making returns for a fiscal
year, the notice of assessment is given on or before the
expiration of ninety days from the day when the return
was required to be filed. 16
Notice and Demand for Tax. If the tax is not paid
on or before the date on which it is due, a notice and
demand is issued to the taxpayer. The notice and de-
mand is usually dated and sent out on the day the tax
is due. It calls attention to the fact that the tax has
been assessed, showing the amount thereof, and demands
payment on or before a date given in the notice. Unless
H Dodge v. Osborn, 240 U. 3. 118.
1& The notice is given to corporations on a form known aa Form
1-647 A and to individuals on Form 1-647B. The two forms are
initially the same. Each is divided into three parts, one part
for the taxpayer (which will operate as his receipt when he pays
the tax), one part for the record of the Commissioner, and one
part for the record of the local collector. When the tax is paid
all three parts of the notice should be presented to the local col-
lector who will properly receipt the part intended for the taxpayer
and retain the other two parts.
16 Reg. 33, Art. 177.
F. I. Tax. 26
402 FEDERAL INCOME TAX
*
the tax is paid within the time specified the penalty im-
posed for delay in payment of the tax will be added to
the assessment. 17 This notice and demand is necessary
in order to make the taxpayer liable for the penalty and
interest in case of delay in payment of the tax, and is
necessary to complete the government's lien on property
belonging to the taxpayer. The fact that a claim for
abatement is pending, or the tax is in litigation, does
not relieve the collector from issuing the notice. 18 The
notice may lawfully be given by mail and when so given
is presumed to have been received. The burden rests
on the taxpayer to prove the contrary in order to avoid
the penalty. 19 The practice of the Department in such
cases is to permit the taxpayer to show, to the satisfac-
tion of the Commissioner, that he did not receive the
notice, and upon such showing to give the taxpayer an
opportunity to pay his taxes without penalty. The record
of the collector showing that notice had been duly mailed
is considered merely as prima facie evidence that the
notice was received. 20 The date appearing on the notice
and demand, as the last date on which the tax may be
paid without penalty, should be a date ten days subse-
quent to the actual mailing of the notice and not neces-
sarily ten days from the date of the notice. The date of
mailing controls. 81
17 Keg. 33. Art. 197. Form 1-17A is used in notifying corpo-
rations and Form 1-17B in notifying individuals. The forms are
essentially the same, each is divided in three parts in the manned
and for the purpose described in the preceding note regarding
the notice of assessment.
18 T. D. 1995.
19 U. S. v. General Inspection and Loading Company, 204 Fed.
657.
201. T. S. 1917, If 2268.
21 T. D. 1659.
ASSESSMENT AND PAYMENT OP THE TAX 403
NOTICE AND DEMAND TO ABSENTEES. When an indi-
vidual is absent in a foreign country and it is impossible
for him to receive the notice and demand in time to make
payment of the taxes assessed thereon within the ten-day
period following the service of the notice, the collector
will make an allowance so that the tax may be paid with-
out penalty ten days after receipt of the notice, and, if
the full amount of the tax has been placed in the mail
for transmission within ten days after such receipt, the
penalty and interest will not be exacted. In such a
case the envelope which enclosed the notice, bearing
the postmark of the receiving office, should, if possible,
be forwarded to the collector as evidence of the cause
of delay. -This ruling applies only to the collection of the
tax from individuals, 88 but it would seem to be a rea-
sonable rule to apply to all cases where the time consumed
in the transmission of the mails makes it impossible to
mail the notice and demand and to receive reply in ten
days.
Second Notice and Demand for Tax. If the tax is
not paid within ten days after mailing the first notice
and demand, a second notice and demand is given the
taxpayer, which states that having failed to make pay-
ment of the tax within the prescribed time after notice
and demand, there has attached a 5% penalty on the
tax and interest at 1% per month from a specified
date. In this notice, demand is made for the taxes, pen-
alty and such interest as may accrue before payment,
together with a threat that if -the tax, penalty and inter-
est is not paid within ten days from the date of the
notice, the Collector of Internal Revenue will collect
the same with costs by seizure and sale of property. 88
MT. D. 2028.
84 Form 1-21 A is used in giving corporations the second notice
and demand for tax and Form 1-21B is used in notifying in-
404 FEDERAL INCOME TAX
Time of Payment of Tax. The primary due date is
June 15th, or in the case of corporations reporting for
their fiscal years the 165th day after the close of their
fiscal years. In the case of corporations care should be
taken to reckon the days correctly, as 165 days is not
equivalent to five and one-half months. The second due
date is the date given on the notice and demand for tax,
which date should be not less than ten days after the
first due date. The second due date is the last day on
which the tax may be paid without penalty or interest.
The payment of the tax may be made at any time during
the last day. To accommodate those who make payments
after closing time a mail box is provided at the cashier's
window in the office of the local collector for the deposit
of such collections. 24
ADVANCE PAYMENT OF TAX. The Secretary of the
Treasury, under rules and regulations prescribed by him,
is required to permit taxpayers liable to income taxes
to make payments - in advance in instalments, or in
whole, of an amount not in excess of the estimated taxes
which will be due from them, and upon determination
of the taxes actually due any amount paid in excess
shall be refunded as taxes erroneously collected. "When
payment is made in instalments, the law requires at least
one-fourth of such estimated tax to be paid before the
expiration of thirty days after the close of the taxable
year, at least an additional one-fourth within two months
after the close of the taxable year, at least an additional
one-fourth within four months after the close of the tax-
dividuals. The forms are essentially the same, each is divided
into three parts in the manner and for the purpose described in
the note regarding the notice of assessment.
24 T. D. 1728.
ASSESSMENT AND PAYMENT OP THE TAX 405
able year, and the remainder of the tax due, on or before
the regular* due dates fixed by law. The Secretary
of the Treasury may allow a credit against taxes so
paid in advance of an amount not exceeding the rate
of 3% per annum, calculated upon the amounts so paid
from the date of such payment to the regular due date
fixed by law ; but no such credit is allowed on payments
in excess of taxes determined to be due, nor on payments
made after the expiration of- four and one-half months
after the close of the taxable year. 26 All the penalties
provided by law for failure to pay the tax when due, are
applicable to any failure to pay the tax at the time or
times above stated, in case the taxpayer chooses to pay
in advance. The purpose of applying the penalties to
such advance payments seems to be to protect the tax-
payer, who chooses to make payments in advance, from
the legal disability of recovering voluntary payments of
taxes. By applying the penalties the taxpayer may, if
he observes the rules as to protest and duress, pay the
tax in advance and thereafter sue to recover if he has
overpaid or paid under an erroneous assessment.
Manner of Payment of Taxes. As a general rule,
payment of the tax is authorized by law to be made in
certified checks drawn in favor of the collector on
national and state banks and trust companies located in
the city where the collector has his office, and also such
"out-of-town" certified checks as can be cashed without
cost to the government, providing the depositary will
accept for deposit "out-of-town" certified checks "with-
out recourse. ' ' Prior to this year the Treasury Depart-
ment did not specifically authorize the acceptance of any
form of exchange in payment of internal revenue taxes,
MAct of October 3, 1917 (Public No. 50), 11009.
406 FEDERAL INCOME TAX
other than currency and such certified checks as are
above described. 26 There was no objection to a collec-
tor accepting at his own risk, or at the risk of the gov-
ernment depositary, uncertified checks, or any other
form, of exchange, for collection only. 27 Where a form
of remittance not authorized by law was accepted for
collection, the 5% penalty was incurred by the taxpayer,
if there was delay in collection and the funds were not
actually received by the collector within the time pro-
vided by law. Receipt by the Government depositary, in
the course of collection, was held not to be receipt by the
collector, as the depositary is not an agent of the col-
lector or of the government. 28 At present the law pro-
vides that, under rules and regulations prescribed by
the Secretary of the Treasury, collectors may receive,
at par and accrued interest, certificates of indebtedness
issued under Section 6 of the Act entitled "An Act to
authorize an issue of bonds to meet expenditures for the
National security and defense, and, for the purpose of
assisting in the prosecution of the war, to extend credit
to foreign governments, and for other purposes," ap-
proved April 24, 1917, and any subsequent act or acts.
Under the same provision of law, and under rules and
regulations prescribed by the Secretary of the Treasury,
collectors may also receive uncertified checks in payment
of income taxes, during such time, and under such regu-
lations, as the Commissioner of Internal Revenue, with
the approval of the Secretary of the Treasury, shall
prescribe; but if a check so received is not paid by the
bank on which it is drawn, the person by whom such
check has been tendered shall remain liable for the pay-
26 T. D. 1990.
27 T. D. 2158.
28 T. D. 1651.
ASSESSMENT AND PAYMENT OP THE TAX l<>7
inent of the tax and for all legal penalties and additions
the same as if such check had not been tendered. 89 If
payment is made by check the taxpayer as a precaution
should draw the check for such amount as to cover any
collection charges by the bank, in order that the net
amount received by the Government may be the full
amount of tax due.
Payment Under Protest. The purpose of paying a
tax under protest is to preserve the taxpayer's rights to
recover the tax should the assessment prove to be wrong-
ul or excessive. As a general rule of law, a voluntary
payment of money cannot be recovered and this rule ap-
plies to payments of taxes. It does not seem essential,
although it may be a wise precaution, also to protest at
the time of filing the return on which the assessment is
based.
RECOVERY OP TAXES FROM COMMISSIONER OP INTERNAL
REVENUE. It would seem that a protest is not neces-
sary to recover taxes from the Commissioner of Internal
Revenue, but essential if suit is to be maintained against
an adverse decision of the Commissioner. 80 It is a
principle universally recognized that an action cannot
be maintained for the recovery of money paid in dis-
charge of a tax illegally assessed, unless the payment
was made under protest. But this principle has been
held by the Commissioner of Internal Revenue and
other officers of the Department as too technical and
too exacting for application to the refund of taxes under
Section 3220 of the Revised Statutes. 81
29 Act of October 3, 1917 (Public No. 50), 1010.
30 Chesebrough v. U. 8., 192 U. 8. 253.
31 Real Estate Savings Bank v. U. 8., 16 Court of Claims 335;
i'7 Int. Rev. Rec. 154.
408 FEDERAL INCOME TAX
RECOVERY BY ACTION AT LAW. Though there is some
conflict in the dicta of the Supreme Court, the true doc-
trine seems to be that when taxes are paid under protest
or with notice that the payer contends that they are
illegal and intends to institute a suit to compel their re-
payment, a sufficient foundation for suit to recover has
been established. 32 It appears that a collector is not
personally liable for taxes if no protest or objection is
made to their collection by him. 33
FORM OF PROTEST. There seems to be no legal require-
ment that a protest be in writing. An oral protest may
be effective, 34 but a written , protest is, of course, better
evidence. A protest against paying the tax includes the
penalties without specific mention of the latter. Where
a corporation had been assessed for taxes and the same
were not paid, a writ of distraint was issued by the
collector, and, the corporation having been notified that
the tax would be collected by levy, the deputy collector
counted out and took from a representative of the com-
pany a sufficient amount to pay the tax against verbal
protest at the time. A written notice of protest was then
served in which the corporation denied that it was
liable to the tax. The court held that the protest was
sufficient. 35 Under the 1909 Law the Treasury Depart-
ment ruled that no form of protest was prescribed, any
form of protest would be sufficient if filed before pay-
ment of the tax, and the right of protest was not to be
denied. 36
32 Herold v. Kahn, 159 Ted. 608.
33 Commissioners, etc. v. Buckner, 48 Fed. 533.
34 Wright v. Blackeslee, 101 U. S. 174.
35 Abrast Eealty Co. v. Maxwell, 206 Fed. 333.
36 T. D. 1675.
ASSESSMENT AND PAYMENT OP THE TAX 409
PROTEST ALONE Nor SUFFICIENT. The protest is used
to give effect to other attending circumstances. A pro-
test accompanying a voluntary payment is not sufficient.
There must be coercion and duress. The protest gives
notice that the payment is not to be considered as ad-
mitting the right to make the demand, but if payment of
the tax is made under protest, without any coercion by
actual or threatened exercise of power by the party
exacting or receiving the payment, over the person or
property of the party making the payment, from which
the latter has no other means of immediate relief than
such payment, the payment is voluntary and cannot be
recovered. 37 "Where a party pays an illegal demand,
with full knowledge of all the facts which render such
demand illegal, without an immediate and urgent neces-
sity therefor, or unless to release his person or property
t'nmi detention, or to prevent an immediate seizure of
Ins person or property, such payment must be deemed
voluntary." 38 The duress and coercion must come from
the Government or its agents, 89 not from a third party
and the protest must be made to a duly authorized agent
of the Government having authority to collect the tax. 40
Duress. To recover the tax, payment must be made
under duress and accompanied by a protest. As indi-
cated in the preceding paragraph the duress must come
from the Government and be such as to create an imme-
diate and urgent necessity for paying the tax, in order
to protect the person or property of the taxpayer. The
cases Contain a wide discussion of what constitutes dun -NX
37 Chesebrough v. U. 8., 192 U. S. 253.
* Railroad Co. v. Commissioners, 98 U. 8. 541; Little v. Bowers,
134 U. 8. 547.
39 ( 'hesebrough v. U. 8., 192 U. 8. 253.
40 U. 8. v. New York & Cuba Mail 8. 8. Co., 200 U. 8. 488.
410 FEDERAL INCOME TAX
under various circumstances and particular statutes. A
discussion of the general question would not be of par-
ticular value in this work. Clearly a payment made
upon receipt of the notice of assessment would not be a
payment under duress, since that notice does not demand
the tax and does not contain any threat of penalties. It
seems reasonably certain that payment after .receipt of
the notice and demand for tax would be payment under
duress, although the present form of such notice, 41 does
not contain a specific threat to collect the penalties but
merely a statement that the penalties will accrue if the
payment is not made on or before a certain date. The
form of notice and demand in use prior to 1917 con-
tained a direct threat that the collector would collect the
tax with penalty and interest if payment was not made
within the ten day limit. In a case where a notice very
similar in form and containing such a threat had been
served on a taxpayer under the War Revenue Act of
June 13, 1898, the court said in part: "Every demand
by one clothed with official legal authority to make the
demand, imposes a certain compulsion on the one upon
whom the demand is made. Such a demand is always
exigent and places the recusant in a position of disad-
vantage. Especially is this so in regard to payment of
taxes, state or national. The proper administration of
the fiscal affairs' of the Government, require that the pay-
ment of taxes should not be delayed by disputes as to
their legality, but that the taxes should first be paid
and all questions in regard to them be determined in
suits brought for their refunding. It is a wise i*)liey,
therefore, that encourages the payment under protest
of disputed taxes. Though there is some conflict in the
41 Form 1-17. Qompare this notice with Form 17 in use prior
to 1916.
ASSESSMENT A.\I> I' \YMENT OF THE TAX 411
dicta of the Supreme Court, we think that the true
determination is that, when taxes are paid under protest
that they are being illegally exacted, or with notice that
the pay or contends that they are illegal and intends to
institute suit to compel their repayment, a sufficient
foundation for such a suit has been established. In the
case at bar, however, there was more than the simple
payment of the tax under protest as to its illegality, as
it was paid upon the demand of the Collector, coupled
with a threat that unless promptly paid, the same would
be collected with a penalty and interest at 1% per
month. Payment upon such a demand from a govern-
ment official, acting within the scope of his authority,
constituted such a duress as clearly made such payment
involuntary." 48 It seems that the present form of
notice and demand although not containing an express
threat to collect the 5% penalty and interest, but contain-
ing a statement that such penalty and interest will ac-
crue, is sufficient duress to compel involuntary payment
by the taxpayer in order to protect himself from the
penalty and interest. However, there can be no doubt
that payment upon receiving the second notice and de-
mand is clearly payment under duress, since that notice
threatens the seizure and sale of the taxpayer's property
to satisfy the tax, penalty, interest and casts. 48 If the
taxpayer delays payment until the receipt of such notice,
in order that it may be shown that payment was clearly
made under duress, penalty and interest must also be
paid, and the protest should be not only against payment
42 Herold v. Kahn, 159 Fed. 608; 86 C. C. A. 598; citing Chese-
brough v. U. 8., 192 U. 8. 253 ; 24 Sup. Ct 262, 42 L. Ed. 432,
and City of Philadelphia v. Collector, 5 Wall. 720, 18 L. Ed. 614.
48 See Form 1-21A or 1-21B.
412 FEDERAL INCOME TAX
of the tax but against payment of such penalty and
interest as well.
Form of Receipt for Payment of Tax. The only offi-
cial receipt for taxes that collectors may sign under the
law is the form prescribed by the Department. How-
ever, there is not objection, on the part of the Depart-
ment, to collectors signing commercial receipts or
voucher checks, but they should in signing such receipts
or vouchers write or stamp across the face thereof "not
an official receipt." The official receipt must also be
furnished, and an unofficial receipt is not in any manner
binding on the Government and will not be received by
it as evidence of payment of the tax. 44 Deputy collectors
may give taxpayers, at the time of the payment, a per-
sonal receipt stating that the amount of payment has
been received to be forwarded to the collector. 45
Abatement and Refund. The taxpayer may file a
claim for abatement of an assessment which he thinks
is erroneous after the assessment has been made and
before the tax is paid, or may file a claim for refund of
a tax which he thinks has been erroneously assessed after
the tax is paid. A further discussion of this subject is
contained in the chapter on abatement and refund. 46
i
Additional Assessment. The law provides that in
cases of refusal or neglect to make a return and in cases
of erroneous, false, or fraudulent returns, the Commis-
sioner of Internal Revenue shall, upon the discovery
thereof, at any time within three years after the return
44 T. D. 2226.
45 T. D. 2341.
46 See Chapter 39.
ASSESSMENT AND PAYMENT OP THE TAX 413
i* due, or has been made, make a return upon informa-
tion obtained as provided for in the law, or require the
necessary corrections to be made, and in such cases the
assessment made by the Commissioner of Internal
Revenue thereon shall be paid by the taxpayer immc
diately upon notification of the amount of such assess-
ment. The usual ten day period of grace, however, ap-
plies to such assessments as well as to the regular assess-
ments.* 7 Although the Commissioner of Internal Reve-
nue has power summarily to assess the tax upon dis-
covery of income which has not been reported, yet if
such discovery is made prior to the day on which tin 1
tax is due (June 15th or in the case of the corporations
tiling for their fiscal year 165 days after the closing of
the fiscal year) the tax cannot be summarily assessed,
but may be paid at any time before the regular due date
with an additional period of ten days of grace. 48 Where
a summary assessment is made after the regular due
date, the tax is due immediately upon notice and demand
given by the collector. 49 Additional assessment may be
made where the erroneous return is due to an honest
mistake, and where the mistake is not discovered until
after the tax is assessed and has been paid in the regular
course. 50
AMENDED RETURNS. Where an individual or a fiduci-
ary or a withholding agent has been found subject i :i
further tax as a result of the audit of his return, or an
investigation made by a revenue agent, it is not necessary
to file an amended return, but the taxpayer is advised
Act of September 8, 1916, f 9 (a) and 14 (a).
T. D. 2003.
Reg. 33, Arts. 177 and 184.
60 Eliot National Bank v. Gill, 218 Fed. 600; 134 C. C. A. 358.
414 FEDERAL INCOME TAX
by letter of the amount of additional tax to be assessed
and the reasons for making such assessments. 61 In the
case of corporations amended returns are required, but
the examining officers of the Government are required to
give the officers of the corporation the fullest oppor-
tunity to make any investigation that may be desired
prior to signing the amended returns, provided such
investigation does not cover an unreasonable length of
time. 52
THREE- YEAR LIMITATION ON SUMMARY ASSESSMENT.
The statute authorizes the Commissioner of Internal
Revenue to make a summary assessment of the tax on
undisclosed income, if the discovery is made within three
years after the return in which such income should have
been reported was due. It is not necessary that the assess-
ment be made within three years, so long as the dis-
covery is made within that time. In computing the
three year period, March 1, the date on which the re-
turns should have been filed or was filed in due course,
should be excluded. The general rule in' the interpreta-
tion of statutes, where time is to be computed from a
particular day, is to exclude the day thus designated
and to include the last day of the specified period. 63
The three years limitation in this provision is not a
limitation upon the right of the Government to sue for
unpaid taxes, but at most is a limitation upon the right
of the collecting officers to make assessment and enforce
the payment by the summary statutory proceedings. 64
51 Mimeograph letter No. 1232 to Collectors.
52 Letter from Treasury Department dated February 2, 1915;
I. T. S. 1917, 11 1617.
53 Eliot National Bank v. Gill, 218 Fed. 600; 134 C. C. A. 358;
National Bank of Commerce v. Allen, 223 Fed. 472 ; 139 C. C. A. 20.
54 U. S. v. Grand Rapids & Indiana By. Co., 239 Fed. 153.
ASSESSMENT AND PAYMENT OP THE TAX 415
WAIVING THE THREE- YEAR LIMITATION. While the
Government is fully authorized to recover taxes by suit
upon discovery of liability to original or additional tax
after the three-year period, the Treasury Department
prefers that the collection should be made in the or-
dinary statutory method, that is, as a result of a formal
assessment. Jn order that this may be done taxpayers
are requested to make amended returns and to execute
waivers in such form as will waive the three-year statu-
tory limitation. In executing such waiver, the tax-
payers forfeit none of their rights and assume no liabil-
ity to any penalty that might not be enforced against
them in the absence of such waiver. If the taxpayer,
against whom an additional tax liability is discovered,
will formally accept the findings of the examining of-
ficer and agree voluntarily to pay the tax, this amounts
to a waiver and neither amended returns nor waivers
will be required. 65 There seems to be no objection to a
taxpayer signing a waiver where additional tax liability
is discovered after the expiration of the three-year period,
providing he does not question the legality of the assess-
ment. The result of signing a waiver will be to compel
him to pay the tax under protest and sue for its re-
covery, while if a waiver is not signed, the Government
becomes the plaintiff in an action brought to collect sin-h
tax.
REFUND OP TAXES COLLECTED ON SECOND ASSESSMENT.
Where a second assessment is made in case of a list, .state-
ment, or return, which in the opinion of the collector or
deputy collector was false or fraudulent, or which con-
tained any understatement or undervaluation, such as-
sessment shall not be remitted, nor shall taxes collected
65 Mim. Letter No. 1192 to Collectors.
416 FEDERAL INCOME TAX
under such assessment be refunded or paid back, unless
it is proved that said list, statement, or return was not
false or fraudulent, and did not contain any under-
statement or undervaluation. 66
Interest on Delinquent Taxes, interest for the full
time from the second due date will be collected on an
assessment the abatement for which has been applied for
and rejected; that is time consumed in considering the
claim must be included. 57 Where penalty has been added
for delinquency, interest is reckoned upon the entire
assessment including both the tax and the penalty. 68 In-
terest is recoverable as interest and not as penalty. 69
Suit for Collection of Taxes. Where net income has
been incorrectly stated in a return and the tax based
upon such return has been paid, an action of indebitatiis
assumpsit will lie to recover the balance of the tax, which
should have been levied and paid, without any formal
assessment of such tax. Neither the limitation of three
years as to summary assessment, nor any other statute of
limitation bars an action by the United States Govern-
ment to recover the difference between the amount of
the tax levied and paid and the amount which should
have been levied and paid, if the return had correctly
stated the net income. 60 In the collection of the taxes
imposed by statute the Government is not confined to the
summary proceedings therein provided, but may resort
to a plenary suit. Where a tax of a fixed percentage
56 E. S., 3220.
57 Keg. No. 1, page 110.
58 T. D. 870, February 27, 1905.
59 u. S. v. Guest, 143 Fed. 456.
. 60 U. S. v. Minneapolis Threshing Machine Co., 229 Fed. 1019.
ASSESSMENT AND PAYMENT OP THE TAX 417
is imposed by the statute on a subject or object which is
so definitely described in the statute that its amount or
value, on which the fixed percentum is to be calculated,
can be ascertained and determined, on evidence, by a
court, a suit for the tax will lie without an assessment. 61
Suits for the collection of taxes can be brought at any
time whether the taxes have been assessed or not, or
whether they are or are not assessable. 68 Interest on
taxes sued for runs from the time the taxes were due. 68
Lien for Unpaid Taxes. If any person liable to pay
any tax neglects or refuses to pay the same after de-
mand, the amount shall be a lien in favor of the United
Siatrs from the time when the assessment-list was re-
ceived by the collector, except when otherwise provided,
unlil paid, with the interest, penalties, and costs that
may accrue in addition thereto, upon all property and
rights to property belonging to such person. 64
NOTICE OP LIEN. The Government's lien for collection
of taxes is not valid as against any mortgagee, pur-
chaser or judgment-creditor, until notice of such lien
has been filed by the collector in the office of the Clerk
of the District Court of the District within which the
pn.prrty subject to such lien is situated, and is not
valid in a state which by appropriate legislation author-
i/t - tlir filing of such notice in the office of the registrar
or recorder of deeds of the counties of that state, 1111-
he notice is filed in the office of such registrar or
61 T. S. v. Grand Rapids & Indiana Ry. Co., 239 Fed. 153 and
eases cited therein. .
62 Dollar Savings Bank v. U. 8., 19 Wall. 227; Kane v. U. 8.,
'.".' r. 8. 229; U. 8. v. Little Miami Co. et al., 1 Fed. 700.
8 U. 8. v. Erie R. R., 106 U. 8. 327.
M R. 8., S 3186.
F. I. Tax 27
418 FEDERAL INCOME TAX
recorder of deeds of the county (or parish in the State
of Louisiana) within which the property subject to the
lien is situated. 66 A lien for taxes is not similar to the
lien of an ordinary incumbrance. It is not displaced
by a sale under a pre-existing judgment or decree, un-
less otherwise directed by statute. It attaches to the
res without regard to individual ownership, and when
it is enforced by sale pursuant to the statute prescribing
the mode of assessing and collecting taxes, the purchaser
takes a valid and unimpeachable title. 66 To create a
lien, demand must be made for a specific amount; all
steps required by law must be pursued strictly. The
lien requires an assessment, a notice of the tax due, and
a specific demand upon the individual taxpayer for p#y-
ment. 67 The Government is not compelled to resort to
a sale of chattels and personal effects of a taxpayer, be-
fore instituting proceedings to enforce a lien on the
taxpayer's real estate and leaseholds, and such lien may
be enforced against the grantees of the taxpayer's real
estate and leasehold interests subsequent to the filing
of the list with the collector and demand upon the tax-
payer, although the grantees had no notice of the
lien. 68
TIME WHEN LIEN ATTACHES. The statute expressly
provides that a lien for unpaid taxes in favor of the
United States shall attach from the time when the as-
sessment-list was received by the collector, except when
65 See Act of March 4, 1913, amending , 3186 E. S. Prior to
the Act of March 4, 1913, it was not necessary to file any notice
in compliance with State laws to make a lien effective. (U. S. v.
Snyder, 149 U. S. 210).
66 Osterberg v. Union Trust Co., 93 U. S. 424.
67 U. S. v. Pacific R. R., 1 Fed. 97.
68 U. S. v. Curry, 201 Fed. 371.
ASSESSMENT AND PAYMENT OF THE TAX 419
otherwise provided. No other provision seems to be
applicable to the income tax law. The 1916 Law provides
in part that "all administrative, special and general pro-
visions of law, including the laws in relation to assess-
ment, remission, collection and refund of internal-
revenue taxes not heretofore specifically repealed and
not inconsistent with the provisions of this title, are
hereby extended and made applicable to all the pro-
visions of this title and to the tax herein imposed." 69
Under the Income Tax Law it is the duty of the Com-
missioner of Internal Revenue to send to each collector
a list of the taxpayers liable for the tax in his district,
showing the amounts for which they are liable, within
such time that the collector may give the required notice
of assessment on or before the first day of June, and
upon such lists the collections are made. The lien is
fixed upon the assets of the taxpayer when this list
comes into the collector's hands. In the case of a cor-
poration which has distributed its assets prior to the
time when a lien would attach thereto, the Government
may proceed to collect the tax as a general creditor. 70
Taxes Collectible by Distraint. If any person liable
to pay any taxes neglects or refuses to pay the s^me
within ten days after notice and demand, it shall bo
lawful for the collector or his deputy collector to col-
lect the taxes, with the 5% penalty, and interest at
the rate of \% per month, by distraint and sale of the
goods, chattels or effects, including stocks, securities,
and evidences of debt, of the person delinquent. 71 This
section of the statute exempts certain property from
Act of September 8, 1916, $ 22.
70 See Chapter 12 on corporations.
71 R. S., 3187.
420 FEDERAL INCOME TAX
distraint in the case of the head of a family. Extensive
provision is made in the statute for the mode of levy-
ing distraint and proceedings on distraint. 72
72 See E. 8., 3188, et seq.
CHAPTER 37
PENALTIES AND COMPROMISES
Several penalties are contained in the law for failure
to comply with its provisions and for making false or
fraudulent statements in the returns. The penalties
take two forms: (a) specific penalties in the nature of
fines between minimum and maximum limits, and (b)
penalties of either 50% or 100% of the amount of
tax due.
Suit to Enjoin Collection of Penalties. While Section
:>M of the Revised Statutes, which prohibits suits to
enjoin the collection of internal revenue taxes, does
not specifically include "penalties" as such, yet where
penalties are authorized by the statute to be added to
the tax and collected as a part of the tax, the courts
will hold that the penalty is a part of the tax, and its
collection cannot be enjoined. 1
Failure to File Return of Annual Net Income. If an
individual fails to file a return the specific penalty is
not less than $20 nor more than $1,000. 8 In the case
of a corporation the specific penalty is any amount not
ding $10,000. 3 In any case of failure to file a
1 Kohlhamer v. Smietanka, 239 Fed. 408.
Act of September 8, 1916, 8 18.
Id. U (c).
421
422 FEDERAL INCOME TAX
return or list within the time prescribed by law or by
the collector, the Commissioner of Internal Revenue
also adds to the tax 50% of its amount. 4
EXCEPTION. When a return is voluntarily, and with-
out notice from the collector, filed after the time pre-
scribed by law, and it is shown that the failure to file
was due to a reasonable cause and not to wilful neglect,
the addition of 50% of the tax is not made. 5 The notice
referred to in this provision of the law is the formal
notice contemplated by Section 3173 of the Revised
Statutes. 6 Where revenue agents or examining officers
receive a return after the due date, or examine the
books covering a delinquent return for the year 1916,
or any subsequent year, the assessment of 50% addi-
tional will be recommended only if such formal notice
had been given prior to the filing of the return, or the
discovery of unreported income. If the formal notice
has not been given prior to such discovery or to the
making of the return, a return will be considered vol-
untarily filed, although informal notice may have been
given by the collector or agent. 7 This provision waiv-
ing the penalty in case of voluntary filing is contained
in a section of the general revenue laws amended by
and contained in the 1916 Law and has been held, by
,. the Treasury Department, to apply only to returns
filed under the 1916 Law, since Section 24 of the 1916
Law continues in force all the provisions of the
1913 Law for the assessment and collection of taxes
which have accrued thereunder, and for the imposition
4R. S. 3176; T. D. 1950.
5 E. S. 3176, as amended by Act of September 8, 1916.
6 This notice is known as Form 1045.
7 Mimeograph letter to Collectors, C. T. No. 54.
PENALTIES AND COMPROMISES 423
and collection of all penalties and forfeitures. In the
case of delinquent returns filed under the 1909 and
the 1913 Laws, the respective provisions of those laws
will be enforced and the additional tax assessed, together
with the specific penalty. The 50% additional tax will
be assessed, or reported for assessment, only in those
a-M'S under the 1913 and 1909 Laws where the delin-
quency was discovered within three years from the date
the returns were due to be filed, and the specific pen-
alty will be assessed only in those cases in which the
delinquency was discovered within five years from the
date the returns were due. 8 The ruling of the Treasury
Department holding that the provision which waives the
penalty applies only to returns filed under the 1916
Law, does not seem to take into consideration the fact
that although the provision is contained in the 1916
La\\, yet it is an amendment to a section of the revenue
laws applying generally and, it seems, operates to super-
sede the penalty provisions of the 1913 Law and the
1909 Law with respect to all returns filed under those
laws on and after September 9, 1916, as well as to
returns under the 1916 Law.
Returns of Withholding Agents. Failure to make
and tile withholding returns on or before March 1st
renders a withholding agent liable to the specific pen-
alty or not less than $20 nor more than $1,000, but
the r>0% addition to the tax for failure to make a return.
ami the 100% addition for intentional false or fraudu-
lent return, is not assessed against withholding agents. 9
8 M imeograph letter to Collectors, C. T. No. 56.
9 Mimeograph letter to Collectors, No.
424 FEDERAL mCOME TAX
Specific Penalty Not Waived by Accepting Return.
The specific penalty is not waived or remitted by the
fact that the Commissioner accepts a delinquent return. 10
Intentional Neglect or Refusal to Make Returns.
The same specific penalties apply to intentional neglect
or refusal to make returns as apply to all cases of
failure to make returns, but in the case of intentional
neglect or refusal the penalty of 100% of the tax is
added, unless the neglect is due to sickness or absence. 11
False Returns. The law provides that ''in case a
false or fraudulent return or list is wilfully made, the
Commissioner of Internal Revenue shall add to the tax
100 per centum of its amount. This provision does not
seem to include returns which are false in the sense
of containing mistakes or unintentional misstatements.
A return may be false, in the sense used in those sec-
tions of the law which permit summary assessments
in the case of erroneous, false or fraudulent returns,
without being false in the sense used in the provision
prescribing the penalty tax of 100%. 12 There seems
to be no penalty imposed in case a return is false in
the sense of being incorrect in the absence of wilful
intent to make a false return.
Fraudulent Returns. Where a false or fraudulent
return is wilfully made the Commissioner of Internal
Revenue adds to the tax 100% of its amount. This
10 U. S. v. Suprise 5, 10 & 19c Store, not yet officially reported.-
11 T. D. 1950.
12 Act of September 8, 1916, 9 (a) and 14 (a). Eliot Nat.
Bank v. Gill, 218 Fed. 600.
PENALTIES AND COMPROMISES 425
increase is only made in case the return is fraudulently
false. 13
Fine Against Officer of Corporation. In case an offi-
cer of a corporation, charged with the duty and respon-
sibility of making and verifying a return, makes a false
or fraudulent return, with the intent of defeating or
evading any assessment or tax, he is guilty of a mis-
demeanor and subject to a fine not to exceed $2,000,
or to imprisonment not to exceed one year, or both, at
the discretion of the court, together with the costs
of prosecution. 1 *
Failure to File Information at Source. Any person,
corporation, partnership, association or insurance com-
pany called upon to supply information required by
the law, who refuses or neglects to do so at the time
or times specified in each year, shall be liable to a
penalty of not less than $20 nor more than $1,000. 16
FAILURE TO WITHHOLD TAX AT THE SOURCE. Any per-
son required by law to deduct and withhold the tax at the
source is personally liable for such tax. 18
Delay in Payment of the Tax. In the case of indivi-
duals any sum or sums due and unpaid after the 15th
day of June in any year, and for ten days after notice
and demand thereof by the collector, there shall be
added the sum of 5% on the amount of tax unpaid,
13 National Bank of Commerce v. Allen, 223 Fed. 472.
HT. D. 1950, Act of September 8, 1916, g 18.
1 Act of September 8, 1916, 18, as amended by Act of October
, 1917.
16 Act of September 8, 1916, 8 9 (b).
426 FEDERAL INCOME TAX
and interest at the rate of \% per month upon said
tax from the time the same became due. In the case
of corporations, the same penalty, and the same rate of
interest, is added to any sum or sums due and unpaid
after the 15th day of June in any year (or after 105
days from the date on which the return of income is
required to be made in the case of corporations report-
ing for their fiscal years) and for ten days after notice
and demand thereof by the collector. 17 This penalty
and interest do not accrue in case of any tax due from
the estates of insane, deceased or insolvent persons,
where the return was made by the incapacitated per-
son and he becomes insane, or dies, or becomes insolvent,
after making the return and prior to the required date
of payment of the tax. 18 When an assessment has been
made for a tax or penalty and within ten days after
demand a claim for abatement is filed, and accepted
by the collector, the time ceases to run against the
claimant as to the 5% penalty, until the claim is re-
jected. Upon receipt of the notice of rejection of the
claim, the tax may be paid within ten days from
the date of the notice, without penalty. Interest at the
rate of 1% per month, however, continues to run and
is collected for the full number of calendar months
which intervene between the date of the expiration of
the first ten days' notice and the date of payment of the
tax, notwithstanding that a claim for abatement lias
been filed. 19
17 Act of September 8, 1916, 9 (a) and 14 (a):
18 Letter from Treasury Department dated April 1, 1916;
T. S. 1917, If 476.
19 Reg. No. 14, October 15, 1911 ; Eeg. No. 1, page 110.
PENALTIES AND COMPROMISES 427
Statute of Limitations. The Revised Statutes 80 pro-
vide that no suit or prosecution for any penalty or
forfeiture, pecuniary or otherwise, accruing under the
laws of the United States, shall be maintained, except
in cases where it is otherwise specially provided, unless
the same is commenced within five years from the time
when the penalty or forfeiture accrued. The statute
does not run, however, if the person liable for the
penalty is not to be found within the United States
so that proper process may be served against him.
