mmm NEW INCOME TAX MANUAL mmmmmmmmmmmmmmmmmmmemmmmmm / Xx S^ A New Income Tax Manual Explaining The Requirements of The Federal Income Tax Law And the Treasury Department Regulations ' With Respect to the Administration Thereof. By JOSEPH WALKER MAGRATH, Counselor at Law, New York. \ Author of "An Income Tax Manual," "The Federal Income Tax.'' New York THE BENCH AND BAR COMPANY 27 Cedar Street 1915 u-3^^^^ ^V^ Copyright, 1915, by JOSEPH WALKER MAGRATH LECOUVER PRESS CO.. Law Printers, 61 Veaey St., New York. PREFACE The object of this book is to present a general explana- tion of the requirements of the Federal Income Tax Law and the Regulations and Rulings of the Treasury Depart- ment with respect thereto. Being in the nature of a compilation, it is proper that there should be references to the authority upon which its statements are based, and for this reason numer- ous references are made to the Law itself, by paragraphs, thus: (Par. E), (Par. G, subd. a), etc.; to the Regulations and Rulings of the Treasury Department, by their re- spective numbers, thus: (T. D. 1887), (T. D. 1901), etc.; and to the General Regulations by articles, thus: (G. B. 1), (G. B. 2), etc. References are also made to the various forms which have been prescribed by the Department by their num- bers, thus (Form 1000), (Form 1001), etc., and to the instructions or special notices, appearing on some of the forms in a similar manner, thus, (Instr. Form 1031), (Instr. Form 1040), etc. These references are invariably to the revised forms which have recently been issued by the Treasury Department and not to earlier forms bearing the same numbers but now obsolete. In addition, references are made to various letters of the Treasury Department containing rulings which have not been embodied in the Treasury Decisions. These let- ters are published by the Corporation Trust Company of New York in connection with its most efficient Income Tax Service, his indebtedness to which the author takes pleasure in acknowledging. References from one part of the book to another are made by section numbers, thus: (See Sec. 5), (See Sees. 8, 12), etc. The Treasury Decisions covered by this book are those relating to the Income Tax numbered from 1887 to 2090, both inclusive. T. D. 1887, approved Oct. 25, 1913, was the first Treasury Decision issued on this subject, while T. D. 2090, issued Dec. 17, 1914, is a synopsis of previous rulings [i] ^-k^ .r-% M r-kr~k ill NEW INCOME TAX MANUAL. on questions relating to the Income Tax, and hence con- stitutes a suitable stopping point. It is not to be expected that a general explanation of this character should present the solution of every ques- tion which may arise in connection with the administra- tion of the law, and the author has, as a rule, refrained from any expression of his own views ; but it is hoped that the manual will suffice to give the reader a clear under- standing of what the law and the regulations in terms require, how they affect him, and what he must do to comply therewith. JOSEPH WALKER MAGRATH. 27 Cedar Street, New York City. January 2, 1915. CONTENTS § 1. Upon Whom Tax Imposed, p. 1 § 2. Rate of Tax, p. 4 § 3. Amount on Which Tax Payable, p. 5 § 4. How Net Income of Individual Computed, p. 5 § 5. How Net Income of Corporation, Association, etc.. Com- puted, p. 13 § 6. Accumulation of Income, p. 22 § 7. The Specific Exemption, p. 22 § 8. Exemption of Compensation of Public Officers and Em- ployees, p. 24 § 9. Exemption of Interest upon Public Securities, etc., p. 25 §10. Exemption of Income Derived from Public Utilities, etc., p. 26 §11. Necessity for Return, p. 26 §12. Who Required to Make Return, p. 27 §13. Time for Making Return, p. 30 §14. To Whom Return Made, p. 31 §15. Form of Return Generally, p. 32 §16. Return of Individual, p. 32 §17. Return of Corporation, Association, etc., p. 35. §18. Return of Fiduciary, p. 38 §19. List Returns of Person, Corporation, etc.. Occupying Position of Source of Income, p. 40 §20. Verification of Return, p. 43 §21. Return by Commissioner of Internal Revenue for De- linquent, p. 44 §22. Increasing Amount Shown by Return, p. 44 §23. Compelling Testimony and Production of Books and Papers, p. 44 §24. Inspection of Returns, p. 45 §25. Disclosing or Publishing Information Contained in Re- turns, p. 45 ' §26. Taxing Periods, p. 45 §27. Assessment of Tax, p. 47 §28. Notice of Assessment, p. 47 [iS] iv CONTENTS. §29. By and to Whom Tax Paid Generally, p. 47 §30. Time and Mode of Pa3anent, p. 48 §31. Receipt for Payment, p. 49 §32. Collection at the Source of Income Generally, p. 49 §33. Items on Which Tax Not Withheld at the Source, p. 53 §34. Collection of Tax on Interest on Bonds, Mortgages, etc.» of Corporations, Associations, etc., p. 55 §35. Collection at the Source of Tax on Income Other than Interest on Bonds, Mortgages, etc., of Corporations, Associations, etc., p. 64 §36. Collection of Tax on Income Arising in Foreign Coun- tries, p. 68 §37. Collection of Tax on Income of Estates Held in Trust, p. 71 §38. Provisions as to