Treasury Department : : Bureau of Internal Revenue BULLETIN "E" INCOME TAX TAXES DEDUCTIONS AND CREDITS REVENUE ACT OF 1918 This Bulletin contains information from which taxpayers and their counsel may obtain the best available indication of the trend and tendency of official opinion in the admin- istration of the income and profits tax provisions of the Revenue Act of 1918, with respect to deductions and credits for taxes. It does not have the force or effect of a Treasury Decision and does not commit the Department to any interpretation of law which has not been formally approved and promulgated by the Secretary of the Treasury Taxpayers and officers of the Bureau of Internal Revenue are cautioned against reaching a conclusion in any case merely on the basis of similarity to conditions stated herein and should base their judgment on the application of all pertinent provisions of the law. regulations, and other Treasury Decisions to all of the facts in each case of Californi Q Regional FacJi- WASHINGTON GOVERNMENT PRINTING OFFICE 1920 Treasury Department : : Bureau of Internal Revenue BULLETIN "E" INCOME TAX TAXES DEDUCTIONS AND CREDITS REVENUE ACT OF 1918 This Bulletin contains information from which taxpayers and their counsel may obtain the best available indication of the trend and tendency of official opinion in the admin- istration of the income and profits tax provisions of the Revenue Act of 1918, with respect to deductions and credits for taxes. It does not have the force or effect of a Treasury Decision and does not commit the Department to any interpretation of law which has not been formally approved and promulgated by the Secretary of the Treasury Taxpayers and officers of the Bureau of Internal Revenue are cautioned against reaching a conclusion in any case merely on the basis of similarity to conditions stated herein and should base their judgment on the application of all pertinent provisions of the law, regulations, and other Treasury Decisions to all of the facts in each case WASHINGTON GOVERNMENT PRINTING OFFICE 1920 INTRODUCTION. This bulletin is designed to be an aid in ascertaining the proper deductions and credits for taxes. Part I iflfltee to the deduction of taxes and Part II to credit for taxes. The rulings are assembled first as they apply to individual citizens and residents of the United States. Next in order follow rulings relating to nonresident alien individuals, fiduciaries, partnerships, and personal service corporations, domestic corporations, and foreign corporations. The references to sections and articles relate to the sections and articles of the J^evenue Act of 1918 and Regulations 45, respectively. SEPTEMBEr I., 1920. (2) CONTENTS. Tagr. Introduction 2 PART I. DEDUCTIONS ALLOWED: TAXES. Section 214(a)3, Revenue Act of 1918 5 Citizens and residents of the United States 5 Taxes paid and taxes accrued 5 War taxes under the Revenue Act of 1918 6 Schedule of taxes, Titles V, VI, VII, VIII, IX, X, XI, and XII, Revenue Act of 1918 30 Additional income taxes, 1913 and 1916 Acts 6 Taxes paid by lessee in addition to rent 7 Taxes on bank stock 7 State secured debts law 7 Wisconsin bonus law 7 Iowa automobile taxes 7 Automobile license fees 8 Assessments for local benefits 8 Assessments for local benefits paid by tenant 8 Drainage assessments 9 New York State franchise tax 9 New York State personal income tax 9 Foreign taxes 9 Nonresident aliens 10 Section 217, Revenue Act of 1918 10 Return required 10 Deductions allowed 10 Fiduciaries 10 Inheritance taxes 10 Decedent's taxes paid by fiduciary 11 Federal estate tax 11 Interest on overdue estate tax 11 Partnerships and personal service corporations 12 Corporations 12 Section 234(a)3, Revenue Act of 1918 12 Domestic corporations 13 Additional taxes, 1909, 1913, and 1916 Acts 13 Ten per cent tax on undistributed net income, 1917 Act 13 Munitions tax 13 Import or tariff duties 13 Business, license, privilege, and stamp taxes 13 Taxes on bank stock ^ 1 . 13 Capital-stock tax 14 Cuban tax imposed on corporations operating sugar plantations 14 Corporations issuing tax-free covenant bonds 14 Addition to tax for delinquency or fraud 14 Foreign corporations 15 (3) PART II. CREDIT FOR TAXES. Tag*. Section 222(a), Revenue Act of 1918 10 Meaning of term "amount of * * * taxes paid during the taxable year".. 17 Analysis of credit for taxes 17 Citizens of the United States 17 Alien residents of the United States 17 Countries which do or do not satisfy the similar credit requirement of section 222(a)3 of the Revenue Act of 1918 17 Conditions of allowance of credit 18 Taxes paid 18 Taxes accrued 19 Bond 19 Citizens of the United States residing abroad 19 Foreign tax withheld in lump sum from dividends paid to stockholders in the United States. . 19 Taxes paid by citizens of the United States to foreign countries 20 Credit for tax withheld at source 20 Section 221(d), Revenue Act of 1918 20 Deduction not allowed for payment of tax 20 Where no liability for normal tax in personal return 21 Corporations: Section 238, Revenue Act of 1918 21 Procedure for securing credit 21 Domestic corporation affiliated with foreign corporation 21 Domestic corporation stockholder in foreign corporation 22 Taxes paid by a foreign subsidiary 22 Credit under section 240(c) , Revenue Act of 1 918 23 Taxes paid to Philippine Government 23 Redetermination of tax when credit taken proves incorrect 23 Credits allowed corporations in computing income tax 23 Section 236, Revenue Act of 1918 23 Domestic corporations 24 Foreign corporations 24 Corporation with fiscal year ending in 1918 24 Penalty for delinquency or fraud 24 Credit for excess taxes paid 24 Section 252, Revenue Act of 1918 24 Claim for credit of tax erroneously collected 25 Action on claims for credit 25 Effect of filing claim for credit 26 Credit of overpayment of tax on stock dividends 26 Overpayment by members of partnership which was later incorporated 28 Ten per cent tax on undistributed net income, 1917 Act 29 Credit allowed only for tax actually ascertained to be in excess of amount due 29 Excess profits tax paid by partnership on 1918 income 29 PART I. DEDUCTIONS ALLOWED: TAXES. SEC. 214. (a) That in computing net income there shall be allowed as deductions: * * * * * (3) Taxes paid or accrued within the taxable year imposed (a) by Section 2l4(a)3, .-> ,, ., , ,, TT .. , , , .. ~, j Revenue Act of the authority of the United States, except income, war profits and 1913. excess profits taxes; or (b) by the authority of any of its possessions, except the amount of income, war profits and excess profits taxes allowed as a credit under section 222; or (c) by the authority of any State or Territory, or any county, school district, municipality, or other taxing subdivision of any State or Territory, not including those assessed against local benefits of a kind tending to increase the value of the property assessed; or (d) in the case of a citizen or resident of the United States, by the authority of any foreign country, except the amount of income, war profits and excess profits taxes allowed as a credit under section 222; or (e) in the case of a nonresident alien indi- vidual, by the authority of any foreign country (except income, war profits and excess profits taxes, and taxes assessed against local benefits of a kind tending to in crease the value of the property assessed), upon property or business; : * ' *. INDIVIDUALS. The taxes which may be deducted by individual ^^ ? the citizens and residents of the United States in rendering Unlted states. their personal income tax returns consist of all taxes paid or accrued within the period for which the return is made that are not specifically