Compromise of Penalties. The Commissioner of In-
ternal Revenue, with the advice and consent of the
Secretary of the Treasury, may compromise any civil
or criminal case arising under the internal revenue laws
instead of commencing suit thereon ; and, with the advice
and consent of the said Secretary, and the recommenda-
tion of the Attorney General, he may compromise any
case after a suit thereon has been commenced. When-
ever a compromise is made in any case there shall be
placed on file in the office of the Commissioner the
opinion of the Solicitor or Internal Revenue, or of the
officer acting as such, with his reasons therefor, with
a statement of the amount of tax assessed, the amount
of additional tax or penalty imposed by law in conse-
quence of the neglect or delinquency of the person
against whom the tax is assessed, and the amount
actually paid in accordance with the terms of the com-
promise. 81 He has under this section no power to
compromise a suit against the Government, 88 the power
o R. s., 1047.
81 R. 8., 3229 ; see 3469, as to compromise of cases af tor
judgment
W 23 Op. Atty. Gen. 507.
428 FEDERAL INCOME TAX
being limited to suits which the Government may prose-
cute. A compromise operates for the protection of the
offender against subsequent proceedings as fully as a
formal conviction or acquittal, and is a bar to further
action. 23 Where an action is brought by the United
States against a delinquent taxpayer, for having failed
to file a return, the verdict must specifically state the
amount of the penalty, after which the only remedy
of the defendant (other than an appeal) is to apply
for a compromise. 24 Offers in compromise should in-
clude payments of cost. 25 .The amount of the offer should
be deposited with the Commissioner, but cannot be held
or set off against the tax due. 26
SPECIFIC PENALTIES. While the sections of the Re-
vised Statutes relating to compromises 27 do not in
express language refer to the compromise of the spe-
cific penalty for failure to file the return, neither are;
they restricted in terms, nor by any reason of public
policy, to penalties for the non-payment of taxes. In
the opinion of the Attorney General the application
of these sections to compromise of penalties for failure
to file returns in time is proper, and, further, that in
such compromises the Commissioner is authorized to
consider not only the pecuniary interests of the Treas-
ury, but also general considerations of justice, equity
and public policy. 28
83 U. S. v. Chouteau, 102 U. S. 603.
24 U. S. v. Acorn Koofing Co., 204 Fed. 157.
25 T. D. 642, March 20, 1903.
26Boughton v. U. S., 12 Ct. Cls. 330.
27 R. S., 3229 and 3469.
28 29 Op. Atty. Gen. 217.
PENALTIES AND COMPROMISES 429
FIFTY PER CENT. INCREASE OP TAX. The penalty of
50% increase in tax for failure to file returns is found
in practically all revenue laws relating to special taxes,
and the uniform construction has been that no admin-
istrative officer is clothed with authority to compromise
such increase in tax. 89 The income tax law is explicit
and mandatory in its provisions relative to the addi-
tional assessment of 50% of the tax otherwise due, in
case of failure to file a return of income within the
prescribed time, and does not give discretionary author-
ity for remission of these additional taxes to any officer
of the Government. 80 Since the 50% penalty was not
subject to compromise under the general revenue laws,
Congress passed an act providing particularly for the
refund of such additional taxes, assessed under the 1909
Law, for neglect to file returns, 81 but no such statute
has been passed with respect to penalties incurred under
the 1913 Law or the 1916 Law.
Offers in Compromise. It is the practice of the
Treasury Department to accept, as a minimum offer,
$5 from individuals and withholding agents, and $10
from corporations, in compromise of the specific pen-
alty incurred for failure to file returns, in cases where
the neglect w r as not intentional. 88 Offers in compromise
do not receive favorable consideration in cases where
returns for the year in question have not been filed,
but such offers are accepted "subject to the filing of
the return." 88 No particular form is prescribed for
D. 1701.
30 T. D. 2135.
31 Act of March 3, 1913.
38 T. D. 2311 ; T. D. 2349.
33 T. D. 2311.
430 FEDERAL INCOME TAX
use in making offers in compromise of the specific
penalties, and such offer may be made in the form of
a letter addressed to the local collector. Each offer
in compromise should be accompanied by an affidavit
in which the proponent should state briefly the facts
which caused the delinquency. Where affidavits allege
facts that no delinquency was incurred or recite cir-
cumstances which warrant relief from the specific
penalty, the offer is returned, unless there are facts
in the possession of the collector at variance with the
contentions made by the proponents. All delinquents
who do not compromise their liabilities to the specific
penalty, after ample opportunity, are reported to the
United States District Attorney for ^proceedings. 34 It
is the duty of every District Attorney to prosecute
every case for the collection of a fine, penalty or for-
feiture reported to him by any collector, unless, upon
inquiry and examination, he decides that such proceed-
ings cannot properly be sustained, or that the needs
of public justice do not require that such proceedings
be instituted; in which case he reports the facts to the
Commissioner of Internal Revenue for his direction. 36
34 T. D. 2311.
35 B. S., 838.
CHAPTER 38
EXAMINATION OF TAXPAYERS' BOOKS
For the purpose of verifying returns the Commis-
sioner of Internal Revenue may, by any duly author-
ized revenue agent or deputy collector, cause the books
of a taxpayer to be examined, and if such examination
discloses that the taxpayer is liable to tax in addition
to that previously assessed, the same is assessed and
becomes payable within ten days from the time of send-
ing the taxpayer a notice and demand. For the purpose
of such examination the books of the taxpayer shall
be opened to the examining officer, or shall be produced
upon a summons issued by any properly authorized
officer. 1 The authority for making such examination
of the taxpayer's books is contained in Sections 3172,
3173 and 3176 of the Revised Statutes, as amended
by, and contained in, the 1916 Law. Under these gen-
eral provisions applying to all revenue taxes, a collector
may send out his deputies to make inquiries. If any
person refuses to allow any regularly authorized, Gov-
ernment officer to examine his books or the books of
the person, firm, or corporation for whom he is agent,
it is lawful for the collector to summon such person,
or any other person having possession, custody or care
of the books of account containing entries relating to
the business of such taxpayer, or any other person
1 Beg. 33, Art. 186.
431
432 FEDERAL INCOME TAX
he may deem proper, to appear before him and pro-
duce the books at a time and place named in the sum-
mons, 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 col-
lection district where such person may be found and
there make the examination authorized by the law. If
the taxpayer fails to make a return or makes, wilfully
or otherwise, a false or fraudulent return, the collector
or deputy collector is authorized to make the return
from his own knowledge and from such information
as he can obtain through testimony or otherwise. 2 Sec-
tion 3173 of the Revised Statutes clothes collectors of
internal revenue with supervisory powers over and
authorizes them to investigate all accounts, lists, or
returns made or required to be made to them by any
and all classes of persons liable to pay taxes upon any
property, trade or business. 3 It has also been held that
the examination of books under this section is not an
infringement of the Constitution. 4 In all suits and pro-
ceedings, other than criminal, arising under any of the
revenue laws of the United States, the attorney repre-
senting the Government may, whenever in his belief
any business-book, invoice, or paper, belonging to or
under the control of the defendant or claimant, will
tend to prove any allegation made by the United States,
2E. S., 3173 and 3176, as amended by Act of September 8,
1916.
3 U. S. v. Hodson, 14 Int. Rev. Eec. 100.
4 In re Strouse, 1 Sawyer 605.
i:\AMINATION OF TAXPAYERS' BOOKS 433
make a written motion particularly describing such
book, invoice, or paper, and setting forth the allegation
which he expects to prove; and thereupon the court
may, at its discretion, issue a notice to the defendant
or claimant to produce the same. Upon failure to do
so the allegation stated in the motion is taken as con-
fessed, unless the failure or refusal is explained to the
satisfaction of the court. 5 This provision applies to
proceedings under the Internal Revenue laws as well
as the customs revenue laws. 6
Instructions to Revenue Agents. The following in-
structions have been given by the Treasury Department
to revenue agents and examiners : ' ' In conducting their
examination the agents will, except in clear cases of
in is representation, proceed on the assumption that all
errors in the returns rendered are unintentional; and
they will, so far as possible, make their examination
in such manner as not to interfere with the company's
business, either as to the use of its books or in the
general conduct of its affairs. Contentions with offi-
cers, employees or representatives of corporations are
to be carefully avoided, and no action that may cause
friction, that is not necessary in the proper perform-
ance of their duties, must be indulged in by officers
making these examinations. Ordinarily no very extended
\amination of the* company 's books will be necessary.
as the verification of the particular items to which atten-
tion has been called will be sufficient. Where, however,
a thorough examination is found to be necessary, and
the accounts are so kept as to involve much labor in
their examination, the agent may assign two assistants
6 Act of June 22, 1874, 18 Stat. 187.
U. S. v. Distillery, 21 Int. Rev. Rec. 366.
F. I. Tax. 28
434 FEDERAL INCOME TAX
for this purpose. Where discrepancies between the
company's books and the return made are discovered,
the officers of the company should be given full oppor-
tunity to explain the same, and to furnish, if so desired,
a sworn statement in reference thereto. In such cases
the agent will, if deemed necessary, require the attend-
ance of any officer or employee of the company, and
there examine such officer or employee respecting % the
matter under investigation. The witnesses in such cases
should be duly sworn by the agent, and in case of
refusal of any such officer or employee to testify, or
in the case of refusal to produce the books or papers
called for, the agent will at once report the fact to
this office." 7
^
7T. D. 1617.
CHAPTER 39
ABATEMENT, REFUND AND RECOVERY OP TAXES
The prompt collection of the revenue and its faith-
ful application is one of .the most vital duties of
Government. Depending, as the Government does, upon
its revenue to meet not only its current expenses, but
to pay the interest on its debt, it is of the utmost impor-
tance that it should be collected with despatch, and
that the officers of the Treasury should be able to make
a reliable estimate of means in order to meet liabilities.
It would be difficult to do this, if the receipts paid
into the Treasury were liable to be taken out of it, on
suits for alleged errors and mistakes, concerning which
the officers charged with the collection and disbursement
of the revenue had received no information. To guard
against such consequences, Congress has from time to
time passed laws on the subject of the revenue, which
not only provide for the manner of its collection, but
also point out a way in which errors can be corrected.
These laws constitute a system which Congress has pro-
vided for the benefit of those persons who complain
of illegal assessments of taxes and illegal exactions of
duties. The party aggrieved can test the question of
the illegality of an assessment or collection of taxes
by suit; but he cannot do this until he has taken an
appeal to the Commissioner of Internal Revenue. Thus
it will be seen that the person who believes he has suf-
fered wrong at the hands of the collector can appeal
435
436 FEDERAL INCOME TAX
to the courts; but he cannot do this until he has taken
an intermediate appeal to the Commissioner, and, in
any event, he is barred from bringing a suit, unless
he does it within the period limited by law. The object
of these different provisions is apparent. While the
Government is desirous to secure to the citizen a
mode of redress against erroneous assessments or col-
lections, it says to him: "We want all controverted
questions concerning the revenue settled speedily, and
if you have complaint to make, you must let the Com-
missioner of Internal Revenue know the grounds of it;
but if he decides against you, or fails to decide at all,
you can test the question in the courts if you bring
your suit within a limited period of time." l The Com-
missioner of Internal Revenue, subject to regulations
prescribed by the Secretary of the Treasury, is author-
ized, on appeal made to him, to remit, refund, and
pay back all taxes erroneously or illegally assessed,
or collected, all penalties collected without authority,
and all taxes that appear to be unjustly assessed or j
excessive in amount, or in any manner wrongfully
collected. 2
Taxes Paid on Second Assessment. Where a second
assessment has been made by the collector 3 in case ofl
a list statement or return which, in the opinion of the
collector, or deputy collector, was false or fraudulent,
or contained any understatement or undervaluation,
such assessment shall not be remitted, >nor shall taxes
collected under such assessment be refunded, or paid
1 Nichols v. United States, 7 Wall. 122; U. S. v. Real Estate
Savings Bank, 104 U. S. 728.
2 E. S., 3220.
3 See Chapter 36.
ABATEMENT, REFUND AND RECOVERY OF TAXES 437
, back, unless it is proved that said list and statement, or
return, was not false or fraudulent, and did not con-
tain any understatement or undervaluation.*
Who May Claim Recovery of Tax. As a general rule,
the taxpayer against whom the tax is assessed and by
whom the tax is paid is the one who is entitled to claim
abatement or refund or sue for its recovery. In cases
where the tax has been withheld at the source the
claim for abatement or refund may be made either
by the withholding agent against whom the assessment
was made or by the person for whose account such taxes
were withheld. 8 Where one corporation had leased all
of its property to another, a tax being thereafter assessed
upon the lessor,' and its claim for an abatement being
rejected, the tax was paid by the lessee to avoid the
penalty threatened by the collector and to avoid dis-
traint and sale of the leased property. The court held
that the payment by the lessee was not voluntary and
that it was entitled to sue for its recovery without
regard to' privity of contract between it and the
collector. 6
Abatement. The Secretary of the Treasury has pro-
vided two forms for the purpose of refund and abate-
ment. One is made applicable to the return of taxes
and penalties illegally or improperly assessed and
paid, and the other for an abatement of their assess-
ment. The former is applicable to cases where the
taxes and penalties have been paid, and the latter to
cases where they have not been paid. These regulations
4 B. 8., 8 3220.
5 Reg. 83, Art. 33.
Cambria Steel Co. v. McCoach, 225 Fed. 278.
438 FEDERAL INCOME TAX
of the Secretary have the force of law, and the Federal
Courts are obliged to take notice of them. Further-
more, they are obviously binding upon the Commissioner
and he obtains jurisdiction to pass upon a claim only
when and as they have been complied with. The merits
of a case come before him when a proper claim has
been made. Under a claim for abatement he can only
determine whether or not the assessment should be
abated. Any further action would be in violation of
the regulations and beyond his jurisdiction. 7 The Com-
missioner possesses no equity powers in case of abate-
ment; if the tax is a legal one he cannot abate it. 8 It
seems that the Commissioner has no authority to revoke
the abatement of a tax once made by him, but he may
re-assess the tax. 9
EFFECT OF REJECTION OF CLAIM FOR ABATEMENT. By
weight of authority it seems that, if an appeal is taken
from an assessment and decided against the appellant,
and the tax is afterwards collected, it is not necessary
to take a second appeal for refund of the payment
before commencing suit to recover the tax. 10 When
the abatement claim has been considered and rejected
upon its merits, no claim for refund is necessary to
lay foundation for a suit. 11 In a recent case it was
said: "What the Commissioner of Internal Revenue
thought about the assessment had been obtained upon
7 Hastings v. Herold, 184 Fed. 759.
8 Decision No. 180, 36 Int. Rev. Rec. 13.
9 U. 8. v. Alexander et al., 110 U. S. 325.
10 San Francisco Savings Society v. Gary, 2 Sawyer 393.
UDeBary v. Dunne, 162 Fed. 961; Schwarzschild and Suls-
berger Co. v. Rucker, 143 Fed. 656; T. D. 974; Grier v. Tucker,
150 Fed. 657; T. D. 1293; Contra, Hastings v. Herold, 184 Fed.
759.
ABATEMENT, REFUND AND RECOVERY OF TAXES 439
full statement of the facts, and it would have been a
useless form again, after the tax was paid, to appeal
to the Commissioner and obtain the same* judgment.
The reason for the appeal did not exist, and hence the
appeal after the tax was paid was not necessary." 12
This seems to be the general rule, but it has also been
held to the contrary that under a claim for abatement
the Commissioner can only determine whether or not
the assessment should be abated. Any further action
would be in violation of the regulations and beyond
his jurisdiction, and where the abatement was rejected,
but no application was made for refund after paying
the tax, it was held that a suit could not be main-
tained. 13
PROCEDURE FOR CLAIMING ABATEMENT. Claim for
abatement of taxes or penalties erroneously or illegally
assessed, or which are abatable under remedial acts,
etc., must be made out on the form prescribed by the
Government u and must be sustained by the affidavits
of the parties against whom the taxes were assessed,
or of other parties cognizant of the facts. 15 The prac-
tice is to obtain the official form from the local col-
lector, prepare it according to instructions and file it
with the local Collector. The claim for abatement can
only be made between the time the tax is assessed and
the date it is due. If the claim has not been acted upon
within ten days after notice and demand for the tax,
interest will accrue from the due date, but the 5%
12 Weaver v. Ewers, 195 Fed. 247.
13 Hastings v. Herold, 184 Fed. 759. The weight of authority
seems to be contrary to the rule in this case.
14 The form prescribed by the Government is known as Form 47.
15 Reg. No. 14, Rev. October 15, 1911.
440 FEDERAL INCOME TAX
penalty for failure to pay the tax will not accrue if
the tax is paid within ten days after the claim for
abatement is rejected. 16
Refund. Where the Commissioner of Internal Reve-
nue, in a case within the scope of his authority and
jurisdiction, has ordered a refund, a court cannot inquire
as to the sufficiency of the evidence before him, 17 and
neither the Comptroller of the Treasury nor any account-
ing officer has authority to review the Commissioner's
decision. 18 Decisions by the Commissioner of Internal
Revenue, in cases where a refund is directed, are
binding and, in the absence of fraud, or mistake of
calculation, not subject to revision. 19 The Commis-
sioner's decision is conclusive as to the questions of
fact, 20 but apparently not as to questions of law. 21 His
decisions are in the nature of awards made by arbi-
trators, and generally speaking bind both the claimant
and the Government. A refund may be impeached for
fraud, want of jurisdiction, mistake apparent in the
certificate, or for such irregularities as would avoid
an award. 22 The Commissioner of Internal Revenue
may reconsider and revoke an allowance for refund
at any time before the allowance is paid, but whether
a commissioner has power to revoke an allowance made
by his predecessor is not clear. 23 Where one Commis-
16 See Chapter 36.
ITWoolner v. U. S., 13 Ct. Cls. 355.
18 Bank of Greencastle v. U. S., 15 Ct. Cls. 225.
19 Dugan v. TJ. S., 34 Ct. Cls. 458.
20 U. S. v. Wright, 11 Wall. 648.
21 6 Comp. Dee. 259.
22 Dugan v. U. S., 34 Ct. Cls. 458; Gumming v. U. S., 22 Ct,
Cls. 344.
23 Ridgway v. U. S., 18 Ct. Cls. 707.
ABATEMENT, REFUND AND RECOVERY OF TAXES 441 '
sioner recommended the allowance of the claim and
referred the matter to the Secretary of the Treasury
for advisement, a succeeding Commissioner to whom
the matter was referred back could reject the claim. 24
The Commissioner is not precluded from allowing a
claim for refund because a former Commissioner
rejected a claim for abatement, and he is authorized
to reconsider and allow a claim which he had, through
error of law, previously rejected. An application for
the refund of taxes, though informal or defective, may
be regarded as a claim, so far at least as to permit a
formal amendment to be filed after the statute of
limitations has run. 85 The Commissioner of Internal
Revenue has no authority to remit the 50% penalty
unless it is illegally collected. The words "wrongfully
collected" are construed as synonymous with the
words "illegally collected." No equity powers are
conferred on the Commissioner, and the Commissioner
is authorized, not obliged, to .refund. 26
STATUTE OF LIMITATIONS. All claims for refund must
be presented to the Commissioner of Internal Revenue
within two years next after the cause of action accrued. 87
Presentation to the collector is equivalent to presenta-
tion to the Commissioner. 88 Where a protest was held
by the Commissioner to be an informal appeal, and a
formal application for refund was thereafter acted
upon, although made after the expiration of two years,
his decision was held to be conclusive and could not
8* Stotesbury v. U. S., 23 Ct. Cls. 285.
25 14 Op.' Atty. Gen. 615.
2616 Op. Atty. Gen. 667; 13 Op. Atty. Gen. 439.
27 R. S., 3228.
M Real Estate Savings Bank v. U. 8., 16 Ct. Cla. 335; 104 U. S.
728.
442 , FEDERAL INCOME TAX
be set aside by the court. 29 Failure to make a claim
for refund within two years after paying the tax is
a bar to a suit thereon. 30
WHEN STATUTE OP LIMITATION Is EXTENDED. Al-
though generally the provisions of Section 3228 limit
all claims for refund to a period of two years after
the tax has been paid, an extension of this time is
granted in cases where, upon examination of any return
of income made pursuant to the 1916 Law, the 1913 Law
or the 1909 Law, it appears that amounts of tax have
been paid in excess of those properly due. In such
cases the taxpayer is permitted to present a claim for
refund, notwithstanding the provisions of Section 3228. 31
This provision was inserted as a remedy in cases where
an agent of the Treasury Department makes an exam-
ination of a taxpayer's books within three years after
a return has been filed and discovers undisclosed income.
An examination may also disclose an overpayment, as
well as undisclosed income, in which case the result
of the examination may operate to the benefit of the
taxpayer as well as to the benefit of the Government,
regardless of the statute of limitations. Claims once
rejected by the Commissioner, because of the statute
of limitation in existence at that time, may be reopened
under this provision, if the adjustment necessitates an
examination of the return, but not otherwise. 32
PROCEDURE. The provisions for claiming refund must
be strictly complied with. 33 Claim for the refunding
29 First Nat. Bank of Greencastle v. U. S., 15 Ct. Cls. 225.
30 Kings County Savings Institution v. Blair, 116 U. S. 200.
31 Act of September 8, 1916, 14.
32 T. D. 2396.
33 Public Service Eailway Co. v. Herold, 219 Fed. 301 ; Public
Service Gas Co. v. Herold, 277 Fed. 496.
AHATKMKNT, KKFUND AND RECOVERY OF TAXES 443
of assessed taxes and penalties must be made out upon
the form prescribed by the Government. The burden
of proof rests upon the claimant. All the facts relied
upon in support of the claim must be clearly set forth,
under oath. 84 The practice is to obtain a copy of the
form from the local collector, prepare it according to
instructions thereon, and file it with the local collector
for further action. The collectors of internal revenue
and revenue officers are forbidden to prepare affidavits
for persons claiming remission of taxes or penalties
under the internal revenue law. 86 An appeal for abate-
ment or refund is imperfect if it does not have endorsed
thereon the affidavit of the deputy collector and cer-
tificate of the collector required by the regulations, 86
but this is a matter of action within the Department.
Suits to Recover Taxes. If a claim is rejected by the
Commissioner, a judicial remedy is given the taxpayer
l'\ an action against the collector or the United States.
If the claim is allowed by the Commissioner and pay-
incut refused by the accounting officers, a suit may
be brought directly against the Government in the Court
of Claims. 87 The allowance of the claim by the Com-
missioner may be used as the basis of an action ajrainst
the United States in the Court of Claims, when pay-
iih'iit is not made by reason of the refusal of any of
thf officers of the Department to pass or to pay tin-
claim, and it will be prima facie evidence of the amount
that is due, and puts on the Government the burden
84 Reg. 14 Rev. The form to be used in claiming refund is
officially known as Form 46.
36 T. D. 2443.
36 Hastings v. Herold, 184 Fed. 759.
87 Edison Electric Illuminating Co. v. U. 8., 38 Ct. Cls. 208.
444 FEDERAL INCOME TAX
of showing fraud or mistake. 38 Before a suit can be
commenced to recover taxes erroneously or illegally
assessed or collected, or upon any penalty claimed to
have been collected without authority, or for any sum
alleged to have been excessive or in any manner wrong-
fully collected, an appeal must be made to and a deci-
sion rendered by the Commissioner of Internal Revenue,
according to the provisions of law in that regard, and
the regulations of the Secretary of the Treasury estab-
lished in pursuance thereof. If such decision is delayed
more than six months from the date of appeal, the
suit may be brought at any time within the period pro-
vided by Section 3227, Revised Statutes, without first
having a decision of the Commissioner. 39 Section 3227
provides that no suit to recover taxes wrongfully col-
lected may be maintained in any court, unless it is
brought within two years next after the cause of action
accrued. Under Section 3226 no suit can be maintained
unless the taxpayer appeals to the Commissioner of
Internal Revenue. This appeal must be made within
two years after the cause of action accrued. The ac-
crual of the cause of action is at the date the tax is
illegally assessed or collected. The date when the col-
lector receives the money in payment of the tax is
considered to be the date when the wrongful act is done
by the United States. For example, if a tax is paid
on June 28, 1917, the claim for refund must be filed on
or before June 28, 1919, and suit may then be com-
menced not less than six months after filing the claim
for refund, and not more than two years after the Com-
38 TJ. S. v. Real Estate Savings Bank, 104 U. S. 728 ; Kaufman
v. U. S., 96 U. S. 567.
39 R. S., 3226.
ABATEMENT, REFUND AND RECOVERY OF TAXES 445
missioner makes his decision on such claim for refund. 40
The claimant is not required to bring suit within two
years and six months after filing the claim for refund,
but may, at his election, await the decision of the Com-
missioner and, if adverse, bring suit within two years
thereafter. 41 The rejection of a claim, by the Commis-
sioner of Internal Revenue, must be on the merits and
not for irregularity in the form in order to support
an action. 48 If an imperfect claim is filed within two
years, it seems to be within the statute, although the
corrected application is not made within that time,
and if suit is brought within two years after rejection
of the corrected claim, it is within the statute, although
more than two years have expired since the first rejec-
tion. If the application for refund was filed more than
two years after paying the tax, suit cannot be main-
tained, and the fact that the Commissioner rendered
an adverse decision on the application, when filed, does
not operate to extend the time. 43
SUIT AGAINST COLLECTORS. The collector who exacted
the tax may be sued for the recovery thereof, but an
action thereon canot be commenced against his suc-
cessor in office. The remedy lies in an action against
40 New York Mail and Newpaper Transportation Co. v. Ainler
son, 234 Fed. 590.
41 Merck v. Treat, 174 Fed. 388; Cheatham v. U. 8., 92 U. 8. 85;
Kings County Savings Institution v. Blair, 116 U. 8. 200; Com-
missioners v. Buckner, 48 Fed. 533; Christie-Street Commission
Co. v. U. 8., 136 Fed. 326, affirming 129 Fed. 506; Farrell v.
tT. 8., >67 Fed. 639; Schwarzschild and Sulaberger v. Rucker,
143 Fed. 656; Hicks v. James' Administratrix, 48 Fed. 542; aff 'd
110 U. 8. 272.
48 Hicks v. Administratrix, 48 Fed. 542; aff'd 110 U. 8. 272.
43 Public Service Ry. Co. v. Herold, 219 Fed. 301.
446 FEDERAL INCOME TAX
the collector to whom the tax was paid, or in an action
against the United States. 44 It has been held that an
action of assumpsit may be maintained against the col-
lector who actually exacted the tax, and such action
can be revived against the personal representative of
the deceased collector. 45 When once an action has been
lawfully commenced against a collector, it does not
abate by reason of the expiration of his term, but in
such event the court may, under the express provisions
of the Act of February 8, 1899, 46 allow the suit to be
maintained against his successor.
SUITS AGAINST THE UNITED STATES. Suit for recov-
ery of taxes alleged to have been wrongfully assessed
and collected may be maintained directly against the
United States under the so-called Tucker Act. 47 In
answer to the question, "Can the plaintiff bring suit
to recover taxes, alleged to have been wrongfully
assessed and collected under the corporation tax law,
directly against the United States under the Tucker
Act, other requirements of law having been complied
with, or is its remedy against the Collector of Internal
Revenue by whom the assessment and collection were
made" it was held that the question was no longer
4* Roberts v. Lowe, 236 Fed. 604. In this case the court said
the latter remedy was apparently authorized by the case of U. S.
v. Emery, 237 U. S. 28; 35 Sup. Ct. 499; 59 L. Ed. 825. As to 1
suing collector personally under a state law for damages in wrong-
fully collecting taxes, see Public Service Ey. Co. v. Herold, 229
Fed. 902, 910.
45Fatton v. Brady, Executrix, 184 U. S. 608, 22 Sup. Ct. 493;
46 L. Ed. 713.
46 30 Stat. L. 822, c. 121.
47 Judicial Code 24, 1 20; Ch. 397, 24 Stat. 635 (U. S. Compiled
Stats, p. 3635).
ABATEMENT, REPUND AND RECOVERY OF TAXES 447
open. 48 The Tucker Act refers to original suits, and
does not permit a recovery of demands against the
United States on counterclaims. 48
PROTEST AND DURESS. In order to maintain an action
for the recovery of taxes it is necessary that the tax
shall have been paid under protest and duress. For
a discussion of this subject see the chapter on assess-
ment and payment of the tax. 60
Recovery of Interest. It is a well-settled principle
that the United States are not liable to pay interest
on claims against them, in the absence of express statu-
tory provision to that effect. It has beerv established
as a general rule in the practice of the Government
that interest is not allowed on claims against it, whether
such claims originate in contract or in tort; whether
they arise in the ordinary business of administration,
or the private acts of relief by Congress on special
application. The only recognized exceptions are where
the Government stipulates to pay interest, and where
interest is given expressly by an Act of Congress, either
by the name of interest, or by that of damages. Not
only is this the general principle and settled rule of
the executive department of the Government, but it
has been the rule of the Legislative Department, be-
cause Congress, though well knowing the rule observed
at the Treasury, and frequently invited to change it,
has refused to pass any general law for the allowance
and payment of interest on claims against the Govern-
** Emery, Bird Thayer Realty Co. v. U. 8., 198 Fed. 242, citing
Christie-Street Commission Co. v. U. 8., 136 Fed. 326.
U. 8. v. Nipissing Mines Co., 206 Fed. 431.
50 See Chapter 36.
448 FEDERAL INCOME TAX
rnent. 51 Where a person accepts from the .Government
without objection a refund of a sum illegally exacted
he gives up his right to sue for interest. 52 The ground
for refusal to allow interest is the presumption that
the Government is always ready and willing to pay
its ordinary debts. When, however, an illegal tax has
been collected, the citizen who has paid it, and has
been obliged to bring suit against the collector, is enti-
tled to interest in the event of recovery from the date
of the illegal exaction. 53 In a case where there had
been a delay of thirty years in prosecuting a claim to
recover internal revenue taxes, interest was not allowed
from the date of payment of the taxes, but was allowed
frpm the time of commencing the suit. 5 * It seems clear
that in a suit against a collector of internal revenue
interest may be recovered whether or not the same
rule applies to suits against the United States. 55 On
recovery of a judgment against a collector of internal
revenue for the amount of an internal revenue tax
illegally collected, the plaintiff is entitled to have the
judgment state that it is with interest. 56 Where judg-
ment is recovered in an action against K collector, inter-
est may be recovered up to the time final -judgment is
entered and a certificate from the trial court that there
was probable cause for the collection of the tax has
been "given. Upon giving such certificate the claim
becomes one against the United States, stopping the
right to further interest, unless a review of the judg-
ment by an appellate court is obtained, in which event
51 U. S. v. Bayard, 127 U. S. 260, 8 Sup. Ct. Eep. 1156.
52 Stewart v. Barnes, 153 U. S. 456.
53 Erskine v. Van Arsdale, 15 Wall. 75.
54Burrough v. Abel, 105 Fed. 366.
55 Conant v. Kinney, 162 Fed. 581.
56 New York Mail and Newspaper Transportation Company v.
Anderson, 234 Fed. 590.
ARATEMENT, REFUND AND RECOVERY OP TAXES 449
the judgment upon tin- mandate of the appellate court
will be treated as a final judgment, to the rendition of
which interest will be allowed, unless the plaintiff unduly
delays the presentation of his claim. 67 A suit against
a collector is a private suit and there is no claim, against
the Government until a certificate of probable cause,
under Section 989, Revised Statutes, has been obtained
from the court, at which time the Government assumes
a definite liability of the collector, which does not
include the payment of interest thereafter; neither is
there any further personal liability on the part of the
collector. The interest which may be recovered is that
put into the judgment before there is any certificate
of probable cause, and if none has been put in, the
Government assumes no part of the liability of the
defendant. The liability assumed by the Government
includes interest and costs forming part of the recovery,
I nit does not include interest after judgment. 68
Costs. Section 3220 of the Revised Statutes author-
izes the Commissioner of Internal Revenue to repay
to any collector or deputy collector the full amount of
such sums of money as may be recovered against him
in any court, for any internal taxes collected by him,
with the cost and expenses of suit; also all damages
and costs recovered against any collector, deputy col-
lector, or inspector, in any suit brought against him
by reason of anything done in the due performance of
his official duty. Under this section costs may be recov-
ered against the collector. 69 Judgment is usually given
in the District Court for costs and interest.
"Klock Produce Co. v. Hartson, 212 Fed. 758.
M White v. Arthur, 10 Fed. 80.
MDe Bary v. Carter, 102 Fed. 130. However, see Treat v.
Farmers Loan and Trust Company, 185 Fed. 760, 763, as to coats
in the Supreme Court and Circuit Court of Appeals.
F. T. Tax. 29
CHAPTER 40
INFORMATION AT THE SOURCE
A new administrative provision added to the 1916
Law 1 requires that information be furnished by brokers
as to their customers, by corporations as to dividend
payments and interest payments, by first collection
agencies as to foreign items, and by persons, corpora-
tions and partnerships generally as to payments of
income to others, in order that the Treasury Depart-
ment may have data on which to audit the returns of
annual net income. Rulings and regulations applying
these provisions have not been issued at the time of
this writing. The several classes of payments which
are required to be reported, and the provisions with
respect to each, are discussed in the following para-
graphs.
Miscellaneous Income, Gains and Profits. Payments
of interest, rent, salaries, wages, premiums, annuities,
compensation, remuneration, emoluments, or other fixed
or determinable gains, profits and income of $800 or
more in any taxable year must be reported. "Fixed
or determinable gains, profits and income" as used in
this section would seem to include payments of all the
kinds expressly enumerated and all payments of a simi-
1 Act of September 8, 1916, 26, 27 and 28, added by Act of
October 3, 1917.
450
INFORMATION AT THE SOURCE 451
lar kind or nature. In the case of collection at the
source the payments must be annual or periodical, while
in the case of information at the source the law does
not contain such limitation. Hence any payments of
the kind described, whether made in isolated cases or
from time to time, must be reported. It is immaterial
\v hot her or not an employee is employed for the full year
or his wages are fixed in advance or paid according
to the amount of work he does. 8 The only exception
is in the case of payments which do not amount to
$800 or more in any taxable year. If the aggregate
of several payments made to the same payee equals or
exceeds $800 in any taxable year the gross amount
should be reported. The payments may be from differ-
ent forms of income, as, for instance, from interest and
rent, or interest and salary. In such cases, it seems,
the total is required by law to be reported, if the aggre-
gate of all payments in the year to the same payee equal
or exceed $800. The income required to be reported
under this provision of the law and subject to the
minimum limitation of $800 does not include any of
the classes of income specifically required to be reported
as indicated in the following paragraphs. 8
Gains and Losses of Customers of Brokers. Every
person, corporation, partnership or association, doing
business as a broker on any exchange or board of trade
or other similar place of business, is required to dis-
close to the Commissioner of Internal Revenue the
names of customers for whom such broker has trans-
* Letter from Treasury Department dated October 25, 1917;
I. T. S. 1917, T2470.
3 Act of Soptomlwr 8, 1916, ? 28. n-l.lo.l by A deduct and withhold such sums as will be suffi-
cient to pay the normal tax imposed thereon by the 1916
Law. 28 Xo normal tax is imposed on non-resident aliens
3 Reg. 33, Art. 38.
2 * See Chapter 6.
25 Act of September 8, 1916, 9 (b) as amended by Act of
October ::, 1917.
464 FEDERAL INCOME TAX
by the 1917 Law. 26 This means that upon all payments
of income to non-resident aliens 2% must be withheld
at the source by the withholding agent and paid over
to the Government. There is* no withholding at the
source on payments of fixed or determinable income to
citizens or residents or to corporations or partnerships,
except as indicated in the following paragraphs.