Partnerships, p. 74 §39. Penalties, p. 75 §40. Time Table, p. 76 §41. Practical Working of Law— Preparation of Return, p. 77 §42. How to Obtain Forms, p. 86 NEW INCOME TAX MANUAL §1. UPON WHOM TAX IMPOSED. Section II of the Tariff Act of 1913, known as the "In- come Tax Law," imposes a tax upon the income of : (1) Every citizen of the United States, whether re- siding in the United States or abroad. (Par. A, subd. 1; G. R. 1) The (Constitution of the United States provides that "All persons bom or naturalized in the United States, and subject to the jurisdiction thereof, are citizens of the United States and of the state wherein they reside," and it is also well established that the children of citizens, although born outside of the United States, are themselves citizens of the United States. The operation of the law is not confined to those who have political rights, but the tax is imposed upon all who come within the meaning of the term "citizen," regardless of age, sex, or any other consideration affecting their civil or political status. (2) Persons other than citizens of the United States, but who reside in the United States. (Par. A, subd. 1; G. R. 1) By this is meant a residence of a permanent character, as it is not intended to impose a tax upon per- sons who are merely visiting the country with no inten- tion of remaining here for any considerable time. (3) Persons who, although neither citizens nor resi- dents of the United States, derive an income from prop- erty owned or business carried on in the United States, to the extent of such income. (Par. A, subd. 1; G. R. 1) (4) Corporations, joint-stock companies or associa- tions, and insurance 'companies, organized or existing under the laws of the United States or any State or Terri- tory. (Par. G, subd. a; G. R. 76) As to what constitutes a corporation or joint-stock company or association see G. R. 78, 79. (5) Corporations, joint-stock companies or associa- tions, and insurance companies, organized or existing under the laws of foreign countries, but deriving an in- come from business transacted, capital invested, or prop- Ell 2 NEW INCOME TAX MANUAL. erty owned in the United States, to the extent of such in- come. (Par. G, subd. a; G. R. 46, 77) Corporations, Associations, Etc., Exempt from Tax.— The tax is not to be paid by labor, agricul- tural, or horticultural organizations; mutual savings banks not having a capital stock represented by shares; fraternal beneficiary societies, orders, or associations oper- ating under the lodge system, paying death, sick, accident, or other benefits to members or their de- pendents; domestic building and loan associations; cemetery companies organized and operated exclu- sively for the mutual benefit of their members; corpora- tions or associations organized and operated exclusively for religious, charitable, scientific, or educational pur- poses, no part of whose income inures to the benefit of any private stockholder or individual; business leagues; chambers of commerce or boards of trade not organized for profit and no portion of whose net income inures to the benefit of any private stockholder or individual; or civic leagues or organizations not organized for profit and operated exclusively for the promotion of social welfare. (Par. G, subd. a; G. R. 87) The agricultural and horticultural associations which are exempt are such associations as county fairs, or like organizations, not themselves engaged in agricultural or horticultural pursuits, but which, by means of awards, premiums, etc., are intended to encourage better produc- tion, and no part of whose income inures to the benefit of any private stockholder or individual. The exemption also extends to fruit-growers' associations whose purpose is to promote the mutual benefit of their members in mar- keting their products, which are not organized for profit and have no capital stock represented by shares, and whose income is derived wholly from membership fees, dues, and assessments to meet necessary expenses. Corporations en- gaged in agricultural or horticultural pursuits for profit are liable to the tax, as are also corporations owning sugar or other plantations and disposing of the products thereof. (T. D. 2090) NEW INCOME TAX MANUAL. 3 Domestic building and loan associations are not ex- empt unless all the profits and benefits provided for are ratably distributed among all members regardless of the kind of stock held, according to the amount of money they have on deposit. This excludes from the exemption an association issuing different classes of stock upon which different rates of interest or dividends are guar- anteed or paid. (O. R. 87) Mutual telephone companies, mutual insurance com- panies, and the like are not exempt from the income tax, even though they are organized primarily for the mutual benefit of their members and not for profit. (T. D. 1933; G. R. 80; T. I>. 