excluded by section 214 (a)3. The statute provides for the deduction of taxes paid or accrued within the taxable year. A taxpayer whose D ^ t a accounts are kept on the basis of cash receipts and dis-^^Sf his ac ~ bursements is entitled to deduct taxes actually paid within the taxable period for which return is made, whereas a taxpayer whose accounts are kept on the accrual basis is required to deduct taxes accrued, whether or not actually paid, within such period. A tax is de- ducted when it is subtracted from the gross income of the individual in computing his net income subject to tax, thus serving to reduce the net income, whereas a tax is credited when it is applied against the total tax due on his return, thus serving to reduce the total tax payable on the return by the amount so credited. (5) io%Ted r by ax thl A taxpayer may claim as a deduction the amount of Revenue Act of war tax pa ^ on f ac iiiti e s furnished by public utilities, which mcludes tax on railroad and steamship fares, and the war tax paid on admissions and dues. A taxpayer claiming this deduction must keep some record of such taxes paid; a mere estimate will not be sufficient. The war excise taxes imposed by section 904 and paid by the purchaser are deductible, but the war excise taxes imposed by section 900, which are levied against and paid by the manufacturer, producer, or importer, are not de- ductible by the individual purchaser. On certain classes of merchandise the excise tax is levied against the manufacturer, producer, and importer; on other classes of merchandise it is levied against the vendor who sells for consumption or use; and on still others it is levied against the purchaser. In determining who is entitled to the deduction for taxes so levied and which have been paid on the purchase or sale of mer- chandise, one must be guided in all cases by the general rule that the person against whom the tax is levied is entitled to the benefit of the deduction therefor. The sales tax on jewelry is levied directly against the dealer who sells for consumption or use and he alone is entitled to the benefit of the deduction. The tax is measured by the price for which the article is sold. If the price of a taxable article is increased to cover the tax, the tax is on such increased price. The profit to be returned from the sale in such case is determined by a comparison of the cost to the dealer and the actual sales price, including the amount added to the list price to offset the tax which he is required to pay. Where, however, the tax is billed to the consumer as a separate item such amount need not be included in the price for which the article is sold in determining the profit derived from the sale thereof, but the dealer may not take a deduction in respect of such taxes unless he includes the amount of them in his gross income. Further information concerning the different taxes im- posed by the Revenue Act of 1918 may be obtained from the schedule on pages 30 to 39 of this Bulletin. Additional m- Additional income tax assessed against a taxpayer u^dcr ta i9i3 le and upon the basis of his returns filed under the Acts of October 3, 1913, and September 8, 1916, due to the correction of errors made in preparing such returns, are deductible only if paid prior to January 1, 1917, since the Acts in effect for 1917 and subsequent years prohibit the deduction of Federal income taxes in computing tax- able net income. An individual who leases a house and in addition to paying rent therefor agrees to pay taxes imposed on the to rent - premises, is not permitted to deduct such taxes in his personal return unless the property is used by him for business purposes. If so, both the rent and taxes may be deducted as a business expense. An amount so paid by the lessee on account of taxes would constitute income to the lessor, and would also be an allowable deduction in the lessor's return unless it represented an assessment for a local benefit, in which event the amount should be reported as income by the lessor, but would not be an allowable deduction. Taxes paid on bank stock by the issuing bank in be- half of the stockholders are deductible in the returns of the stockholders provided they are included in the gross income reported in their returns as dividends. Where under a State law a plan is authorized provid- la | ecured debts ing that the owner of securities of a certain kind may, by making a lump-sum payment, render them exempt for all time from taxation under the laws of the State, the sum so paid is a tax within the meaning of the statute and as such is deductible from the gross income of the payor for the year in which paid. The tax imposed on a taxpayer's 1918 income, under BU W fc^ nsin b0 ' the bonus law of the State of Wisconsin, passed by the State Legislature in September, 1919, does not constitute an allowable deduction in his Federal income tax return for 1918 since it was not a known liability at the time of closing his accounts for that year; however, such tax paid in 1919, is an allowable deduction in the taxpayer's return for 1919. A taxpayer whoso books are kept on the receipts and b nt v a % s sutomo ' disbursements basis may deduct from gross income in his 1919 return automobile taxes levied against him by the State of Iowa for 1919 and 1920, provided he actually paid such taxes during 1919. If the books of the tax- payer are kept on the accrual basis, then only the amount of such tax applicable to the year 1919 may be taken as a deduction in preparing his 1919 income tax return and the amount which represents the 1920 tax may bo deducted in his 1920 return, notwithstanding that ho actually paid the tax for both years in 1919. 8 cens"\ecs bno U " Automobile license foes are ordinarily taxes and when so identified may be deducted from gross income as such. for\ S ocaienciits. Payments made to a State or political subdivision, thereof, in the form of assessments against local benefits of a kind tending to increase the value of the property assessed are not allowed as deductions by the statute. So-called taxes, more properly assessments, paid for local benefits, such as street, sidewalk, and other like improvements, imposed because of and measured by somo benefit inuring directly to the property against which the assessment is levied, do not constitute an allowable deduction from gross income. A tax is considered assessed against local benefits when the property subject to the tax is limited to the property benefited. Special assessments are not deductible, even though an incidental benefit may inure to the public welfare. The taxes de- ductible are those levied for the general public welfare by the proper taxing authorities at a like rate against all property in the territory over which such authorities have jurisdiction. Assessments under the statutes of California relating to irrigation and of Iowa relating to drainage, and under certain statutes of Tennessee relating to levees, are limited to property benefited, and when it is clear that the assessments are so limited, the amounts paid thereunder are not deductible as taxes. When assessments are made for the purpose of maintenance or repair of local benefits, the taxpayer may deduct the assessments paid as an expense incurred in business, if the payment of such assessments is necessary to the conduct of his business. When the assessments are made for the purpose of constructing local benefits, the payments by the taxpayer are in the nature of capital expenditures and are not deductible. Where assess- ments are made for the purpose of both construction and maintenance or repairs, the burden is on the tax- payer to show the allocation of the amounts