Withholding on Payment of Dividends. The tax is
withheld on payment of dividends only in cases where the
dividend is paid to non-resident foreign corporations not
engaged in business or trade within the United States
and not having any office or place of business therein. 27
The law requires the corporation paying the dividend,
or its paying agent, to withhold the tax of 2% imposed
-by Section 10 (a) of the 1916 Law. This amount is to
be withheld regardless of the year in which the divi-
dend was earned by the paying corporation. 28 It has
been held by the Treasury Department that the tax of
4% imposed on foreign corporations by the 1917 Law is
not to be withheld at the source on payments of divi-
dends, 29 since, for the purpose of assessing the tax im-
posed by the 1917 Law, corporations are permitted to
deduct from their net incomes the amount of dividends
received from other corporations taxable under that
law. 30 Where stock, actually owned by a non-resident
foreign corporation having no office or place of business
in tli is country, stands on the books of the corporation
26 Act of October 3, 1917, 1.
27 Act of September 8, 1916, 13 (f).
28 T. D. 2584.
29 Letter from Treasury Department dated October 29, 1917,
I. T. S. 1917, U 2469.
30 Act of October 3, 1917, 4.
COLLECTION OF TAX AT THE SOUHCE 465
in the name of a nominal stockholder, the paying COI-JMI-
ration will be required to withhold the tax at the souiv
it' it has knowledge of the fact that the^ actual owner is
such a foreign corporation. 81 When stock dividends are
paid, the Treasury Department suggests that a domestic
corporation may protect kself by requiring the foreign
corporation stockholder to deposit with it, prior to the
payment of the stock dividend, an amount equal to the
tax, or to issue stock or scrip in payment of the balance
due on the stock after deducting the tax. In short, each
corporation, so far as the law is concerned, must provide
its own method for performing this duty. 32
Withholding on Payment of Bond Interest. The stat-
ute requires withholding at the source on payment of
lininl interest (as defined above) to non-resident aliens,
i KM i -resident foreign partnerships not engaged in busi-
>r trade in the United States and not having an
ofliee or place of business therein, and non-resident for-
eign corporations not engaged in business or trade in the
Tiiited States and not having an office or place of busi-
ness therein. The amount to be withheld at the source
depends upon the status of the owner of the income. If
the income is owned by a non-resident alien, 2% of the
payment is required to be withheld at the source; if the
nvner of the income is a foreign partnership no tax need
l>e withheld at the source, 88 if the owner of the income
31 Letter from Treasury Department dated October 23, 1917,
I. T. S. 1917, f 2467.
3 letter from Treasury Department dated April 10, 1917;
I. T. S. 1917, 1J 2188.
33 This anomaly is due to the language of $ 13 (e) of the 1916
Law, as amended by the Act of October 3, 1917, requiring tli<
tax imposed by "subdivision (a) of 8 10" of the 1916 Law to be
withheld at the source, which section imposes no tax on partner-
F. I. Tax. 30
466 FEDERAL INCOME TAX
is a foreign corporation, 6% of the payment is required
to be withheld 3 *
INTEREST ON BONDS CONTAINING COVENANTS TO PAY
THE TAX. Withholding is not required on payment of
bond interest to citizens and residents, unless the bond,
mortgage, deed of trust or other similar obligation of the
corporation contains a contract or provision by which the
corporation agrees (a) to pay any portion of the income
tax of the creditor or (b) to reimburse the creditor for
any portion of the tax or (c) to pay the interest without
deduction for any tax which the corporation may be
required or permitted to pay thereon or retain therefrom
under any law of the United States. 36 The corporation
is relieved from withholding only if the person entitled
to receive such interest files with it, on or before Febru-
avy 1st, a signed notice in writing claiming the benefit
of the personal exemption under Section 7 of the 1916
Law. 38 The 1917 Law 37 provides that the normal tax
imposed by that law shall not be withheld under this
provision on payments of interest made prior to January
ships. It has, therefore, been held that income of such partner-
ships is not in fact subject to withholding at the source. (Letter
from Treasury Department dated October 26, 1917, I. T. S. 1917,
f 2468) .
34 T. D. 2457.
35 Act of September 8, 1916, 9 (e) as amended by Act of
October 3, 1917. This provision has been called "an excrescence
on the law." Its purpose seems not to be so much to assist the
Government in collecting the tax as to shift the burden of the tax
from the creditor to the debtor corporation, a burden the corpora-
tion would not be required to assume were it not for the require-
ment that the tax be withheld at the source.
36 Act of September 8, 1916, 9 (c) as amended by Act of
October 3, 1917.
37 Act of October 3, 1917, 3.
COLLICCTION ni T\.\ \T -in i soi I 467
1, 1918, and that ou payments of interest made after that
date only one 2% normal tax shall be deducted and
withheld under this provision, any further normal tax
for which the recipient of such income is liable, under
the 1916 Law or the 1917 Law, being payable by the
recipient and not by the debtor corporation. If the
covenant does not require the corporation to pay the
tax imposed by the 1916 Law or the 1917 Law for the
bondholder, no tax need be withheld. 87 * The prac-
tical effect of these provisions of the law is that where a
corporation has issued bonds containing a covenant such
as described above, it will be required to go through
the motions of withholding 2% on all payments of interest
to citizens or residents, unless a certificate is filed claim-
ing exemption from the tax on such income. No tax will
actually be withheld, since the interest will be paid in
full under the terms of the covenant, and the corpora-
tion will pay the tax theoretically withheld. The citizen
or resident receiving such income will state, in his return
of annual net income, that a normal tax of 2% has been
withheld at the source, and the tax assessed against him
will be reduced to that extent Upon payments of such
interest to non-resident aliens, the corporation will be
required to withhold only 2%, since the normal tax
under the 1917 Law is not imposed on non-resident
aliens. If the owner of the bond is a non-resident foreign
corporation having no office or place of business in this
country, the Treasury Department requires 6% to be
withheld at the source, and the paying corporation will
consequently assume the burden of a tax of 6% on all
such payments. If a citizen or resident is not subject to
the income tax by reason of the personal exemption to
37 Letter from Treasury Department dated November 21, 1917;
I. T. S. 1917, 1 2511.
468 FEDERAL INCOME TAX
which he is entitled, he should file, on or before February
1st of the year following that in which the interest was
paid, a certificate claiming exemption, as otherwise he.
will subject the paying corporation to an expense of 2%
of the amount of interest, although no tax is justly due. 38
The normal tax required to be withheld by this provision
of the law is required to be deducted only by the debtor
corporation and should not be withheld by any bank or
agency through which collection is made. 38a
Against Whom the Tax Is Withheld. Although the
foregoing paragraphs indicate the classes of taxpayers
against whom the tax is withheld, the law will be re-stated
under this heading for the sake of convenient reference.
INDIVIDUALS. The tax is withheld on payments to non-
resident aliens of fixed or determinable annual or periodic
income, including payments of bond interest, but not
including payments of dividends. The amount to be
withheld on all payments to non-resident aliens is 2%.
The tax is withheld on payments to citizens and residents
38 In good conscience, the bondholder should in all cases apply a
portion of his personal exemption to his income from interest
of the kind described in this section, as the personal exemption
is, according to the intent of the law, applicable to his income as
a whole and not to his income from any particular source. Thus,
if one-tenth of an individual's income is from interest of this
character, one-tenth of his personal exemption should be applied
against it, but it cannot be reasonably expected the average in-
dividual will adopt this course of procedure when the law places
it within his power to apply his entire exemption to income from
other sources, and to place upon the debtor corporation the burden
of his tax to the extent of 2 per cent upon the full amount of inter-
est on "tax-exempt" bonds.
38a Letter from Treasury Department dated November 13, 1917 ;
I. T. S. 1917, If 2480.
COLLECTION OP TAX AT THE SOUKCE 469
of interest on corporate bonds containing covenants to
pay the tax, but only to the extent of 2 %, as indicated in
the foregoing paragraph on that subject.
I'AUTNKKSMIPS. No tax is withheld upon payments to
partnerships. Congress attempted to require the tax to
l>e withheld upon payments of bond interest to non-resi-
dent foreign partnerships not engaged in business or
trade in the United States and not having an office or
place of business therein, but by a defect in the language
of the law the present statute does not impose such
requirement. 89
CORPORATIONS. No amount is withheld on payments to
domestic corporations or to foreign corporations which
are engaged in business or trade in the United States or
have an office or place of business therein. The tax is
withheld on payments of bond interest and dividends to
non-resident foreign corporations not engaged in busi-
ness or trade within the United States and not having an
office or place of business therein. 40 The amount to be
withheld on payment of bond interest to such foreign
corporations is 6%, and on payment of dividends, 2%.
FIDUCIARIES. The tax is withheld upon payments to
fiduciaries who are citizens or residents of this country,
or who have an office or place of business herein, in the
same manner and to the same extent as in the case of
itixoiix and residents. The tax is withheld on payments
to foreign fiduciaries in the same manner and to the
same extent as in the case of non-resident aliens. 41
39 See Note No. 33 of this chapter.
*ORee Page 464.
See Page 468.
470 FEDERAL INCOME TAX
Fiduciaries are subject to all the provisions of the law
which apply to individuals. 42
AGENTS. The fact that an individual, partnership or
corporation may have an agent within this country to
collect and receive income does not operate to prevent
withholding of the tax on payments of income to such
agent in cases where payments of income direct to the
principal would be subject to withholding. The appoint-
ment of an agent in this country does not in itself estab-
lish the residence of the principal in this country, for
purpose of the income tax, nor does such appointment
exempt the non-resident foreign corporation from the
withholding provisions unless, in addition to the appoint-
ment of the agent, the corporation is engaged in business
or trade in this country or has an office or place of busi-
ness herein. Agents of non-resident aliens, or foreign
partnerships or corporations subject to the withholding
provisions should proceed, in collecting income for their
principals, in the same manner as the principals would
proceed if acting for themselves. 43
NOMINAL STOCKHOLDERS. The tax is withheld on pay-
ment of dividends of nominal stockholders in all cases
where the paying corporation knows the actual owner is
a non-resident foreign corporation not engaged in busi-
ness or trade in the United States and not having an
office or place of business therein. The tax is also with-
held on payments of dividends to nominal stockholders
who are such foreign corporations, regardless of who the
42 Act of September 8, 1916, 8 (\ following the procedure indicated in the chapter on
non-resident aliens. 80
Abatement and Refund. Where the withholding
airent has reported the amounts withheld to the Govern-
ment and the tax has been assessed thereon abatement
67 Reg. 33, Art. 40.
5T. D. 1903.
68 T. D. 2589.
W See p. 56.
476 FEDERAL INCOME TAX
may be claimed, in the manner indicated in the chapter
on abatement and refund, either by the withholding
agent against whom the assessment was made or by the
person on account of whom such taxes were withheld. 61
If the tax has been paid by the withholding agent refund
may be claimed as indicated'in the same chapter. 62
By Whom the Tax Is Withheld. The tax is withheld
by the one paying the income whether the payor be an
individual, a partnership, or a corporation. Special rules
applying to certain classes of withholding agents are
briefly summarized below.
BANKS. Banks, bankers and trust companies and
other banking institutions receiving deposits of money
are not required to withhold the normal tax on interest
paid or accruing on such deposits, whether on open ac-
counts or on certificates of deposit ; but all such interest
whether paid or accrued must be reported by the de-
positor. 63 This ruling applies if the depositor is a non-
resident alien or a foreign corporation having no office
or place of business in the United States. 64
CORPORATIONS. Corporations are required to withhold
the tax on payment of any fixed or determinable income
to non-resident aliens, on bond interest and dividends
paid to foreign corporations not engaged in business
or trade in the United States and not having an office
or place of business therein, and on payments of interest
on bonds containing covenants to pay the tax to any
61 Keg. 33, Art. 33.
62 See pp. 437 and 440.
63 Reg. 33, Art. 67.
64 Letter from Treasury Department dated June 29, 1917, I.
T. S. 1917, 5J 2256.
COLLECTION OP TAX AT THE SOURCE 477
individual bondholders. The amounts to be withheld
and the duties with respect thereto are discussed else-
where in this chapter.
DEBTORS. Resident debtors whether individuals,
partnerships or corporations, including mortgagors, are
required to withhold the tax on all payments of interest
to non-resident aliens.
EMPLOYERS. Employers are required to withhold the
tax on all salaries, wages or compensation paid to non-
resident aliens except where the salary of the non-resi-
dent alien is not taxable under the law. 65
FIDUCIARIES. Trustees, executors, administrators,
conservators and other fiduciaries are required to with-
hold the tax on all payments of fixed or determinable
annual or periodic income to non-resident aliens, includ-
ing beneficiaries of the trust estate in their hands. For
ilisi-ussion of the special duties with respect to bene-
ficiaries see the chapter on fiduciaries. 66
LESSORS. Lessors and tenants paying rent to non-
resident aliens, or their agents, are required to withhold
tin- tax, as rent is fixed or determinable income within
the meaning of the law. In computing the amount to
l>c withheld the lessor should take into consideration such
MUMS. If any, as are paid under the terms of the lease.
;is taxes, or other disbursements, for the landlord. Thus,
if a tenant pays an annual rent of 10,000 in cash and in
;i T\\ AT TIIK SOURCE . 479
withhold the tax in such cases where the records of the
company disclose the fact that the owner of the bonds
is a person or corporation against whom the tax is with-
In-Ill. 69 The tax is withheld before sending out orders
or checks for such interest to the registered owners, and
the interest order or check is endorsed with the words
"income tax withheld by debtor." An interest order or
check bearing such indorsement may be presented for
payment or collection without an ownership certificate
being attached. 70
<).\ PAYMENT OP DIVIDENDS. Corporations paying
dividends to non-resident foreign corporations, against
which the tax is required to be withheld, are not required
to obtain ownership certificates, but should withhold the
tax in all cases where the records of the corporation show
tlit- stockholder to be a foreign corporation not engaged
in business or trade in the Unitetf States and not having
an office or place of business therein. If the corporation
has knowledge of who is the actual owner of the stock,
it is required to disregard the status of the stockholder
of record and to withhold the tax in caseg where the
*t;itus of the actual owner requires withholding.
MONTHLY LIST RETURNS. It has heretofore been the
|u-;ictice of the Treasury Department to require monthly
returns of the amounts withheld by (a) banks or col-
I'-.-ting agencies receiving coupons and interest orders
not accompanied by certificates of owners and (b) by
banks and by corporations on payments of interest and
eT. D. 1974.
70 T. IX 1974.
480 FEDERAL INCOME TAX
dividends. This practice will be continued unless and
until the Treasury Department rules otherwise. 71
ANNUAL LIST EETURNS. The law requires an annual
return to be made on or before March 1st of each year
of the amounts withheld during the preceding calendar
year. 72
DISPOSITION OF OWNERSHIP CERTIFICATES. The own-
ership certificates received by the withholding agents are
filed with the local collector at the time of filing the list
returns. Withholding agents filing monthly list returns
are required to file the ownership certificates monthly
and those filing annual list returns are required to file
71 The monthly list return to be filed by corporations with re-
spect to payment of interest and dividends is known as Form 1012.
When the form is used for reporting tax withheld on dividends
there should be stamped across the printed declaration at the top
of the form, in large letters, "monthy return of income tax with-
held from dividend paid to non-resident alien corporations, etc."
(T. D. 2388.) The form used by banks and collecting agencies,
receiving coupons not accompanied by certificates of the owners,
is Form 1044.
72 Act of September 8, 1916, 9 (b) as amended by Act of
October 3, 1917. Heretofore the annual list return of amounts
withheld on payments of bond interest and dividends has been
made on Form 1013. (Being a summary of the monthly list
returns) ; the annual list return of amounts withheld on salaries,
wages and rent, interest or other fixed or determinable annual
income has been made on Form 1042; the annual list return of
amounts of tax withheld on foreign income by licensed banks or
collection agencies on Form 1043a, and the annual list return of
amounts withheld by banks or collecting agencies on payments of
interest where coupons and interest orders were not accompanied
by certificates of owners, on Form 1044a. The use of these forms
will be continued, where necessary, until others are prescribed.
N OK T\.\ AT Till-: BO1 If I
certificates annually, in each case accompanying
the return.
PAYMENT OF AMOUNTS WITHHELD AT THE SOURCE.
Tin- withholding agent is required to pay to the local
collector the amounts withheld at the source, on or before
June 15 of the year following the year in which the
amounts were withheld. The usual notice of assessment,
ami notice and demand, is sent to the withholding agent
and payment is made in the same manner as payment of
the tax. 78
Penalty for Failure to Withhold the Tax. The statute
expressly provides that withholding agents are person-
ally liable for the tax which they are required to with-
hold at the source. 74 When a withholding agent, through
ignorance of his duties, or for any other reason, has
failed to withhold the tax and to make return, a return
may be filed, upon discovery of his neglect, accompanied
by a claim for the abatement, of such items of tax as can
! shown to have been paid by the taxpayers against
whom th<> tax should have been withheld. 76
3 s,- e Chapter 36.
74 Act of September 8, 1916, 9 (b) as amended by Act of
October 3, 1917.
75 Mimeograph letter No. 1265 to Collectors.
P. I. Tar. 31
CHAPTER 42
COVENANTS TO PAY TAXES
Covenants to pay taxes are contained in bonds, mort-
gages, notes, leases and similar instruments whereby
it is stipulated that the interest, rent, or other income
payable thereon, shall be paid without deduction for
taxes. Many such covenants became operative under the
1913 and 1916 Laws by reason of the requirement in
those laws that the normal tax should be withheld at the
source. They are operative under the present law only
in eases (a) where the payee of the income is a non-
resident alien individual, (b) in the case of payments of
interest, on the bonds, mortgages or other obligations of
corporations, to foreign corporations not engaged in
business or trade in the United States and not having
an office or place of business therein, and (c) in the case
of payments of such interest to citizens and residents,
to the extent that one 2% normal tax is required to be
withheld. 1
Since there is a requirement in the law that the tax
be withheld on payments to citizens or residents in
cases where the interest paid is upon bonds and mort-
gages, or deeds of trust or other similar obligations of
corporations containing a contract or provision by which
the obligor agrees to pay any portion of the tax imposed
by the law upon the obligee, or to reimburse the obligee
1 See Chapter 41.
482
COVENANTS TO PAY TAXES 488
for auy portion of the tax, or to pay the interest with-
out deduction for any tax which the obligor may be
required or permitted to pay thereon or to retain there-
from under any law of the United States, it becomes a
matter of importance to officers of corporations to de-
termine whether or not the covenants in the bonds or
mortgages of the corporation are broad enough in gen-
eral language, or specific enough, to require the corpora-
tion to assume the burden of the present income tax.
1'nless there is a legal obligation to pay the income tax,
or any part thereof for the bondholder, the officers of the
corporation may incur liability by making such pay-
ments, since if there is no legal compulsion, the payment
of the tax of a bondholder is a diversion of the funds of
the corporation to which the stockholders and creditors
m;i\ object and for which the officers may incur personal
liability. An examination of the covenant in each bond
or mortgage becomes essential.
A covenant reading as follows does not impose any
duty upon a corporation to withhold the tax at the source
on payments to citizens or residents:
Both principal and interest of this bond are payable
without deduction for any taxes, assessments or other
governmental charges which the company may be re-
quired to pay thereon or authorized to retain therefrom
under any present or future law or requirement of the
Tinted States of America (except any Federal Income
Tax) or any State, county, municipality or other gov-
ernmental subdivision thereof." 1 *
Many covenants to pay taxes were entered into prior
to the enactment of the 1013 Law. and without contem-
plation of an income tax law requiring collection at
1* Letter from Treasury Department flated November 21, 1917;
I. T. 8. 1917,12511.
484 FEDERAL INCOME TAX
the source. Iii such covenants no specific reference is
made to an income tax and the force of the covenant
with respect to the present income tax depends upon
the general language used therein. One typical form
reads as follows :
' ' Both the principal and interest of this bond are pay-
able without deduction for any tax or taxes, assessment
or assessments, or other Governmental charges, which
the company may be required or permitted to pay there-
on, or to retain therefrom, under any present or future
law of the United States, of of anv state, countv. munici-
pality or other lawful taxing authority thereof."
Whether this form of covenant requires the corpora-
tion to pay the income tax of the bondholder, or only
such taxes as are imposed on the bond or interest, as such,
is an unsettled question. In a recent case decided by the
Supreme Court of the State of Arkansas it was held that
a clause in bonds issued by a corporation promising
payment "without deduction from either such principal
or interest, for any tax or taxes, which the Marion Hotel
Company may be required to pay or retain therefrom,
under any present or future law, the Marion Hotel
Company agreeing to pay such tax or taxes," did not
require the corporation to pay the Federal income tax
of the bondholder which it retained from the payment of
interest on the bonds, since the tax is not a tax on the
bond, but a personal obligation of the bondholder, aris-
ing out of the possession of an income in excess of the
exemptions and deductions allowed by such law. 8 The
2 Urquhart v. Marion Hotel Company, 194 S. W. 1. The court
referred to the early cases of Haight v. Bailroad Co., 6 Wall.
(73 U. S.) 15, 18 L. Ed. 818; Baltimore v. Baltimore B. R., 10
Wall. 543, 19 L. Ed. 104.1,
COVENANTS TO PAY TAXES 485
Supreme Court of Massachusetts in deciding whether the
income tax came within the terms of a covenant by a
lessee to pay "all taxes and assessments * * upon
or in respect of the rent * * * howsoever and to
whomsoever assessed," held that the 1913 Law imposed
the tax "in respect of the rent" and held that the lan-
guage quoted was effective to compel the tenant to
assume the tax of the landlord to the extent that the
law required the amounts thereof to be withheld at the
source. 8
Other covenants provide that the debtor "will pay
the principal and interest of these bonds without deduc-
tion fop taxes." It is a question whether or not cove-
nants of this kind are broad enough to include taxes upon
the bondholder as well as taxes assessed against the cor-
poration upon the mortgage or bond or interest. "Where
a lease provided that the lessee should "pay all taxes and
assessments upon the yearly payments herein agreed
to be made by the party of the second part to the party
of the first part for the payment or collection of which
taxes or assessments the said party of the first part
would otherwise be liable or accountable under any law-
ful authority whatever;" and that the lessee "should
pay all taxes, charges, levies, claims, liens and assess-
mt'iits of any and every kind, which during the contin-
uance of the term hereby demised, shall, in pursuance
3 Suter v. Jordan Marsh Company, 113 N. E. 580. The court
seemed to rest its decision in this case on the conclusion that the
tax was levied uron the separate sources from which a part of the
net income was derived. This conclusion seems to be contra to the
weight of authority that the tax is on the person and not on his
property. If such conclusion had been reached by the court it
seems from the opinion that the decision might have been different.
See, however, Cntnwissa R. R. Co. v. Philn. & Reading Co., 2.1;> Pa.
269.
486 FEDERAL INCOME TAX
of any lawful authority, be assessed or imposed upon
the demised premises, or any part thereof all payments
required to be made by the party of the first part during
the term of this indenture shall be assumed and dis-
charged by the party of the second part as if the party
of the second part were primarily liable for same," it
was held that the lessee was liable for the income tax
of the lessor on the ground that it was the apparent in-
tention of the parties that the lessor should receive the
amounts stipulated as rent without deduction by reason
of any tax, charge or assessment of any kind and that
the language was sufficiently broad to cover the Federal
income tax although not enacted at the time the lease was
made.* In another case it was held that where a coven-
ant provided that the specified rent should be paid
"without any deduction, defalcation or abatement for
any taxes, charges or assessments whatsoever,
it being the express agreement of the said parties that
the said covenantor, his heirs and assigns, shall pay all
taxes whatsoever that shall hereafter be laid, levied or
assessed by virtue of any law whatever, as well on the.
said hereby granted lot and buildings thereon erected or
to be erected as on the said yearly rental now charged
thereon" it was held that the covenant did not impose
an obligation upon the lessee to pay the Federal income
tax, but that the parties contemplated a tax measured
by accumulated surplus or property. 6 Again, where a
lease provided that the lessee should "pay all taxes,
charges and assessments * * * imposed under any
existing or future law on the demised premises, or any
4 Northern Pennsylvania E. E. Co. v. Philadelphia & Beading
By. Co., 43 Pa. C. C. 150; aff'd 249 Pa. 326.
6 Van Beil v. Brogan, 23 D. E. 1055 (Dauphin County Court,
Pa., 1914).
COVENANTS TO PAY TAX '
pail thereof, or on the business there carried on, or on
the gross receipts or net, derived therefrom, or upon the
capital stock of 'the lessor' or the dividends thereon, in
upon the franchises of the said company, for the pay-
ment or collection of any of which said taxes the 'lessor'
may otherwise be or become liable" it was held that the
lessee was not required to pay the Federal income tax on
tiie rental rec-eived by tin- lessor on the ground that such
tax was not expressly mentioned and the covenant was-
not broad enough to discharge all liability for taxes of
every kind for which the lessor should become primarily
liable. 6
The cases referred to above are cases which have
been decided under the 1913 or 1916 Laws. Other cases
arising under different statutes are referred to in the
foot note. 7
6 Little Schuylkill etc. Co. v. Philadelphia & Reading Ry. Co.,
44 P. A. County Ct. Rep/ 197. It seems in this case the intention
of the lessor was to have the lessee pay any and all taxes so that
the net amount of the rental could be distributed without diminu-
tion to the stockholders, but the court held that the languau- ol
the Covenant was not broad enough to so hold.
7 Northern Trust Co. v. Buck, 263 111. 222, 104 N. E. 1114.
IVttihone v. Smith, 150 Pa. 118, 24 Atlantic 693; Chicago etc. Ry.
v. Kansas City N. W. R. R., 75 Kans. 167, 88 Pac. 1085; Erie, etc..
R. R. v. Pennsylvania R. R,, 208 Pa. 506, 57 Atlantic 980; Clopton
\. Phila. & Reading R. R. Co., 54 Pa, 356; Northern Central R. R.
Co. v. Jackson, 7 Wall. 262; U. 8. v. Baltimore & Ohio R. R. '>..
17 Wall. .'.L'L'. See also article in Illinois Law Review. January.
191.-..
CHAPTER 43
CONSTITUTIONALITY OF THE LAW
It is not the purpose of this chapter to discuss ex-
haustively the constitutional questions which might exist
with respect to the present laws, but to point out certain
features of the law with respect to which questions of
constitutionality have been raised.
Power of Congress to Levy Income Taxes. The Six-
teenth Amendment to the Federal Constitution author-
ized Congress "to lay and collect taxes on incomes from
whatever source derived, without apportionment." As
Chief Justice White has said, 1 this amendment does
not confer power to levy income taxes in a generic sense
or to limit and distinguish between one kind of income
tax and another, but the whole purpose was to relieve
all income taxes, when imposed, from apportionment;
in short, doing away with the principle upon which
the Pollock case 2 was decided. The amendment places
no limitation as to the nature and character of the in-
come taxes which it authorizes. Congress derives
from the Constitution 3 its powers ' ' to lay and collect
taxes, duties, imposts and excises." This power is
1 Brushaber v. Union Pacific E. R. Co., 240 U. S. 1.
2 Pollock v. Farmers Loan and Trust Co., 157 U. S. 429; 158
U. S. 601.
3 The Constitution of the United States, Art. 1, 8.
488
CONSTITUTIONALITY OF THE LAW 489
exhaustive and embraces every conceivable power of
taxation, limited only by the constitutional provisions
that "all duties, imposts and excises shall be uniform,
throughout the United States," 4 that "direct taxes
shall be apportioned among the several states" 8 and
that "no capitation or other direct tax, shall be laid,
unless in proportion to the census. ' ' 6 The Sixteenth
Amendment removed the limitation but did not enlarge
the power of Congress.
Taxing Gains and Profits from Sale of Property. The
decision in Gray v. Darlington 7 has sometimes been
mentioned as placing a limitation on the power of
Congress to tax profits arising from the sale of capital
assets, on the ground that the word "income" as used
in the Sixteenth Amendment was used in the sense in
which it had theretofore been defined in this case, 7 *
but the case hinged on a consideration of the language
of a particular act, 8 and did not define the term in any
general sense. The only question before the court was
to what extent had Congress intended by that act to
tax gains and profits. The court said in part: "The
statute looks, with some exceptions, for subjects of taxa-
tion only to annual gains, profits, and income. Its gen-
eral language, is 'that there be levied, collected, and
pakl annually upon the gains, profits and income of
every person,' derived from certain specified sources,
a tax of five per cent., and that this tax shall be 'assessed,
4 Id. Art 1, 8, Cl. 1.
8 Id. Art. 1, 5 2, Cl. 3.
Id. Art. 1, 9, Cl. 4.
t Gray v. Darlington, 15 Wall. 63.
7 The word must be presumed to have been used in the sense in
which the Supreme Court had theretofore defined it if a judicial
definition had been .clearly given. Towne v. Eisner, 242 Fed. 702.
Act of March 2, 1867.
490' FEDERAL INCOME TAX
collected, and paid upon the gains, profits, and income
for the year ending the 31st of December next preceding
the time for levying, collecting, and paying said tax.' 8
This language has only one meaning, and that is that
the assessment, collection, and payment prescribed are
to be made upon the annual products or income of one's
property or labor, or such gains or profits as may be
realized from a business transaction begun and completed
during the preceding year. There are exceptions, as al-
ready intimated, to the general rule of assessment thus
prescribed. One of these exceptions is expressed in the
statute, and relates to profits upon sales of real property,
requiring, in the estimation of gains, the profits of such
sales to be included where the property has been pur-
chased, not only within the preceding year, but within the
two previous years. Another exception is implied from
the provision of the statute which requires all gains, prof-
its, and" income derived from any source whatever, in ad-
dition to the sources enumerated, to be included in the
estimation of the assessor. The estimation must, there-
fore, necessarily embrace gains and profits from trade
and commerce, and these, for their successful prosecution,
often require property to be held over a year. In the
estimation of gains of any one year the trader and mer-
chant will, in consequence, often be compelled to include
the amount received upon goods sold over their cost
which were purchased in a previous year. Indeed, in
the estimation of the gains and profits of a trading or
commercial business for any one year, the result of
many transactions have generally to be taken into account
which originated previously. Except, however, in these
and similar cases, and in the cases of sales of real prop-
erty, the statute only applies to such gains, profits, and
914 Stat. at Large, 477-8, 13.
CONSTITUTIONALITY OF THE L\\V 491
iiicome as are strictly acquisitions made during the year
preceding that in which the assessment is levied and
collected." 10
The facts in this case were that Darlington, who
apparently was neither a merchant nor a trader, ex-
changed in 1865 certain U. S. Treasury notes for certain
U. S. bonds. Two years later the law was enacted, and
two years after the incidence of the tax (in 1869) he
sold the bonds at a profit. The profit was held by the
Treasury Department to be income for the year 1869.
The court held: "We are satisfied that no such result
was intended by the statute." Since this decision hinged
upon the language of the statute its application to the
present law necessitates a comparison of the language
of the Act of 1867 and the 1916 Law. The Act of 1867
provided for a tax upon the annual gains, profits and
income of every person "from any source whatever"
and further provided that in estimating the gains and
profits and income, profits realized within the year from
sales of real estate purchased within the year or within
two years previous should be included as well as "all
other gains, profits and income derived from any source
whatever." The language of the statutes enacted since
10 In the case of Cleveland, C., C. and St. L. Ry. Co. v. United
stritt-s, 242 Fed. 18, the court said: "The precise point decided
in Gray v. Darlington was that the accretion in value during tin-
previous years were not income for the year in which the prop-
erty was sold; but doubtless some of the language of the opinion
would indicate that such accretions were not income even for the
year in which they happened." The language to which the court
refers, however, seems to be dicta and, in the language of the
opinion quoted in the text above, it was intimated that the rnlf
as to merchants and traders would be different from the rule as
to persons making isolated investments, this difference being due
to the language of the act and not predicated upon any general
principles.
492 FEDERAL INCOME TAX .
the Sixteenth Amendment is much broader. The tax
is imposed on "gains, profits and income derived from
* * dealings in property, whether real or personal,
growing out of the ownership or use of or interest in
real or personal property ' ' or gains or profits and income
derived from any source whatever. In the 1916 Law
there is a provision which expressly prescribes the
method of computing the gain derived from the sale
of assets acquired before March 1, 1913. There seems
to be no doubt that Congress intended to tax profits
from any and all sales of property, regardless of when
the property was acquired, and it does not seem that
there is any want of power to do so under the Sixteenth
Amendment. 11
Want of Due Process of Law. The due process clause
of the Fifth Amendment to the Federal Constitution
is not a limitation upon the taxing power conferred
upon Congress by the Constitution; in other words, the
Constitution does not conflict with itself by conferring
on the one hand a taxing power and taking the same
away on the other by the limitations of the due process
clause. To make a tax statute unconstitutional the
seeming exercise of the taxing power of the act must
be so arbitrary as to constrain to the conclusion that
it was not the exertion of taxation, but a confiscation
of property, that is, a taking of the same in violation of
the Fifth Amendment, or, what is equivalent thereto, was
so wanting in basis for classification as to produce such a
gross and patent inequality as to inevitably lead to the
same conclusion. In Brushaber v. Union Pacific R. R.
Co., the Supreme Court, after enumerating a number of
features of the 1913 Law which, it had been alleged,
11 Brushaber v. Union Pacific R. R. Co., 240 U. S. 1.
CONSTIIVTION AI.ITV Mi:<>K r<>l
less than 1% nor more than 9% 6 of the invested capi-
tal 7 and (b) the specific exemption allowed by the law, 8
at graduated rates 9 unless no invested capital or not
more than a nominal capital 10 is employed, in which
case the tax is 8% of the net income of such trade or
business in excess of the specific exemption allowed by
law. The tax will be assessed on information given by
the taxpayer in his or its return of annual net income,
(partnerships being required to file returns for this pur-
pose) and will be due and payable at the same time as
the income tax.
Corporation. The term "corporation" includes joint
stock companies or associations, and insurance com-
panies. 11 A domestic corporation is one created under
the laws of the United States or of any state, territory
or district thereof. A foreign corporation is one created
under the laws of Porto Rico, the Philippines, the Pan-
ama Canal Zone, Virgin Islands or the laws of any other
possession of the United States or the laws of any foreign
country or Government. 12 Corporations exempt from
the income tax are also exempt from this tax. 18 A
foreign corporation deriving less than $3,000 of net
income from sources within the United States during a
taxable year is not required to pay any tax. 14
See p. 527.
I See Definition on pp. 512 to 526.
See Definition on p. 529.
9 See Definition on p. 530.
10 See Definition on p. 526.
II The term, as used in this law, has the same meaning as in the
income tax law. For a discussion of the definition under that law
see Chapter 12.
"Section 200.
13 Section 201, see Chapter 15.
14 Sect ion 202.
506 APPENDIX
Partnerships. The law does not define the term
"partnerships," but the intent is, undoubtedly, to in-
clude all kinds of partnerships, general and limited.
Limited partnerships have been held by the Treasury
Department to come within the definition of the term
"corporations." 15 A domestic partnership is one
created under the law of the United States, or of any
state, territory or district thereof. A foreign partner-
ship is one created under the law of any other possession
of the United States or of any foreign country or gov-
ernment. 16 Partnerships carrying on or doing the same
business, or coming within the same description, as cor-
porations exempt from the income tax law, are exempt
from this tax. 17 A foreign partnership deriving less
than $3,000 of net income from sources within the United
States during a taxable year is not required to file a
return or pay any tax. 18
Individuals. Special provisions apply to individuals
who are citizens and residents of this country. The
definition of the term "citizens and residents" will un-
doubtedly be the same as that made with respect to the
income tax law, 19 except that the term ' ' United States ' '
as defined in this statute does not include Porto Rico,
the Philippines or other possessions. It would seem
that Congress did not intend the tax to apply to the
incomes of the citizens and residents of those possessions,
except to the extent that such income is derived from
business or trade conducted within the ' ' United States, ' '
15 See Chapter 12.
16 See Section 200.
17 Section 201; see Chapter 15.
18 Section 202.
19 See Chapter 4.
THE WAR EXCESS PROFITS TAX 507
;is tin- UTIH is defined in the following paragraph. The
term "non-resident alien individuals" is not defined in
the statute but the definition of the Treasury Depart-
ment, under the income tax law, will probably be applied
to the term as used in this statute. 80 Individuals carry-
ing on or doing the same business, or coming within
the same description, as corporations exempt from the
income tax, are exempt from this tax. Officers and em-
ployees of the United States, or any state, territory or
the District of Columbia, or any local subdivision thereof,
are exempt with respect to the compensation or fees re-
ceived by them as such officers or employees. 21 A non-
resident alien deriving less than $3,000 of net income
from sources within the United States during a taxable
year is not required to pay any tax under this law. 28
United States. The term "United States" means
only the states, the territories of Alaska and Hawaii,
and the District of Columbia. 83 In view of this definition
a foreign corporation, or partnership, or a non-resident
alien, deriving income from Porto Rico, Philippines,
Virgin Islands, Panama Canal Zone and other posses-
sions will not be subject to this tax.
Taxable Year. In the case of individuals, the term
taxable year" means the calendar year, the first taxable
year being the year 1917. In the case of corporations
ami partnerships, the term means the calendar year,
unless the corporation or partnership has fixed its own
fiscal year, in which case it means such fiscal year.
80 See Chapter H.
21 Section 201.
22 Section 202
28 Section 200.
508 APPENDIX
Where a fiscal year has been fixed, the first taxable year
is the fiscal year ending in 1917. In such cases, the tax
for such fiscal year will be that proportion of the tax
computed upon the net income for the full fiscal year
which the time in 1917 bears to the full fiscal year. 84
The tax will be computed upon the full income for the
fiscal year, but only such part thereof will be assessed
as is ascertained by multiplying the amount computed
for the full fiscal year by the fraction of the fiscal year
falling in the calendar year 1917. For example, if one-
third of the fiscal year falls in the calendar year 1917,
one-third of the full amount of the tax so computed will
be assessed.
Prewar -Period. The term "prewar period" means
the calendar years 1911, 1912 and 1913. If a corpora-
tion or partnership was not in existence during the whole
of such period, its "prewar period" will be as many of
such years during the whole of which it was in existence.