1996) Neither are co-operative dairies exempt. (T. D. 1996; T. D. 2090) In order to secure exemption, a corporation, etc., must, when requested by the Collector or Commissioner of Internal Revenue, establish its right to exemption by aflSdavit or otherwise. It is not suflflcient for such an organization merely to declare that it is exempt, but it must show the character and purpose of the organization, the manner of distributing the net income, if any, or that none of the net income inures to the benefit of any private stockholder or individual. (G. R. 88) All clubs are not exempt from the provisions of the income-tax law, even though not operated for profit. A club desiring to be registered as an exempt organization should file with the Commissioner of Internal Revenue a copy of its charter, or an aflSdavit of its principal officer, setting forth the nature of its organization, the purpose for which organized, the source, if any, from which it derives income, and the disposition made of such income as is re- ceived by it, for consideration and determination as to whether or not it comes within the class of organizations held to be exempt. (T. D. 2090) Partnexrsliips, as such, are not liable to an income tax, but the share of each partner in the profits or in- come of the firm is included in his personal income upon which he pays a tax as an individual. (See Sec. 38) Individuals ivhose net income does not ex- ceed $3,000 are exempt from the payment of the tax 4 NEW INCOME TAX MANUAL. (see Sec. 7), but where their income is such as to be tax- able at the source they may lose the benefit of this exemp- tion by neglecting to take the steps necessary to secure it. (See Sees. 32, 34-36) §2. RATE OF TAX. The Law provides for two classes of tax: (1) The normal tax is at the rate of 1%, and is imposed alike upon individuals (Par. A, subd. 1), cor- porations, joint-stock companies or associations, and in- surance companies. (Par. G, subd. a) (2) The additional tax is a graduated tax in addition to the normal tax, imposed upon individuals whose incomes are large (Par. A, subd. 2; G. R. 2) Cor- porations, joint-stock companies or associations, and in- surance companies are not subject to the additional tax (G. R. 185), but nonresident aliens are subject thereto. (G. R. 8) The rate of the additional tax is as follows: 1% on income over $20,000 and up to $50,000. 2% on income over $50,000 and up to $75,000. 3% on income over $75,000 and up to $100,000. 4% on income over $100,000 and up to $250,000. 5% on income over $250,000 and up to $500,000. 6% on income over $500,000. The Income Tax Law, in so far as it affects private individuals, thus imposes a constant tax on all income (over $3,000 or $4,000 as the case may be) and an addi- tional tax at a varying rate on income in excess of $20,000. But it is to be borne in mind that the possession of an income subjecting one to an additional tax does not render one liable to pay that tax upon the entire income, but only on the excess over particular amounts. For illustra- tion see Sec. 41. In the case of a hnsband and xrife having separate incomes, the additional tax is computed upon the basis of the separate income of each and not upon the basis of the combined income of both. (T. D. 2090) To illus- trate, let us disregard all exemptions and deductions, and suppose the case of a husband and wife each having a NEW INCOME TAX MANUAL. 5 separate income of |30,000. In such case, there would be an additional tax, as to each, amounting to $100, being 1% on the excess over $20,000, the total additional tax thus being |200. If the incomes were combined, making a total of $60,000, the additional tax would be $300 on the excess over $20,000 up to $50,000, and $200 on the excess over $50,000, a total of $500. It will thus be seen that this ruling makes the tax much less onerous than it would otherwise be in the case of husband and wife having large separate incomes. § 3. AMOUNT ON WHICH TAX rATABLE. Individuals who are citizens or residents of the United States, and domestic cori)orations, joint-stock companies or associations, and insurance companies are taxed ux)on their entire net income, by which is meant the gross, or entire income, less certain deductions authorized by the law. (G. K. 3) (See Sees. 4, 5) Persons who are neither citizens nor resi- dents of the United States are taxed upon their net in- come accruing from property owned, or business, trade, or profession carried on by them within the United States. (Par. A, subd. 1) Foreign corporations and associations.