assessed to the different purposes. If the allocation can not be made, none of the amounts so paid are deductible. Assessments Assessments for local benefits to business property Pa r id ( by 1 traant ts paid by a tenant for his landlord according to agreement are held to be additional rent paid by the tenant, and are therefore deductible by the tenant as business expenses, in computing his taxable net income. The amount so received by the landlord is taxable income to him, but because of its nature is not an allowable deduc- tion in his return. where state drainage laws provide both for special assessments for benefits and for general taxation, depend- ing in some instances upon ordinances promulgated by the trustees of the drainage districts, taxpayers must show in their income tax returns the nature of assess- ments paid under such laws. Any amount representing an assessment for a local benefit would not be deductible. rran e c W hS r t k a x! ate The New York State franchise tax imposed for the privilege of doing business in that State for the fiscal year of the State ending October 31, 1920, is based on 1918 income, but is not due and payable until a later date. A taxpayer making a calendar year return on an accrual basis may deduct two-twelfths of such tax in his return for 1919 and ten- twelfths in his return for 1920. pers e onai r income The New York State personal income tax law, passed May 14, 1919, provides for the imposition of an annual tax upon income, and concludes with the statement that "such tax shall first be levied, collected, and paid in the year 1920, upon and with respect to the taxable income for the calendar year 1919, or for any taxable year ending during the year 1919." A taxpayer of the State of New York, who keeps his accounts upon the accrual basis, may in rendering his Federal income tax return for 1919, deduct the accrued tax for his fiscal year ended in 1919, imposed by the New York State personal income tax law, provided such fiscal year ended subsequent to May 14, 1919, the date of passage of the State taxing act. In case his fiscal year ended prior to May 14, the accrued tax would not be deductible in his Federal income tax return for 1919, since it was not a known liability at the time of closing his accounts for such fiscal year. In the event of judicial interpretation of the New York State personal income tax law which would have the effect of changing the individual's tax liability there- under, it would be necessary for him to file an amended return for Federal income tax purposes. Foreign taxes. Taxes imposed by a foreign country other than assess- ments against local benefits are deductible from gross income, except the foreign income, war profits, and excess profits taxes which are allowed as a credit against the tax. 8937 20 2 10 NONRESIDENT ALIENS. Revenue Act 21 of SEC. 217. That a nonresident, alien individual shall receive the 191$. benefit of the deductions and credits allowed in this title only by filing or causing to be filed with the collector a true and accurate return of his total income received from all sources corporate or otherwise in the United States, in the manner prescribed by this title, including therein all the information which the Commissioner may deem neces- sary for the calculation of such deductions and credits: Provided, That the benefit of the credits allowed in subdivisions (c) and (d) of section 216, may, in the discretion of the Commissioner, and except as other- wise provided in subdivision (e) of that section, be received by filing a claim therefor with the withholding agent. In case of failure to file a return, the collector shall collect the tax on such income, and all property belonging to such nonresident alien individual shall be liable to distraint for the tax. iX-ed Urn re " ^ ie Benefits of the deductions and credits allowed against net income for the purpose of the normal tax may not be received by a nonresident alien by filing a claim with the withholding agent, but only by claiming them upon filing a return of income, except as permitted in article 316, relating to the credit for personal exemp- tion and for dependents. aibwcd uctions ^ nonresident alien, in making a return of his income from sources within the United States, may deduct taxes paid to a foreign country if and to the extent that they are connected with the income arising from sources within the United States; however, he is not entitled to deduct foreign income and profits taxes, or foreign taxes assessed against local benefits of a kind tending to increase the value of the property assessed. Otherwise the same general rules applicable to a citizen or resident of the United States govern the computation of the deduction allowed a nonresident alien on account of taxes. FIDUCIARIES. Section 225 provides that fiduciaries shall be subject to all the provisions of the Act which apply to individuals; therefore, the deduction which a fiduciary may claim on account of taxes is subject to the same rules as laid down in the case of an individual. State inheritance taxes paid by the executor or ad- ministrator of the estate of a deceased person, which are provided by law to be deducted from the respective legacies or the distributive shares, are not allowable inheritance deductions in computing the net income of such estate subject to tax, even though the will contains a direction 11 to pay inheritance taxes out of the residue. Neither is the amount of such tax an allowable deduction in the returns of the distributees or legatees, since it is imposed upon the transfer of the property before it reaches them. A testator died September 30, 1918, having kept his books on the accrual basis. Taxes assessed against him fl< * uciar y- and paid by his executor should be claimed as a deduc- tion, in accordance with section 214(a)3 of the Revenue Act of 1918, in the return rendered by the executor in his behalf for the period ending September 30, 1918. In a similar case, if the decedent's books of account were kept on the basis of cash receipts and disbursements, the executor should claim such taxes paid as a deduction in the return of the estate in process of administration for the period beginning at the date of decedent's death. The Federal estate tax is not deductible in Computing ts ^ agnl estate the taxable net income of an estate in process of admin- istration. The estate tax is entirely separate and distinct from the income tax. In substance, the Government collects a tax on the income accruing up to the moment of death. It then takes out of the estate a certain part as a transfer tax. The remainder passes and becomes the estate, the income of which is taxable while it is being administered. When the estate passes into the possession of an execu- tor, he holds for the United States that portion which is required to be deducted as a transfer tax. The remain- der is the estate which he holds for creditors and bene- ficiaries, and the income of which is taxable. When he pays to the Government that which he has been holding for it, he pays nothing out of the estate the income of which is subjoct to tax. The law separates this part of the original estate from that part which is to be treated as the estate for purposes of income taxes. The reasons leading to the ruling with reference to the principal part of the Federal estate tax are equally appli- cable to interest thereon. Deduction of the tax is re- fused for the reason that it is imposed upon the privilege of transmission and receipt of the property left by the decedent, and that the "estate during the period of administration or settlement," the income of which is taxed (Revenue Act of 1918, sec. 