If an individual was not engaged in trade or business
during the whole of such period, his "prewar period"
will be as many of such years during the whole of which
he was engaged in the trade or business. 26 The purpose
of fixing a prewar period is solely to determine what
particular percentage of invested capital between 1%
and 9% may be taken by the taxpayer as a deduction. 86
Trade and Business. The term "trade and business"
is defined in the law to include professions and occupa-
tions. 87 The term has no particular value with reference
to corporations and partnerships, since every corporation
24 Section 200.
25 Section 200.
26 Section 203.
27 Section 200.
TIIK \\ \K I \( I. I'KOFITS TAX 509
and partnership is deemed to be engaged in business
and all of its income is deemed to be the income of a
single trade or business. 28 In other words, the tax is
not imposed with respect to income from the trade or
business of a corporation or partnership, but with re-
spect to its entire net income from all taxable sources.
With respect to individuals, the Treasury Department
has already defined the term "trade or business" under
the income tax law. 29 The term has been given a very
narrow construction under the income tax law, and it
has been held that one deriving income from the pur-
chase and sale of securities is not engaged in business,
unless he is a member of an exchange. This ruling
was made with reference to deducting losses incurred in
trade, and it was naturally to the interest of the Gov-
ern inent to give a very narrow definition to the term
'in trade." It is not at all unlikely that under the
present law the same term will be given a broader defini-
tion, since the interests of the Government are now
served by including as many activities as possible within
the term, and the present statute expressly defines the
term to include "all trades or businesses of whatever
d-N -ription, whether continuously carried on or not,"
including "professions and occupations." 80 Income
derived from the business of life, health, and accident
insurance combined in one policy Issued on the weekly
premium payment plan is exempt from the tax. 31
Net Income of Domestic Corporations. The net in-
< -onie of a domestic corporation, to which this tax applies.
28 Section 201.
28 See Chapter 4, p. 32.
30 Section 200 and section 201.
31 section 201.
510 APPENDIX
is the income of the taxable year as reported in the re-
turn of net income, except that the amounts received
by it as dividends upon the stock or from the net earn-
ings of other corporations subject to the income tax
are deducted. 32 It is to be noted that the net income is
ascertained by excluding income defined to be exempt
under the income tax law, and further, by excluding
dividends received from corporations subject to the in-
come tax. It is also to be noted that such dividends
may be deducted if the corporation is subject to the
income tax, although it may not be subject to this excess
profits tax. Dividends received from corporations, not
subject to the income tax, may not be deducted.
NET INCOME FOR PREWAR PERIOD. The net income of a
domestic corporation for the year 1911 is to be deter-
mined according to the provisions of the 1909 Law (ex-
cluding dividends) except that the amount of the tax
assessed by the Federal Government on the income of
the corporation for the year 1910 (and paid by the cor-
poration in 1911) should not be deducted. 33 Corpora-
tions were permitted to deduct such amounts in ascer-
taining their net income under the 1909 Law, but in
ascertaining the net income of the prewar period, for
the purpose of this tax, the amount need not be deducted.
It is, of course, a slight advantage to the corporation
to include the amount of such taxes, in order to increase
the amount of income for the prewar period. The net
32 Section 206.
33 The language of the statute is "except that income taxes paid
by it within the year imposed by the authority of the United States
shall be included. ' ' The tax imposed by the 1909 Law was not~an
income tax but an excise tax but Congress undoubtedly had refer-
ence to that tax in using the language quoted.
THE WAR EXCESS PROFITS TAX 511
income for 1!12 is ascertained in the same manner as
indicated above for 1911, except that the tax imposed by
the Federal Government upon the net income of the cor-
poration for the year 1911 (and paid by the corporation
in 1912) should be included. The net income for the
year 1913 is ascertained in the manner provided by the
]!!:; Law. except that the tax assessed under the 1909
Law on income for 1912 (and paid in 1913) should be
included, and the amount received by the corporation as
dividends upon the stock of other corporations taxable
under the 191:5 Law should be deducted. 8 *
Net Income of Foreign Corporations. The net income
of a foreign corporation is the net income received from
sources within the Tinted States, 88 as reported for the
purpose of the income tax, but not including the income
received from dividends of domestic or resident corpora-
tions subject to the income tax. It follows from this that
in so far as a foreign corporation receives dividends
from this country it is not subject to the tax imposed by
this law.
NET INCOME FOR PREWAR PERIOD. The income of a
foreign corporation for the prewar period is ascertained
in the same manner as indicated above in the case of
domestic corporations, except that it will include only
net income received during that period from sources
within the United States. 36
Net Income of Partnerships. The net income of do-
mcstic partnerships is determined in the same manner
34 Section 206.
35 Section 200 nn.l si n> TAX
property borrowed is not ' ' invested capital. ' ' Further,
capital which may have been contributed to the business
loses the status of "invested capital" by being invested
in stocks (the dividends of which are not included in
net income) or by being invested in state, municipal or
other bonds ^of that character (the interest on which is
exempt under the income tax law) or other assets, the
income from which is not subject to the tax. An excep-
tion is made in the case of capital invested in the obli-
gations of the United States. Such capital does not lose
its status as "invested capital" although the interest
from the bonds may be excluded from net income. 38 The
intent of the law seems to be that if capital is invested in
an asset the income from which, if any, would not be in-
cluded as net income, the capital so invested shall not
be included as "invested capital" for the purpose of
ascertaining the amount of deduction. Thus, if capital
is invested in stocks, bonds or other assets the income
from which would not be taxable, the capital invested in
such assets must be excluded, whether or not any income
is actually derived from the assets in question. 39 The
purpose of ascertaining the "invested capital" of a busi-
ness is to allow what Congress considered a fair return
or earning thereon before imposing the tax, hence, it
follows that if the earninrs arc not taxable the asset is
not "invested capital."
AVERAGK INVIXIKD c \i-n.\i. FOR THE YEAR. Since, as
indicated in the preceding paragraph, the amount of in-
38 The purpose of this exception is, of course, to stimulate in-
vestment in bonds and certificates of indebtedness issued by the
United States for the purpose of raising money to defray the cost
of the war.
W Section 207.
F. T. Tax. 33
514 APPENDIX
vested capital may vary from time to time, depending
upon the kind or character of asset in which the. capital
of the business may be invested, and for other reasons,
as will appear more fully in the following paragraphs,
the law provides that the invested capital shall not be de-
termined as of any particular day in the year, but shall
be "averaged monthly." The intent of this provision
would seem to be that the amount of invested capital
shall be ascertained on some particular day of each
month, in order to obtain the average for the year.
BUSINESS CARRIED ON BY SUCCESSOR. If a trade or
business carried on by a corporation, partnership, or in-
dividual, lias been organized or reorganized on or after
January 2, 1913, the new business concern being sub-
stantially a continuation of the trade or business carried
on prior to that date, the successor is deemed to have been
in existence prior to that date, and the net income and
invested capital of its predecessor prior to that date is
deemed to have been its net income and invested capital
for the prewar period prior to that date. 40 If a reorgani-
zation, consolidation, or change of ownership of a trade
or business takes place after March 3, 1917, no assets
transferred or received from the prior trade or business
shall be allowed a greater value than would have been
allowed in computing the invested capital of the prede-
cessor (a) if an interest or control in such trade or
business of 50% or more remains in control of the same
persons, corporations, associations, partnerships, or any
of them, (b) unless such asset was paid for specifically
as such, in cash or tangible property, and then not to
exceed the actual cash or actual cash value of the tang-
40 Section 204.
THE WAR EXCESS PROFITS TAX 515
ihle propci iy paid therefor at the time of such pay-
ment.* 1
Invested Capital of Corporations and Partnerships.
Subject to the limitations discussed in the three preced-
ing paragraphs, the law provides a particular method for
determining the invested capital of a corporation or
partnership, which will be discussed in the following
paragraphs. Hriefly, the invested capital in such cases,
consists of (a) the actual cash paid in, (h) the actual
ca-h value of tangible property paid in, (c) subject to
certain limitations, the actual cash value of patents and
copyrights paid in for stock or shares, (d) subject to cer-
tain limitations, the actual cash value of good-will, trade-
marks, trade-brands, the franchise of a corporation or
partnership or other intangible property paid in for
slock or shares issued prior to March 3, 1917, and (e)
paid in or earned surplus and undivided profits used
and employed in the business. 42
ACTIAI. CASH PAID IN. This means the actual amount
of money paid in by shareholders or members for stock
or shares-. It should be noted that the actual cash
paid in is to be taken, not the par value of the stock
which may have been issued therefor. If more than par
-as paid for stock the entire amount so paid may be
treated as actual cash paid in, or an amount equal to
the par value of the stock may IK> treated as actual cash
paid in and the excels as ''paid in surplus," but the
same amount should not be included under both heads,
ft seems that under this head should be included not
nly cash but the "e M iii\a1enf of cash," that is, if stock
41 s.-ction 208.
Section 207a.
516 APPENDIX
of the taxable corporation has been issued for securities
which had an ascertainable value at the time, such
securities should be treated as the "equivalent of cash"
and the value at the time of issue taken to be actual
cash paid in.* 3
TANGIBLE PROPERTY PAID IN. Where tangible prop-
erty (other than cash) has been paid in by stockholders
or members, for stock or shares, the actual cash value of
such tangible property, at the time of such payment, may
be included as "invested capital" (but in case such
tangible property was paid in prior to January 1, 1914,
the actual cash value of such property as of January 1,
1914, but in no case to exceed the par value of the orig-
inal stock or shares specifically issued therefor). The
phrase ' ' tangible property ' ' as used in this section must
be given a liberal construction in order not to work
undue hardship on taxpayers. It will include, of course,
all property which is ' ' tangible ' ' and should in addition
include mining rights, oil leases, and similar species of
property, in cases where the consideration for such
property was paid in a specific sum by the one contrib-
uting it to the corporation or partnership, and is not
merely in the form of annual rentals or royalties. The
value of tangible property must be taken as of the time
it was paid in to the corporation or partnership in ex-
change for stock or shares, except in cases where it was
so paid in prior to January 1, 1914, in which case the
value on January 1, 1914 shall be taken. In this connec-
tion, the law provides that the value as of January 1,
1914, shall in no case exceed the par value of the original
43 This seems to be necessary if any credit is to be given for
property so acquired.
THE WAR EXCESS PROFITS TAX 517
stock or shares specifically issued for the property. It
is not conceivable that Congress intended what the law
literally says, as, for instance, there are many cases in
which corporations have issued merely nominal amounts
of stock in exchange for property of great value, and to
hold that the "invested capital" in such cases cannot
exceed the par value of the stock would be so unreason-
able and unjust as to raise doubts of the constitutionality
of the law. Where property of greater value than the
stock issued therefor has been transferred to a corpora-
tion prior to January 1, 1914, an amount equal to the
par value of the stock should be treated as capital, and
the excess as "paid in surplus."
PATENTS AND COPYRIGHTS. Patents and copyrights
are a species of intangible property which may be con-
sidered, when issued for stock or shares, in ascertaining
"invested capital." The actual cash value of such pat-
ents and copyrights, at the time they were paid in for
the stock or shares, may be included as "invested capi-
tal," but not to exceed the par value of the stock or
shares issued therefor. It seems that the actual cash
value at the time patents and copyrights are paid in
determines the amount of invested capital, regardless of
whether or not the time is before or after the enactment
of the law.
GOOD-WILL. Good-will may be considered subject to
the limitations, and under the conditions, discussed in a
following paragraph entitled "Intangible Property."
TRADK-MARKS. Trade-marks may be considered sub-
ject to the limitations, and under the conditions, dis-
cussed in a following paragraph entitled "Intangible
Property."
518 APPENDIX
TRADE-BRANDS. Trade-brands may be considered sub-
ject to the limitations, and under the conditions, dis-
cussed in a following paragraph entitled "Intangible
Property. ' '
FRANCHISE OF A CORPORATION OR PARTNERSHIP. The
franchise of a corporation or partnership may be con-
sidered subject to the limitations, and under the condi-
tions, discussed in the following paragraph entitled
' ' Intangible Property. ' '
INTANGIBLE PROPERTY. The law provides that good-
will, trade-marks, trade-brands, the franchise of a cor-
poration or partnership, or other intangible property,
may be included as invested capital if the corporation
or partnership made payment in good faith therefor,
specifically as such, in cash or tangible property. This
is one of the many obscure provisions of the law and it is
difficult to understand the reason for inserting the lan-
guage, since, if payment is made for such intangible
property with cash or tangible property, it must either
be cash or tangible property contributed by the stock-
holders or members, or cash or tangible property bor-
rowed. In the former case the consideration has already
been included as invested capital and in the latter case
the law expressly provides that borrowed money or
property cannot be so included. The law further per-
mits such intangible property to be considered in ascer-
taining invested capital, when paid for in stock or shares
of the corporation or partnership, tinder the following
conditions and limitations: (a) the intangible properly
must have been purchased in good faith prior to March
3, 1917, and the stock or shares in payment thereof must
have been issued prior to March 3, 1917, (b) the amount
TIII: \v\u K.\n:*s I-HOKITS TAX P
of shares which may be considered as having IMM-H issued
for such intangible property is an amount not to exceed
(on March 3, 1917) 20% of the total interests or shares
df the partnership or corporation, (e) the amount which
may he included as invested capital i,s the actual cash
value of such intangible property at the time of such
purchase limited, however, in case of issue of stock there-
for to ;m amount not to exceed the par value of such
stock. It will be noted from (a) above that good-will,
trade-marks, trade-brands, franchise of a corporation or
partnership, or other intangible property paid in for
stock or shares may not be considered in determining
invested capital if such property was paid in on or after
March :!. 1917. The permission applies only to trans-
fictions which took place prior to that' date. It should
also be noted that if the property was paid in prior to
that date, but stock or shares were not issued until on or
after that date, the transaction cannot be considered, if
the law is to be literally construed. The provision stated
in (b) above, apparently means that if a corporation
or partnership issued more than one-fifth of its stock
or shares for such intangible property, the invested
capital may be computed only on such proportion as
is represented by one-fifth of the stock or shares. If.
fur instance, a corporation had, on March 3, 1!>17. twr-
tiftlis of its stock issued for siich intangible property.
"iily one-half of the actual cash value (at the time it was
paid in) of such intangible property can be considered
as invested Capital." The statement under (ted i-apital" and the two paragraphs following it 47
tlie law provides a particular method for determining the
46 Section 207, last paragraph.
47 See pp. 512-515.
524 APPENDIX
invested capital in the case of an individual, which will
be discussed in the following paragraphs. Briefly, the
invested capital in such cases, consists of (a) the actual
cash paid into the trade or business, (b) the actual cash
value of tangible property paid into the trade or busi-
ness, (c) the actual cash value of patents, copyrights,
good-will, trade-marks, trade-brands, franchises, or other
intangible property, paid into the trade or business, at
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.
ACTUAL CASH PAID INTO THE TRADE OR BUSINESS.
This wculd seem to include any amount of cash used or
employed by the individual in the trade or business with
respect to which the income is taxed. Where an in-
dividual uses in his business large sums of his money at
various times of the year, and invests the same outside
of his business at other times, it seems that the amounts
should be considered as invested capital in proportion to
the time they are employed in the business. Thus, if a
sum is employed in the business for six months each
year it should be included as invested capital for each
of those months in order to ascertain the average invested
capital for' the year.
TANGIBLE PROPERTY PAID INTO THE TRADE OR BUSI-
NESS. This would seem to mean the tangible property
owned by the individual and used in the trade or busi-
ness with respect to which the tax is imposed. If such
property was first employed in the business at some time
prior to January 1, 1914, the actual cash value as of
TMK WAR I -.\ I I'KOFITS TAX 525
January 1, 1914, may be considered as invested capital.
If first employed at a time subsequent to that date the
actual cash value at the time it was so first employed is,
apparently, the amount which may be included as in-
vested capital.
INTANGIBLE PROPERTY PAID INTO THE TRADE OR BUSI-
NESS. Patents, copyrights, good-will, trade-marks, trade-
brands, franchises, or other intangible property may be
considered as invested capital only if payment was made
therefor, specifically as such, in cash or tangible property.
The amount which may be taken as invested capital is the
actual cash value of such intangible property, at the time
of such payment, not to exceed the actual cash or actual
'a-.li value of the tangible property bona, fide paid there-
for at the time of such payment. Literally, this means
that the actual cash paid for such property may not be
considered as invested capital if the actual cash value of
the property was less. Therefore one who, through lack
of shrewdness or because of necessity, has paid more
for such property than its actual cash value, the law will
penalize him by s permitting only the actual cash value to
be considered as invested capital.* 8 As an illustration
of the practical effect of this provision, let us assume
that an individual is engaged in manufacturing under a
patent of his own invention, and that this patent has had
a recognized actual cash value of more than a million
dollars for a period of five years in the past. Under the
law lie is permitted to use no part of the value of such
patent in ascertaining his invested capital. But if he
* A practical interpretation would be that the actual cash paid
for such property is the actual cash value thereof, but the extreme
caution of the Conference Committee in framing this clause per-
mits of the literal interpretation indicated in the text.
526 APPENDIX
should form a corporation and transfer the patent to the
corporation, for stock of a par value of one million
dollars, the corporation may include in its "invested
capital" one million dollars, with respect to such patent,
since the law expressly provides that the invested capital
of a corporation shall include the actual cash value of
patents paid in for stock, at the time of such payment,
but not to exceed the par value of such stock at the time
of such payment. 49
Invested Capital of Non-Resident Aliens. >A non-
resident alien is required by the law to ascertain his
"entire invested capital" in the manner indicated in the
preceding paragraphs, and his "invested capital" for the
purpose of this law is that proportion of the entire in-
vested capital which his net income from sources within
the I'nited States bears to his entire net income. 60
Nominal Capital. The law provides that a flat rate
of 8% shall be imposed in cases where a business or trade
has no invested capital, or not more than a nominal
capital. 61 The statute does not define the meaning of the
term "nominal capital," but applying the rules pre-
scribed for determining "invested capital," it would
seem that an individual, corporation or partnership do-
ing business entirely on borrowed money would have no
capital and consequently be taxable at the flat rate of 8%.
It would seem, also, that if the entire capital was invested
in stock, or in assets the income from which, is not sub-
ject to this tax, there would be no invested capital. Thus,
an individual doing business entirely on credit is taxed
*9 Section 207K
50 Section L'07, hist ] mm graph.
61 Section 209.
TIIK w\i; KXOESS PROFITS TAX 527
at a lesser rate than one doing business with his own
capital, but one doing business largely on credit may be
very severely penali/ed, since the small amount of his
own capital invested in his business may not be con-
sidered merely nominal. The effect might be somewhat
a* follows: If the capital of a business is one hundred
thousand dollars and all of it is borrowed, the business
lias no "invested capital" and consequently the annual
ineome might be subject only to a tax of 8%. If, how-
ever, $90,000 of the capital is borrowed, and $10,000 is
paid in by the stockholders, members or individual, as
the caso may be. there is grave danger that the entire net
ineome will be taxed at the graduated rates after allow-
ing a deduction on merely $10,000 of "invested capital."
To evolve a practical definition of the phrase "nominal
capital" will be one of the many difficulties of the Trea-
ury Department under this law. No arbitrary line can
lie drawn beyond which the amount of capital is no
longer nominal. What may be nominal capital in one
business may lie more than nominal in another. A fixed
ratio between income and capital cannot he used to draw
the line, since the same amount of capital may be merely
nominal in two businesses, and the earnings in one may
he much greater than tlie earnings of the other. It would
seem, however, that a trade, business, occupation or pro-
!'--i<>n in which the net income is produced by the
activity of the persons .-niraijed therein, and not by the
use of capital, except incidentally to furnish such per
situs with business quarters, tools, instruments or appli-
ances, is- mie to which the flat rale of S', will apply.
Deductions. From its net income for the taxable
year, a corporation, partnership, or individual, domestic
or foreign, citizen, resident or non-resident, may deduct
528 APPENDIX
an amount equal to the same percentage of the invested
capital for the taxable year which the average amount
of the annual income of the trade or business during the
prewar period was of the invested capital for the prewar
period, but not less than 1% nor more than 9% of the
invested capital for the taxable year. For example, if
the average net income during the prewar period was
7%, or less, of the average invested capital for that
period, the deduction for the taxable year will be 1%.
If the average net income for the prewar period was
over 1% but not over 9%, the same percentage of in-
vested capital may be deducted for the taxable year. If
the average net income for the prewar period was more
than 9%, only 9% of the invested capital for the taxable
year may be deducted. 62 If a corporation or partner-
ship was not in existence, or an individual was not
engaged in the trade or business, during the whole of
any one calendar year during the prewar period, the
deduction is 8% of the invested capital for the taxable
year. 53 If a corporation or partnership, or a citizen or
resident of the United States, (a) had no net income
from trade or business during the prewar period or (b)
the percentage of net income on invested capital was low,
as compared with the percentage, during the same period,
of representative corporations, partnerships, and individ-
uals, engaged in a like or similar trade or business, or
(c) the net income for the prewar period cannot be
ascertained to the satisfaction of the Secretary of the
Treasury, the deduction for the taxable year shall be the
same percentage as in the case of such representative
corporations, partnerships or individuals. For instance,
if, due to exceptional circumstances, a particular busi-
52 Section 203.
53 Section 204.
TIIK \YAIt EXCESS PROFITS TAX 529
ness made only 1% on invested capital during the prewar
period, while representative concerns in the same line of
business made 10%, the unfortunate business concern
will be allowed a deduction for the taxable year of 9%
on its invested capital, which is the percentage that will
be allowed to the business concerns making 10 % during
the prewar period. The percentage of net income on
invested capital in each trade or business is required by
the law to be determined by the Commissioner of Internal
Revenue, for the calendar year, and, when applied to a
corporation or partnership which has fixed its own fiscal
year, the percentage determined by the calendar year
ending during such fiscal year shall be used. The un-
t'nrtimate taxpayer whose earnings were unduly low dur-
ing the prewar period is required by the law to report
on that basis, but may claim the benefit of the rate of
representative concerns by filing a claim for abatement
of the amount by which the tax so assessed exceeds a tax
computed upon the basis of the deduction determined
for representative concerns. In such event, collection of
that part of the tax covered by such claim for abatement
shall not be made until the claim is decided, but the
Commissioner of Internal Revenue may require the
claimant to give a bond, conditioned for the payment of
any tax found to be due, with interest thereon, and if
siirh bond is not given the full amount of tax shall be
>-ed and the taxpayer be left to find his remedy by a
claim for refund. 64
SPECIFIC EXEMPTION. In addition to the deduction
described in the preceding paragraph, a domestic cor-
poration may also deduct the specific sum of $3,000 from
54Scctiou 205, Section 203 (d).
F. I. Tax. 34
530 APPENDIX
its net income for the taxable year. 55 A domestic part-
nership, or a citizen or resident of the United States, may
deduct the sum of $6,000. 56 A foreign corporation,
foreign partnership, or a non-resident alien individual,
is not entitled to any specific exemption, 57 but if the net
income from sources within the United States is less than
*.'5,000, no tax is imposed. 58
Deductions in Case Invested Capital Is Not Deter-
minable. If the Secretary of the Treasury is unable in
any case satisfactorily to determine the invested capital,
the amount of the deduction in such case shall be deter-
mined by the proportion between the deduction and the
net income of representative concerns engaged in a like
or similar trade or business. The law requires the Com-
missioner of Internal Revenue to determine the propor-
tion between the deduction and net income in each trade
or business and in the case of a corporation or partner-
ship which has fixed its own fiscal year, the proportion
determined for the calendar year ending during such
fiscal year shall be used. 59
Rate of Tax. In the case of taxpayers having in-
vested capital the tax is computed at the following
rates : 60
20% of the amount of the net income in excess of the
deduction and not in excess of 15% of the invested
capital for the taxable year;
55 Sect ion 203 (a).
56 Section 203 (b).
57 Section 203 (c).
58 Section 202.
59 Section 210.
60 Section 201.
THE WAR EXCESS PROFITS TAX 531
25% of the amount of the net income in excess of 15%
and not in excess of 20% of such capital ;
35% of the amount of the net income in excess of 20%
;iiid not in excess of 25% of such capital;
l-.V r of the amount of the net income in excess of
L'.V , ami nut in excess of 33% of such capital; and
60% of the amount of the net income in excess of '> ''' ,
of such capital.
Jij-rsTKATioxs. A corporation which has invested
capital of $100,000 ; net income of $50,000 for the taxable
\ car. and is entitled to a deduction of 9% on its invested
'apital, would compute the tax as follows. The amount
of the deduction would be 9% of $100,000 or $9,000,
plus the specific exemption of $3,000, making a total of
$12,000. The 20% rate would apply to an amount of net
income not in excess of 15% of the invested capital
($15,000) less the amount of the deduction ($12,000) or
$3,000. The 25% rate would apply to so much of the
income as exceeded 15% of the capital and did not
exceed 20% of the capital, that is, $5,000. The 35%
rate would apply to $5,000 of the income (the amount in
' \ ss of 20% and not in excess of 25% of the invested
'apital). The 45% rate would apply to $8,000 (the
amount in excess of 25% and not in excess of 33% of the
apital) and the 60% rate would apply to the remainder
nf the net income, Thus,
Income Rate Amount
$1 5,000 $1 2.000 = $3,000 20% $ 600
'-.000 25% 1,25(1
"'.000 35% 1,750
s.OOO 45% 3,600
17.000 60% 10,200
*5().(HM) $17,400
532 APPENDIX
Rate of Tax in Case of Nominal Capital. In the case
of a trade or business having no "invested capital" or
not more tb,an a nominal capital a tax of 8% is imposed
upon the net income of such trade or business, in excess
of the specific exemption of $3,000 allowed to domestic
corporations or $6,000 allowed domestic partnerships
and citizens or residents of the United States. In the
case of foreign corporations, foreign partnerships and
non-resident aliens the tax is imposed upon the entire
net income without any deduction, 61 unless such net
income from sources within the United States is less than
$3,000, in which case no tax is imposed. 62
Tax Paid Under Former Excess Profits Tax Law.
The excess profits tax law of March 3, 1917, is repealed
by this law, and any amount paid on account of the tax
imposed by that law is required to be credited toward
the payment of the tax imposed by this law. If payment
under the former law exceeds the amount of the tax
imposed under this law, the excess may be refunded
under the provisions relating to the refund of taxes. 63
Annual Returns. 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 is required to file a
return annually, at the same time and in the same man-
ner as is prescribed for income-tax returns under the
1916 Law. Partnerships having less income than above
indicated are not .required to file returns and are subject
61 Section 209.
62 Section 202.
63 Section 214.
THE \\ \i; KXCK^s PROFITS TAX **.'>
to 110 tax. 8 * Other taxpayers will report the information
necessary to assess this tax on their income tax returns.
Administrative Provisions. All administrative, spe-
cial and general provisions of law in relation to the
assessment, remission, collection, and refund of internal
revenue taxes, not specifically repealed, and not incon-
sistent with the provisions of this law, are extended and
made applicable to all the provisions of this law and to
the tax imposed thereby. All provisions of the 1916 In-
come Tax Law, as amended, relating to returns and pay-
ment of the income tax, including penalties, are made
applicable to the tax imposed by this law. 66 The Com-
niiss-ioner of Internal Revenue is authorized to make all
necessary regulations for carrying out the provisions of
this law, and may require any corporation, partnership,
or individual, subject to the provisions of this law, to
furnish him with such facts, data, and information as in
his judgment are necessary to collect the tax. 66
4 Section 211.
88 Section 212.
66 Section 213.
CHAPTER 46
THE CAPITAL STOCK TAX
This tax is popularly known as the capital stock tax,
but the statute describes it as " a special excise tax with
respect to carrying on or doing business. ' ' * The tax
is imposed upon, "Every corporation, joint-stock com-
pany or association, now or hereafter organized in the
United States for profit and having a capital stock repre-
sented by shares, and every insurance company, now or
hereafter organized under the laws of the United States,
or any state or territory of the United States ' ' and upon,
"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." The tax is imposed
for the privilege of carrying on or doing business for the
taxable year and is payable in advance by every taxable
corporation engaged in business during any part of the
preceding year.
Definitions. The word "corporation" as used in this
chapter means, unless otherwise stated, a corporation,
joint-stock company, association, or insurance company.
The phrase "taxable year" is the fiscal year of the Gov-
ernment beginning July one of each calendar year and
ending on the last day of June of the year following.
1 Act of September 8, 1916, 407.
534
THE CAPITAL. STOCK TAX 535
The phrases ''preceding year" and "preceding taxable
year" as used in the Statute mean the twelve-month
period ending June 30, preceding the taxable year.
Domestic Corporations Subject to the Tax. The tax
applies to corporations, joint-stock companies or associa-
tions organized in the United States, provided they are
(a) organized for profit, (b) Eave capital stock repre-
sented by shares, (c) were engaged in business during
the preceding taxable year, and (d) are not exempt
organizations under the provisions of Section 11 of the
1016 Income Tax Law. 8 It should be noted that the
law applies not only to corporations but to all associations
"organized in the United States" and in this respect
SIMM us to be broader in its scope than the 1909 Law,
which was construed to apply only to corporations, joint-
stock companies or associations "organized under the
laws of the United States or of any state or territory of
the United States or under the Acts of Congress applic-
able to Alaska or the District of Columbia." 8 It was
apparently the intent of Congress to make this law apply
to associations which were held not to be taxable under
the 1909 Law, because not organized under some statute.*
* For a discussion of corporations exempt from tax under the
1916 Income Tax Law, see Chapter 15.
3 A.-t of August 5, 1909, 38.
* Tt. was the intention of Congress to embrace within the 1909
I,a\v only Midi corporations and joint-stock associations as are
nr^ii iii/i'il under some statute or derived from that source some ,
i|ii:ility or benefit not existing at the common law. (Eliot v. Free-
niiin, 2iM r. S. 178.) This was a case involving the so-called
"Massachusetts Real Estate Trusts" and the Treasury Depart-
ment has indicated that it will not hold such trusts subject to the
capital stock tax. It seems, nevertheless, that Congress had a
definite intention to include such organizations by using the phrase
536 APPENDIX
The language of the two laws not being identical,
decisions under the 1909 Law are not controlling with
respect to this law. It seems, rather, that any corpora-
tion or association subject to the 1916 Income Tax Law
would be subject to the capital stock tax law (providing
the other conditions co-exist) since the language of Sec-
tion 10 (a) of the 1916 Law has phraseology very similar
to the language of this law. 6
Insurance Companies. It seems that an insurance
company in order to be subject to this tax must be organ-
ized under the laws of the United States, or any state
or territory of the United States. An insurance com-
pany not organized under some statute would not be
subject to the tax although it may have capital stock
represented by shares. If organized under a statute the
other elements must co-exist, that is, it must have been
organized for profit, must be engaged in business and
must not be one of the classes of corporations specifically
enumerated as exempt in the 1916 Income Tax Law.
Although the law imposes the tax on insurance com-
panies without reference to whether or not they have
capital stock represented by shares it has been held by
the Treasury Department, inasmuch as the basis of tax
is the fair value of the stock of the corporation, that
mutual insurance companies and other associations not
having capital stock represented by shares will be held
"organized in the United States" instead of the phrase "organ-
ized under the laws of the United States or of any state or terri-
tory of the United States," which latter phrase was used in the
1909 Law and was the precise language on which this case was
decided.
5 For rulings under the 1916 Law on joint-stock companies and
associations see Chapter 12.
Till. CAPITAL MOCK TAX 537
exempt from the tax, in the absence ofl a basis for the
computation thereof. 6
Holding Companies. A holding company, as such, is
not exempt from this tax. The Treasury Department
has held that a holding company organized in the United
States for the purpose of acquiring and holding capital
stock of subsidiary companies, and actually engaged in
holding such stock, voting thereon, receiving dividends
thereon, and distributing money among its own share-
holders, is engaged in business and is subject to this tax. 7
Both holding companies and their subsidiary corporations
are required to file returns and pay the tax, no deduc-
tion being allowed to the holding corporation for the
tax assessed on its subsidiary. 8
Subsidiary Companies. A subsidiary company is
taxed on the fair value of its capital stock, although the
parent company is also taxed on the value of its capital
stock, represented by the stock of such subsidiary. 9
It has been held that in order to determine the fair
value of capital stock of subsidiary companies, the fair
value of the capital stock of the parent company, deter-
mined from the prices listed on an exchange or from
actual sales, may be apportioned among the subsidiaries
according to the amount of net profits earned by each
during the year, making due allowance for the amount
of net profits earned by the parent corporation from
actual operations and investments or holdings in stock of
companies other than its subsidiaries. As an illustration,
6T. D. 2364.
7T. D. 2429.
T. D. 2503.
T. D. 2493.
538 APPENDIX
assume that the fair value of the capital stock of a parent
company is $5,000,000 and that it derived one-fifth of its
ome during the preceding year from operations and
investments in securities, other than stock of its two
subsidiaries. In such case, one-fifth of the fair value of
its capital stock will be ascribed to capital used in its
operations and outside investments, four-fifths, or $4,-
000,000, being ascribed to the capital stock of the sub-
sidiaries. Assume further, that one of the subsidiaries
had net income of $600,000 and the other had net income
of $200,000. The aggregate net income of the subsidiaries
would be $800,000, three-fourths of which would be
earned by the one and one-fourth by the other. Conse-
quently, the value of the capital stock of the one would
be three-fourths of $4,000,000, and the value of the capi-
tal stock of the other would be one-fourth, or $3,000,000
and $1,000,000 Tespectively. Where the value of the
stock of a subsidiary company is determined on this basis,
the Treasury Department requires a statement showing
the fair value of capital stock of the parent company, its
earnings for the preceding year, the amount of such
earnings derived from operations and outside invest-
ments, and the net earnings of each subsidiary. 10
Corporations Not Engaged in Business. Since this is
a tax with respect to the carrying on or doing business
by a corporation, it follows that only such corporations
as are engaged in business are subject to the tax. The
meaning of the term "engaged in business" was defined
by a number of decisions under the 1909 Law, with par-
ticular reference to cases where corporations had cease I
to do business. Thus, it was held that where a corpora-
10 T. D. 2493 as amended by T. D. 2509.
THE CAPITAL STOCK TAX 539
lion, originally organized for the purpose of owning and
ivniing an office building, leased its property for 130
\ . MI-X. its sole authority under its charter thereafter being
to hold the title subject to the lease and to receive and
distribute the rentals which might accrue under the
trrms of the lease, or the proceeds of any sale of the land
if it should be sold, was not engaged in business within
the meaning of that law. 11 In another case, it was held
that a railroad corporation which had leased its prop-
erty for a term of years, and parted with its control and
management, maintaining, however, its corporate organ-
i/ation, collecting rentals from the lessee, and distributing
tin- same among its stockholders, was not engaged in
business. 18 Where, however, a corporation was organized
to build and lease property, the fact that it had leased
all of its property and did nothing except collect and
distribute the rents, did not exempt it from the tax, since
such collection and distribution of rents from the leased
property was the business for which it was organized. 18
These and other decisions 14 will be followed by the
11 Zonne v.' Minneapolis Syndicate, 220 U. 8. 187. In a later
;IM- it was held that, although a corporation might have power
to do business under its charter, if it had .leased all its property
:ml was merely collecting rent it was not engaged in business.
U. S. v. Emery, etc. Co., 237 U. S. 28.
12 MoCoach v. Mine Hill & Schuylkill Haven B. B. Co., 228 U. S.
295.
13 Bio Grande Junction By. Co. v. U. 8., 51 Ct. Cls. 274.
14 Other cases arising under the 1909 Law are Anderson v. Mor-
ris & Essex B. B. Co., 216 Fed. 83; Cambria Steel Co. v. McOoach,
225 Fed. 278 ; Jasper, etc. By. Co. v. Walker, 238 Fed. 533 ; Lewel-
lyn v. Pittsburgh, et. B. B. Co., 222 Fed. 177; McCoach v. Con-
tinental Passenger By. Co., 233 Fed. 976; Miller v. Snake Biver
Valley R. R. Co., 223 Fed. 946; New York Central v. Gill, 219 Fed.
LS4; New York Mail, etc. Co. v. Anderson, 234 Fed. 590; Phila-
delphia, etc. B. B. Co. v. Lederer, 242 Fed. 492; Philadelphia
540 APPENDIX
Treasury Department where the decisions are by the
United States Supreme Court or, if by the lower courts,
have been acquiesced in by the Department. Corpora-
tions organized for the purpose of buying, owning, ex-
ploring, developing, leasing, improving, selling and deal-
ing in lands, mining properties, tenements, and heredita-
ments, are considered to be engaged in business if they
perform any of their powers. It is not necessary that
such a corporation be an operating company in order to
be taxable under this law. If a corporation is doing
any one of the several things it is authorized to do, by its
charter, it is "engaged in business" and subject to this
tax. 15 Corporations in the possession and control of
receivers appointed by a court are not engaged in busi-
ness during the period of the receivership. 16
Engaged in Business During Preceding Taxable Year.