— A corporation, joint-stock company or association, or in- surance company, organized, authorized, or existing under the laws of a foreign country, but doing business within the United States, must pay the normal tax of 1% upon the amount of net income accruing from business trans- acted and capital invested within the United States. ( Par. G, subd. a) §4. HOTV NET INCOME OF INHIVIHUAL COMPVTEH. The gross income of an individual, within the mean- ing of the Income Tax Law, includes gains, profits, or in- come from practically every conceivable source (Par. B; G. K. 4) except the proceeds of life insurance policies, paid upon death, maturity, surrender, or by way of annuity < NEW INCOME TAX MANUAL. OP otherwise. Where property is acquired by gift, be- quest, devise, or descent, the income from such property is to be included, but not the value of the property. (Par. B;G. R. 5; T. D. 2090) Pensions from the United States must be included as income. (T. D. 2090) Aliniony must be included as income. (T. D. 2090) Gains, profits, or income derived from sifts, as distinguished from the value of the gifts, are subject to the tax. (Par. B; G. R. 5; T. D. 2090) Thus, if property acquired by gift is subsequently sold at a price greater than the appraised value at the time when the property was so acquired, the gain in value is held to be income subject to the tax. (T. D. 2090) Amount received under life insurance, «ndoiirment, or annuity contract.— The amount which is paid under a life insurance, endowment, or an- nuity contract is not income when returned to the person making the contract, either upon the maturity or surrender of the contract; but the amount by which the sum received exceeds the sum paid and coming into the hands of the person making the contract and payment is income. When the settlement under such a contract is made in more than one payment each payment will be considered as being composed of interest and a proportionate part of the prin- cipal. Where the entire annuity is composed of an interest return upon the principal sum paid therefor, the entire annuity is income. (T. D. 2090) Mileage.— The difference between the amount re- ceived as mileage and the actual necessary expenses in- curred on a journey should be included as income. (T. D. 2090) Comniissions received by a salesman are income and should be accounted for by him. ( T. D. 2090 ) Commissions on renewal insurance pre- miums are income when received and for the period in which received, and insurance agents must include such commissions in computing their income. (T. D. 2011; T. D. 2090) NEW INCOME TAX MANUAL. f Payment for surrendering contract of employment.— Where an employee is paid a sum equal to two years' salary on condition that he surrender his contract of employment, such sum should be included by him as a part of his income. (T. D. 2090) One -who is furnished with living quarters, in addition to salary, for his services, must include as income the rental value of such quarters. (T. D. 2090) Salaries paid by exempt organizations.— Salaries paid by corporations, etc., which are exempt from the income tax (See Sec. 1) are subject to the income tax, and should be returned as income by the individuals to whom they are paid, the corporation not being required .to withhold the tax therefrom, whatever the amount may be. (T. D. 2090) Payments to widows of employees.— Where the salary of an employee is paid to his widow for a limited period after his death in recognition of the services ren- dered by her husband, no services being rendered by the widow, such payment is considered a gratuity and she is not taxable thereon. (T. D. 2090) Clergymen must include in their taxable income Easter offerings, and fees received by them for funerals, masses, marriages, baptisms, etc. ; but Christmas gifts are not considered income. (T. D. 2090) An appreciation in the value of assets is not considered as income until, as a result of a com- pleted, closed transaction, it has been converted into cash or its equivalent; that is, until it has been realized as an addition to and a part of the tangible assets of the in- dividual. Consequently mere book entries of apprecia- tion in the value of capital assets may be disregarded. (Letter of Aug. 14, 1914, to Internal Revenue Collectors and Agents) Income from legacies.— Legacies must be held to be vested rather than contingent unless this is clearly in- consistent with the intention of the testator; and where there is a vested interest, the income from such interest, whether distributed or not, is subject to the tax. (T. D, 2090) 8 NEW INCOME TAX MANUAL. Dednctions from gross income.— In comput- ing net, or taxable income, whether for the purpose of the normal or the additional tax, an individual is entitled to deduct from his gross income the following items (Par. B;a R. 3, 6;T. D. 2090) : (1) The expenses, actually paid, of carrying on his business. Premiums paid for insurance on property which is not occupied by the owner as a dwelling, but is rented or leased to secure an income, may be deducted. (T. D. 2090) A commission paid to a real estate agent for collect- ing rents and managing property is a legitimate business expense and may be deducted as such; and the same is true of commissions paid to salesmen as part of the ex- pense of conducting business. (T. D. 2090) It is provided by T. D. 2090 that "taxes paid by a tenant to (for) a landlord are considered as additional payment for rent and are deductible as an expense of carrying on business." It is obvious that this refers only to taxes on property occupied for business purposes. Where an employee is required to furnish a bond and to pay the premium on such bond as a necessary