219(a)l), does not come into existence until the satisfaction of this tax. It follows that the "estate" in question does not pay the tax, and the case is consequently not within the provi- 12 sion relating to "taxes paid within the taxable year" (sec. 214 (a)3), since this provision plainly refers to a tax paid Inj the taxpayer taking the deduction. The statute also permits the deduction of "interest on indebtedness'' (sec. 214 (a)2). The item in question is "interest." It is not, however, interest "on indebted- ness" of the estate. As already indicated, the entire tax, principal and interest, is satisfied before the "estate" comes into existence. If the obligation is not as to the "estate" a "tax," neither is it an "indebtedness." It is held, therefore, that interest on unpaid estate tax is not deductible from gross income of the estate in process of administration in determining taxable net income. PARTNERSHIPS AND PERSONAL SERVICE CORPORATIONS. Partnerships and personal service corporations as such are not subject to taxation under the Revenue Act of 1918, but are required to render returns of income. The net income is computed in the same manner and on the same basis as the net income of an individual, except that the deduction of contributions or gifts is nob per- mitted. Therefore taxes of a partnership or a personal service corporation may be deducted from gross income to the same extent as provided in the case of individuals. CORPORATIONS. SEC. 234. (a) That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions: ***** Section 234 (a) (3) Taxes paid or accrued within the taxable year imposed (a) by o'fiois. the authority of the United States, except income, war profits and excess profits taxes; or (b) by the authority of any of its possessions, except the amount of income, war profits and excess profits taxes allowed as a credit under section 238; or (c) by the authority of any State or Territory, or any county, school district, municipality, or other taxing subdivision of any State or Territory, not including those assessed against local benefits of a kind tending to increase the value of the property assessed; or (d) in the case of a 'domestic corporation, by the authority of any foreign country, except the amount of income, war profits and excess profits taxes allowed as a credit under section 238 ; or (e) in the case of a foreign corporation, by the authority of any foreign country (except income, war profits and excess profits taxes, and taxes assessed against local benefits of a kind tending to increase the value of the property assessed), upon the property or business: Provided, That in the case of obligors specified in subdivision (b) of section 221 no 13 deduction for the payment of the tax imposed by this title or any other tax paid pursuant to the contract or provision referred to in that subdivision shall be allowed ; * * *. DOMESTIC CORPORATIONS. The allowable deduction for taxes in a corporate return is limited to the items specified in section 234 (a) 3. Additional excise tax assessed against a corporation, Add ,JJL io , a o 1 r taxes, 1909, 1913, under section 38 of the Act of August 5, 1909, and paid and 1916 Acts - during subsequent years is an allowable deduction from the gross income reported in the corporation's return for the year in which paid; but income taxes assessed under the Acts of October 3, 1913, and September 8, 1916, are deductible only if paid prior to January 1, 1917. The 10 per cent tax imposed on the undistributed net Tenpercenttax * ... .. on undistributed income of corporations by section 10(b) of the Revenue et t income, 1917 Act of 1917 is not an allowable deduction from gross income of a corporation shown on an income tax return. A corporation may not accrue munitions taxes for 1916 Munitions tax. and 1917 and deduct the amount so accrued during each year in its munitions tax return for that year before the final computation of the munitions tax is made. The munitions tax as finally computed must be de- ducted in the income tax return (but not in the munitions tax return) for the year in which the tax is accrued, irre- spective of the year in which the tax is actually paid. Munitions taxes for 1916 which are actually paid in 1917 are properly deductible in computing the munitions tax for the calendar year 1917. (This paragraph and the two preceding paragraphs have no application to any return filed under the Revenue Act of 1918.) Import or tariff duties paid to the proper customs . import or tana duties; business, officers, and business, license, privilege, and stamp taxes paid to collectors of internal revenue are deductible as taxes imposed by the authority of the United States, pro- vided they are not added to and made a part of the ex- penses of the business or the cost of the articles or mer- chandise with respect to which they were paid, in which case they can not be deducted separately under taxes. Banking and other corporations which pay taxes ta e * nk - stock assessed against their stockholders on account of their ownership of the shares of stock issued by such corpora- tions may not deduct the amount of taxes so paid. The shares of stock are the property of the stockholders who are primarily liable for payment of the tax. The amount 14 of tax so paid by the corporation is in the nature of an additional dividend and should be so reported by the stockholder, but he may deduct the amount of the tax from his gross income in accordance with section 2 14 (a) 3. - stock rpj^ Ca pit a l- S tock tax imposed by section 1000 of the Revenue Act of 1918, may, for the purpose of computing income subject to income, excess profits, and war profits taxes, be deducted from the gross income for the year for which such taxes accrue, if the accounts of the corporate taxpayers are kept on the accrual basis, or may be deducted from gross income for the year in which paid, if the accounts are kept on the receipts and disburse- ments basis. sugar 1 ! 311 tax n The Republic of Cuba (act of July 31, 1917), imposes on all corporations operating sugar plantations in Cuba a tax on each bag of sugar produced. As this tax is based on production, not on income, and is in the nature of an excise tax, a domestic corporation may, under the provisions of section 234 (a)3 of the Revenue Act of 1918, deduct from gross income in its return to the United States Government the amount of such tax paid to the Cuban Government, but may not claim the amount as a credit under section 238 against the total tax due to the United States. issufn^tax^fire In the case of corporations issuing bonds or obligations covenant bonds, containing a tax-free covenant clause no deduction from gross income is allowed for the payment of the income tax or any other Federal tax paid pursuant to such covenant. In the case, however, of corporate bonds or obligations containing an appropriate tax-free covenant clause, the corporation paying a State tax or any other than a Federal tax for some one else pursuant to its agreement may deduct such payment as interest paid on indebted- ness. for Ad diunquency Tnc addition to tax authorized to be assessed by scc- or fraud. ^ on 317^ Revised Statutes, as amended, on delinquent or false and fraudulent returns is to be considered a penalty and not a tax 'except for purposes of collection. The payment representing an addition to tax for de- linquency in filing a return may be deducted from gross income as a business expense when such an addition to tax is an incident to carrying on a business or trade. The payment of an addition to tax upon a false return may not ordinarily be deducted from gross income as a 15 business expense and may never be deducted in the