A corporation is not subject to tax in any taxable year
unless these two conditions co-exist: (a) it must have
been carrying on business during some part of the pre-
ceding year, and (b) it must be carrying on business in
the taxable year. It is not necessary, however, that the
corporation should have been engaged in business during
the entire preceding year. If it was engaged in business
at some time during the preceding year, the length of
time has no bearing upon the amount of tax due. A
corporation commencing business on the last day of the
preceding year is held by the Treasury Department to
Traction Co. v. McCoaeb, 224 Fed. 800; Public Service Electric
Co. v. Herold, 229 Fed. 902; Traction Companies v. Collector of
Internal Rev., 223 Fed. 984; Wilkes-Barre, etc. Traction Co. v.
Davis, 214 Fed. 551.
15 T. D. 2457.
16 T. D. 2424.
THE CAPITAL STOCK TAX 541
be subject to the tax to the same extent as though it had
been engaged in business for the entire year, and the full
rate of tax for the taxable year is imposed. 17
Inactive Corporations. A corporation not engaged in
business at the beginning of the taxable year is not re-
quired to file a return or pay a tax, although it may have
been engaged in business during a part of the preceding
year. If such corporation resumes business at any time
during the taxable year, it will be required, at that time,
to make a return and pay the tax for the proportion of
the year in which it intends to do business. In such
cases the tax is computed proportionately from the first,
day of the month in which it engages in business to the
end of the taxable year. Thus, if a corporation was
engaged in business during some part of the taxable year
beginning July 1, 1916, and ending June 30, 1917, but
was not engaged in business on July 1, 1917, it was
required to file no return and pay no tax at that time.
If it subsequently engaged in business in September,
1917, the return was required to be filed and the tax be
paid at that time, for ten-twelfths of the full year. If an
inactive corporation was not engaged in business during
any part of the preceding year, it is not taxed in the year
it resumes activity, but makes a return and pays the tax
at the beginning of the next taxable year.
Corporations Ceasing to Do Business During the Tax-
able Year. If a corporation has paid this tax at the
liejji lining of a taxable year and ceases to do business
before the close of that year, no refund of any amount
of the tax is allowed for that portion of the year iu
which it does no business. 18
" T. D. 2417.
l See 3237, Rev. 8tat.
542 APPENDIX
Basis of Tax. The basis of the tax in the case of all
domestic corporations is ".the fair average value of the
capital stock for the preceding year/' The tax is im-
posed upon the fair value of the entire capital stock of
domestic corporations, no deduction being allowed in
cases where a part of the capital is invested in foreign
countries. 19
Fair Value of Capital Stock. The law provides in the
case of domestic corporations, that in estimating the
value of capital stock, the surplus and undivided profits
shall be included; provided, that in the case of insur-
ance 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 in estimating the
value of the capital stock, surplus and undivided
profits. 80 The Treasury Department has prescribed
three methods by which the fair value of the capital stock
may be determined : Case 1, where the stock is listed on
an exchange ; Case 2, where 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, and Case 3,
where the stock is not listed and no actual sales have been
made, or if the price at which sales have been made is
not known to the officer making the return. 21 Cases 1
19 T. D. 2417.
20 Act of September 8, 1916, 407. The methods prescribed by
the Treasury Department for ascertaining the fair value of capital
stock eliminate such deposits and reserve funds maintained or
held in the United States and the amount thereof is not deducted
after computing the value of the stock by any one of the three
methods described below. (T. D. 2503.)
21 T. D. 2364.
THE CAPITAL STOCK TAX 543
and '2 present romparatively few difficulties and cover a
comparatively small number of corporations. Case '3
has- more general application. The rules applicable to
each of the three .-ases are discussed below.
INCKI. \>i: r\ce for the stock on the last business day of each
month during the preceding fiscal year (or if no bid
pri'-e was- quoted on the last day, then the latest day in
the month on which a bid price was quoted), and divid-
ing by twelve, the re.su It being the average bid price per
share for that year. 24 A corporation may. if it prefers,
average the fair value throughout the entire fiscal year
by showing on a statement, attached to the back of the
return, the highest bid price for stock on each day
22 T. D. 2503.
23 Letter from Treasury Department dated December 19, 191C..
2* T. D. 2364.
544 APPENDIX
l
throughout the year. 26 Where stock listed on an ex-
change is subject to great fluctuation, and the prices do
not indicate the fair value of the stock, the corporation
may attach a statement to its return setting forth the
reasons why the bid prices are not considered an indica-
tion of the value of the stock, which statement will be
taken into consideration when assessment of the tax is
made. 26
Case 2. 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 determining factor in ascertaining the fair value per
share. 27 Corporations estimating the fair value of their
stock under Case 2, are required to take "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. A corporation
protesting against the computation of the value of stock
by this method may file a statement with its return set-
ting forth the facts in detail and requesting the Collector
to bring the case to the attention of the Treasury Depart-
ment when the return is forwarded to that Department
for audit. 28 When sales have been made during the year
25 T. D. 2503.
28 Letter from Treasury Department dated January 22, 1917.
27 T. D. 2364.
28 T. D. 2423.
TIII: CAPITAL STOCK TAX 545
under circumstances which do nut indicate the true value
Dl the stuck, the prices which were paid should be stated,
ami. in addition, the value of the stuck may he estimated
under Case 3, a statement being attached to the return
explaining why the figures in Case 2 do uot indicate the
fair average value of the stock. 29 If there are not enough
sales to establish a basis for estimating the fair value of
the total capital stock, the corporation will be required
tu till out Case 3. 30
Case 3. If Case 1 and Case 2 can not be applied, viz.,
the stuck is nut listed on any exchange, and no actual
-ales have been made during the preceding fiscal year,
m it 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. 31 The Treasury De-
partment requires the return to show the amount of net
income reported on the federal income tax returns for
five preceding years and the number of shares outstand-
ing on December 31 of each of such years, together with
the percentage of earnings on each share of stock. A
1Q% earning capacity, so determined, is taken as prima
facie evidence that the stock is worth par. If the earn-
ini: capacity is more or less than 10% the estimated fail-
value per share is taken to be correspondingly more or
lets than par. Thus, if the earning capacity is shown
29 Letter from Treasury Department dated January 22, 1917.
30 T. D. 2503.
31 T. D. 2364.
F. I. Tax 35
f4() APPENDIX
to be 8% the tax will be assessed on a ''fair average
value" of 80% of par. If the earning capacity is shown
to be 12% the fair average value is taken to be 120% of
par. The assessment is based on this prima facie valua-
tion unless the corporation submits proof that such
valuation is not fair and equitable. The estimated fair
value per share having been ascertained, as above, such
sum is multiplied by the number of shares outstanding
on June 30 preceding the time of making the return, in
order to ascertain the fair value of the capital stock. If,
however, the number of shares outstanding during the
year has varied, the average number of shares outstand-
ing may be taken instead of the total number of shares
outstanding on June 30. Thus, if a corporation has 500
shares outstanding for four months, and 1,000 shares
outstanding for eight months, the average number of
shares outstanding for the year will be the total of the
number outstanding at the end of each month divided by
twelve, or 833 shares. Should the officers of a corpora-
tion consider that a 10% earning capacity does not war-
rant a valuation of par for their stock they may attach
to the return a statement under oath, reciting the reasons
for their conclusion and giving a statement of the assets
and liabilities as of June 30 preceding, or as of the end
of their last fiscal year, and these factors will be given
consideration in making the assessment.
Exceptions to Case 3. Corporations that have no
regular earnings, such as companies organized for the
purpose of developing and selling timberland, mining
property, and other real property, and corporations that
have earned no profits in the past five years or have only
been engaged in business one or two years, can not very
well estimate the value of the stock from their earning
THE CAPITAL STOCK TAX 547
capacity. It lias also been found that the earning capac-
ity is not an equitable method in computing the fair
value of real estate and investment companies. Such
corporations are permitted, therefore, to file a detailed
statement, attached to the back of the return, showing
their assets and liabilities as of June 30, last, or as of
the end of their last fiscal year, and may estimate the fair
value of the stock from the book value thereof. 38 If the
book value of assets is fictitious and does not represent
the true value of the property, this fact should be fully
explained on the statement and the true value of the
property should be stated, together with any other data
as to the hazards of the business or conditions peculiar
to the business which in the judgment of the officers
tends to affect the value of the stock.
Exemption. After computing- the fair value of the
rapital stock, the law permits an exemption of $99,000,
that is, the tax is imposed only upon the fair value of
the capital stock in excess of $99,000. 33
Rate of Tax. The tax is an amount equivalent to
fifty cents for each one thousand dollars of the fair value
of the capital stock. It is i-mupiited on each full one
thousand dollars and not on any fractional part thereof . S4
Thus, if a corporation has a fair value of capital stock
of $186,656, the fraction over $186,000 is eliminated in
the tax.
Deduction of Munition Manufacturers' Tax. If the
corporation has paid the tax imposed under the Act of
32 T. D. 2503, Letter from Treasury Department dated August
17, 1917.
33 Act of September 8, 1916, | 407.
34 T. D. 2364.
548 APPENDIX
September 8, 1916, on munition manufacturers, the
amount of such tax may be deducted from the tax found
to be due under this Act and only the remainder, if any,
will be payable. The deduction of the munition manu-
facturers' tax is allowed only with respect to such tax
actually paid since the making of the last previous re-
turn. No deduction can be made for a tax assessed but
not paid at the time of making the capital stock tax
return. 36
Tax Due. This tax is an excise tax on the privilege
of doing business, similar to occupational taxes imposed
on individuals. Being a privilege or occupational tax,
it is payable annually, in advance, in July, the beginning
of the Government's fiscal year. The tax is payable to
the collector, at any time after July 1, but penalties for
non-payment do not attach until ten days after notice
and demand therefor has been served by the collector
upon the taxpayer. 36
Returns. The capital stock tax return is required t o
be filed in July of each year. 37 The return is filed with
the collector of the district in which the principal place
of business of the corporation is located. Forms are sent
to taxable corporations known to collectors, but failure
to receive a blank form does not relieve a corporation
from the penalties prescribed by law for failure to make
the return within the time required.
35 T. D. 2364.
36 T. D. 2423. See Chapter 36 for rulings as to notice and de-
mand.
37 T. I). 2364. The form to he used by domestic corpornt.ions
is known as Form 707.
THE CAPITAL STOCK TAX 'I' 1
WHEN REQUIRED. A return is required of every do-
mestic corporation engaged in business, having a capital
stock issued and outstanding, represented by shares, of
the "fair average value" of $75,000 or over, regardless
of the par value of its capital stock, unless such corpora-
tion was not engaged in business during the preceding
taxable year. 88 Since the Treasury Department has
adopted an arbitrary rule of valuing capital stock on the
theory that a 10% earning capacity makes the stock
worth par. a corporation may be required to file a re-
turn, and lie subject to the penalties for failure so to do,
notwithstanding that the officers of the company con-
sider the stock to be worth less than $75,000. Thus, a
corporation having a capital stock outstanding of $50,000
par value, on which it earns 15%, will be required to
make a return, the "fair average value" being 150% of
par, according to the rule laid down by the Treasury
Department. Similarly, a corporation having $25,000
par value of stock outstanding, on which it earns 30%,
will be required to file a return. To determine whether
or not a corporation should file a return, the percentage
of earnings per share should be multiplied by ten to
ascertain the percentage of value of its shares over or
under par. If this figure, multiplied by the number of
shares outstanding, gives a product of $75,000 or more,
a return should be filed in order to avoid penalties.
EXTENSION OF TIME. An extension of time for tiling
the capital stock return may l>o obtained in the ,-.,-
sickness or absence, such extension not to exceed thirty
davs. 39
38 T. D. 2364.
39 T. D.
550 APPENDIX
Penalty for Failure to Make Return. If a corporation
fails to make a return on or before the last day of July
in any year, the collector may make a return from such
information as he can obtain through testimony or other-
wise, and a penalty of 50% of the amount of the tax so
found due will be added, unless a return is voluntarily
made and without notice from the collector and it is
shown that the failure to file it was due to a reasonable
cause and not to wilful neglect. 40 In case of false or
fraudulent return is made the Commissioner will add
100% of the amount of the tax. "Every person who car-
ries 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 mis-
demeanor, 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." 41
The 50% penalty for delinquency in filing returns, as
we 1 ! as the specific penalty for carrying on business
without payment of special tax, will be strictly enforced
against corporations that fail to file returns of capital-
stock tax within the time prescribed by law or by the
collector. 42
Penalty for Delay in Paying Tax. Upon failure to
pay the tax assessed within ten days after notice and
demand, a penalty of 5% of the tax unpaid, and interest
40 T. D. 2364; Eev. Stat. 3176, as amended. See p. 422.
41 Act of September 8, 1916, 408, T. D. 2364.
42 For procedure in compromising the specific penalty see Chap-
ter 37.
THE CAPITAL STOCK TAX 551
at the rate of 1% per month until paid, is added to the
amount of such tax. 43
Foreign Corporations. Every corporation, joint-stock
company or association, or insurance company, organ-
ized for profit under the laws of any foreign country and
engaged in business in the United States, is subject to
this tax, with respect to the carrying on or doing busi-
ness in the United States by such corporation, joint-stock
company or association, or insurance company, the tax
being based upon the capital invested in the transaction
of business in the United States. It is to be noted that
a foreign corporation is not subject to this tax merely
because it receives income from sources within this coun-
try. To be taxable, a foreign corporation must be carry-
ing on or doing business in the United States and must
have capital actually invested in the transaction of such
business.** The chapter on foreign corporations, in the
foregoing part of this book, contains decisions and
rulings which define what is doing business by foreign
corporations, and such rulings and decisions have appli-
cation to this tax. It should be borne in mind, however,
that some of the rulings with respect to the taxability of
foreign corporations under the income tax law have no
application to this law, since this tax is imposed only
where the foreign corporation is carrying on or doing
business in this country and has capital invested in the
transaction of such business.* 6
43 See Chapter 36 for rules vith respect to assessment and pay-
ment of the tax.
* Act of September 8, 1916, f 407.
* Laurentide Co., Limited, v. Durey, 231 Fed. 223, and Bryant
and May, Limited, v. Scott, 226 Fed. 875, are cases in point. S
p. 178, supra.
552 APPENDIX
BASIS OF TAX. In the case of foreign corporations, the
tax is imposed upon the capital actually invested in the
transaction of its business in the United States, the
amount of the tax being computed on the basis of the
average amount of capital so invested during the preced-
ing- year. Bank accounts carried by a foreign corpora-
tion in this country are to be, considered in computing
the amount of capital actually invested if the money is
carried on the books of the corporation as capital invested
in its business in this country, 46 but not if the money is
kept here merely for convenience or investment.
FOREIGN INSURANCE COMPANIES. Foreign insurance
companies are permitted, by statute, to exclude from
capital actually invested in the transaction of business
in the United States, such deposits or reserve funds as
they are required by law or contract to maintain or hold
in the United States for the protection of or payment to
or apportionment among policyholders. The Treasury
Department has held that the amount of capital invested
in the transaction of business in the United States by
foreign insurance companies is the amount of "surplus
to policyholders," as shown by the conventional form of
report to State insurance departments. Foreign insur-
ance companies are permitted to state the amount of
"surplus to policyholders" as shown by the report for
the last fiscal year of the company. The only deduction
allowed, by the Treasury Department is the amount of
deposits actually required bj- states in which the com-
pany is transacting business. 47
EXEMPTION. As stated above, an exemption of $99,000
i.s allowed from the capital stock of each domestic cor-
48 Letter from Treasury Department dated February 10, 1917.
47 T. D. 2503.
THK CAPITAL STOCK TAX
I >iir;ii ion. hi the case of foreign corporations the exemp-
lion is such proportion of $99,000 as the amount of
capital actually invested in business in the United States
bears to tin- total amount invested in the transaction of
business within and without the United States. If a
foreign corporation has all its capital invested here, it
will be entitled to the full amount of $99,000, but if it
has only a fraction of its capital invested here, the ex-
emption will be such fraction of $99,000. This exemp-
tion is allowed only if the foreign corporation makes a
return to the Commissioner of Internal Revenue showing
the amount of capital invested in the transaction of busi-
peea outside the United States, so that the Commissioner
of Internal Revenue may compute the proportion of the
exemption to which the corporation is entitled. 48
li \TE OF TAX. The rate of tax is 50 cents on each one
thousand dollars of the capital actually invested in the
transaction of business in this country, in excess of the
amount of the exemption. If the capital so invested
exceeds an amount in even thousands, the fraction above
the even thousand may be disregarded, as in the case of
domestic corporations. The tax is due at the same time
as in the case of domestic corporations and the same
'ivrlit for payment of munition manufacturers' tax is
extended to foreign corporations. 49
lii TURNS. A return is required of every foreign cor-
poration irrespective of the amount of capital employ,!
it her in this country or elsewhere in the transaction of
business. 50 The return is required to be filed at th<
its
A,-t of September 8, 1916, 5 407.
*See p. 547.
50 T. D. 2364.
554 APPENDIX
same time and in the same manner as in the case of
domestic corporations and the same penalties accrue for
neglect or failure. Keturns are filed with the local
collector under the rules which apply to the filing of
returns of annual net income. 61
Administration of the Law. All Administrative or
special provisions of the internal revenue laws including
the laws relating to the assessment of taxes, so far as ap-
plicable, are extended to and made a part of the section
imposing the capital stock tax and every corporation
liable to the capital stock tax is required to keep such
records and render, under oath, such statements and re-
turns, and comply with such regulations as the Commis-
sioner of Internal Revenue may prescribe. 62
61 See pp. 548 and 189.
52 Act of September 8, 1916, 409.
TEXT OF 1916 LAW AS AMENDED 1
TITLE 1 OF THE ACT OF SEPTEMBER 8, 1916, AS AMENDED BY ACT
OF OCTOBEE 3, 1917.
PAET I. ON INDIVIDUALS
Sec. 1. (a) That there shall be levied, assessed, collected, and
paid anually upon the entire net income received in the preceding"
calendar year from all sources by every individual, a c.tizen or
resident of the United States, a tax of two per centum upon such
income; and a like tax shall be levied, assessed, collected, and paid
annually upon the entire net income received in the preceding
calendar year from all sources within the United States by every
individual, a non-resident alien, including interest on bonds, notes,
or other interest- bearing obligations of residents, corporate or
otherwise.
(b) In addition to the income tax imposed by subdivision (a)
of tliis section (herein referred to as the normal tax) there shall
be levied, assessed, collected, and paid upon the total net income
of every individual, or, in the case of a non-resident alien, the total
net income received from all sources within the United States, an
additional income tax (herein referred to as the additional tax)
of one per centum per annum upon the amount by which such total
net income exceeds $20,000 and does not exceed $40,000, two per
centum per annum upon the amount by which such total net in-
come 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
i Matter repealed by the amendment is omitted. New matter is
shown in italics.
555
556 APPENDIX
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
rxt-ccd $500,000, ten per centum per annum upon the amount by
which such total net income exceeds $500,000 and does not exceed
$1,000,000, eleven per centum per annum upon the amount by
\vhich 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
fc', 0(10,000, and thirteen per centum per annum upon the amount
l.y which such total net income exceeds $2,000,000.
For the purpose of the additional tax there shall be included as
income the income derived from dividends on the capital stock or
from the net earnings of any corporation, joint-stock company or
association, or insurance company, except that in the case of non-
resident aliens such income derived from sources without the
United States shall not be included.
All the provisions of this title relating to the normal tax on
individuals, so far as they are applicable and are not inconsistent
with this subdivision and section three, shall apply to the imposi-
tion, levy, assessment, and collection of the additional tax im-
posed under this subdivision.
(c) The foregoing normal and additional tax rates shall apply
to the entire net income, except as hereinafter provided, received
by every taxable person in the calendar year nineteen hundred and
sixteen and in each calendar year thereafter.
INCOME DEFINED
Sec. 2. (a) That, subject only to such exemptions and deduc-
tions as are hereinafter allowed, the net income of a taxable person
slial include gains, profits, and income derived from salaries, wages,
or compensation for personal service of whatever kind and in
whatever form paid, or from professions, vocations, businesses,
trade, commerce, or sales, or dealings in property, whether real
or personal, growing out of the ownership or use of or interest
TEXT OP 1916 LAW AS AMENDED 557
in real or jKjrsonal 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.
(&) Income received by estates of deceased persons during the
period Dt administration or settlement of the estate, shall be sub
je.-t to the normal ami additional tax and taxed to their estates,
and ulso such income of estates or any kind of property h#ld in
trust, including such income accumulated in trust for the benefit
of unborn or unascertained persons, or persons with contingent
interests and income held for future distribution under the terms
of the will or trust shall be likewise taxed, the tax in each instance,
except where the income is returned for the purpose of the tax
by the beneficiary, to be assessed to the executor, administrator,
or trustee, as the case may be: Provided, That where -the income
is to be distributed annually or regularly between existing heirs
or legatees, or beneficiaries the rate of tax and method of com-
puting the same shall be based in each case upon the amount of
the individual share to be distributed.
Such trustees, executors, administrators, and other fiduciaries
are hereby indemnified against the claims or demands of every
beneficiary for all payments of taxes which they shall be required
to make under the provisions of this title, and they shall ha\e
credit for the amount of such payments against tin- beueliciary
or principal in any accounting which they make as such trustee
or other fiduciaries.
(c) For the purpose of ascertaining the gain derived from tin-
sale or other disposition of property, real, personal, or mixed,
acquired before March first, nineteen hundred and thirteen, the
fair market price or value of such property as of March first,
nineteen hundred and thirteen, shall be the basis for determining
tin- amount of such gain derived.
ADDITIONAL TAX INCLUDES UNDISTIM MI'TKI)
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 or distributed or not, of all corporations, joint-
stock companies or associations, or insurance companies, however
558 APPENDIX
created or organized, formed or fraudulently availed of for the
purpose of preventing the imposition of such tax through 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 company, or that the gains and profits
are permitted to accumulate beyond the reasonable needs of the
business, shall be prima facie evidence of a fraudulent purpose
to escape such tax; but the fact that the gains and profits are in
any case permitted to accumulate and become surplus shall not be
construed as evidence of a purpose to escape the said tax 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 Commissioner of Internal Kevenue,
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
Sec. 4. The following income shall be exempt from the pro-
visions of this title:
The proceeds of life insurance policies paid to individual
beneficiaries upon the death of the insured; the amount received
by the insured, as a return of premium or premiums paid by him
under life insurance, endowment, or annuity contracts, either
during the term or at the maturity of the term mentioned in the
contract or upon the surrender of the contract; the value of
property acquired by gift, bequest, devise, or descent (but the
income from such property shall be included as income) ; interest
upon the obligations of a State or any political subdivision thereof
or upon the obligations of the United States (but, in the case of
obligations of the United States issued after September first,
nineteen hundred and seventeen, only if and to the extent provided
in the Act authorising the issue thereof) or its possessions or
securities issued under the provisions of the Federal Farm Loan
Act of July seventeenth, nineteen hundred and sixteen; the com-
pensation of the present President of the United States during
the term for which he has been elected, and the judges of the
TEXT OF 1916 LAW A> AMENDED 559
Supreme and inferior courts of the United States now in office,
:nnl the compensation of all officers and employees of a State,
or any political subdivision thereof, except when such compensa-
tion is paid by the United States Government.
DEDUCTIONS ALLOWED
Sec. 5. That in computing net income in the case of a citizen
or resident of the United States
(a) For the purpose of the tax there shall be allowed as
deductions
First. The necessary expenses actually paid in carrying on
any business or trade, not including personal, living, or family
expenses;
Second. All interest paid within the year on his indebtedness
except on indebtedness incurred for the purchase of obligations or
securities the interest upon which is exempt from taxation as
income under this title;
Third. Taxes paid within the year imposed by the authority
of the United States (except income and excess profits taxes) or of
its Territories, or possessions, or any foreign country, or by the
authority of any State, county, school district, or 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 com-
pensated for by insurance or otherwise: Provided, That for the
purpose of ascertaining the loss sustained from the sale or other
disposition of property, real, personal, or mixed, acquired before
March first, nineteen hundred and thirteen, the fair market price or
value of such property as of March first, nineteen hundred and
thirteen, shall be the basis for determining tho amount of such
loss sustained;
Fifth. In transactions entered into for profit but not rim-
nected with his business or trade, the losses actually sustaine-1
therein during the year to an amount not exceeding the profits
:i rising therefrom;
Sixth. Debts due to the taxpayer actually ascertained to be
worthless and charged off within the year;
Seventh. A reasonable allowance for the exhaustion, wear :ui.|
560 APPENDIX
tour of property arising out of its use or employment in the busi-
ness or trade;
Eighth, (a) In the case of oil and gas wells a reasonable
allowance for actual reduction in flow and production to be ascer-
tained not by the flush flow, but by the settled production or
regular flow; (&) in the ease 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 dur-
ing the year for which the return and computation are made,
such reasonable allowance to be made in the case of both (a)
and (b) under rules and regulations to be prescribed by the
Secretary of the Treasury: Provided, That when the allowances
authorized in (a) and (b) shall equal the capital originally
invested, or in case of purchase made prior to March 1, 1913,
the fair market value as of that date, no further allowance shall
lie made. No deductions 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 deduc-
tion 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;
Ninth. Contributio-ns or gifts actually made within tJie year
to corporations or associations organised and operated exclusively
for religious, . charitable, scientific, or educational purposes, or to
societies fof the prevention of cruelty to children 01- animals, no
part of the net income of which inures to the benefit of any private
stockholder or individual, to an amount not in excess of fifteen
IK r centum of the taxpayer's taxable net income as computed
without* the benefit of this paragraph. Such contributions or
gifts shall be allowable as deductions only if verified under rules
and regulations prescribed by the Commissioner of Internal 'Reve-
nue, with the approval of the Secretary of the Treasury.
CREDITS ALLOWED
(b) For the purpose of the normal tax only, the income
embraced in a personal return shall be credited with the amount
received as dividends upon the stock or from the net earnings of
any corporation, joint-stock company or association, trustee m-
insurance company, which is taxable upon its net income as herein-
after providi-l ;
II VI ii| 1916 LAW AS AMKNDED 561
(-i A like credit shall be allowed as to the amouiit of incomr.
(lie normal tax upon which has been paid or withheld for payment
.-it tlir sourer of tin- inc under the |imvisions of this title.
NON-RESIDENT ALIENS
Sr,-. (!. That ill computing net income in the case of a nun
re-ident alien
(a) For the purpose of the tax there shall be allowed as
deductions
First. The necessary . -.x^'iises actually paid in carrying on
any business or trade conducted by him within the United States,
not including personal, living, or family expenses;
Second. The proportion of all interest paid within the year
by such person on his indebtedness (except on indebtedness in-
curred for the purclMse of obligations or securities the interest
upon which i-tt exempt from taxation as income under this title i
which the gross amount of his income for the year derived from
sources within the United States bears to the gross amount of his
income for the year derived from all sources within and without
the United States, but this deduction shall be allowed only if
such person includes in the return required by section eight all
the information necessary for its calculation;
Third. Taxes paid within the year imposed by the authority
of tlio United States (except income and excess profits taxes),
or of its Territories, or possessions, or by the authority of any
State, county, school district, or municipality, or other taxing
subdivision of any State, paid within the United States, not
including those assessed against local benefits;
Fourth. Losses actually sustained during the year, incurn-d
in business or trade conducted by him within the United State*.
and losses of property within the United States arising from
fires, storms, shipwreck, or other casualty, and from theft, when
Mich losses are not compensated for by insurance or othorwi-r:
Provided, That for the purpose of ascertaining the amount of
such loss or losses sustained in trade, or speculative trail-action-
not in trade, from the same or any kind of pro|inty ai-<|iiirrd
before March first, nineteen hundred and thirtem, the fair market
price or value of such property as of March tir-t. nineteen hundred
and thirteen, shall be the basis for determining the amount of
such loss or losses sustained ;
F. T. Tax. 36
562 APPENDIX
Fifth. In transactions entered into for profit but not con-
nected with his business or trade, the Ipsses actually sustained
therein during the year to an amount not exceeding the profit
arising therefrom in the United States;
Sixth. Debts arising in the course of business or trade con-
ducted by him within the United States due to the taxpayer actu-
ally ascertained to be worthless and charged off within the year;
Seventh. A reasonable allowance for the exhaustion, wear and
tear of property within the United States arising out of its use
or employment in the business or trade; (a) in the case of oil
and gas wells a reasonable allowance for actual reduction irt
flow and production to be ascertained not by the flush flow, but
by the settled production or regular flow; (&) in the case of
mines a reasonable allowance for depletion thereof not to exceed
the market value in the mine of the product thereof which has
been mined and sold during the year for which the return and
computation are made, such reasonable allowance to be made
in the case of both (a) and (b) under rules and regulations to
be prescribed by the Secretary of the Treasury: Provided, That
when the allowance authorized in (a) and (b) shall equal the
capital originally invested, or in case of purchase made prior to
March first, nineteen hundred and thirteen, the fair market value
as of that date, no further allowance shall be made. No deduction
shall be allowed for any amount paid out for new buildings,
permanent improvements, or betterments, made to increase the
value of any property or estate, and no deduction shall be made
for any amount of expense of restoring property or making good
the exhaustion thereof for which an allowance is or has been
made.
(6) There shall also be allowed the credits specified by sub-
divisions (&) and (c) of section five.
(c) A non-resident alien individual sluM receive the benefit
of tHe deductions and credits provided for in this section only by
filing or causing to be filed with the collector of internal revenue
a true and accurate return of his total income, received from all
sources, corporate or otherwise, in the United States, in the man-
ner prescribed by this title; and in case of his failure to file sui'h
] return the collector shall collect the tax on such income, and all
property belonging to such non-resident alien individual shall be
liable to distraint for the tax.
TEXT OK 1910 LAW AS A.MKNDED 563
PERSONAL EXEMPTION
So-. 7. That for the purpose of the normal tax ouly, there shall
be allowed as an exemption in the nature, of a deduction from the
amount of net income of each citizen or resident of the United States,
ascertained as provided herein, the sum of $3,000, plus $1,000 addi-
tional if the person making the return be a head of a family
or a married man with a wife living with him, or plus the sum of
$1,000 additional if the person making the return be a mairied
woman with a husband living with her; but in no event shall tnis
:i<>.licyholders on account of premiums previously paid
by them and interest paid upon such amounts between the ascer-
tainment 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
ha\e been paid back or credited to such individual policyholder, or
treated as an abatement of premium of such individual policy-
holder, within such year.
Third. The amount of interest paid within the year >n it-
indehtedness (except on indebtedness incurred for the purchaar
of obligations or securities the interest upon whifh ix exempt
from 1aart. All the ordinary and necessary expenses actually paid
within the year out pf earnings in the maintenance and operation
I' its business and property within the United States including
rentals or other payments required to be made as a condition
to the continued use or possession of property to which the cor-
poration has not taken or is not taking title, or in which it has
no equity;
Second. All losses actually sustained within the year in busi-
ness or trade conducted by it witliin the United States 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) and
in tho case of oil and gas wells a reasonable allowance for actual
reduction in flow and production to be ascertained not by the flush
How, but by the settled production or regular flow; (b) in the case
of mines a reasonable allowance for depletion thereof 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, such reasonable allowance to be made
in the case of both (a) and (b) under rules and regulations to
be prescribed by the Secretary of the Treasury: Provided, That
when the allowance authorized in (a) and (b) shall equal the
capital originally invested, or in case of purchase made prior to
March first, nineteen hundred and thirteen, the fair market value
as of that date, no further allowance shall be made; and (c) in
the 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 and annuity
contracts: Provided, That no deduction shall be allowed for any
amount paid out for new buildings, permanent improvements, or
betterments, made to increase the value of any property or estate,
and no deduction shall be made for any amount of expense of
restoring property or making good the exhaustion thereof for
which an allowance is or has been made; Provided further, That
mutual fire and mutual employers' liability and mutual work-
men 's compensation 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
576 APPENDIX
(ho premium deposits returned to their policy holders, 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 in-
clude 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 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;
Third. The amount of interest paid within the year on its
indebtedness (except on indebtedness incurred for the purcltase
of obligations or securities the interest upon which is exempt
from taxation as income under this title) to' an amount of such in-
debtedness not in excess of the proportion of the sum of (a) the
entire amount of the paid-up capital stock outstanding at tiie
close of the year, or, if no capital stock, the entire amount of the
capital employed in the business at the close of the year, and (ft)
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 without the United States: Provided, That in the case of
bonds or other indebtedness which have been issued with a guar-
anty 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 resi-
dents of the United States and secured by interest-bearing cer-
tificates of indebtedness issued by such bank, banking association,
loan or trust company, or branch thereof;
TEXT OF 1916 LAW A> AM i:\DED 577
Fourth. Taxes paid within tin- year imposed by the authority
dt tin- United States (except income and excess profits taxes), or
"/ its Territories or possessions, or by the authority of any State,
county, school district, or municipality, or other taxing subdivision
of ;uiy State, paid within the United States, not including those
assessed aganst local benefits.
(<) In the case of assessment insurance companies, whether
domestic or foreign, the actual deposit of sums with State or
Territorial officers, pursuant to law, as additions to guarantee or
rr-rrve funds shall be treated as being payments required by
law to reserve funds.
RETURNS.
Sec. 13. (a) The tax shall be computed upon the net income,
as thus ascertained, received within each preceding calendar year
eliding December thirty-first: Provided, That any corporation,
joint-stock company 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 payable by it computed upon the basis of the
in-t 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 first day of March of the year in which its return
would be filed if made upon the basis of the calendar year;
(6) 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 day of March in each year thereafter, or, if it has
designated a fiscal year for the computation of its tax, then within
xixty 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 a true and accurate
return of its annual net income in the manner and form to be
in-escribed by the Commissioner of Internal Revenue, with the
approval of the Secretary of the Treasury, and containing such
F. I. Tax.-^37.
578 APPENDIX
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 carry out the provisions of this
title. The return shall be sworn to by the president, vice presi-
dent, or other principal officer, and by the treasurer or assistant
treasurer. The return shall be made to the collector of the district
in which is located the principal office of the corporation, com-
pany, 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, company, or association, to the collector
of the district in which is located its< principal place of business
in the United States, 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 Commis-
sioner of Internal Revenue;
(c) In cases wherein receivers, trustees in bankruptcy, or
assignees are operating the property or business of corporations,
joint-stock companies or associations, or insurance companies,
subject to tax imposed by this title, such receivers, trustees, or
assignees shall make returns of net income as and for such cor-
porations, joint-stock companies ur associations, and insurance
companies, in the same manner and form as such organizations
are hereinbefore 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 organizations of whose businesses
or properties they have custody and control;
(d) A corporation, joint-stock company or association, or in-
surance company, keeping accounts upon any basis other than
that of actual receipts and disbursements, unless such other basis
does not clearly reflect its income, may, subject to regulations
made by the 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;
(e) All the provisions of this title relating to the tax author-
ized and required to be deducted and withheld and paid to the
officer of the United States Government authorized to receive the
same from the income of non-resident alien individuals from
sources within the United States shall be made applicable to thf
TEXT OF 191 r, LAW AS AMENDED ">7!
tax imposed by subdivision (v the Commissioner of Internal Revenue thereon shall le
580 APPENDIX
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 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
to be made by the taxpayer, and after ten days ' 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 : 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 Octo-
ber third, nineteen hundred and thirteen, entitled "An act to
reduce 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 nothwithstand-
ing the provisions of section thirty-two hundred and twenty-eight
of the Revised Statutes;
(ft) When the assessment shall be made, as provided in this
title, the returns, together with any corrections thereof which
may have been made by the commissioner, shall be filed in the
office of the Commissioner of Internal Revenue and shall con-
stitute public records and be open to inspection as such : Pro-
vided, That any and all such returns shall be open to inspection
only upon the order of the President, under rules and regulations to
be prescribed by the Secretary of the Treasury and approved by
the President: 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 cor-
poration, joint-stock company or association, or insurance com-
pany, 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 asso :
ciations, or insurance companies aforesaid shall refuse or neglect
to make a return at the time or times hereinbefore specified in
each year, or shall render a false or fraudulent return, such cor-
poration, joint-stock company or association, or insurance company
TEXT OF 1916 LAW AS A.MKNDKD 581
shall be liable to a penalty of not exceeding $10,000: Provided.
That the Commissioner of Internal Revenue shall have authority,
in the case of either corporations or individuals, to grant a 'rea-
sonable extension of time in meritorious cases, as he may deem
proper ;
(d) That section thirty-two hundred and twenty-five of tin-
Revised Statutes of the 1'nitfd States be, and the same is heivl.y,
amended so as to read as follows:
"Sec. 3225. When a second assessment is made in case of any
list, statement, or return, which in the opinion of the collector or
deputy collector was false or fraudulent, or contained any under-
statement or undervaluation, no tax collected under such assess-
ment shall be recovered by any suit unless it is proved that tin-
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. ' '
I'Airr I II. GENERAL ADMINISTRATIVE PROVISIONS
Sec. 15.* That the word "State" or "United States" when
used in this title shall be construed to include any Territory, tin-
District of Columbia, Porto Rico, and the Philippine Islands, when
Midi construction is necessary to carry out its provisions.