incident of his employment, he is entitled to deduct the premium so paid. (T. D. 2090) Where the salary of an employee is paid to his widow for a limited period after his death in recognition of the services rendered by her husband, no services being ren- dered by the widow, such payment is a gratuity, and can- not be deducted as an expense of carrying on business. (T. D. 2090) (2) The interest which he has paid on outstanding indebtedness. (3) All taxes which he has paid, except those as^ sessed against local benefits. The provision for the deduction of taxes applies only to taxes paid to the United States, or to some State or political subdivision thereof, and hence taxes paid to a foreign country cannot be deducted. (T. D. 2090) Taxes paid pursuant to assessments levied by special NEW INCOME TAX MANUAL. 9 assessment districts created under the laws of the several states for public purposes, such as the improvement of streets and public highways, the provision for sewerage, gas, and light, and the reclamation, drainage, or irrigation of bodies of land, and levee and school districts are held to be assessed against local benefits and are not allowable deductions. (T. D. 2090) (4) Actual losses in trade, or from fire, storm, or shipwreck, which are not compensated for by insurance or otherwise. For example, if a stock of goods worth $10,000 were destroyed by fire, the owner would be en- titled to deduct that amount if he had no insurance ; if he was partly covered by insurance he would be entitled to deduct the difference between |10,000 and the amount which he received from his insurance; while if the loss was fully covered by insurance he would not be entitled to any deduction whatever. Loss is defined as the difference between selling price and cost, where the selling price is less than cost; and rules for ascertaining the cost of property are prescribed. (T. D. 2005) In order to be deductible, a loss must be absolute and complete and must have been actually sustained; it must be determined and ascertained upon an actual, completed, closed transaction. So there can be no deduction for a loss based upon a speculative or fluctuating valuation of a continuing investment, and a shrinkage in the value of bonds, stocks, and like securities, due to fluctuations in their market value, is not deductible. ( T. D. 2005 ; T. D. 2090) It is also necessary to authorize the deduction of a loss, that it should have been sustained "in trade," by which is meant the business which engages one's time, at- tention, and labor for the purpose of livelihood, profit, or improvement. Accordingly, losses sustained through sales of or dealings in real or personal property, or growing out of the ownership or use of or interest in such property are not deductible at all unless they are an incident of, connected with, and grow out of the business of the in- 10 NEW INCOME TAX MANUAL. dividual sustaining the loss. (T. D. 1989; T. D. 2005; T. D. 2090) A person may engage in more than one trade and may deduct losses incurred in all of them, but it must be clearly shown in such cases that he is actually a dealer, or trader, or manufacturer, or whatever the occupation may be, and is actually engaged in one or more lines of recognized busi- nesses before losses can be claimed with respect to either or more than one line of business, and his status as such dealer must be clearly established. (T. D. 2090. See also T. D. 1989; T. D. 2005) Losses on stocks, grain, cotton, etc., may be deducted if they are incurred by a person engaged in trade to which the buying and selling of stocks, etc., are incident as a part of the business, as by a member of a stock, grain, or cotton exchange. (T. D. 2090) (5) Debts actually ascertained to be worthless and charged off during the year. The rules prescribed by the instructions on Form 1040, as issued for use in making returns for 1913, with respect to how the worthlessness of a debt must be ascertained, are no longer in force, and the present regulations merely authorize the deduction of "a debt which has been actually ascertained to be worthless and charged off within the taxable year," and specially provide that in case of default upon installment payments on real estate, the vendor may charge off as bad debts "the amount of such unpaid install- ments less the salvage value of the real estate repossessed." (T. D. 2090) (6) A reasonable allowance for exhaustion and wear and tear of property from use or employment in business. Where such allowance is made there can be no deduction for the cost of restoring or making good such exhaustion or wear and tear. Depreciation of farm buildings, other than a dwelling occupied by the owner, actually sustained within the year in excess of repairs made, is an allowable deduction. (T. D. 2090) Actors and actresses are permitted to deduct the de- preciation of costumes purchased by them and used ex- NEW INCOME TAX MANUAL. 