case of an individual who himself was guilty of making a fraudulent return. FOREIGN CORPORATIONS. Foreign corporations are allowed the same deductions i from their gross income arising from sources within the United States as are allowed to domestic corporations to the extent that the deductions are connected with such gross income. Full deduction may be made for taxes imposed by the United States or any of its pos- sessions or by any State, Territory, or political subdi- vision thereof except taxes for local benefits and income, war profits, and excess profits taxes. PART II. CREDIT FOR TAXES. INDIVIDUALS. Revenue S*ot SE ' 222 ^' That the t&X com P uted under Part TI of this title sha11 19U. be credited with: (1) In the case of a citizen of the United States, the amount of any income, war profits and excess profits taxes paid during the taxable year to any foreign country, upon income derived from sources therein, or to any possession of the United States; and (2) In the case of a resident of the United States, the amount of any such taxes paid during the taxable year to any possession of the United States; and (3) In the case of an alien resident of the United States who is a citizen or subject of a foreign country, upon income derived from sources therein, if such country, in imposing such taxes, allows a similar credit to citizens of the United States residing in such country; and (4) In the case of any individual who is a member of a partnership or a beneficiary of an estate or trust, his proportionate share of such taxes of the partnership or the estate or trust paid during the taxable year to a foreign country or to any possession of the United States, as the case may be. (b) If accrued taxes when paid differ from the amounts claimed as credits by the taxpayer or if any tax paid is refunded in whole or in part, the taxpayer shall notify the Commissioner, who shall redetermine the amount of the tax due under Part II of this title for the year or years affected, and the amount of tax due upon such redetermination, if any, shall be paid by the taxpayer upon notice and demand by the collector, or the amount of tax overpaid, if any, shall be credited or refunded to the taxpayer in accordance with the provisions of section 252. In the case of such a tax accrued but not paid, the Commissioner as a condition precedent to the allowance of this credit may require the taxpayer to give a bond with sureties satisfactory to and to be approved by the Commissioner in such penal sum as the Commissioner may require, conditioned for the payment by the taxpayer of any amount of tax found due upon any such redetermination; and the bond herein prescribed shall contain such further conditions as the Commissioner may require. (c) These credits shall be allowed only if the taxpayer furnishes evi- dence satisfactory to the Commissioner showing the amount of income derived from sources within such foreign country or such possession of the United States, and all other information necessary for the com- putation of such credits. (16) 17 The "amount of * * * taxes paid during the tax- ter ^ eaning of able year" means taxes proper paid or accrued during the taxable year on behalf of the individual claiming credit, no credit being given for amounts representing interest or penalties. ANALYSIS OF CREDIT FOR TAXES. In the case of a citizen of the United States, whether u2tSstats. thc resident or nonresident, the basis of the credit for taxes is as follows: (a) ''The amount of any income, war profits and ex- cess profits taxes paid" or accrued "during the taxable year * * * to any possession of the United States." (b) "The amount of any" such taxes paid or accrued ''during the taxable year to any foreign country, upon income derived from sources therein." (c) The "proportionate share of" any "such taxes of" a partnership of which he is a partner or of an estate or trust of which he is a beneficiary paid or accrued "during the taxable year to a foreign country or to any possession of the United States, as the case may be." In the case of an alien resident of the United States the , A1 n residents of the Tjmtcd basis of the credit for taxes is as follows: (a) "The amount of any income, war profits and ex- cess profits taxes paid" or accrued "during the taxable year * * * to any possession of the United States." (b) "The amount of any such taxes paid" or accrued "during the taxable year to" the country of which he is a citizen or subject "upon income derived from sources therein, if such country, in imposing such taxes, allows a similar credit to citizens of the United States residing in such country." (c) The "proportionate share of" any "such taxes of" a partnership of which he is a partner or of an estate or trust of which he is a beneficiary paid or accrued "during the taxable year to" the country of which he is a citizen or subject ("if such country, in imposing such taxes, allows a similar credit to citizens of the United States residing in such country"), "or to any possession of the United States as the case may be." The following is an incomplete list of the countries do o un do ics ot 1 sat > which satisfy the similar credit requirement of section isf ^ ^ similar , J c r e d 1 1 require- 222(a)3 of the Kevenuc Act of 1918, either by allowing ment - to citizens of the United States residing in such countries 8937 20 3 18 a credit for the amount of income, war profits, or excess profits taxes paid to the United States upon incomes derived from sources therein, or, in imposing such taxes, by exempting from taxation the incomes received from sources within the United States by citizens of the United States residing in such countries: Bulgaria, Canada, Italy, Newfoundland, Salvador. The following is an incomplete list of the countries which do not satisfy the similar credit requirement of section 222 (a)3 of the Revenue Act of 1918, either by allowing no credit to citizens of the United States re- siding in such countries for the amount of income, war profits, or excess profits taxes paid to the United States upon incomes derived from sources therein, or because such countries do not impose any income, war profits, or excess profits taxes: Argentina, Bahama, Belgium, Ber- muda, Bolivia, Bosnia, Brazil, Chile, China, Costa Rica, Ecuador, Egypt, Finland, France, Great Britain and Ire- land, Guatemala, Herzegovina, India, Jamaica, Japan, Montenegro, Morocco, New Zealand, Nicaragua, Panama, Paraguay, Persia, Peru, Portugal, Roumania, Santo Domingo, Serbia, Siam, Sweden, Switzerland, Venezuela. The former names of certain of these territories are here used for convenience in spite of the actual or possible change in the name or sovereignty. A resident of the United States who is a citizen or subject of any country bi the first list is entitled, for the purpose of the total tax due the United States, for 1918 and subsequent years, to a credit for the amount of any income, war profits, and excess profits taxes paid or accrued during the taxable year to such country upon income from sources therein. If he is a citizen or sub- ject of any country in the second list, he is not entitled to such credit. If he is a citizen or subject of a country which is in neither list, then to secure the desired credit he must prove to the satisfaction of the Commissioner that his country satisfies the similar credit requirement of the statute. CONDITIONS OF ALLOWANCE OF CREDIT. Taxes paid. When credit is sought for income, war profits, or excess profits taxes paid other than to the United States, the income tax return of the individual must be accompanied by Form 1116, carefully filled out with all the informa- 19 Taxes accrued. Bond. tion