Sec. 16. That sections thirty-one hundred and sixty-seven.
thirty-one hundred and seventy-two, thirty-one hundred ;md
seventy-three, and thirty-one hundred and seventy-six of the Re-
vised 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 to any person tin- operations, style of work, or
apparatus of any manufacturer or producer visited by him in the
discharge of his official duties, or the amount or source of income,
profits, In-s.-s, expenditure-, nr 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
l>y law: and it shall In- unlawful for any person to print or publish
582 APPENDIX
in any manner whatever not provided by law any income return or
any part thereof or source of income, profits, losses, or expendi-
tures 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
pay any internal-revenue tax, and all persons owning or having
the care and management of any objects liable to pay any tax,
and to make a list of such persons and enumerate said objects.
"Sec. 3173. It shall be the duty of any person, partnership,
firm, association, or corporation, made liable to any duty, special
tax, or other tax imposed by law, when not otherwise provided for,
( 1 ) in case of a special tax, on or before the thirty-first day of July
in each year, (2) in case of income tax on or before the first day 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
inquire after and concerning all persons therein who are liable to
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 regula-
tions to be prescribed by the Commissioner of Internal Revenue,
with the approval 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, articles or objects liable to pay
any duty, tax, or license, shall fail to make and exhibit a list or
return required by law, but shall consent to disclose the particulars
of any and all the property, goods, wares, and merchandise, articles,
and objects liable to pay any duty or tax, or any business or
occupation liable to pay any tax as aforesaid, then, and in that
case, it shall be the duty of the collector or deputy collector to
make such list or return, which, being distinctly read, consented
TEXT OF 1916 LA\V AS AMENDED 583
to, and signed and verified by oath by the person so owning,
possessing, or having the care and management as aforesaid, may
l.c received as the list of such person: Provided further, That in
case no annual list or return has been rendered by such ]>ersoii
to the collector or deputy collector as required by law, and the
person shall be absent from his or her residence or place of busi-
ness at the time the collector or a deputy collector shall call for
the annual list or return, 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 discretion, if such be present,
otherwise to deposit in the nearest postoffice, a note or memoran-
dum 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 per-
son having possession, custody, or care of books of account con-
taining 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 time and place named in the summons,
and to give testimony or answer interrogatories, under oath, re-
specting 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 can not be
found within such State or Territory, he may enter any collection
district where such person may be found and there make the
examination herein authorized. And to this end he may there
exercise all the authority which he might lawfully exercise in the
district for which he was commissioned: Provided, That 'person,'
as used in this section, shall be construed to include any corpora-
tion, joint-stock company or association, or insurance company
such construction is necessary to carry out it* provisions.
584 APPENDIX
"Sec. 3176. If any person, corporation, company, or associa-
tion fails to make and file a return or list at the time prescribed
by law, or makes, willfully or otherwise, 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 information
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.
"If the failure to file a return or list is due to sickness or
absence the collector may allow such further time, not exceeding
thirty days, for making and filing the return or list as he deems
proper.
' ' The Commissioner of Internal Kevenue 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 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
)>e 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 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 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 or printed receipt, expressing the amount paid and
the particular account for which such payment was made; ;uxl
whenever 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 creditor"! in
such form that such debtor can conveniently produce the same
separately to his several creditors in satisfaction of their respective
demands to the amounts specified in such receipts; and such
receipts shall be sufficient evidence in favor of such debtor to
TEXT OP 1916 LAW AS AMENDED 585
justify him in withholding the amount therein expressed from his
next payment 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 fur-
ther satisfaction of the debt to that amount, require the surrender
tn him of such collector's receipts.
Sec. 18. That any person, corporation, partnership, associa-
tion, or insurance company, liable to pay the too;, to make o return
or to supply information required under this title, who refuses or
neglects to pay such tar, to make such return or to supply such
information at the time or times herein specified in each year,
shall be liable, except as otherwise specially provided in this title,
to a penalty of not less than $20 nor more than $1,000. Any
individual or any officer of any corporation, partnership, asso-
ciation, or insurance company, required by law to make, render,
sign, or verify any return or to supply any information, who
makes any false or fraudulent return or 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 prosecu-
tion: Provided, That where any tax heretofore due and pay-
able has been duly paid by the taxpayer, it shall not be re-collected
from any withholding agent required to retain it at its source, nor
shall any penalty be imposed or collected in such cases from the
taxpayer, or such withholding agent whose duty" it was to retain it,
for failure to return or pay the same, unless such failure was
fraudulent 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 collector have reason to believe that the amount
of any income returned is understated, he shall give due not in- t
the person 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. Sm-li person may
furnish sworn testimony to prove any relevant facts, ami. if dis
v.-itislied with , the decision of the collector, may appeal tn tin-
Commissioner of Internal Revenue for his decision undei
rules of procedure as may tie prescribed by regulation.
Jo. That jurisdiction is hereby conferred upon the district
586 APPENDIX
courts of the United States for the district within which any per-
son summoned under this title to appear to testify or to produce
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 containing 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 Commissioner of Internal Revenue with the approval of the
Secretary of the Treasury.
Sec. 22. That all administrative, special, and general provisions
of law, including the laws in relation to the assessment, remission,
collection, and refund of internal-revenue taxes not heretofore
specifically repealed and not inconsistent with the provisions of
this title, are hereby extended and made applicable to all the
provisions of this title and to the tax herein imposed.
Sec. 23. That the provisions of this title shall extend to Porto
Rico and the Philippine Islands: Provided, That the administra-
tion of the law and the collection of the taxes imposed in Porto
Rico and the Philippine Islands shall be by the appropriate in-
ternal-revenue 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 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 subdivisions 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 provide revenue for the Government, and for other
purposes, ' ' is hereby repealed, except as herein otherwise provided,
and except that it shall remain in force for the assessment and
collection of all taxes which have accrued thereunder, and for the
imposition and collection of all penalties or forfeitures which havo
accrued or may accrue in relation to any of such taxes, and except
that the unexpended balance of any appropriation heretofore made
ITXT OF 1916 I..UV AS AMKNDKh 587
and now available for the administration of such section or any
provision thereof shall be available for the administration of this
title or the corresponding provision thereof.
Sec. L'.~>. That income on which has been assessed the tax im-
posed 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.
Sec. 26. Every corporation, joint-stock company or associa-
tion, or insurance company subject to the tax herein imposed,
when required by the Commissioner of Internal Revenue, shall
render a correct return, duly verified under oath, of its payments
of dividends, whether made in cash or its equivalent or in stock,
including the names and addresses' of stockholders and the 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.
Sec. 27. That every person, corporation, partnership, or asso-
ciation, doing business as a broker on any exchange or board of
trade or other similar place of business shall, when required by
the Commissioner of Internal Revenue, render a correct return duly
verified under oath, under such rules and regulations as the Com-
missioner of Internal Revenue, with the approval of the Secretary
of the Treasury, may prescribe, showing the names of customers
for whom such person, corporation, partnership, or association has
transacted any business, with such details as to the profits, losses,
or other information which the 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.
Sec. 28. That all persons, corporations, partnerships, associa-
tions, and insurance companies, in whatever capacity acting, in-
cluding lessees or mortgagors of real or personal property, trustees
in-tiiifi in any trust capacity, executors, administrators, receivers,
conservators, and employers, making payment to another person,
corporation, partnership, association, or insurance company, of
interest, rent, salaries, wanes, premiums, annuities, compensation,
588 APPENDIX
remuneration, emoluments, or other fixed or determinable gains,
profits, and income (other tlian payments described in sections
twenty-six and twenty-seven) , of $800 or more in any taxable year,
or, in the case of such payments made by the United States, the
officers or employees of the United States having information as
to such payments and required to make returns in regard thereto
by the regulations hereinafter provided for, are hereby autliorized
and required to render a true and accurate return to the Commis-
sioner of Internal Eevenue, 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
ivtnoumt of such gains, pro-fits, and income, and the name and
address of the recipient of such payment: Provided, That such
returns shall be required, regardless of amounts, in the case of
payments of interest upon bonds and mortgages or deeds of trust
or other similar obligations of corporations, joint-stock companies,
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 divi-
dends from the stock of foreign corporations by persons, corpora-
tions, partnerships, or associations, undertaking as a matter of
business or for profit the collection of foreign payments of such
interest or dividends by means of coupons, checks, or bills of
exchange. When necessary to make effective the provisions of this
section the name and address of the recipient of income shall be
furnished upon demand of the person, corporation, 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.
Sec. 29. That in assessing income tax the net income em-
braced in the return shall also be credited with the amount of any
excess profits tax imposed by Act of Congress and assessed for the
same calendar or fiscal year upon the taxpayer, and, in the case of
a member of a partnership, with his proportionate share of such
excess profits tax imposed upon the partnership.
Sec. 30. That nothing in section II of tlie 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," or in this title, shall be construed as
-.1' <>K 191ti LAW AS AMKNPED
instil;/ UK income uf foreign govern im nts received from invest-
mi >ttx in the United States in stocks, bonds, or other domestic
*i < -in ities, owned by such foreign governments, or from interest on
/ /i.vi/.v i/i banks in the United States of moneys belonginii tn
for, ii/n i/ui-i rn nn /i/.v.
\ . 31. (a) Tlmt t/ti term " (liri? the calendar year nineteen hundred and
seventeen, except in the cases covered by subdivision (c) of section
nine of such Act, as amended by this Act, shall be released and
paid over to such individual, and the entire too; 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.
TEXT OF 1917 LAW
ACT OF OCTOBER 3, 1917
TITLE I. WAR INCOME TAX
Section 1. That in addition to the normal tax imposed by
subdivision (a) of section one of the Act entitled "An Act to
increase the revenue, and for other purposes," approved Septem-
ber eighth, 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
Knifed States, received in the calendar year nineteen hundred and
seventeen and every calendar year thereafter.
Sec. 2. That in addition to the additional tax imposed by
subdivision (6) of section one of such Act of September eighth,
nineteen hundred and sixteen, there shall be levied, assessed, col-
lected, and paid a like additional tax upon the income of every
'individual received in the calendar year nineteen hundred :iml
seventeen and every calendar year thereafter, as follows:
One per centum per annum upon the amount by which the total
net income exceeds $5,000 and does not exceed $7,500;
Two per centum per annum upon the amount by which tin-
total 'net income exceeds $7,500 and does not exceed $10,000;
Three per centum per annum upon the amount by which tin-
total net income exceeds $10,000 ami does not e.xc.eil $12,500; '
Four per centum per annum upon the amount by which the
total net income exceeds $12,500 and does not exceed $15,000;
Five per centum per annum upon the amount by which the
total net income exceeds $15,000 and does not exceed $20,000;
Seven per centum per annum upon the amount by which the
total net income exceeds $20,000 and does not exceed $40,0(in;
Ten per centum |>er annum upon the amount l>\ \\hieh the
total net income exceeds $40,000 and doe not exceed $>O.OIMI ;
601
592 APPENDIX
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;
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 income 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 in the same manner as the similar taxes
imposed by section one of such Act of September eighth, nineteen
hundred and sixteen, except that in the case of the tax imposed
by section one of this Act (a) the exemptions of $3,000 and $4,000
provided in section seven of such Act of September eighth, nine-
teen hundred and sixteen, as amended by this Act, shall be,
respectively, $1,000 and $2,000, and (ft) the returns required under
subdivisions (b) and (c) of section eight of such Act, as amended
by this Act, shall be required in the case of net incomes of $1,000
or over, in the case of unmarried persons, and $2,000 or over in
tho case of 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 derived from interest to be deducted and
withheld at the source of the income shall not apply to the new
TEXT OF 1917 LAW 593
two per centum normal tax prescribed in section one of this Act
until on and after January first, nineteen hundred and eighteen,
and thereafter only one two per centum normal tax shall be de-
ducted and withheld at the source under the provisions of such
suhdivision (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
i>e jiaid 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
.I in I sixteen, as amended by this Act, there shall be levied, assessed,
collected, and paid a like tax of four per centum upon the income
received in the calendar year nineteen hundred and seventeen and
every calendar year thereafter, by every corporation, joint-stock
company or association, or insurance company, subject to the tax
imposed by that subdivision of that section, except that if it has
fixed its own fiscal year, the tax imposed by this section for the
fiscal year ending during the calendar year nineteen hundred and
seventeen shall be levied, assessed, collected, and paid only on that
proportion of its income for such fiscal year which the period
between January first, nineteen hundred and seventeen, aiul tin-
end" of such fiscal year bears to the whole of such fiscal year.
The tax imposed by this section shall be computed, levied,
assessed, collected, and paid upon the same incomes and in (he
same manner as the tax imposed by subdivision (a) of section ten
of such Act of September eighth, nineteen hundred and sixteen,
as amended by this Act except that for the purpose of the tax
imposed by this section the income embraced in a return of a
corporation, joint-stock company or association, or insurance com-
pany, 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
Porto Rico or the Philippine Islands, and the Porto Rican or
Philippine Legislature shall have power by due enactment to
amend, alter, modify, or repeal the income tax laws in t'nrco in
I'orto Rico or the Philippine Islands, resj>ectiv. l\
F. I. Tax. 38.
594 APPENDIX
ADMINISTEATIVE PROVISIONS OF THE ACT
OF OCTOBER 3, 1917 1
Sec. 1009. That the Secretary of the Treasury, under rules and
regulations prescribed by him, shall permit taxpayers liable to
income and excess profits taxes to make payments in advance in
installments or in whole of an amount not in excess of the esti-
mated taxes which will be due from them, and upon determination
of the taxes actually due any amount paid in excess shall be
refunded as taxes erroneously collected: Provided, That when
payment is made in installments at least one-fourth of such esti-
mated tax shall be paid before the expiration of thirty days after
the close of the taxable year, at least an additional one-fourth
within two months after the close of the taxable year, at least an
additional one-fourth within four months after the close of the
taxable year, and the remainder of the tax due on or before the
time now fixed by law for such payment : Provided further, That
the Secretary of the Treasury, under rules and regulations pre-
scribed 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 pay-
ment to the date now fixed by law for such payment'; but no such
credit shall be allowed on payments in excess of taxes determined
to be due, nor on payments made after the expiration of four
and one-half months after the close of the taxable year.
All penalties provided by 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
Secretary of the Treasury, Collectors of Internal Revenue may
receive, at par and accrued interest, certificates of indebtedness
issued under section six of the Act entitled "An Act to authorize
an issue of bonds to meet expenditures for the national security
and defense, and, for the purpose of assisting in the prosecution
of the war, to extend credit to foreign governments, and for other
purposes," approved April twenty-fourth, nineteen hundred and
seventeen, and any subsequent Act or Acts, and uncertified checks
in payment of income and excess profits taxes, during such time
i These provisions apply to the 1916 Law and the 1917 Law.
They are contained in Title X of the Act of October 3, 1917. #
ADMINISTRATIVE PROVISION ">!>'>
and under such regulations as the Commissioner of Internal
Kevenue, with the approval of the Secretary of the Treasury,
shall prescribe; but if a check so received is not paid by the hank
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 cheek had
not been tendered.
TABLE OF CASES
Abrast Realty Co. v. Maxwell,!
206 Fed. 333
Aguirre 'v. Maxwell, 3 Blatch.
140, Fed. Cas. No. 101
Alkan v. Bean, 23 Int. Rev.
Rec. 351, Fed. Cas. No. 202,
8 Bliss 83
Allen v. Pullman's Palace Car
Co., 139 U. 8. 658, US. Ct.
682, 35 L. Ed. 303
Altheimer & Rawlings Inv. Co.
v. Allen! T. D. 2441 (Not
yet officially reported)
Ambrosini v. U. 8., 187 U. 8.
1, 23 8. Ct. 1, 47 L. Ed. 49
Amer. Net and Twine Co. v.
Worthington, 141 U. S. 468,
12 8. Ct. 55, 35 L. Ed. 821
Anderson v. Forty-two Broad-
way Company,! 239 U. 8.
69/69 8. Ct. 17, 60 L. Ed.
152; reversing 213 Fed. 777
and 209 Fed. 991
\mli-rson v. Morris & Essex
Railroad Co.,1 216 Fed. 83,
132 C. C. A. 327
Bailey v. New York C. & H. R.
Co., 106 U. 8. 109, 1 Sup.
Ct. 62, 27 L. Ed. 81
Bailey v. Railroad Company,
22 Wall. 604, 22 L. Ed. 840
Baldwin Loco. Works v. Mc-
Coach,! 221 Fed. 59, C. C. I
A.; affirming 215 Fed. 927
Baltimore v. Baltimore R. R.,
10 Wall. 543, 19 L. Ed. 1043
Bank of Greencastle v. 1 T . 8., !
15 Ct. Cls. 225
Bartels v. Redfield, 27 Fed.
Bfl
v. T. S., 192 U. 8.
38, 24 S. Ct. 189, 48 L. Ed.
331
Billings v. United States, 232
U. 8. 261, 34 Sup. Ct. 421,
58 L. Ed. 596
Biwabik Mining Co. v. U. 8.,!
242 Fed. 9.
Boughton v. U. S.. 12 Ct. Cls.
330
Brady v. Anderson,* 240 IV, I.
665
Brushaber v. Union Pacific R.
R. Co.,* 240 U. S. 1, 36 8.
Ct. 236, 60 L. Ed. 495
Bryant & May, Ltd. v. Scott,!
226 Fed. 875
Burrough v. Abel, 10." l-V.l. ::iiti
Butterick Co. v. U. 8.,* 240
Fed. 539
Cambria Steel Co. v. Mc-
Coach,! 225 Fed. 278
Carrick v. Lamar, 116 U. 8.
423, 6 S. Ct. 424, 29 L. K.I.
677
Catawissa R. R. v. Phila. &
2 Reading Ry., 255 Pa. 269
Chapman, Tn re, 166 U. 8. 661,
17 8. Ct. 677, 41 L. Ed. 11. "^
Cheatham v. U. 8., 92 I*, s.
85, 23 L. Ed. 561
Chesebrough v. U. 8., lit:.' I
S. 253, 24 8. Ct. :>;:.'. 18 L.
Ed. 432
< 'hit-ago, etc., Ry. v. Kansas
City X. W. R.' R.. 75 Kans.
167, 88 Pac. 1085
Christie-Street Comm. Co. v.
U. 8., 136 Fed. 326, 69 C. C.
A. 464
597
598
TABLE OF CASES
City of Phila. v. Collector, 5
Wall 720, 18 L. Ed. 614
Cleveland, etc., Ry. Co. v. U.
S.,1 242 Fed. 18
Clopton v. Phila. & Reading
R. R. 54 P. A. 356
Cohen v. Lowe,2 234 Fed. 474
Collector v. Day, 11 Wall. 113,
20 L. Ed. 122
Commercial Travelers' Life &
Ace. Ass'n v. Rodway,! 235
Fed. 370
Commissioners v. Buckner, 48
Fed. 533
Conant v. Kinney, 162 Fed.
581
Conn. Gen. Life Ins. Co. v.
Eaton,! 218 Fed. 188.
Conn. Mutual Life Ins. Co. v.
Eaton,! 218 Fed. 206
Corning v. U. S., 34 Ct. Cl.
271
Gumming v. U. S., 22 Ct. Cls.
344
DeBary v. Carter, 102 Fed.
130, 42 C. C. A. 209
DeBary v. Dunne, 162 Fed.
961
Deoatnr v. Paulding, 14 Pet.
497, 10 L. Ed. 559
De Ganay v. Lederer,2 239
Fed. 568
Delaware R. R. Co. v. Pretty-
man, 17 Int. Rev. Rec. 99,
Fed. Gas. No. 3767
Dodge v. Brady ,2 240 U. S.
123, 30 S. Ct. 277, 60 L. Ed.
560
Dodge v. Osborn,2 240 U. S.
118, 36 S. Ct. 275, 60 L. Ed.
557
Doherty v. U. S., 6 Ct. Cls. 90
Dollar Savings Bank v. U. S.,
19 Wall. 227, 22 L. Ed. 80
Doyle v. Mitchell Bros. Co.,1
235 Fed. 686, 149 C. C. A.
106
Dugan v. U. S., 34 Ct. Cls.
458
Edison Electric Illuminating
Co. v. U. S., 38 Ct. Cls. 208
Edwards v. Keith,2 231 Fed.
110, 145 C. C. A. 298
Eliot Nat. Bank v. Gill,! 218
Fed. 600, 134 C. C. A. 358
Eliot v. Freeman,! 220 U. S.
178, 31 S. Ct. 360, 55 L. Ed.
424
Emery, Bird Thayer Realty
Co. v. U. S.,1 198 Fed. 242
Equitable Trust Co. v. West-
ern Pac. Ry Co. et al.,2 236
Fed. 813
Erie & Pittsburgh R. R. v.
Penu. R. R., 208 Pa. 506, 57
Atl. 980
Erskine v. Van Arsdale, 15
Wall. 75, 21 L. Ed. 63
Farrell v. U. S., 167 Fed. 639
First Nat. Bank of Green-
castle v. U. S., 15 Ct. Cls.
225
First Nat. Bank of Jackson,
Miss. v. Me. Neel,l 238 Fed.
559, 151 C. C. A. 495
Flint v. Stone-Tracy Co.,1 220
U. S. 107, 31 S. Ct. 342, 55
L. Ed. 389
Forty-fort Coal Co. v. Kirken-
dall,l 233 Fed. 704
Gauley Mt. Coal Co. v. Hays,!
230 Fed. 110, 144 C. C. A.
408
Gould v. Gould,2 No. 41, Oct.
Term, 1917, U. S. Sup. Ct.,
not yet officially reported.
Grand Rapids & Ind. Ry. Co.
v. Doyle,! T. D. 2210
Gray v. Darlington, 15 Wall.
63, 21 L. Ed. 45
Grier v. Tucker, 150 Fed. 658
Gulf Oil Corp. v. Lewellyn,2
242 Fed. 709; reversed by
Circuit Court of Appeals,
Lewellyn v. Gulf Oil Cor-
poration, T. D. 2542
Haight v. Railroad Co., 6
Wall. 15, 18 L. Ed. 818
Hartranft v. Weigmann, 121
U. S. 609, 7 S. Ct. 1240, 80
L. Ed. 1012
TABLE OF CASES
599
Hastings v. Herold, 184 Fed.
759
Herold v. Kahn, 163 Fed. 947,
86 C. C. A. 598
Herold v. Mutual* Benefit Life
Ins. Co.,1 201 Fed. 918
Herold v. Parkview Bldg. &
Loan Ass 'n,l 210 Fed. 577
Hicks v. James' Admx., 110
U. 8. 272, 4 8. Ct. 6, 28 L.
Ed. 144
Home Savings Bank v. Des
Moines, 205 U. 8. 503, 27
Sup. Ct. 571, 51 L. Ed. 901
Industrial Trust Co. v. Walsh,!
222 Fed. 437
Insurance Company of North
America v. McCoach,! 218
Fed. 905
Jacobs and Davies (Inc.) v.
Anderson,! 228 Fed. 505
Jasper & Eastern By. Co. v.
Walker,! 238 Fed. 533, 151
C. C. A. 469
Johnson v. Herold, 161 Fed.
593
Kaufman v. U. 8., 96 U. 8.
567, 24 L. Ed. 792, 13 Ct.
Cls. 562
Keeley v. Sanders, 99 U. 8.
441," 25 L. Ed. 327
King v. U. 8., 99 U. 8. 229,
25 L. Ed. 373
Kings County Sav. Inst. v.
Blair, 116 U. 8. 200, 206, 6
8. Ct. 353, 29 L. Ed. 657
Kinney v. Conant, 166 Fed.
720/92 C. C. A. 410
Klock Produce Co. v. Hartson,
212 Fed. 758
Knowlton v. Moore, 178 U. 8.
41. 20 8. Ct. 747, 44 L. Ed.
969
Kohlhamer v. Smietanka, 239
Fed. 408
Laurentide Co. Ltd. v. T)nrey,l
231 Fed. 223
I^owellyn v. Pittsburgh, B. &
L. E. R. Co.,1 222 Fed. 177,
137 C. C. A. 617
Little v. Bowers, 134 U. 8.
547, 10 8. Ct. 620, 33 L. Ed.
1016
Little Schuylkill, etc., Co. v.
Phila. & B. By. Co.,8 44 Pa.
Co. Ct. Rep. 197
Lynch v. Hornby, 236 Fed.
661, 149 C. C. A. 657
Lynch v. Turrish, 236 Fed.
653, 149 C. C. A. 649
McCoach v. Continental Pass.
By. Co.,1 233 Fed. 976, 147
C. C. A. 650
McCoach v. Ins. Co. of N.
Am.,1 241 U. 8. 674, 36 Sup.
Ct. 724, 60 L. Ed. 1231; re-
versing 224 Fed. 657
McCoach v. Mine Hill, etc.,
Co.,1 228 U. 8. 295, 33 8. Ct.
419, 57 L. Ed. 842
McCulloch v. Maryland, 4
Wheat. 316, 4 L. Ed. 579
McLain v. Penn. Co., 108 Fed.
618, 47 C. C.'A. 529
Maryland Casualty Co. v. U.
S. (Court of Claims), T. D.
2451
Medbury T. U. 8., 173 U. 8.
492, 19 8. Ct. 503, 43 L. Ed.
779
Merck v. Treat, 174 Fed. 388,
98 C. C. A. 606
Merritt v. Cameron, 137 U. 8.
542, 11 S. Ct. 174, 34 L. Ed.
772
Middlesex Banking Co. v.
Eaton,! 233 Fed. 87, 147 C.
C. A. 157; affirming 221 F.-.l.
86
Miller v. Snake River, rtr.,
Co.,1 223 Fed. 946, 139 C. C.
A. 426
Mine Hill, etc., Co. v. Me-
Coach.l 192 Fed. 670
Mitchell v. Doyle.l 225 rV.1.
437
Moore v. Stewarts, >tr., I.M..
8 Fraser 1129
Mutual Benefit v. Herol.l.l L'"l
Fed. 918, 120 C. C. A. -'':
affirming 198 Fed. 199
Nat. Bank of Comm. v. AMrn.l
600
TABLE OF CASES
223 Fed. 472, 139 C. C. A.
20; affirming 211 Fed. 743
New Orleans v. Stemple, 175
U. S. 309, 20 S. Gt. 110, 44
L. Ed. 174
New York C. & H. R. v. Gill,l
219 Fed. 184, 134 C. C. A.
558
New York Mail, etc., v. Ander-
son,! 234 Fed. 590, 148 C. C.
A. 356
Nichols v. TT. S., 7 Wall. 122, 19
L. Ed. 125
Nixon v. U. S., 18 Ct. Cls. 448
North Pa. R. R. Co. v. P. & R.
Ry. Co.,2 249 Pa. 326, 95 Atl.
100
Northern Central R. R. Co. v.
Jackson, 7 Wall. 262, 19 L.
Edt 88
Northern Trust Co. v. Buck,
263 111. 222, 104 N. E. 1114
Northern Trust Co. v. Mc-
Coach,! 215 Fed. 991
Nye v. Washburn, 125 Fed.
818
Osborne, Matter of; 209 A. D.
(N. Y.) 450
Osterberg v. Union Tr. Co., 93
TI. S. 424, 23 L. Ed. 964
Pacific Bldg. & Loan Ass'n. v.
Hartson,! 201 Fed. 1011
Parkview Bldg., etc., v. Her-
old,l 210 Fed. 577, 127 C. C.
A. 213
Patton v. Brady, Executrix,
184 U. S. 608, 22 S. Cf. 493,
46 L. Ed. 713
Peck v. Lowe,2 234 Fed. 125
Penn. Steel Co. v. N. Y. C. Ry.
Co.,1 176 Fed. 471, 193 Fed.
286, 198 Fed. 774, 117 C. C.
A. 556
People v. Davenport, 30 Hun.
177
Pettibone v. Smith, 150 Pa.
118, 24 A. 693
Phila. H. & P. R. R. Co. v.
Lederer,! 242 Fed. 492
Phila. Traction v. McCoach,!
224 Fed. 800
Pollock v Farmers L. & T. Co.,
157 U. S. 429, 15 S. Ct. 673,
39 L. Ed. 759; 158 U. S. 601,
15 S. Ct. 912, 39 L. Ed. 1108
Pub. Serv. Electric Co. et al.
v. Herold,! 227 Fed. 486,
229 Fed. 902, 144 C. C. A. 184
Pub. Serv. Gas Co. v. Herold,!
227 Fed. 496; 229 Fed. 902,
144 C. C. A. 184
Pub. Serv. Ry. Co. v. Herold,!
219 Fed. 301; 227 Fed. 490;
229 Fed. 902, 144 C. C. A.
184
Pub. Serv. Ry. Co. v. Moffett,!
227 Fed. 494; 229 Fed. 902,
144 C. C. A. 184
Railroad Co. v. Commission-
ers, 98 TJ. S. 541, 25 L. Ed.
196
Railroad Co. v. Howard, 7
Wall. 392
Real Estate Sav. Bank v. U.
S., 16 Ct. Cls. 335; 104 U. S.
728, 26 L. Ed. 908
Redfield v. Iron Co., 110 U. S.
174, 3 Sup. Ct. 570, 28 L: Ed.
109
Rensselaer, etc., Co. v. Irwin,2
239 Fed. 739
Ridgway v. U. S., 18 Ct. Cls.
707
Rio Grande J. R, Co. v. U. S.,1
51 Ct. Cls. 274
Roberts v. Anderson,! 226 Fed.
7, 141 C. C. A. 121
Roberts v. Lowe,! 236 Fed.
604
St. Paul, etc., Ry. Co. v.
Phelps, 137 U. S. 528, 11 S.
Ct. 168, 34 L. Ed. 767
San Francisco Sav. Soc. v.
Gary, 2 Sawy. 393
Sargent Land Co. v. Von
Baumbarh,! 207 Fed. 423
Schwarzchild v. Rucker, 143
Fed. 656
Snyder v. Marks, 109 U. S.
i89, 3 S. Ct. 157, 27 L. Ed.
901
TABLE OP CASES
601
South Carolina v. U. S., 199
U. 8. 437, 23 8. Ct. 110, 50
L. Ed. 261
Southern Pacific Co. v. Lowe,*
238 Fed. 847
Spt-fi-kols Bug. R. Co. v. Mc-
Clain, 192 U. 8. 397, 24 8.
Ct. 376, 48 L. Ed. 496
Stanton v. Baltic Mining Co.,*
240 U. 8. 103, 36 8. Ct. 278,
60 L. Ed. 546
State R. R. Tax Cases, 92 U. 8.
575, 23 L. Ed. 663
State v. Evans, 99 Minn. 220
Stewart v. Barnes, 153 U. 8.
456, 14 8. Ct. 849, 38 L. Ed.
781
Stockdale v. Ins. Co., 20 Wall.
323, 22 L. Ed. 348
Stotosbury v. U. 8., 146 U. 8.
196, 13 8. Ct.,1 36 L. Ed. 940
Stratton 's Independence, Ltd.,
v. Howbert.l 231 U. S. 399,
34 S. Ct. 136, 58 L. Ed. 285
Strauss v. Abrast Realty Co.,1
200 Fed. 327
Strouse, In re, 1 Sawy. 605
Suter v. Jordan-Marsh Co.,*
113 N. E. 580
Swift Co. v. TJ. S., 105 U. S.
691, 26 L. Ed. 1108
Towne v. Eisner,* 242 Fed. 702
Traction Co.'s v. Coll. of Int.
Rev.,1 223 Fed. 984, 139 C.
C. A. 360
Treat v. Farmer's Loan & T.
Co., 185 Fed. 760, 108 C. C.
A. 98
Tyee Realty Co. v. Anderson,*
'240 U. 8. 115, 30 S. Ct. 281,
60 L. Ed. 554
Union Hollyw'd Co. v. Carter ,1
238 Fed.' 329, 151 C. C. A.
345
Urquhart v. Marion Hotel
Co.,* 194 8. W. 1
T T . 8. v. Acorn Roofing Co.,1
204 Fed. 157
r. s. v. Alexander, 110 r. s.
.'{25. 4 8. Tt. 99, 28 L. K-l.
166
U. 8. v. Alger, 152 U. 8. 384,
14 8. Ct. 635, 38 L. Ed. 488
U. 8. v. Baltimore & Ohio K. I.'..
17 Wall. 322
IT. S. v. Bayard, 127 U. S. 251,
8 Sup. Ct. 1156, 32 L. Ed.
159
U. 8. v. Black, 128 U. S. 40, 9
8. Ct. 12, 32 L. Ed. 354
U. 8. v. Chouteau, 102 U. 8.
603, 26 L. Ed. 246
U. S. v. Curry, et al., 201 Fed.
371
U. S. v. Distilled Spirits, 17
Int. Rev. Rec. 86, 10 Blatch.
428
U. S. v. Distillery, 21 Int. Ro\ .
Rec. 366
U. S. v. Emery, etc.,1 237 U. S.
28, .35 S. Ct. 499, 59 L. Ed.
825
U. 8. v. Erie R. R. Co., 106
U. 8. 327, 1 S. Ct. 223, 27 L.
Ed. 151
U. 8. v. Gen. Insp. & Loading
Co.,1 192 Fed. 223; 204 Fed.
657
U. 8. v. Graham, 110 U. S. 219,
3 S. Ct. 582, 28 L. Ed. 126
U. 8. v. Grand Rap. & Ind. Ry.
Co.,1 239 Fed. 153
U. 8. v. Guest, 143 Fed. 456,
74 C. C. A. 590
U. 8. v. Guggenheim Exp. Co.,1
238 Fed. 231
U. 8. v. Hill, 120 U. 8. 169, 7
8. Ct. 510, 30 L. Ed. 627
U. 8. v. Hodson, 14 Int. Rev.
Rec. 100
U. 8. v. Little Miami Co., 1
Fed. 700; 108 U. S. 277
Ct. 627, 27 L. Ed. 7-M
U. 8. v. McKee, 11 Ct. Cls. 54;
91 U. S. 442, 23 L. Ed. 326
U. 8. v. Military Const. Co.,1
204 Fed. 153
U. 8. v. Minn. Threshing Ma-
chine Co.,1 229 Fed. 1019
U. 8. v. X. V. \ Culm Co.. 2nn
I". S. .s. LV, - . :-27, 50
I.. K.I. .-;
602
TABLE OF CASES
U. S. v. Nipissing Mines Co.,1
202 Fed. 803; 206 Fed. 431
U. S. v. Pacific R. R., 1 Fed. 97
U. S. v. Railroad Co., 17 Wall.
322, 21 L. Ed. 597
U. S. v. Real Est. Sav. Bank,
104 U. S. 728, 26 L. Ed. 908
U. S. v. Schillinger, 14 Blatch.
71, Fed. Cas. No. 16228
U. S. v. Snyder, 149 U. S. 210,
13 S. Ct. 846, 37 L. Ed. 705
U. S. v. Stowell, 133 U. S. 1,
10 S. Ct. 244, 33 L. Ed. 555
U. S. v. Tanner, 147 U. S. 661,
13 S. Ct. 436, 37 L. Ed. 321
U. S. v. Union Pacific R. R.
Co., 11 Ct. Cls. 1; 91 U. S.
72, 23 L. Ed. 224
U. S. v. Watts, 1 Bond. 580,
Fed. Cas. No. 16653
U. S. v. Wigglesworth, 2 Story
369
U. S. v. Wright, 11 Wall. 648,
20 L. Ed. 188
Van Beil v. Brogan,2 23 D. R.
(Pa.) 1055
Von Baumbach v. Sargent
Land Co.,1 242 U. S. 503, 37
S. Ct. 201
Weaver v. Ewers, 195 Fed.
247, 115 C. C. A. 219
White v. Arthur, 10 Fed. 80,
20 Blatchf. 237
Wilkes-Barre, etc., v. Davis,!
214 Fed. 511
Woolner v. U. S., 13 Ct. Cls.
355
Wright v. Blakeslee, 101 U. S.
174, 25 L. Ed. 1048
Zonne v. Minn. Syndicate,!
220 U. S. 187, 31 S. Ct. 361,
55 L. Ed. 428
1 1909 Law.
21913 Law.
INDEX
ABATEMENT OF TAX ASSESSED,
general statement, 14.
procedure in claiming, 439.
rejection of claims, effect of, 438.
ABSENTEES,
returns may be made by agents for, 26.
ACCIDENT INSURANCE, 280.
ACCOUNTING SYSTEM, 209,
reporting on basis of, 227.
required by state or municipal authorities, 227.
ACCOUNTS ON BASIS OF ACCRUALS, 227.
ACCOUNTS PAYABLE, 307.
ACCOUNTS RECEIVABLE, 238.
income for year created, when, 224.
partnership, profits of, 111.
ACCRUALS OF FIXED CHARGES, 299.
ACCRUED BUT UNPAID INTEREST, 208.
ACCRUED CHARGES, DEDUCTED WHEN, 228.
ACCRUED DEDUCTIONS, 298.
ACCRUED INTEREST ON BONDS, INCOME TO SELLER, 259.
ACCRUING AND ACCRUED INCOME, 206.
reporting on basis of, 207.
ACCUMULATION OF INCOME IN TRUST, 88.
ACTORS, DEPRECIATION ON COSTUMES OF, 348.
A< TTAL DEDUCTIONS ALLOWED, L'!7.