11 clusively in the production of a play, arising from wear and tear or obsolescence at the close of the production, provided such costumes are not adapted for occasional per- sonal use and are not so used. (T. D. 2090) In computing net income for the pnrpose of tlie normal tax, an individual may make the fol- lowing additional deductions, which are not authorized with respect to the additional tax : (7) Amounts received as dividends on stock or from the earnings of any corporation, joint-stock company or association, or insurance company which is taxable upon its net income. (G. R. 3) Dividends declared and paid by a foreign corporation which derives its entire income from business done wholly within the United States, and pays a tax upon its net income under the Income Tax Law, should be treated in the same manner as dividends from domestic corporations. (T. D. 2090) (8) The amount of any income, the tax upon which has been paid or withheld for payment at the source of income. (G. R. 3) But no deduction can be made for in- come received from another where it does not exceed |3,000, is not fixed or certain, or is indefinite or irregular as to amount or time of accrual. No deduction can be made for personal, liv- ing, or family expenses (Par. B), such as expense for medical attendance, store accounts, family supplies, wages of domestic servants, or cost of board, room, or house rent for family or personal use. Neither can any deduction be made for the cost of new buildings or permanent im- provements or betterments made to increase the value of any property or estate (Par. B) or for money or other things of value disposed of by gift, donation, or endow- ment. (T. D. 1890; G. R. 6) It is also ruled that no deduction can be made for alimony paid, w^hich is regai^ded as a personal expense; for assessments paid on corporate stock, which are re- garded as an investment of capital; or for premiums on life insurance paid by the insured. (T. D. 2090) 12 NEW INCOME TAX MANUAL. Government officers and employees, in com- puting their income, must observe the requirements of T. D. 2079, which makes special provision with respect to amounts received as commutation of quarters, allowance for heat and light, mileage, reimbursement for expenses, and per diem allowances in lieu of subsistence. See also T. D. 2090. Computation of profit from sale of real estate.-In T. D. 2005 and T. D. 2090, the Department has fixed the mode of computing profit from the sale of real estate as follows: Profit is the difference between the selling price and the cost where the selling price is more than the cost. Cost of property purchased prior to the incidence of the special excise tax (Jan. 1, 1909), or the incidence of the income tax (Mar. 1, 1913), will be the actual price paid for the property, including the expense incident to the procurement of the property in the first instance and its sale thereafter, together with carrying charges of in- terest actually paid, insurance, and taxes actually paid prior to the incidence (special assessments, if any, "ac- tually paid" as "local benefits" in connection with real estate) ; provided that where, up to the incidence of the tax, the expense of carrying property has exceeded the income from it, the difference between the expense of car- rying and the income from the property shall be added to the purchase price, and the sum thus ascertained shall be the cost of the property ; and provided further, that in the case of property purchased prior to the incidence of the tax and sale thereof subsequent to the incidence of the tax, there shall be excluded from consideration in ascer- taining cost of any items of income, expense, interest, and taxes previously taken into account in preparing a return of annual net income. The cost of property acquired subsequent to the inci- dence of the tax will be the actual price paid for it, to- gether with the expense incident to the procurement of the property in the first instance, and its sale thereafter, and the cost of improvement or betterment, if any. The entire profits realized by individuals or corpora- NEW INCOME TAX MANUAL. 13 tions from the sale of real estate will be taxable except where the property in connection with which the profit is obtained was acquired prior to March 1, 1913, in the case of individuals, or prior to January 1, 1909, in the case of corporations ; and then and in such event the profit will be prorated over the whole time the property was held, and that part of the whole profit apportioned to the taxable period will be reported in annual returns of income. In prorating, fractional parts of years will not be considered. For income-tax purposes, where there is an actual sale and transfer, profit will be considered as realized even though payment is to be made in installments, as notes for deferred payments are secured by the title to the property and presumably bear interest and are held to be worth, in cash, their face value. The net income of non-resident aliens, derived from property owned, or business carried on in the United States is to be computed according to the method provided for computing the net income of foreign