therein called for and with the calculations of credits indicated. It must also be signed and duly sworn to or affirmed. If the taxes for which credit is sought have been paid, there must be attached to Form 1116 the receipt for each such tax payment. When credit is sought for taxes accrued but not paid, the form must have attached to it the return on which each such accrued tax was based. The receipt or return so attached must be either the original, a duplicate original, a duly certified or authenticated copy, or a sworn copy. In case only a sworn copy of a receipt or return is attached, there must be kept readily available for comparison on request the original, a duplicate original, or a duly certified or authenticated copy. In the case of a credit sought for a tax accrued but not paid, the Commissioner may require as a condition precedent to the allowance of credit a bond from the tax- payer in addition to Form 1116. If such a bond is re- quired, it shall be on Form 1117. It shall be in such penal sum as the Commissioner may prescribe and shall be conditioned for the payment by the taxpayer of any amount of tax found due upon any redetermination of the tax made necessary by such credit proving incorrect, with such further conditions as the Commissioner may require. This bond shall be executed by the taxpayer, his agent or representative, as principal, and by sureties satisfactory to and approved by the Commissioner. See section 1320. Income and profits taxes paid to a foreign country by a citizen of the United States residing in such foreign country on income from sources within the United States can not be treated as a credit under section 222. Such taxes are deductible under section 214 (a)3 in computing net income in his return to the United States. Where under a foreign income tax law corporations . F r 1 e J i >'" ta * withheld in lump are required to withhold a fixed percentage of the total amount of dividends paid to stockholders in the United States, such tax being withheld in a lump sum, although imposed upon the individual stockholders, the amounts withheld not being itemized by the foreign government, in lieu of the individual tax receipts required to bo attached to Form 1116, the taxpayer may attach to the return on Form 1116 his affidavit showing the number of shares held during the year, whether or not any of the Citizens of the United Stales re- siding abroad. 20 shares held by him were acquired or sold during the year, giving the dates and number of shares so acquired or sold; the 1 total number of shares outstanding on which the dividend was declared regardless of whether the dividend was paid to citizens of the United States or of other countries; and the total dividends paid or accrued on such shares during the year, and attach to and make a part of such affidavit a certified copy of the tax receipts from the foreign tax collector showing the payment of the tax en bloc, with copies of any other docu- mcnts which he may have that will serve to corroborate the facts set forth in such affidavit. The amount of the credit claimed should be computed by dividing the total tax withheld by the total number of shares of the corporation outstanding and multiplying this result by the number of shares held during the entire } r ear. In the event that any of the shares were acquired or disposed of during the year, an adjustment should be made showing the amount of taxes properly allocated to the dividends received after acquisition or before dispo- sition of the stock. citizens 5 P of id the -^J income or profits taxes paid by a citizen of the ntries United States to a foreign country, with respect to income received from sources therein, are an allowable credit under section 222 (a) against the amount of tax due the United States provided the taxpayer's books of account are kept on the cash receipts and disbursements basis and his return is rendered accordingly; if the tax- payer's books of account are kept on the accrual basis the credit is limited to such foreign taxes as accrued in the taxable year for which the return is rendered. CREDIT FOR TAX WITHHELD AT SOURCE. section 22i(d>, Section 221 (d) provides that "income upon which any Revenue Act Of . -TTTT i 11- 1913. tax is required to be withheld at the source under this section shall be included in the return of the recipient of such income, but any amount of tax so withheld shall be credited against the amount of income tax as computed in such return." Deduction not The entire amount of the income from which the tax allowed for pay- . . . mentcftax. was withheld shall be included in gross income without deduction for such payment of the tax, but any tax actually so withheld shall be credited against the total tax as computed in the taxpayer's return. 21 The amount of normal income tax paid at the source C ri by a debtor corporation in behalf of a bondholder may be Hf^ pcrsonal credited against the total tax due from the bondholder even though he may be liable for surtax only. CORPORATIONS. SEC. 238(a). That in the case of a domestic corporation the total j^uuV A " t 23 of taxes imposed for the taxable year by this title and by Title III shall 1018. be credited with the amount of any income, war profits and excess profits taxes paid during the taxable year to any foreign country, upon income derived from sources therein, or to any possession of the United States. If accrued taxes when paid differ from the amounts claimed as credits by the corporation, or if any tax paid is refunded in whole or in part, the corporation shall at once notify the Commissioner who shall redetermine the amount of the taxes due under this title and under Title III for the year or years affected, and the amount of taxes due upon such redetermination, if any, shall be paid by the corporation upon notice and demand by the collector, or the amount of taxes over- paid, if any, shall be credited or refunded to the corporation in accord- ance with the provisions of section 252. In the case of such a tax accrued but not paid, the Commissioner as a condition precedent to the allowance of this credit may require the corporation to give a bond with sureties satisfactory to and to be approved by him in such penal sum as he may require, conditioned for the payment by the taxpayer of any amount of taxes found due upon any such redetermination; and the bond herein prescribed shall contain such further conditions as the Commissioner may require. (b) This credit shall be allowed only if the taxpayer furnishes evi- dence satisfactory to the Commissioner showing the amount of income derived from sources within such foreign country or such possession of the United States, as the case may be, and all other information necessary for the computation of such credit. (c) If a domestic corporation makes a return for a fiscal year begin- ning in 1917 and ending in 1918, only that proportion of this credit shall be allowed which the part of such period within the calendar year 1918 bears to the entire period. To secure such a credit a domestic corporation, must Procedure for pursue the same course as that laid down for individuals, S(M except that Form 1118 is to be used for claiming credit and Form 1119 for the bond, if a bond is required. For the purpose of section 238 a domestic corporation Domestic cor- i -i -j. f j.1. x- iff' pcratirn affiliated which owns a majority of the voting stock of a foreign with foreign cor- corporation shall be entitled to credit the income, war pc profits and excess profits taxes paid (but not including taxes accrued) by such foreign corporation during the taxable year to any foreign country or to any possession of the United States upon income derived from sources without the United States in an amount equal to the 22 proportion which the amount of any dividends (not deductible under section 234) received by such domestic corporation from such foreign corporation during the taxable year bears to the total taxable income of such foreign corporation upon or with respect to which such taxes were paid. But in no such case shall the amount of the credit for such taxes exceed the amount of such dividends (not deductible under section 234) received by such domestic corporation during the taxable year. A domestic corporation seeking this credit must comply with the provisions of subdivision (a) of article 383, Regulations 45, which are applicable to credits for taxes already paid, except that in accordance with article 611, Form 1118 is to be used instead of Form 1116. Taxes imposed and required by a foreign government corporation? 