604 INDEX.
ACTUAL INCOME TAXABLE, 206.
ACTUAL RECEIPTS, 207.
ADDITIONAL ASSESSMENT, 412.
abatement of, 436.
amended returns for, 391.
corporations, 391.
notice of, 391.
refund of, 436.
ADDITIONAL TAX, 14.
ADDITIONAL NOEMAL TAX, 15.
not imposed on non-resident aliens, 15.
ADDITIONAL SUPERTAX, 16.
ADDITIONS AND BETTERMENTS,
are capital investments, 301.
depreciation on, 301.
ADMINISTRATION OF LAWS, 3.
ADMINISTRATORS,
are fiduciaries, 75.
commissions of, 81.
duties of, 77.
income received by, during settlement of estate, 86.
how reported, 87.
ADVANCE PAYMENT OF TAX, 404.
ADVERSE JUDGMENT, LOSS BY, 344.
AGENTS,
fiduciary agent for beneficiary, when, 84.
foreign corporations, appointed by, 178.
for non-resident aliens, 26.
for non-residents, 59.
may make returns for principals, 26.
partnership, non-resident, of, 121.
receipt by, is receipt by principal, 224.
returns filed by, 384.
AGRICULTURAL ORGANIZATIONS, WHEN EXEMPT, 195.
ALIEN CORPORATIONS, 180.
ALIEN PARTNERSHIPS, 117.
see Partnerships.
INDEX 605
AI.1KNS HKSIDINi, IN THE UNITED STATES, -'::.
ALIMONY NOT INCOME, 280.
ALTERATIONS, COST OF, 310.
AMENDED RETURNS, 391.
on second assessment, 413.
ANNUAL ALLOWANCE FOR DEPRECIATION, 355.
ANNUAL LIST RETURNS, 480.
ANNUAL RETURN, 382.
list returns, 480.
of information at source, 454.
see Return of Annual Net Income.
ANNUITIES, INCOME FROM, 289.
ANTICIPATED LOSSES NOT DEDUCTIBLE, 333.
profits not taxable, 207.
APARTMENT HOUSES, DEPRECIATION ON, 355.
ARMY, RETURNS SIGNED BY PERSONS IN, 389.
ASSESSMENT AND PAYMENT OF TAX,
additional assessment, 412.
advance payment, 404.
cannot be restrained, 399.
delinquent taxes, interest on, 416.
distraint, 419.
duress, 409.
general statement, 398.
lien, 417.
manner of payment, 405.
notice and demand for tax, 401.
notice of assessment, 401.
payment under protest, 407.
receipt for, 412.
second assessment, 412.
second notfce and demand, 403.
suit to collect, 416.
time of payment of tax, 404.
ASSESSMENT INSURANCE" COMPANIES, 169.
s ASSESSMENTS OF TAX,
abated, how, 439.
how made, 398.
606 INDEX
ASSESSMENTS ON STOCK, 281.
ASSOCIATES, WHEN TREATED AS CORPORATIONS, 126.
ASSOCIATIONS TAXABLE AS CORPORATIONS, 126.
dividends from, 263.
ASSOCIATIONS FOR MARKETING PRODUCE, EXEMPT
WHEN, 202.
ASSOCIATIONS (FRATERNAL) EXEMPT WHEN, 1916.
BAD DEBTS, 34.
see Worthless Debts.
BALANCE SHEET,
must show depreciation allowance, 356.
BANK DEPOSITS,
interest credited on is income, 260.
interest on, of non-resident aliens, 46.
no withholding on interest on, 476.
BANK GUARANTY FUNDS, PAYMENTS TO, 329.
BANKS,
foreign, 188.
may deduct all interest on deposits, 143.
no withholding on interest paid on deposits, 476.
BARTER AND EXCHANGE, 211.
BEARER STOCK CERTIFICATES, 71.
BENEFICIARIES,
accident insurance, of, 280.
estate reported as, when, 88.
file own returns, unless, 93.
income from trust estates, 84, 95.
life insurance, of, 282.
non-resident alien, 99.
of estates in foreign countries, 99.
returns filed for, when, 9...
who are, 76.
BILLS RECEIVABLE, 238.
BOARDS OF TRADE, EXEMPT WHEN, 199.
BONDS WITH ACCRUED INTEREST, PURCHASE OF, 259.
BONDED AND OTHER INDEBTEDNESS, 160.
INDEX t'<>7
BONDHOLDERS,
to pay tax for, 482.
from tax-free bonds, 40.
t;,x paid for, 145.
BOND INTEREST, DEFINED, 461.
BONDS,
depreciation not allowed, 349.
issued below par, 337.
purchased above par, 339.
retirement, purchase of, for, 338.
BONDS ISSUED FOR PUBLIC PURPOSES, INTEREST ON,
258.
BONUS,
deductible when, 315.
fixed and determinate income, when, 459.
gifts, when, 316.
income, when, 230.
paid by lessees of oil or gas property, 368.
taxable when received, 229.
BOOKKEEPING,
farmers, 242.
1 reporting income on basis of, 227.
BOOKKEEPING ENTRIES,
allowance for depletion, 363.
allowance for depreciation, 355.
constitute neither loss nor gain, 352.
deductions reported according to, 298.
except when, 209.
losses must be charged off, when, 333.
not conclusive as to income, 208.
worthless debts must be evidenced by, 343.
BOOKKEEPING SYSTEM, 209.
BOOKS,
examination of taxpayers', 431.
BOOKS OF ACCOUNT, 209.
BOOK VALUE OF ASSETS, 210.
BOOK VALUES,
depreciation not based on, 352.
fluctuations in, 333.
608 INDEX
BOOK VALUES Cont.
not conclusive in sale of property, 246.
profit not based on, 247.
writing off, 352.
BROKERS,
interest received and paid by, 260.
must report names of customers, 451.
BUILDING AND LOAN ASSOCIATIONS,
exempt when, 197.
matured shares in, income from, 289.
BUILDINGS ERECTED BY TENANT, 252.
BUILDINGS USED FOR RENTAL PURPOSES, 30.
BUREAU OF INTERNAL REVENUE, 3.
BUSINESS ASSOCIATIONS, EXEMPT WHEN, 199.
BUSINESS EXPENSES,
citizens and residents, 30.
corporations, 135.
deductible, when, 304.
fiduciaries, 80.
foreign corporations, 185.
non-resident aliens, 51.
trust estates, 80.
BUSINESS, INCOME FROM, 236.
BUSINESS OR TRADE, DEFINED, 32.
CAMPAIGN EXPENSES, CONTRIBUTIONS TO, 307.
CAPITAL,
loss of, 334.
worthless debts representing, 342.
CAPITAL ASSETS, SALE OF, 245.
Gray v. Darlington, 245.
CAPITAL ORIGINALLY INVESTED,
in mines, 375.
in oil or gas deposits, 364.
CAPITAL STOCK ISSUED FOR LESS THAN PAR, 335.
CAPITAL STOCK, PROCEEDS FROM SALE OF, 135.
redemption of preferred, 137.
INDEX 609
CARRYING CHARGES,
added to <-ost of property, when, 246.
CASE 1 (CAPITAL STOCK TAX), 54.*.
CASE 2 (CAPITAL STOCK TAX), 544.
CASE 3 (CAPITAL STOCK TAX), 545.
CASH DISBURSEMENTS, 298.
CASH DIVIDENDS, 271.
CASH, EQUIVALENT, OF, 212.
CASUALTY INSURANCE COMPANIES, 172.
CEMETERY COMPANIES, EXEMPT WHEN, 199.
CERTIFICATE OF PROBABLE CAUSE, 448.
CERTIFICATES OF INDEBTEDNESS,
interest credited on, 260.
CESTUI QUE TRUST, 76.
CHAMBERS. OF COMMERCE, EXEMPT WHEN, 199.
CHARGES FOR SERVICES, 207.
CHARITABLE ORGANIZATIONS, EXEMPT WHEN, 199.
CHECKS IN PAYMENT OF TAX, 406.
CHILDREN,
see Minors,
exemption for, 37.
CHRISTMAS GIFTS, 231.
CITIZENS OF THE UNITED STATES,
deductions and exemptions allowed to, 29.
dividends received by, 265.
extent to which taxable, 29.
no distinction between native and naturalized. _"_'.
paying out income, duty when, 40.
residing abroad, 23.
residing in the United States, --.
taxable on entire net income from all sources. !'_'.
tax withheld at source, when, 40.
F. I. Tax 39
610 INDEX
CITIZENSHIP DETERMINED BY TREASUEY DEPART-
MENT, 22.
effect of payment of income tax, 23.
CITY EMPLOYEES, EXEMPTION OF, 22.
CIVIC ORGANIZATIONS, EXEMPT WHEN, 199.
CLERGYMEN,
voluntary offerings received by, 231.
CLUBS, EXEMPT WHEN, 199.
COLLATERAL,
interest on indebtedness secured by, 143.
subject of sale in ordinary business, 144.
COLLECTING INCOME FOR NON-RESIDENTS, 6.",.
COLLECTION AGENCIES, 455.
COLLECTION DISTRICTS, 3.
COLLECTIONS OF FOREIGN PAYMENTS, 455.
COLLECTION OF TAX AT THE SOURCE,
abatement and refund, 475.
agents, on payments to, 470.
against whom tax withheld, 468.
annual list returns, 480.
banks, interest paid by, 476.
by whom tax withheld, 476.
corporations, on payments to, 469.
corporations withhold tax, when, 476.
debtors withhold tax, when, 477.
dividends, procedure in paying, 479.
employers withhold tax when, 477.
fiduciaries, on payments to, 49.
fiduciaries withhold tax when, 477.
fixed or determinable income, 458.
foreign fiduciaries, on payments to, 101.
not required by, 102.
foreign partnerships, on, 120.
tax not withheld at present, 120.
general statement, 12.
individuals, on payments to, 469.
interest on bonds containing covenants to pay tax, 466.
lessors withhold tax when, 477.
monthly list returns, 479.
nominal stockholders, 470.
INDEX 611
COLLECTION OF TAX AT THE SOURCE Cont.
non-resident aliens, credit for tax withheld, 55.
release of amounts withheld, 56.
officers and employees of U. S., 478.
on dividends, when, 464.
on interest of domestic corporations, 46.").
ownership certificates, 471.
disposition of, 480.
partnerships on payments to, 469.
partnerships, domestic, 108.
payment to government of tax, 481.
payments to non-resident aliens, 463.
penalty for failure to withhold, 481, 425.
procedure in collecting income, 471.
registered interest, 478.
release of amounts withheld, 475.
substitute certificates, 473.
substitute, etc., use of discontinued, 475.
withholding agents, duties of, 478.
COLLECTION OF TAX BY SUIT, 416.
COLLECTORS OF INTERNAL REVENUE,
assistance of, in making returns, 390.
injunction suits against, 400.
letters to, 5.
may extend time to file returns, 386.
may take affidavits to returns, 389.
may summon taxpayers, 432.
personally liable if tax paid under protest, 408.
return made for taxpayer, when, 390.
suits against, 445.
interest, 448.
COMMERCE, INCOME FROM, 236.
COMMERCIAL FARMING, 242.
COMMERCIAL PAPER, 461.
COMMISSIONER OF INTERNAL REVENUE, 3.
assessments are made by, 3.
has general charge of internal revenue, 3. '
COMMISSIONS,
fixed and determinate income, when, 459.
income when received, 232.
paid in stock, 214, 306.
reinsurance, on, mutual companies. 171.
s :t06.
612 INDEX
COMPENSATION,
based on stockholding, 315.
officers and employees of a state, 234.
COMPENSATION BY INSURANCE, 290.
COMPENSATION FOR PERSONAL SERVICES,
exempt corporations, paid by, 230.
received, taxable when, 229.
services extending over a year, 232.
taxable in whatever form paid, 229.
COMPUTING THE TAX, ILLUSTRATION, 17.
COMPROMISE OF PENALTIES, 427.
CONSERVATORS,
are fiduciaries, 73.
CONSOLIDATION OF CORPORATIONS, 130.
CONSTITUTIONAL AMENDMENT, 2.
CONSTITUTIONALITY OF LAW,
examination of taxpayers' books, 432.
exemption of certain classes of corporations, 493.
not tested by injunction suits, 399.
power of Congress to levy tax, 488.
retroactive feature, 493.
taxing gains and profits from sale of property, 489.
tax on foreign steamship companies, 179.
uniformity, 493.
want of due process of law, 492.
CONSTRUCTION OF LAW, 6.
CONTINGENT INCOME, 207.
CONTINGENT INTERESTS IN TRUST ESTATES, 88.
CONTINGENT LOSSES, 300.
CONTRACTING COMPANIES,
income of, 238.
CONTRIBUTIONS TO CHARITIES, 36.
CO-OPERATIVE BANKS, EXEMPT WHEN, 197.
CO-OPERATIVE ORGANIZATIONS, EXEMPT. WHEN, 201.
INDEX Gi:i
CO-PARTNERSHIP,
see Partnerships.
COPYRIGHTS, ROYALTIES FROM, 295.
CORPORATIONS,
annual return, 157.
filed when no net income, 157.
when filed, 157.
where filed, 157.
assessments on stock, 281.
associations are, 126.
bonded and other indebtedness, 160.
bonds issued below par, 337.
books of account, effect of, 209.
brokers, report of, 163.
capital stock tax, 534.
capital stock, sale of, 135.
redemption of, 137.
capital stock,
paid up, 142.
collateral subject to sale, 144.
collection of tax from assets, 131.
collection of tax at source, 165.
i-iiiisolidating during year, 130.
dealer only, definition, 144.
deductions allowed to, 135.
deficit, contribution to make good, 281.
'IHinition of term, 126.
dissolving during year, 130.
before enactment of 1917 Law, 131.
orations may designate, 15/5.
notice of, 156.
requirements as to, 154.
foreign, see Foreign Corporations,
foreign countries, operating in, 128.
gifts to, 134, 283.
subsidiaries, 149.
ImMing companies. 14(5.
title tn t'iiniinys <>t' "iitiMili.-mi--. 1 l*
614 INDEX
CORPORATIONS Cont.
income subject to tax, 133.
indebtedness outstanding at close of year, 142.
insurance companies are, 126.
interest-bearing indebtedness, 140.
interest, deduction of, 137.
indebtedness secured by collateral, 143.
different rates of, 141.
limitation of, 138.
on mortgage not assumed, 140.
on tax-free bonds, 145.
paid by banks, 143.
tax paid on, for bondholders, 145.
joint stock companies are, 126.
lessor and lessee corporations, 149.
liability for tax after dissolution, 131.
liquidating during year, 130.
losses, 137.
merging during year, 130.
name, change of, 130.
newly organized, 129.
non-resident, dividends of, 264.
operating entirely abroad, 128.
ordinary business, defined, 145.
organization expenses, 136.
organized during year, 129.
owned by exempt corporations, 202.
parent companies, 146.
payments of dividends to be reported, 452.
payments in lieu of rent, 136.
payments of income, report of, 163.
payments of interest to be reported, 452.
Philippines, operating in, 129.
Porto Rico, operating in, 129.
principal office, defined, 157.
private banks are, when, 127.
property acquired for stock, 247.
receivers of, 152.
corporations in hands of, taxable, 153.
redemption of preferred stock, 137.
residence of, 128.
resident, dividends of, 264.
retirement of bonds, 338.
return of annual net income, 157.
by whom filed, 158.
how prepared, 159.
how signed and sworn to, 162.
returns may be inspected, when, 394.
salaries paid to stockholders, 230.
separate entities, 125.
sinking funds, income from, 281.
INDEX 615
CORPORATIONS Cont.
special returns by, 162.
- 1 -ft- i lie exemption, not entitled to, 125.
stockholders of lessee, 151.
stock outstanding, 159.
state, national, etc., bonds, 161.
statutory office, 158.
supertax not imposed on, 15.
subsidiary companies, 146.
inactive, 147.
syndicates are not, 126.
tax not excise tax, 125.
taxes, 146.
treasury stock, 159.
trusts are, when, 127.
undistributed profits, report of, 164.
withholding tax at source, 165.
CORPORATION TAX, 12.
CORRESPONDENCE, GOODS SOLD BY, 177.
COST,
inventory taken at, 237.
of timberlands, 291.
COST OP,
Irilling wells for oil or gas, 370.
manufactured products, 305.
new buildings to include loss on property destroyed incident to
construction, 302.
patents, 294.
COST OP PROPERTY, 246.
depreciation based on, 350.
received in exchange for stock, 212.
when acquired by gift, 284.
COUNTY EMPLOYEES, EXEMPTION OF, 22.
COUNTY FAIRS, ASSOCIATIONS EXEMPT, WHEN, 196.
COURT OF CLAIMS,
suit in, 43.
COURTS,
construction of law by, 7.
COVENANTS TO PAY THE TAX, 482.
defined, 462.
forms of, 483.
o|>rate wln-n. JML'.
616 INDEX
CREDITORS,
of insolvents, 77.
CREDITS IN FOREIGN COUNTRIES, 224.
CROP SHARES, 243.
CUSTOMS DUTIES, 307.
DAMAGES, AMOUNT RECEIVED AS, 281.
DEALER,
interest deductible by corporation as, 144.
DEBTS, DEDUCTION OF WORTHLESS, 34.
DECEDENT, PROPERTY LEFT BY, 249.
DECEDENTS' ESTATES,
income received during settlement of, 86.
DECLARATIONS OF TRUST, 126.
DEDUCTION AT THE SOURCE, 12.
DEDUCTIONS,
accounts payable, 307.
accruals to meet fixed charges, 299.
actual, must be, 297.
additions and betterments, 301.
alterations, cost of, 310.
assessments against local benefits, 303.
bank guaranty funds, payments to, 329.
bonus, payments of, 315.
book entries, reporting according to, 298.
business expenses, 304.
commissions, 306.
contributions to political parties, 307.
cost of manufactured products, 305.
customs duties, 307.
depletion of oil and gas deposits, 360.
depletion of mines, 373.
depreciation, 346.
discounts, 307.
donations, 317.
duplication of, 304.
entertainment money, 307.
expenses in earning exempt income, 305.
expenses of business, 304.
of operation, 305.
farmers, by, 318.
INDEX 617
DEDUCTIONS Cent.
general statement, 296.
gifts to employees, 316.
gratuities, 316.
improvements, 308.
instalments, unpaid, 344.
insurance premiums, 312.
interest, 320.
losses, 331.
loss of earnings not allowed as, 297.
maintenance of property, expense of, 308.
new equipment, 309.
obsolescence, loss due to, 349.
payment in lieu of rent, 311.
pensions, 317.
profit-sharing payments, 315.
public utility, by, when, 319.
partnerships, allowed to, 109.
premiums, insurance, 312.
removal of buildings, 302.
repairs, 308.
reserves to meet liabilities, 300.
restoring property, expense of, 302.
royalties, 318.
salaries, 313.
statute specifies, 297.
taxes, 324.
tenant by, 311.
voluntary destruction of property, 302.
worthless debts, 342.
DELAY IN PAYMENT OF TAX,
penalty for, 425.
DELINQUENT TAXES, INTEREST ON, 416.
DEMAND FOB TAX, 401.
DEPLETION, ALLOWANCE FOR,
citizens and residents, deductible by, 35.
dividends from reserves for, 271.
foreign corporations, deductible by, 187.
non-resident aliens, deductible by, 54.
trust estates, deductible by, 83.
DEPLETION OF MINES,
allowance for, 373.
basis of deduction, 374.
capital invested, 375.
cost of, 375.
depreciation not included in, 373.
618 INDEX
DEPLETION OF MINES Cont.
fair market value March 1, 1913, 376.
lessees not entitled to, 374.
owner entitled to claim, 374.
rate of deduction, 377.
separate deposits, 379.
statement attached to annual return, 379.
DEPLETION OF OIL AND GAS WELLS,
basis of deduction, 363.
book entries of, 363.
capital originally invested, 364.
deduction by lessees, 367.
depreciation not included in, 361.
fair market value March 1, 1913, 364.
lessee may not claim, when, 361.
owner of property only may claim, 363.
rate of annual deduction, 365.
reduction of production and flow, 366.
statement attached to annual return, 370.
DEPOSITS,
interest on, deducted by bank, 143.
interest on, paid by foreign banks, 188.
DEPRECIATION,
annual allowance, 353.
apartment houses, 355.
based on cost of property, 350.
bonds, 349.
citizens and residents, deduction by, 35.
claim disallowed, procedure when, 356.
copyright, 295.
deduction of, 346.
depletion is separate allowance, 361.
dividends from reserves for, 271.
farm buildings and machinery, 348.
good will, 349.
incidental repairs, 353.
investment of reserves for, 357.
lessees of oil and gas properties, 369.
lessees, 'claimed by, 358.
life of property, how determined, 353.
live stock, 348.
merchandise in stock, 348.
obsolescence, 349.
oil operators' equipment, 361.
patents, of, 294.
property must be subject to wear and tenr. ::().
rate of, 355.
real estate, not allowed on, 347.
INDEX 619
DEPRECIATION Cont.
renewals to property, 353.
rental value of building not subject to, 347.
reserves for, 357.
stocks, 349.
tangible property only, on, 350.
timberlands, of, 290.
trust estates, deductible by, 82.
unearned increment, 350.
wearing apparel, 348.
DEPUTY COLLECTORS,
may take affidavit toTeturns, when, 389.
DESTRUCTION OF PROPERTY,
by fire, storms, etc., 339.
DETERIORATION OF PROPERTY IN STORAGE, 341.
DISCOUNTS, 307.
DISSOLUTION OF COPORATIONS, 130.
DISTRAINT, COLLECTION OF TAX BY, 419.
DISTRIBUTION OF ASSETS,
taxable as dividend when, 262.
DISTRICT IN WHICH INDIVIDUALS FILE REURN8, .W,.
DISTRICT IRRIGATION BONDS, 342.
DISTRICT OF COLUMBIA,
income accruing to, 203.
officers and employees, of, 234.
DITCH COMPANIES, MUTUAL, EXEMPT WHEN, 201.
DIVIDENDS,
amounts paid by lessee corporations, 151.
associations, from, 263.
cash, 281.
corporations, deductible by, when, 146.
credit for normal tax, 36.
deemed to be from most recent accumulation, :2fix.
definition of, 262.
earnings prior to March 1, 1913, 269.
fxi-nipt only to stockholders, 270.
estates, received by, 271.
extent to which taxable, 264.
life insurance policies, on, 263.
620 INDEX
DIVIDENDS Cont.
non-resident alients, how reported, 54.
non-resident aliens, taxability of, 44.
paid in equivalent of cash, 272.
paid in Liberty bonds, 273.
partnerships, received by, 113.
profits prior to March 1, 1913, 270.
rate of tax on, 264.
reserves for depreciation, from, 271.
salaries held to be, when, 230.
scrip, 271.
stock, paid in, 274.
stock not owned by recipient, 66.
stock, surplus on reorganization, 220.
taxes paid for stockholders are, 273.
taxable in year received, 223.
withholding tax on payment of, 464.
DIVIDENDS ON LIFE INSURANCE POLICIES, 288.
DOMESTIC COEPORATIONS OPERATING ABROAD,
dividends of, 45.
DONATIONS BY CORPORATIONS, 317.
DUE PROCESS OF LAW, 492.
DURESS, PAYMENT OF TAX UNDER, 409.
notice and demand, 411.
second notice and demand, 411.
DUTCH ADMINISTRATION OFFICES, 70.
DUTIES, CUSTOMS, 307.
DWELLING HOUSE, NO DEPRECIATION ALLOWED ON, 346.
EDUCATIONAL ORGANIZATIONS, EXEMPT, WHEN, 199.
EMPLOYEES,
premiums paid by, on bonds, 313.
EMPLOYEES ' LIABILITY COMPANIES, 172.
ENDOWMENT POLICIES, INCOME FROM, 289.
ENTERTAINMENT MONEY, 307.
ENTITIES,
corporations taxed as, 125.
limited partnerships taxed as, 103.
trust estates taxed as, 89.
INDEX, G21
I \iriI-MENT, COST OF, 309.
EQUITY,
hill in to restrain collection of tax, 399.
EQUIVALENT OF CASH,
dividends paid in, 272.
EQUIVALENT OF CASH, INCOME RECEIVED IN, 212.
living quarters, board, lodging, 221.
notes, 221.
ERRONEOUS RETURNS, 391.
ESTATES OF DECEASED PERSONS,
specific exemption allowed to, 38.
EXAMINATION OF TAXPAYER'S BOOKS, 431.
refund of overpayment discovered by, 442.
EXCESS PROFITS TAX, 503.
EXCESS PROFITS TAXES DEDUCTED FROM NET IN-
COME, 326.
EXCHANGE OF STOCK, 217.
loss on, 334.
EXCISE TAX (CAPITAL STOCK TAX), 534.
EXCISE TAX,
1916 Law does not impose, 125.
1913 Law provided, when, 125.
EXECUTORS,
acting also as receiver in partition proceedings, 86.
are fiduciaries, 75.
commissions of, 81.
decedents, returns of income of, 27.
duties of, 77.
income received by, during settlement of estate, 86.
how reported, 87.
EXEMPT CORPORATIONS,
enumeration of, 195.
extent of exemption, 193.
foreign, 177.
status established, how, 193.
interest on obligations of, 259.
not exempt from duty to withhold, 193.
only classes enumerated are, 194.
622 INDEX
EXEMPT CORPORATIONS Cont.
question as to exemption, 194.
right must be proved, 195.
salaries paid by, 230.
when exempt, 193.
EXEMPT DIVIDENDS, 269.
EXEMPT INCOME,
expense incurred in earning, 305.
general statement, 226.
not subject to withholding, 460. 4,
omitted from annual return, 21.
EXEMPT INTEREST, 255.
EXEMPT PERSONS, 21.
EXPECTATION OF RECEIVING MONEY, NOT INCOME, 206.
EXPENSES,
foreign corporations, deductible by, 186.
non-resident aliens, deductible by, 51.
EXPORT BUSINESS,
income from, 238.
EXTENSION OF TIME TO FILE RETURNS, 386.
FAILURE TO RECEIVE FORMS, 388.
FALSE RETURNS, 424.
FARMERS,
cost of live stock, how deducted, 248.
deductions claimed by, 243.
depreciation on farm buildings, 348.
stock for breeding purposes, 348.
expenses, deductible by, 318.
income of, 242.
losses deductible by, 340.
FARMERS' MUTUAL OR CO-OPERATIVE COMPANIES, 201.
associations for marketing produce, 202.
FEDERAL JUDGES, COMPENSATION OF, 235.
FEDERAL LAND BANKS, EXEMPT, 202.
FEDERAL OFFICERS AND EMPLOYEES, COMPENSATION
OF, 232.
INDEX 623
FEDERAL RESERVE BANKS,
dividends of, exempt, 204.
income of, exempt, 204.
FEES, 229.
see Compensation.
FIDELITY BONDS, PREMIUMS ON, 313.
FIDUCIARIES,
acting in more than one estate, 92.
agents are not fiduciaries, 74.
annual return of net income, 90.
where filed, 92.
beneficiaries, returns filed for, when, 93.
domestic fiduciaries, 73.
duties of, 77.
foreigners acting as, 98.
income not actually paid out, 84.
income of several years, when distributed, 85.
income of trust estate, 84.
income received from, by non-resident aliens, 48.
incompetents, returns filed for, 84.
indemnified and claims and demands for payments of tax, 77.
information at source, duty to report, 97.
may file returns for beneficiary, when, 93.
minors' returns filed for, 84.
non-resident beneficiary, duty in case of, 84.
non-resident aliens acting as, 98.
non-resident aliens, returned filed for, 84.
only one beneficiary, return in case of, 94.
power of attorney, 74.
required to pay tax, when, 77.
returns by, 90.
supertax, when paid by, 84.
withholding by, 96.
withholding tax against, 96.
withholding tax at source, 84.
FIFTY PER CENT PENALTY,
cannot be compromised, 429.
failure to file returns, for, 422.
FINES FOR FALSE STATEMENT IN RETURNS, 425.
FIRE INSURANCE, MONEY FROM, 290.
FIRE, LOSS BY, 33.
FIRMS,
see Partnership.
624 INDEX
FIRST COLLECTION AGENCIES, 455.
FISCAL YEAR,
corporations may designate, 153.
change to calendar year, 156.
how designated, 154.
requirements as to, 154.
partnerships may fix, 113.
ending in year rates are changed, 114.
FIVE PER CENT PENALTY,
delay in payment of tax, 425.
FIXED CHARGES, ACCRUAL OF, 299.
FIXED OR DETERMINABLE INCOME, 458.
withholding tax on, 463.
FOREIGN ASSESSMENT INSURANCE COMPANIES, 169.
FOREIGN BANKS, 188.
FOREIGN CORPORATIONS,
agents for, 59, 182.
returns filed by, 190.
annual return of, 189.
branch of, agent regarded as, 178.
branches in U. S., 184.
capital stock tax, 551.
chartered ships, 179.
collection of tax at source, against, 181.
deductions allowed to, 185.
when income from investments, 185.
depletion of natural resources, 187.
depreciation, deductible by, 186.
dividends of, paid to non-resident aliens, 45.
doing business in U. S., 178.
excess profits, tax on, 503.
exempt corporations, 177.
expenses, 186.
foreign banks, 188.
foreign insurance companies, 187.
income of, 176.
income subject to tax, 183.
steamship companies, 183.
interest, deductible by, 187.
investments of, 184.
losses deductible by, 186.
Nineteen Hundred and Thirteen Lnw. rules as to, 176.
nominal stockholders, 69.
when, 182.
INDEX 62-'.
FOREIGN CORPORATIONS Cont.
non-resident alien corporations, 181.
ordinary and necessary expenses, 186.
paying out income, 189.
payments of dividends to be reported, when, 452.
. payments of interest to be reported, when, 453.
resident agents for, 182.
resident alien corporations, 180.
return of net income, 189.
by whom filed, 190.
filed by agent, 190.
how prepared, 191.
when filed, 190.
where filed, 190.
sale of goods by correspondence, 177.
ships chartered to residents, 179.
ships touching American ports, 180.
special returns by, 191.
steamship companies, 179.
income of, 183.
storing goods in U. 8., 178.
taxable, when, 177.
taxes, deductible by, 189.
tramp steamers, 179.
transacting business in U. S., 178.
traveling salesmen, 177.
FOREIGN COUNTRIES,
persons taxable in, 21.
FOREIGN FIDUCIARIES,
beneficiaries, return for, 99.
definition of term, 98.
duties of, 98.
distribution of income by, 99.
return of net income by, 100.
tax not withheld by, 102.
tax withheld on payment to, 101.
trust estate in hands of, 98.
undistributed income in hands of, 99.
FOREIGN GOVERNMENTS, 180.
FOREIGN INSURANCE COMPANIES, 166.
FOREIGN PARTNERSHIPS,
see Partnerships,
agents for, 121.
agents for, required to liK- returns, when. (in.
I'iti/.fiis and residents, partners of, 117.
collecting income, procedure, 122.
F. I. Tax. 40
626 INDEX
FOREIGN PAETNEESHIPS Cont.
defined, 117.
extent to which taxable, 122.
general, 119.
income of, 117.
limited, 118.
no withholding against, 469.
nominal stockholders, 69.
non-resident, 119.
non-resident alien, partners of, 117.
paying out income, 122.
resident, 119.
returns by, 123.
special returns, 123.
FORMS,
failure to receive, 388.
of annual returns, 388.
usually sent to taxpayers, 388.
FRAUDULENT RETURNS, 424.
FRUIT GROWERS' ASSOCIATIONS, EXEMPT WHEN, 202.
GAINS AND PROFITS FROM SALE OF PROPERTY, 245.
see Sale of Property.
N constitutionality of tax on, 489.
GAS WELLS, 362.
GAS WELLS, DEPLETION OF,
citizens and residents, deduction by, 35.
GENERAL PARTNERSHIPS, 106.
of foreign countries, 119.
GENTLEMEN FARMERS, 242.
GIFT,
property acquired by, 21.
property left by decedent, 249.
GIFTS,
contribution to charities, 36.
corporations receiving, 134.
deducted from net income, when, 36.
definition of, 284.
legacies, 283.
pensions, when, 283.
property acquired by, 283.
salary paid to widow of deceased, 284.
to clergymen, income when, 231.
INDEX ti^T
GOOD WILL,
depreciation not allowed, 349.
HOODS SOLD ON APPROVAL, 239.
GOVERNMENT OFFICES AND EMPLOYEES, COMPEN-
SATION OF, 232.
GRADUATED RATES OF SUPERTAX, 1"..
GROSS INCOME,
in general, 225, 237.
insurance companies, 166, 237.
manufacturing companies, 236.
mercantile companies, 236.
GROSS RECEIPTS, NOT GROSS INCOME, 225.
'.I'ARANTEE OF DIVIDENDS OF ANOTHER CORPORA-
TION, 336.
GUARDIANS,
are fiduciaries, 74.
foreigners acting as, 98.
non-resident aliens as, 98.
person exemption for ward, 37.
HEAD OF FAMILY,
definition of term, 38.
personal exemption of, 37.
HEAT AND LIGHT, PAYMENT IN, 233.
HOLDING COMPANY, 146.
supertax on undistributed profits of, 19.
HORTICULTURAL ORGANIZATIONS, WHEN EXEMPT, 195.
HUSBAND AND WIFE,
exemption on second issue Liberty Bonds, 256.
family treated as a unit, 25.
personal exemption of, 39.
returns of, joint when, 383.
supertax on separate incomes of, 18.
wife assumes citizenship of husband, 22.
wife assumes nationality of husband, 42.
IMPROVEMENTS AND BETTERMENTS,
:i.l.l-d to cost, 246.
no deduction allowed for permanent. 3">.
IMPROVEMENTS. COST OF, 308.
628 INDEX
IMPROVEMENTS MADE BY TENANT, 252.
INACTIVE COEPORATIONS, 147.
INCOME,
accounts receivable, 223.
accruing and accrued, 206.
accruing to state or local governments, 203.
actual receipts, 207.
agents, receipts of by, 224.
amount to be reported from trust estates, 95.
barter does not produce, 211.
beneficiaries to report, when, 86.
shares being known, 88.
board, cash value of, 221.
book value of assets, 210.
bookkeeping entries, 208.
change in form of assets, 213.
credited in foreign country, 224.
decedent 's estates, 86.
definition df, 205.
exchange of property,
no value fixed, 211.
exchange of stock for property, 215.
on reorganization of corporation, 216.
exchange of stock for stock,
par for par, 217.
exempt, 226.
foreign countries, from, 224.
general discussion, 205.
includes receipts by agents, 224.
income received, 206.
increase in book values, 210.
inventory, when determined by* 211.
living quarters, cash value of, 221.
lodging, cash value of, 221.
loss of not deductible unless, 334.
mortgages receipts in form of, 221.
notes, receipts in form of, 220.
paper profits, 206.
personal services, from, 229.
see Compensation,
potential income, 206.
property held in trust, 87.
rate of exchange, 224.
receipt of, 206.
received in equivalent of cash, 212.
received in kind, 211.
rent received in produce, 211.
specific legacy, how treated, 87.
stock received for property, 215.
stock received for services, 214.
INDEX
INCOME Con t.
surplus in case of reorganization, 220.
taxable in year received, 223.
travel expenses, 222.
trust estates, 87.
trust estates, amount to be reported by beneficiary, 95.
trust estates, how treated, 84.
undistributed income of trust estates, 85.
worthless debts representing, 342.
INCOMPETENTS,
persons acting for, 76.
returns filed for, 94.
returns made by guardian, 26.
INCORPORATION EXPENSES, 136.
INCREASE IN BOOK VALUE OF ASSETS, 210.
INCREMENT TO SINKING FUNDS, 281.
INDEBTEDNESS,
incurred for purchase of obligations, bearing exempt inter-
est, 322.
interest-bearing, of corporation, 140.
secured by collateral, 143.
INDIVIDUAL TAX RATES, 15.
INDIVIDUALS,
annual return, 9.
dying during year, 27.
excess profits tax on, 503.
exempt from tax, 21.
personal exemption, 10.
returns of, may be inspected, when, 393.
returns of, where filed, 385.
to whom law is applicable, 20.
INFORMATION AT THE SOURCE,
brokers, by, 461.
collection of foreign items of interest and ilivi.lfn.i-
dividend payments, 452.
foreign fiduciaries, by, 102.
general statement, 13.
interest payments, 402.
miscellaneous income payments, 450.
penalty for failure to file, 425.
procedure in paying income, 454.
returns of, 454.
INHERITANCE TAXES, 327.
630 INDEX
INJUNCTION TO RESTRAIN ASSESSMENT OF TAX, 399.
collection of penalties, 421.
INSANE PERSONS,
penalty for failure to pay tax, 426.
returns filed for, 94.
INSPECTION OF EETURNS BY PUBLIC, 392.
INSPECTORS, 4.
may take affidavits to returns, when, 389.
INSTALMENT PAYMENTS,
income from, 292.
unpaid, deductible when, 344.
INSURANCE,
charges added to cost of property, when, 246.
fire, proceeds of policies, 290.