corporations, associations, etc. (Par. B; G. R. 8; T. D. 2013) The Treasury Department has ruled that interest on the bonds, and dividends on the stock of domestic cor- porations, owned by non-resident aliens, are not subject to the income tax, whether such bonds or stock are physi- cally located within or without the United States. (T. D. 2017) §5. HOW NET INCOME OF CORPORA- TION, ASSOCIATION, ETC., COM- PUTED. Neither the law nor any regulations now in force enumerate the items which constitute the gross income of a corporation, the only general provision on the subject being that net income shall be ascertained by making cer- tain specified deductions from "the gross amount of the income * * * received within the year from all sources." (Par. G, subd. a) Form 1031 indicates that the gross in- come is to be ascertained by adding together the amount of sales during the year and the value of stock on hand at 14 NEW INCOME TAX MANtJAL. the close of the year, and deducting from the total the amount of purchases during the year and the value of the stock on hand at the beginning of the year. An appreciation in the valne of assets is not considered as income until, as a result of a completed, closed transaction, it has been converted into cash or its equivalent; that is, until it has been realized as an addi- tion to and a part of the tangible assets of the corpora- tion. (Instr. Form 1031) Consequently mere book en- tries of appreciation in the value of capital assets may be disregarded. (Letter of Aug. 14, 1914, to Internal Revenue Collectors and Agents) Sale of capital assets.— The profit or income to be returned in the event of the sale of capital assets should be determined upon the basis of the difference between the cost and selling price of such assets. But the profit may be prorated in case the assets were acquired prior to January 1st, 1909. (Instr. Form 1031. See also G. R. 108-110 ; T. D. 2077) In the event of a sale of assets whose increase in value has been taken up on the books, the profit or income to be returned will be the difference be- tween the cost and the selling price, and book values will be ignored save as they represent the actual cost. (Letter of Aug. 14, 1914, to Internal Revenue Collectors and Agents) Interest.— A corporation must include in its income all interest received on bonds or securities owned by it, except interest on the obligations of the United States or its possessions, or of a State or political subdivision there- of. (Instr. Form 1031) Rentals.— A corporation must include as income all payments received in cash or its equivalent as rent of buildings or other property owned by the corporation. (Instr. Form 1031) Dividends.— Dividends received upon the stock of other corporations must be included in computing income. (T. D. 2090) Parent, holding, or other corporations, must include in their gross income, and cannot deduct therefrom, any NEW INCOME TAX MANUAL. IS dividends or share of earnings which they may receive from a subsidiary, related, or other corporation ; and this applies even though the parent or holding company owns all the stock of the subsidiary company. (T. D. 2090) Gifts to a corporation must be included as income. ERIVEI> FROM PUBLIC UTILITIES, ETC. The tax imposed on corporations, associations^ etc., does not apply to any income derived from any public utility or from the exercise of any essential governmental function, accruing to any State or Territory, or the Dis- trict of Columbia, or any political subdivision of a State or Territory or the District of Columbia, or to any in- come accruing to the government of the Philippine Islands or Porto Rico, or of any political subdivision of the Philip- pine Islands or Porto Rico. (Par. G, subd. a; G. R. 93) Where any State or Territory, or the District of Columbia, or any political subdivision of a State or Ter- ritory, has, before the passage of the Income Tax Law, entered, in good faith, into any contract with any per- son or corporation for the purpose of acquiring, construct- ing, operating, or maintaining a public utility, no tax is to be levied on the income derived from the operation of such public utility, where the payment thereof would im- pose a loss or burden upon a State or Territory, or the District of Columbia, or a political subdivision of a State or Territory. But this provision is not intended to confer any financial benefit or exemption upon the person or cor- poration with whom such contract was made, or to relieve such person or corporation from the payment of a tax upon any part of the income derived from the operation of such utility to which such person or corporation may be entitled under the contract. (Par. G, subd. a; G. R. 93) §11. NECESSITY FOB BETUBN. The assessment of the tax is to be based upon state- ments or "returns" of income which the Law requires to be made under regulations to be prescribed by the Com- missioner of Internal Revenue and approved by the Secre- tary of the Treasury. NEW INCOME TAX MANUAL. 