811 *' ^ e P^id on the basis of dividends declared by corpora- tions under its laws are taxes on the income of the indi- vidual stockholder in proportion to the amount of stock held. A United States corporation, owning stock in a foreign corporation, taxed on this basis, should report in its annual return of net income for the year in which received its pro rata share of the entire dividend de- clared, and would be entitled to a credit of the amount of the tax paid by the foreign corporation to the foreign government hi its behalf. On the other hand, taxes imposed by a foreign govern- ment on the net incomes of corporations organized under its laws are not taxes to the stockholders, but to the cor- poration itself, and no part thereof would be a proper credit in the return of annual net income of the recipient United States corporation, which would be taxable on the net amount of the dividend received. Taxes paid by The provisions of law (section 240 (c)) and regulations ar} r, forth the full details of dividends received and taxes paid thereon. This claim must be accompanied by a state- ment or certificate from the corporation distributing the dividends, showing the amount distributed to the tax- payer and the years in which profits distributed were earned. Taxpayers on complying with these requirements will be permitted by the collectors to credit the amounts due them against any installment of taxes remaining unpaid. In case the credit to which the taxpayer is entitled ex- ceeds the amount of taxes remaining unpaid, a claim for refund of the difference may be filed. A claim for credit on Form 47-A for tax paid on stock dividends is to be accepted as a suspension of im- mediate collection of tax due only (1) Against income or income and excess profits taxes due and unpaid. (2) If amount claimed as a credit does not exceed the amount of tax collected on the stock dividend less any additional tax due and unpaid upon the sale of stock received as a dividend or stock upon which the dividend was declared. (The basis for determining the gain or loss upon the sale of stock received as a dividend is stated in Regulations 45, article 1547, as amended by Treasury Decision 3059.) (3) When accompanied by an affidavit of the taxpayer (supported by statements from the corporation which distributed the dividends as to the amount distributed to the taxpayer and years in which the profits distributed were earned) covering the following information: (a) Whether the dividend consists of stock of the cor- poration distributing the dividend to the taxpayer or of stock of another corporation acquired by the distributor. (&) The name of each corporation declaring, the decla- ration of, and the date of receipt by the taxpayer of, the stock dividends, the tax on which was paid and is covered by the claim. (c) The year in which the stock dividend was included in the taxpayer's return of income. (d) The number of shares the taxpayer received and the value placed upon the dividend in the return. (If no sale of stock was made, the taxpayer need not furnish the following information.) (e) If any sale has been made of stock of the corpora- tion declaring the dividends, whether the stock be that acquired by a dividend, or upon which the dividend was declared, state (1) The number of shares sold. (2) The selling price. (3) The date or dates of sale. (4) The portion, if any, of the selling price included as taxable profit in the return of net income for the year the sale was made and the item in the return under which the amount was reported. (/) State how many shares of stock the taxpayer owned at the time he received the first stock dividend; how much that stock cost the taxpayer, and the date the stock was acquired. (If acquired prior to Mar. 1, 1913, state its value on that date and manner of determining the value.) (g] State separately the dates from March 1, 1913, upon which you received stock dividends, the number of shares received on each date, and the names of the corporations distributing the dividends. The receipt or canceled check covering the payment of tax involved in the claim should be attached to the claim. Returns for 1918 were filed for a partnership and its faTer Wh l C nco V r- mem ^ ers * n accordance with the Revenue Act of 1917, porated. prior to the passage of the Revenue Act of 3918, and tax paid accordingly. The partnership was incorporated prior to July 1, 1919, and elected to be taxed as a cor- poration under the provisions of paragraph 3, section 330, Revenue Act of 1918. Amended returns for 1918 showing overpayment of tax were filed by the partners. There is no provision in the law whereby either the tax paid by the partnership or any excess tax paid by the partners may be credited against any tax liability of the successor corporation for any year. Remedy may be sought only by the partnership and the individual members thereof filing claims for the refunding of any excess tax paid. 29 The tax imposed on undistributed net income of a corpo- ta ^ e r ^ J^ist ration by section 10(b) of the Act of September 8, 1916,^?^ inco as amended by the Act of October 3. 1917, is held to bo an income tax within the meaning of section 252 of the Revenue Act of 1918 and any overpayment of such tax may. therefore, be credited against an additional amount of income tax due from the taxpayer within the statutory limitation. It has been suggested that under the provisions section 252 of the Revenue Act of 1918 the taxpayer ?" should be allowed a credit for any amount claimed in amouat due - good faith to have been erroneously paid against taxes due from him under any other return, pending the de- cision upon such claim. Such procedure is manifestly not authorized by said section. It provides only for the allowance of the credit when "it appears that an amount of income, war profits or excess profits tax has been paid in excess of that properly due." If this phrase standing by itself be capable of more than one interpre- tation, its interpretation here is fixed by the following provision that "The amount of the excess shall be credited against any income, war profits or excess profits taxes or installments thereof then due from the taxpayer under any other return." It is only the amount of the excess which can be credited against assessments upon another return and the amount of the excess can only be known when the merits of the claim for refund have been determined. It is clear then that the word "appears" as used in this section is equivalent to "has been ascertained." This section, therefore, authorizes the credit only of the amount of taxes actually ascertained to have been paid in excess of those due against taxes due upon any other return. Excess profits tax paid by a partnership with respect t a xpa? or fraction thereof, over 400,000 cigars. Manufacturers of tobacco whose annual sales exceed 200,000 pound?, plus 16 cents t>er thousand pounds, or frac- tion thereof over 200,000. 