INSURANCE COMPANIES, 126.
see also Corporations,
applied surrender values, 175.
assessment companies, 169.
death claims, 169.
deduction, net addition to reserve, 167.
deferred dividends, 173.
disability claims, 169.
dividends on premiums, 169.
expenses of, 167.
gross income of, 166.
instalment policies, 169.
life, see Life Insurance Companies,
losses on policies, 169.
matured endowments, 169.
mutual casualty, 172.
mutual employers' liability, 172.
mutual fire, 170.
mutual life, 175.
mutual marine, 172.
mutual workmen's compensation, 172.
net addition to reserves, 167.
payments on policies, 169.
reinsurance and return premiums, 167.
reserves of, 167.
for loss and unpaid liability claims, 168.
for unpaid taxes, 168.
released, 169.
required by law, 168.
special provisions applying to, 166.
INDEX 631
INSURANCE COMPANIES Cont.
supplementary policy contracts, 174.
consideration for, 169.
uncollected and deferred premiums, 208.
INSURANCE POLICIES,
proceeds of, when exempt, 21.
INSURANCE PREMIUMS,
on fire insurance deductible, 312.
except when, 30.
on life insurance not deductible, 312.
corporations, 312.
individuals, 30.
partnerships, 109.
INTENTIONAL NEGLECT TO FILK RETURNS, 4L>4.
INTEREST,
accrued at time of purchase of bonds, 259.
accrued but unpaid, 208.
accruing prior to March 1, 1913, 260.
banks, paid by on deposits, 143.
citizens and residents, deduction of, 31.
corporation, amount deductible by, 137.
deductible by non-resident aliens, 52.
deduction of, 320/
delinquent taxes on, 416.
fixed and determinable income, when, 459.
foreign corporations, deductible by, 187.
income from, 255.
income to non-resident aliens, when, 46.
indebtedness secured by collateral, 143.
national bonds and obligations, on,
received by partnerships, 112.
not deductible, when, 322.
of domestic corporations operating abroad, 46.
on bank deposits of non-resident aliens, 47.
paid by non-resident citizens, 47.
paid within year, 322.
partnerships, amount deducted by, 110.
recovery of on taxes paid, 447.
states and political subdivisions, on,
received by partnerships, 112.
trust estates, deductible by, 81.
I \ I KRE8T BEARING INDEBTEDNESS,
of corporations, definition, 140.
INTERSTATE COMMERCE COMMISSION
accounting rules of, 2'27.
632 INDEX
INVENTORY,
determines income, when, 211.
how taken, 237.
must be taken at cost, 211.
INVESTED CAPITAL, 51^ 5
INVESTMENTS, EXCHANGE OF, 213.
IRRIGATION COMPANIES, EXEMPT WHEN, 201.
JOINT-FIDUCIARIES,
annual return filed by whom, 90.
JOINT RETURNS OF HUSBAND AND WIFE, 383.
JOINT STOCK COMPANIES, 126.
dividends from, 263.
JOINT-STOCK LAND BANKS, EXEMPT INCOME OF, 202.
KIND, INCOME RECEIVED IN, 211.
LABOR ORGANIZATIONS, WHEN EXEMPT, 195.
LANDLORDS,
commissions paid to real estate agents, 306.
insurance premiums deductible, when, 312.
lessor and lessee corporations, 149.
may deduct expenses of buildings rented, 30.
but not for dwelling house, 30.
rent income when received, unless, 252.
repairs made by tenant, 311.
taxes paid by tenant, 311, 330.
value of improvement made by tenant, 252.
LAST DUE DATE TO FILE RETURNS, 386.
LAW CONSTRUED IN FAVOR OF TAXPAYER, 6.
LEGACY,
income from, 282.
specific legacy, income from, 87.
value of, 249.
LEGATEES,
are beneficiaries, 97.
income from specific legacy, 87.
LESSEE,
corporations, 150.
may recover tax of lessor, when, 437.
4 tenants, see Tenants.
INDEX
LESSEES OF MINES,
deductions by, 318.
LESSEES OF OIL AND GAS PROPERTIES,
houus paid by, 368.
cost of lease, 368.
depreciation claimed by, 301).
royalties paid by, 367.
statement by, 371.
LESSORS AND LESSEES,
corporations, income of, 149.
LETTERS TO COLLECTORS, 5.
LEVEE DISTRICTS, INTEREST PAID BY, 258.
LIBERTY BONDS, 256.
dividends paid in, 273.
LICENSE OF FIRST COLLECTION AGENCIES, 456.
LIEN FOR UNPAID TAXES,
dissolved corporations, for tax on, 132.
including interest and penalties, 417.
notice of, 417.
time when attaches, 418.
LIFE INSURANCE COMPANIES,
applied surrender values, 170.
to be reported and deducted, 175.
consideration for supplementary contracts, 169.
to be reported and deducted, 175.
supplementary policies contracts, 174.
LIFE INSURANCE POLICIES,
dividends on, 263, 288.
proceeds of, 282.
surrender value of, 288.
LIFE INSURANCE PREMIUMS,
see Insurance Premiums,
not deductible as expense, 312.
LIMITED LIABILITY ASSOCIATIONS, 128.
LIMITED PARTNERSHIPS,
see also Partnerships,
foreign, 118.
non-resident alien, partners of, 118.
LIQUIDATION OF CORPORATIONS, 130.
634 INDEX
LIST RETUENS, 479.
LIVE STOCK,
cost of, 243.
depreciation of, 348.
loss of, 340.
LIVING QUARTERS, 232.
LOCAL BENEFITS,
taxes assessed against, 326.
LOCAL BENEFITS, ASSESSMENTS FOR,
not deductible, 303.
LOCAL GOVERNMENTS, INCOME OF, 203.
LOCAL MUTUAL OR CO-OPERATIVE COMPANIES, 201.
LODGE SYSTEM, DEFINED, 196.
LODGES, EXEMPT WHEN, 196.
LOSS BY OBSOLESCENCE OF PATENTS, 294.
LOSSES,
bonds issued below par, 337..
charged off on books, when, 333.
compensated by insurance, 333.
cost of drilling, dry oil or gas wells, 370.
deduction of, 331.
due to adverse judgment, 344.
exchange of stock, on, 335.
fluctuations in market prices, 333.
foreign corporations, deductible by, 186.
income of, not deductible unless, 334.
measure of, 331.
must be actually sustained, 332.
of another, paid by taxpayer, 336.
voluntary payment of, 337.
partnership, partners may deduct, when, 115.
probable losses, 333.
property, destruction of, 339.
reserves for, 300, 333.
retirement of bonds, 338.
shrinkage and deterioration, 341.
unpaid instalments, 344.
worthless debts, 342.
worthless stock, 341.
INDEX
LOSSES INCURRED IN TRADE,
citizens and residents, deduction of, 32.
non-resident aliens, deductible by, 53.
trust estates, deductible by, 82.
LOSSES NOT INCURRED IN TRADE,
citizens and residents, deduction by, 33.
non-resident aliens, deduction by, 53.
trust estates, deduction by, 82.
LOSSES OF PROPERTY,
citizens and residents/ 33.
deduction of, 331.
non-resident aliens, 53.
voluntary destruction, by, 302.
MAILING RETURNS, 386.
MAINTENANCE, EXPENSES OF, 308.
MANAGEMENT EXPENSES, 306.
MANDAMUS, 400.
MANNER OF PAYMENT OF TAX, 405.
MANUFACTURED PRODUCTS, COST OF, 305.
MANUFACTURING COMPANIES,
gross income of, 236.
MARCH'l,
corporations, when return filed on, 9.
individuals, return of net income filed on, 9.
fiduciaries, return of net income filed on, 92.
MARCH 1, 1913,
depreciation not based on value as of, 351.
dividends from earnings accrued prior to, 269.
gas deposits, fair market value on, 363.
interest accruing prior to. 260.
mining deposits, fair market value on, 376.
oil deposits, fair market value on, 363.
value of property oil, 250.
value of timberlands, 291.
MARINE INSURANCE COMPANIES, 173.
MARRIED PERSONS,
personal exemption of, 37
636 INDEX
MARRIED WOMAN,
see Husband and Wife.
MASSACHUSETTS REAL ESTATE TRUSTS, 126.
MATERIALS ON HAND, COST OF NOT DEDUCTIBLE, 306.
MEMBER BANKS,
dividends from Federal Reserve banks exempt, 204.
MERCANTILE COMPANIES,
gross income of, 236.
MERCHANDISE,
depreciation on, 348.
MERGERS,
returns of, 130.
MILEAGE, 233.
MIMEOGRAPH LETTERS TO COLLECTORS, 5.
MINES,
royalties from, 278.
MINORS,
becoming of age, 94.
children of naturalized citizens, 42.
exemption for, 37.
entitled to personal exemption, 37.
claimed by guardian, when, 90.
having separate legal estates, 25.
income from trust estates, 84.
income included in return of father, when, 25.
returns filed for, 94.
returns made by guardians, 25.
MONEY VALUE, 211.
of stock, 212.
of stock dividends, 277.
MONTHLY LIST RETURNS, 479.
MUNICIPALITIES,
interest on obligations of, 257.
mortgage assumed by, 258.
MUTUAL CASUALTY INSURANCE COMPANIES, 172.
MUTUAL EMPLOYERS' LIABILITY COMPANIES, 172.
INDEX
MUTUAL FIRE INSURANCE COMPANIES, 170.
capital employed in business, 170.
commissions on re-insurance, 171.
deductions, 172.
indebtedness, 170.
interest, 171.
ledger assets, maturity of, 171.
loss on sale or maturity of, 171.
loss on ledger assets, 171.
premiums, net amount only reported, 170.
profits on sale of ledger assets, 171.
rentals, net only reported, 171.
MUTUAL INSURANCE COMPANIES, EXEMPT WHEN, 201.
MUTUAL LIFE INSURANCE COMPANIES, 173.
MUTUAL MARINE INSURANCE COMPANIES, 173.
MUTUAL PROTECTIVE ASSOCIATIONS, NOT EXEMPT
WHEN, 197.
MUTUAL SAVINGS BANKS, EXEMPT WHEN, 196.
MUTUAL WORKMEN 'S COMPENSATION COMPANIES, 172.
NAME, CHANGE. OF CORPORATE, 130.
NATIONAL BONDS AND OBLIGATIONS,
partnership profits, deducted from, when, 112.
NATIONAL FARM-LOAN ASSOCIATIONS EXEMPT, 202.
NAVY, RETURNS SIGNED BY PERSONS IN, 389.
NEGLECT TO FILE RETURNS, 424.
NET ADDITION TO RESERVE FUNDS, 167.
NET INCOME,
see Income.
NINETEEN HUNDRED AND NINE LAW,
defined, 2.
depletion of -mines, 380.
depletion of oil or gas wells, .171.
depreciation writing off not required,
limited partnerships taxed under, 1.""..
returns filed by fiduciaries, for, 94.
salaries paid by residents to, 48.
sale of property, profits on, 50.
sources within the United States, 43.
supertaxes on, 11.
taxes, deduction of, 53.
temporarily in the United States, 42.
tax of, how and when paid, 57.
how abated or refunded, 57.
how released by withholding agent, 56.
tax withheld at source, how reported, 54.
release of amounts withheld, 56.
taxable on all income from U. 8., 21.
taxable status of, 41.
withholding, tax on payments to, 463.
\ON-RESIDENT CITIZENS, 23.
acting as fiduciaries, 73.
NON-RESIDENT FOREIGN PARTNERSHIP, 119.
NON-RESIDENTS, DEFINITION OF TERM. 6n.
640 INDEX
NORMAL TAX,
applies to all net income over exemption, 16.
personal exemption from each tax, 16.
rate under 1916 Law, 15.
applies to all individuals, 15.
rate under 1917 Law, 15.
does not apply to non-resident aliens, 16.
rates of, 11.
NOTAEY PUBLIC, SEAL OF NECESSARY, WHEN, 389.
NOTES,
of corporations, 461.
tax withheld on, 460.
NOTES, INCOME IN FORM OF^221.
NOTICE AND DEMAND FOR TAX, 401.
NOTICE OF,
additional assessment, 391.
assessment, 401.
failure to file returns, 392.
lien, 417.
tax, and demand for, 401.
second notice, 403.
OBSOLESCENCE,
no allowance for anticipated, 349.
patents of, 294.
OFFERS IN COMPROMISE OF PENALTIES, 429.
OFFICE FURNITURE, COST OF, 309.
OIL WELLS, 362.
OIL WELLS, DEPLETION OF,
citizens and residents, deduction by, 35.
OPERATION, EXPENSE OF, 305.
ORDINARY AND NECESSARY EXPENSES, 135.
ORGANIZATION EXPENSES, 136.
OVERHEAD CHARGES, 211.
OVERPAYMENT OF TAX,
discovered after two years, 442.
refund of, 441.
INDEX 641
OWNERSHIP CERTIFICATES, 471.
disposition of, 480.
PANAMA CANAL ZONE,
status of citizens and residents, 8.
PARENT COMPANIES,
file list of subsidiaries, 158.
returns by, 158.
PARTITION, RECEIVER IN PROCEEDINGS FOR, 89.
PARTNERS,
see partnerships.
partnership profits not subject to withholding, 460.
returns by, of foreign partnership, 124.
I'. \RTNERSHIP ASSOCIATIONS, 105
PARTNERSHIPS,
annual return not filed by, 9.
deductions allowed to, 109.
definition of, 103.
deriving income from abroad, 49.
dividends received by, 113.
domestic partnerships. 103.
excess profits tax on, 503.
fiscal year may fix, 113.
rate of tax, when changed, 113.
general not separate entity, 108.
not taxed, 103.
income from, non-resident aliens, 49.
income from sources abroad, 107.
insurance premiums, 104.
deductions allowed to, 109.
normal tax on profits, when, 105.
operating abroad, 107.
profits of, as dividends, 104.
taxable as corporations, 103.
taxable under 1909 Law, 104.
losses, net, partners may deduct, 115.
net income of, 108.
non-resident alien partners of, 49, 107.
not taxable as such, 103.
operating abroad, 107.
j.:irtnors of, operating abroad, 107.
paying out income, duties of, 108.
private banks, taxed as corporations, when, 106.
procedure in collecting income, 108.
F. I. Tax. 41
642 INDEX
PARTNERSHIPS Cont.
profit sharing payments, 109.
profits earned prior to March 1, 1917, 114.
profits of, reported by partners, 110.
accounts receivable, as, 111.
amount shown by book, 111.
normal and supertax imposed on,
tax withheld at source, 110.
returns by, 115.
special returns, 116.
salaries of partners, 231.
withholding on, when, 460.
PATENTS,
cost of, 294.
deduction for loss of capital, 294.
royalties from, 294.
PAYMENT OF TAX,
advance, 404.
by check, 406.
manner of, 405.
time of, 404.
PAYMENTS BY TENANT FOR LANDLORD, 253.
PAYMENTS OF INCOME TO OTHERS, DUTIES IN, 450.
PENALTIES,
advance payments made under, 405.
compromise of, 427.
delay in payment of tax, 425.
failure to file returns, 421.
exception, 422.
failure to withhold tax, 425.
false returns, 424.
fines, 425.
fraudulent returns, 424.
information at source, 425.
injunction against collection of, 421.
intentional neglect, 424.
protest, payment under, 408.
specific penalty, 421.
not waived, 424.
statute of limitations, 427.
withholding agents, 423.
PENSIONS,
deductible, when, 317.
income from, 282.
INDEX 643
PER DIEM ALLOWANCES, 233.
PERSONAL EXEMPTION,
amount of, 37.
children, allowance for, 10.
citizens and residents only entitled to, 10, 37.
claimed according to status at end of year, 39.
head of family entitled to, 10.
non-resident aliens, not entitled to, 55.
normal tax, applies to; 10.
persons dying during year, 39.
separate, under each law, 10.
supertax, does not apply to, 40.
PERSONAL LIVING OR FAMILY EXPENSES, 30.
PERSONAL SERVICES, INCOME FROM, 229.
see Compensation.
PERSONS DYING DURING THE YEAR, 27,
1'KKSONS EXEMPT FROM TAX, 21.
PHILIPPINE ISLANDS,
administration of law in, 7.
corporations operating in, 129.
income accruing to, 203.
income from, 225.
legislature may amend law, 8.
1917 Law does not extend to, 8.
officers and employees of, 234.
taxpayers doing business in, 8.
PIPE LINES, DEPRECIATION ON, 354.
PLANTATIONS, 242.
POLICIES, PAYMENTS ON, 169.
POLITICAL AND TAXING SUBDIVISIONS OF STATES, 113.
agencies not governmental, 257.
defined, 258.
employees of, 21.
PORTO RICO,
administration of law in, 7.
corporations operating in, 129.
income accruing to, 203.
income from, 225.
legislature may amend law, 8.
1917 Law does not extend to, 8.
644 INDEX
POETO EICO Cont.
officers and employees of, 234.
taxpayers doing business in, 8.
POSSESSIONS OF THE UNITED STATES,
interest on obligations of, 257.
POTENTIAL INCOME, 206.
POWER OF CONGRESS TO LEVY TAX, 488.
PREMIUMS LIFE INSURANCE, 312.
PRESENT FEDERAL INCOME TAX LAWS, 1.
PRESIDENT OF THE UNITED STATES, 235.
PREWAR PERIOD, 508.
PRINCIPAL, INCOME RECEIVED BY AGENT FOR, 224.
PRINCIPAL OFFICE, 158.
PRIVATE BANKS,
taxed as corporations, when, 106.
PRIVATE RESIDENCE, NO DEPRECIATION ALLOWED
ON, 346.
PROCEDURE IN CLAIMING ABATEMENT, 439.
in claiming refund, 442.
PROCEDURE IN COLLECTING INCOME SUBJECT TO
WITHHOLDING, 471.
PROCEEDS OF LIFE INSURANCE POLICIES, 282.
in favor of corporations, 283.
PROFESSIONAL FEES, 229.
see Compensation.
PROFESSIONS, INCOME FROM, 235.
PROFIT FROM SALE OF PROPERTY, 245.
PROFIT SHARING,
fixed and determinable income, when, 459.
income to recipient, 230.
partnership, payment by, 109.
PROPERTY ACQUIRED BY CORPORATION FOR STOCK, 247.
INDEX 645
PROPERTY LEFT BY DECEDENT, SALE OF,
appraised value of, taken as cost, 249.
PROPERTY RENEWED CONTINUOUSLY, 354.
PROPERTY SUBJECT TO WEAR AND TEAR, 346.
PROPERTY, VALUE OF ON MARCH 1, 1913, 250.
PROTEST,
form of, 408.
necessary in suits to recover taxes, 407.
not necessary for refund, 407.
not sufficient unless duress, 409.
penalties included in, 408.
returns filed under, 407.
tax paid under, 407.
PUBLIC UTILITIES,
income from, exempt when, 240.
income of, 301.
income of accruing to states, territories, etc., 203.
permanent improvements, 301.
service connections, 302.
under contract with a state, 319.
PURCHASE OF BONDS WITH ACCRUED INTEREST, 259.
QUASI-CORPORATIONS, 104.
RANCHES, 242.
RATE OF DEPRECIATION ALLOWANCE, 355.
RATE OF TAX,
dividends, 264.
from surplus earned in prior years, 267.
domestic corporations,
foreign corporations,
individuals,
non-resident aliens,
trust estates,
withheld on dividends, 464.
on bond interest, 465.
withheld on payments to,
agents, 470.
citizens and residents, 468.
corporations, 469.
fiduciaries, 469.
nominal stockholders, 470.
non-resident aliens, 468.
partnerships, 469.
646 INDEX
BATES OF EXCHANGE,
income computed on, when, 224.
EEAL ESTATE,
depreciation on, 347.
when collateral, 144.
EEAL ESTATE AGENTS,
commissions paid to, 306.
REAL ESTATE TRUSTS, 126.
REASONABLE ALLOWANCE FOR DEPRECIATION, 355.
RECEIPT FOR TAX, 412.
RECEIPT OF CASH, INCOME WHEN, 206,
RECEIPT OF INCOME BY AGENT, 224.
RECEIPTS REPRESENTING RETURN OF CAPITAL, 222.
RECEIPTS WHICH ARE RETURN OF CAPITAL, 286.
RECEIVERS,
corporations, for, duties, 152.
of individuals, 75.
duties of, 78.
partition proceedings, 89.
RECOVERIES OF BAD DEBTS, 284.
RECOVERY OF TAX, WHO MAY CLAIM, 437.
RECOVERY OF TAXES, 443.
interest, 447.
RECOVERY OF TAXES BY ACTION AT LAW,
protest, necessary to pay tax under, 408.
REFUND OF TAXES COLLECTED, 440.
interest not allowed, 447.
procedure in claiming, 442.
statute of limitations, 441.
extended when, 442.
REFUND OF TAXES PAID,
general statement, 14.
REFUSAL TO FILE RETURNS, 424.
INDEX 647
REGISTERED INTEREST, PAYMENT OF, 478.
REGULATIONS, 5.
REIMBURSEMENT FOR ACTUAL EXPENSES, 233.
REJECTION OF CLAIM FOR ABATEMENT, 438.
RELEASED RESERVES, 169.
RELIGIOUS ORGANIZATIONS, EXEMPT WHEN, 199.
REMEDY AGAINST ERRONEOUS ASSESSMENT, 400.
REMOVAL OF BUILDINGS INCIDENT TO IMPROVEMENT,
302.
RENEWALS TO PROPERTY, 354.
RENT,
equivalent of cash, received in, 221.
fixed and determinable income, when, 459.
income from, 252.
p.-ii'l in kind, 211.
payments in lieu of, 136.
received in kind, 254.
RENTAL VALUE OF BUILDINGS, 347.
REORGANIZATION OF CORPORATIONS,
income from, 216.
loss on, 334.
surplus, taxability of, 220.
REPAIRS, COST OF, 308.
incidental, defined, 309.
REPORTING INCOME ON BASIS OF BOOK KNTKI1>
same basis must be used consistently, L'L'^.
system of accounting must dearly rellert income, 227.
REPORTING NET INCOME, 9.
KKSKKVE FUND,
* must be required by law, 168.
net addition to, 167.
released reserves, 169.
UK SERVES FOR,
depreciation, 357.
dividends from, 271.
648 INDEX
RESERVES FOR Cont.
losses, 333.
self insurance, not deductible, 313.
RESERVES TO MEET LIABILITIES,
contingent losses, 300.
deductible when, 300. >
RESIDENCE, DEFINITION OF, 24.
of domestic corporations, 46, 128.
English rule, 46.
RESIDENT AGENTS FOR FOREIGN CORPORATIONS, 182.
RESIDENT AGENTS FOR NON-RESIDENTS,
definition of, 59.
duties and liabilities of, 62.
who are held to be, 59.
who are not such agents, 61.
RESIDENT ALIEN CORPORATIONS, 180.
RESIDENT FOREIGN PARTNERSHIPS, 119.
RESIDENTS, MAY BE REQUIRED TO REPORT AS AGENTS
FOR NON-RESIDENT ALIENS AND FOREIGN CORPORA-
TIONS, 59.
RESTORING PROPERTY,
expense of, not deductible, when, 302.
no depreciation when, 354.
RETROACTIVE EFFECT OF TAX,
constitutionality of, 493.
corporations dissolved during year, 131.
individuals dying during year, 27.
RETROACTIVE RULINGS, 5.
RETURN OF ANNUAL NET INCOME,
agents, by, 384.
amended, 391.
assistance of collectors, 390.
by whom filed, 382. f
corporations, requirements as to, 157.
erroneous, 391.
extension of time,
applications for, 387.
by collectors, 386.
by commissioner, 387.
fiduciaries, when required of, 91.
INDEX 649
BETURN OF ANNUAL NET INCOME Cent,
final return of corporations, 130.
foreign corporations by, 189.
foreign fiduciaries, by, 100.
forms, 388.
husband and wife, 383.
incompetent beneficiary of trust estate, 84.
inspection of, 392.
joint fiduciaries, by whom filed, 90.
last due date, 386.
made by collector, 390.
mailing returns, 386.
minor beneficiary of trust estate, 84.
notice of failure to file, 392.
only one return required, 1.
partners of foreign partnerships, 124.
partnerships not required to file, 115.
penalty for failure to file, 421.
exception, 422.
residents required to file for non-residents, when, 62.
procedure, 63.
statement of depletion of mines, 379.
statement of depletion of oil and gas wells, 370.
suppleiiKMitnry statement, 160.
tentative returns, 387.
verification of, 389.
abroad, 389.
in army and navy, 389.
voluntarily filed after due date, 422.
when filed, 385.
where filed, 384.
REVENUE AGENTS, 4.
may examine taxpayer's books, 43.3.
may take affidavit to returns, 389.
RIGHTS TO SUBSCRIBE TO STOCK, 285.
ROYALTIES,
from copyrights, 295.
from patents, 294.
income from, 278.
paid by lessees of oil or gas property, 367.
tax not withheld on, when, 461.
RULINGS AND REGULATIONS,
issued for guidance of taxpayers, 5.
official publication of, 5.
retroactive effect of, 5.
650 INDEX
SALARIES, 229.
see Compensation.
based on stockholding, 315.
deductible as business expense, when, 313.
dividend, held to be, when, 230.
equivalent of cash, received in, 221.
not paid in cash, 212.
paid by residents to non-resident aliens, 48.
partners, of, 231.
soldiers, paid to, by ex-employers, 315.
stockholders of corporations, 314.
taxable in year received, 223.
SALE OF,
bonds with accrued interest, 259.
capital stock by corporation, 135.
farm products, 243.
stock dividends, 277.
SALES AND DEALINGS IN PROPERTY, 245.
SALES, LOSSES ON, 335.
SALES ON APPROVAL, 239.
SALVAGE VALUE OF DESTROYED PROPERTY, 340.
SAVINGS BANKS, EXEMPT WHEN, 196.
SCHOOL DISTRICTS, INTEREST PAID BY, 258.
SCHOOL TEACHERS, PUBLIC, EXEMPTION OF, 22.
SCIENTIFIC ORGANIZATIONS, EXEMPT WHEN, 199.
SCRIP DIVIDENDS, 272.
SECOND ASSESSMENT, 412.
SECOND NOTICE AND DEMAND FOR TAX, 403.
SECRETARY OF TREASURY,
fraudulent accumulation of profits, action of, 19.
SECURITIES DISTRIBUTED AS DIVIDENDS, 272.
SECURITIES, VALUE OF ON MARCH 1, 1913, 250.
SELLING PRICE OF PROPERTY, 251.
SERVICES EXTENDING OVER A YEAR, PAYMENT FOR,
232.
INDEX 651
SHARES WITHOUT PAR VALUE, 142.
SHRINKAGE,
of produce in storage, 243.
of property iu storage, 341.
SHRINKAGE IN VALUES,
reserves for, not deductible, 300.
SINKING FUNDS,
amounts credited to, 300.
income from, 281.
SOCIETIES (FRATERNAL) EXEMPT WHEN, 196.
SOURCES WITHIN THE UNITED STATKs,
non-resident aliens, income from, 43.
SPECIAL RETURNS,
foreign partnerships, 123.
SPECIFIC EXEMPTION,
to trust estates, on undistributed income r 89.
SPECIFIC PENALTY, 421.
roni|ironiise of, 428.
not waived by accepting returns, liM.
STATE EMPLOYEES,
exemption of, - 1 .
MATE OFFICERS MAY INSPECT RETURNS, WHEN, 396.
STATES AND POLITICAL SUBDIVISIONS OF,
income accruing to ? 203.
interest on obligations of, 112, 255.
officers and employees of. -' I.
partnership profits, deducted from, ll'J.
STATUTES OF LIMITATIONS,
none on collection of tax by suit, 416.
penalties, in case of, 4J7.
refund, as to, 441.
extended when, 442.
suits to re<-mer taxe-. :i> to. J H.
summary assessment, 41 1.
STATUTORY OFFICE, 158.
STKAMSIIM' roMI'AXIKS. FOKKICX. 17!>.
agents may file returns, 191.
income of, 183.
652 INDEX
STOCK,
depreciation not allowed, 349.
worthless, 341.
STOCK, ASSESSMENTS ON, 281.
STOCK BOUGHT AT DIFFERENT PRICES, SALE OF, 247.
STOCK DIVIDENDS, 274.
amount to be reported, 277.
money value of, 277.
sale of, profit on, 277.
STOCK HELD BY NOMINAL OWNERS, 66.
STOCK IN EXCHANGE FOR SERVICES, 214.
in exchange for property, 215.
in exchange for stock, 217.
STOCK ISSUED FOR PATENTS, 294.
STOCK ISSUED FOR PROPERTY, 247.
STOCK OUTSTANDING, 159.
STOCKHOLDERS,
lessor corporations, income of, 151.
salaries paid to, 230.
suit to restrain officers from paying tax, 309.
taxed on fraudulent accumulation of corporation, 18.
taxes paid for, by corporation, 327.
voluntary payment of loss of corporation, 337.
worthless stock, 341.
STOCKHOLDERS OF RECORD, 66.
STOPPAGE AT THE SOURCE, 12.
STUMP AGE, ALLOWANCE FOR, 290.
SUBSIDIARY COMPANIES, 146.
SUBSIDIARY CORPORATIONS,
returns by, 158.
separate returns of, 158.
SUBSTITUTE CERTIFICATES, 473.
SUIT FOR COLLECTION OF TAX, 416.
INDEX
SUITS TO RECOVER TAXES, 443.
against collectors, 445.
against the U. S., 446.
costs, recovery of, 449.
interest, recovery of, 447.
when brought, 444.
SUMMARY ASSESSMENT, 412.
SUPERTAX,
applies to all individuals, 11.
corporations, not imposed on, 15.
corporations, not subject to, 125.
husband and wife, on income of, 18.
Liberty bonds, second issue, 256.
on undistributed profits of* corporations, 18.
rates of, 16.
illustration, 17.
tax on undistributed profits called,
tax under both laws imposed, 11.
"SUPERTAX" ON CORPORATIONS, 495.
SUPPLEMENTARY STATEMENT OF CORPORATIONS, 160.
may be varied, 161.
SURPLUS,
taxability of, ou reorganization, 220.
SURRENDER VALUE OF INSURANCE POLICIES, 288.
SURTAX, DEFINITION OF, 15.
SYNDICATES, 126.
T. D.,
'(lined, 5.
TAX,
on income or on person, 20.
paid by residents for non-residents, when, 64.
TAX PUE, 14.
TAX-EXEMPT COVENANTS, 482.
TAX-FREE BONDS,
interest paid on, 145.
TAX FKKK COVENANTS, 482.
654 INDEX
TAX ON UNDISTRIBUTED NET INCOME OF CORPORA-
TIONS,
corporations subject to this tax, 496.
income taxes paid within year, 498.
net income invested in business, 499.
invested in obligations of the U. S., 501.
retained for employment in business, 499.
penalty tax, 502.
rate of tax, 501.
increased when, 502.
returns, 502.
undistributed net income, 496.
TAXES,
added to cost of property, when, 246.
assessed against local benefits, 326.
bondholders, paid for, 326.
citizens and residents, deduction of, 31.
corporations, deductible by, 140.
deductible when, 324.
excess profits taxes, federal, 325.
foreign corporations, deductible by, 189.
income taxes, federal, 325.
inheritance, not deductible, 322.
non-resident aliens, deductible by, 53.
not deductible when, 325.
paid for stockholders, 273.
paid within year, 324.
stockholders, paid for, 327.
tenant paid by, 330.
trust estates, deductible by, 81.
TAX WITHHELD AT SOURCE BY WHOM, 476.
TAXPAYER,
law construed in favor of, 6.
TELEPHONE COMPANIES, CO-OPERATIVE, EXEMPT
WHEN, 201.
TENANT,
buildings erected by, cost of, 311.
depreciation on building erected by, 358.
improvements made by, value of, 252.
incidental repairs, may deduct, 312.
insurance premiums deductible when, 312.
lessor and lessee corporations, 149.
payment in lieu of rent, 311.
payments by, for landlord, 253.
rent paid in one sum, 311.
INDEX 655
TENANT Con t.
repairs and improvements, cost of, ''< 1 1 .
taxes paid for landlord, 330.
TENTATIVE RETURNS, 387.
TERRITORIES AND POLITICAL SUBDIVISIONS OF,
income of, 203.
interest on obligations of, 257.
officers and employees of, 234.
THEFT OF PROPERTY, 339.
THREE- YEAR LIMITATION ON SUMMARY ASSESSMENT,
n i.
TIMBERLANDS, INCOME FROM, 290.
TIME WHEN LIEN ATTACHES, 418.
TRADE, INCOME FROM, 236.
TRAVELING SALESMEN OF FOREIGNERS, 177.
TREASURY DECISIONS, 5.
TREASURY DEPARTMENT,
effect of construction of law by, 7.
pays no interest, 447.
TREASURY STOCK, NOT STOCK OUTSTANDING. 160.
TRUST AGREEMENTS, 126.
TRUST ESTATES,
deductions allowed to, 80.
li-finition of term, 79.
distribution of income of, 84.
dividends received by, 271.
foreign fiduciaries, 98.
income of, 79.
foreign, 99.
TRUSTEE, PAYMENT TO, FOR SERVICES DURING PERIOD
OF TRUST, J
TRUSTEES,
are fiduciaries, 7.",.
foroi^iu-rs art ing an, 98.
non-resident aliens acting as, 98.
personal exemption for beneficiary, 37.
656
INDEX
TRUSTEES Cont.
net -income of, 83.
specific exemption allowed to, 38.
specific exemption on undistributed income, 89. .
TBUSTS TAXABLE AS CORPORATIONS, WHEN, 127.
TUCKER ACT, 446.
UNCERTIFIED CHECKS IN PAYMENT OF TAX, 405.
UNDISTRIBUTED INCOME OF CORPORATIONS, TAX ON,
495.
UNDISTRIBUTED INCOME OF TRUST ESTATES, 87.
estates administered in foreign countries, 99.
set aside for or credited to beneficiaries, 88.
UNDIVIDED PROFITS AND SURPLUS,
most recently accumulated, 268.
UNEARNED INCREMENT, 350.
UNIFORMITY OF TAX, 493.
UNITED STATES,
certificates of indebtedness in payment of tax, 405.
interest on obligations of, 255.
officers of may inspect returns, when, 398.
suits against, to recover taxes, 446.
UNMARRIED PERSONS,
personal exemption, 37.
may be head of family, 38.
UNPAID ACCOUNTS, 207.
VERIFICATION OF RETURNS, 389.
VIRGIN ISLANDS,
status of citizens and residents, 8.
VOCATIONS, 229.
income from, 235.
VOLUNTARY DESTRUCTION OF PROPERTY, 302.
VOLUNTARY OFFERINGS ARE INCOME, WHEN, 231.
VOLUNTARY PAYMENT OF TAX UNDER PROTEST, 409.
INDEX
WAGES, 220.
see Compensation.
WAIVING THREE-YEAK LIMITATION. IIT,.
WAR EXCESS PROFITS TAX,
administrative provisions, 533.
annual returns, 532.
corporation, 505.
deductions, 527.
of business having nominal capital, ":'.".
specific exemption, 529.
domestic corporations,
lift income of, 509.
for prewar period, .~>lii.
foreign corporations,
net income of, 511.
1:1 1 statement, 504.
individuals, 506.
net income of, 512.
invested capital, 512.
average for year, 513.
borrowed money not included, 513.
business carried on by successor, .11 I .
investment in bonds not included, when. Til.;.
investment in certain assets not included. .">]::.
investment in stocks not included, 51.'!.
invested capital of corporations and partnerships, 515.
actual cash paid in, 51-*..
franchise, 518.
good-will, 517.
intangible property. .~>18.
patents and copyrights, ."17.
surplus and individual profit.-, .">jn.
tangible property paid in, ."Hi.
t r.-idehrands. " 1 *v
trademarks, 517.
invested capital of foreign cor|.or:it ion-, .',;!:;.
invested capital of individuals, 523.
invested capital of non-resident alien-, ."c'l'i.
nominal capital, 526.
occupations, 508.
partnerships, 506.
net income of, 511.
prewar period, 508.
professions, 508.
rate of tax, 530.
in case of nominal capital,
tax paid under former law, 532.
taxable year, f>07.
F. I. Tax. 42
658 INDEX
WAR EXCESS PROFITS TAX Cont.
trade and business, 508.
United States, 507.
WAR INCOME TAX, 1.
WARD, 76.
WEARING APPAREL,
depreciation on, when, 348.
WIDOW,
may be head of family, 38.
of alien, 42.
WIDOWER,
may be head of family, 38.
WITHHOLDING AGENTS,
defined, 463.
duties of, 478.
may also be held to be resident agents, 59.
penalty for failure to file returns, 423.
WITHHOLDING AT THE SOURCE, 12.
WORTHLESS DEBTS,
capital, representing, 342.
citizens and residents, deduction by, 34.
how determined, 343.
income, representing, 342.
must be charged off, 343.
non-resident aliens, deductible by, 54.
recoveries of, 284.
reserves for, not deductible, 300.
two class, distinction, 342.
WORTHLESS STOCK, 341.
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