6 cents. Per 10,000, or fraction thereof, of ciga- rettes, including small cigars weigh- ing not more than 3 pounds per thou- sand. Person, ration, ganiz paying lax. corpo- nr or- at ion the Use of yachts, power boats, etc. $1 per foot, lennth not over 50 feetf$2 per foot, length over 50 and not over 100 feet; $4 per foot, length over 100 feet. Yachts, pleasure boats, power boats, motor boats with fixed engines, and sailing vessels of over 5 not tons, not used exclusively for trade, fishing, or national defense nor built accord- ing to plans and specifications ap- proved by the Navy Department. Motor boats of not over 5 net tons with fixed engines. Opium and \ preparations I l cent per ounce or containing opium or its derivatives. Importer, pro- ducer, manu- fact urer, dealer, or dis- penser. Doing busi- ness. any fraction of an ounce in a package. Opium, coca leaves, or any compound, salt, derivative, or preparation there- of, produced in or imported into the United States and sold or removed for consumption or sale. $24 per annum. Every person who imports, manufac- tures, produces, or compounds opium or coca leaves or any compound, man- ufacture, salt, derivative, or prepara- tion thereof. $12 per annum. Wholesale dealers in the aforesaid drugs or preparations. JG per annum. Retail dealers. t3 per annum. Physicians, dentists, veterinary sur- eeons, and other practitioners law- fully entitled to distribute, dispense, give away, or administer any of the aforesaid drags to patients in the course of their professional practice. Parcel post packages. 1 cent on each 25 cents postage or fraction thcrCDf. Parcel post packages transported from one point in the United. States to an- other, postage amounting to 25 cents or more. 2 cents per share. Capital stock without par cr face value sales cr transfers. Persons against whom the tax is levied. Capital stock. ?. cents on each $100 face value or frac- tion thereof. Capital stock: Sales or transfers, agree- ments to sell, memoranda of sales or deliveries, or transfers of Icgil title to shares or certificates of stock, etc. (See sec 1107, subdiv 4.) Produce. 2 cents on each $100 in value of merchan- dise and each $100 or fraction thereof in excess of ilOO. Produce, sales of, on exchange. Upor: each sale or agreement to sell (not in- cluding so-called scratch sales). Ex- ceptions: Transfers to clearing house after tax has been paid and salcj for immediate or prompt delivery. Schedule of taxes imposed by Titles V, VI, VII, VIII, IX, X, XI, and XII, Revenue Act 0/1918, ivhich are deductible under sections 214 (a) 3 and 234 (a) 3 Continued. Tax deductible by- Tax levied upon Rate of tax. Explanation. Sec- tion of 1918 Act Drafts or checks. 2 cents. Drafts or checks (payable otherwise th.n m sight or on demand) upon their acceptance or delivery within the United States, whichever is prior, promissory notes, except bank notes issued for circulation, and for each re- newal of the same, for a sum not ex- ceeding 8100; also 2 cents for e-vch additional $100 or fractional part thereof. Insurance pol- icies. 3 cents on each $1 of premium charged under each policy of insurance. (See sec. 1107, subdiv. 15.) Policy of insurance or its equivalent is- sued to or for or in the name of a domes- tic corporation or partnership or an individual resident of the United States by any foreign corporation or partnership or any individual not a resident of the United States, when such policy or other instrument is not signed or countersigned by an officer or agent of the insurer in a State, Terri- tory or district of the United States within which such insurer is author- ized to do business. 5 cents per share. Capital stock issued; without face value. Capital stock. 5 cents on each $100 actual value and on each $100 or fraction thereof in excess of $100. Capital stock issued without face value: actual value equal to or in excess of $100 per share. Persons against whom the tax is levied. 5 cents on each $100 face value or fraction thereof. Capital stock; original issue, whether or- ganization or reorganization. 1107 Bonds, etc. 5 cents on each $100 face value or fraction thereof. Bonds, debentures, or certificates of in- debtedness issued. (See sec. 1107, sub- div. 1 of schedule A.) Cards. 8 cents per pack. Playing cards (not over 54 cards per pack). Proxies. 10 cents. Proxy for voting at election of officers or other meetings of corporation. Power of at- torney. 25 cents. (See sec. 1107, subdiv. 12.) Entry of goods at custom- house. 25 cents when not ex- ceeding $100 in value. Entry of goods, wares, or merchandise at any customhouse, either for consump- tion or warehousing. Deeds, etc. 50 cents on value be- tween $100 and $500 and for each addi- tional $500 or frac- tion thereof. Conveyances: Deed, instrument, or writ- ing whereby any lands, tenements, or other realty shall be granted, assigned, or otherwise conveyed, exclusive of the value of any lien or incumbranco re- maining thereon at the time of sale. Withdrawal goods from bonded warehouse. 50 cents. Entry for withdrawal of any goods or merchandise from customs bonded warehouse. Entry goods at custom- house. 50 cents on value be- tween $100 and $500. Entry of goods, wares, or merchandise at any customhouse either for consump- tion or warehousing. 39 Schedule of taxes imposed by Titles V, VI, VII, VIII, IX, X, XI, and XII. Revenue Act of 1918, which are deductible under sections 214 (a) 8 and 234 (a) 3 Continued. Sec- Tax deductible by- Tax levied upon Rate of tax. Explanation. tion of 1918 Act. Bonds, indemnity, and surety policies Bonds, surety policies, etc. 50 cents. guaranteeing realty titles and fidelity and guaranty insurance. (Also see sec. 1107, schedule A, subdiv. 2.) Entry goods at custom- house. $1 on value exceeding $500. Entry of goods, wares, or merchandise at any customhouse cither for consump- tion or for warehousing. Persons against whom the tax SI en cost over $10 and Passage ticket one way or round trip for 1107 is levied. not exceeding $30. each passenger, sold or issued in United States for passage by any vessel to a port or place not in the United States, Passage tick- Canada, or Mexico. ets. $3 on cost over $30 and Same as preceding. not exceeding SCO. $5 on cost over SCO. Same as preceding. Mine or quarry in United States in which children under the age of 16 years have been employed or permitted to work during any portion of the taxable year. Mill, cannery, workshop, factory, or manufacturing establishment in the Employer. Emnlovment cf ch'il-l la- bor. 10 per cent of profits computed in accord- ance with Title XII. United States in which children under the age of 14 years have been employed or permitted to work, or children be- tween ages of 14 and 16 have been em- 1200 ployed or permitted to work, more than 8 hours in any day or more than C days in any week or after the hour of 7 p. m. or before the hour of 6 a. m. dur- ing any portion of the taxable year. The taxes on alcoholic beverages imposed by Title VI of the Act are deductible by the distillers, rectifiers, refiners, producers, or importers against whom they are levied. A tabulation of such taxes is not furnished in this bulletin. For detailed information regarding the taxes enumerated in the foregoing schedule and any other taxes levied under the Revenue Act of 1918, it will be necessary to consult the appropriate sections of the Act by which they are imposed and the corresponding regula- tions promulgated by the Commissioner. 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