27 §12. WHO REQUIRED TO MAKE RE' TURN. The Law requires a return of net income to be made by every individual subject to the tax and having a net income of three thousand dollars or over (Par. D. See also G. R. 15) ; and by all corporations, joint-stock com- panies and associations, and insurance companies subject to the tax, regardless of the amount of their net incoma (Par. G, subd. c. See also G. E. 15) The requirement as to corporations imposes upon every corporation, no matter how closely related it may be to any other corporation, the duty to make a return of net income and to pay the tax thereby shown to be due. (T. D. 2090) The fact that one is not liable to pay any income tax does not necessarily exempt him from the obligation to make a return. Where one has a net income of |3,000 or more, the penalty provided by the law for refusal or neglect to file a return ( See Sec. 39 ) will be en- forced against him notwithstanding the fact that his net income may be less than the exemption to which he is entitled. (T. D. 2090) Hnsband and wife living together.-Where a husband and wife living together have separate estates, the income of both may be shown by one return, which should be made by the husband, and should show the amount of the income of each of them and their full names and address. (T. D. 1923; G. R. 10) The wife may, however, make a return of her own in- come if she has a separate estate managed by herself as her separate property and receives an income of more than $3,000; and in such case, if the husband has other net income, making the aggregate of both incomes more than $4,000, the wife's return should be attached to the return of the husband, or his income should be included in her return. (T. D. 1923; G. R. 10) If either husband or wife has an income of $3,000 or over, a return including the incomes of both of them must be made, even though their combined incomes do not 28 NEW INCOME TAX MANUAL. amount to $4,000 (T. D. 1923; G. R. 10) ; but they do not pay any tax in such case. ( Par. C ) If the aggregate net income of husband and wife ex- ceeds $4,000 a return of their combined incomes must be made, although neither of them has a separate income of 13,000; and in such case they are jointly and separately liable for the making of the return and the payment of the tax. (T. D. 1923; G. R. 10) Person receiving dividends from corporate stock.— A person having an income of |3,000 or more, \/ but less than |20,000, part of which is derived from divi- dends or net earnings of corporations, etc., which are them- selves subject to the tax, need not make any return if his income, excluding that received from such corporate sources, is less than $3,000. (T. D. 1945) Persons for irlioni. tax paid at sonrce of in* come.— Where, in accordance with the practice of collec- tion at the source of income (see Sees. 32-37), a return is made and the tax paid by one on behalf of another, the latter is not required to make any return, unless he has other net income besides that upon which the tax is so paid (Par. D), or is liable for an additional tax (G. R. 19), in which cases he must make a separate return. A corporation transacting no business within the year must nevertheless make a return, as this duty is based upon corporate or associational existence and not upon the receipt of income. (T. D. 2090) Corporations ivMcli are in existence only a part of the year are required to make returns. In case a corporation is dissolved, its return must cover the period from the beginning of the calendar year, or of its fiscal year, if it has designated a fiscal year, to the date of dissolution. (T. D. 2090. See also G. R. 84, 85) Persons having custody of funds or prop- erty of others.— Guardians, trustees, executors, admin- istrators, agents, receivers, conservators, and all persons, corporations, or associations acting in any fiduciary capa- city are required to make and render a return of the net Income of the person for whom they act, coming into their NEW INCOME TAX MANUAL. 29 custody or control and management, and are generally subject to all the provisions of the Law, with reference to returns, which apply to individuals. (Par. D; T. D. 1906; G. R. 71) If such a person fails to make a return notice of failure will be served upon him, but he may show that the one for whom he acts did not receive tax- able income. (G. R. 18) In this connection the word "agents" relates only to agents who act in a fiduciary capacity. (T. D. 2090) The executor or administrator of one who died during the taxing year is required to make a return for the decedent covering the period from the first of the year to the date of his death. (G. R. 17; T. D. 2090) By analogy, it would seem that where a taxable individual dies after the end of the year, but before his return has been made and filed, the duty of making and filing such return would rest upon his executor or administrator. Persons, corporations, etc., occupying posi- tions of source of income.— All persons, firms, com- panies, copartnerships, corporations, joint-stock com- panies or associations, and insurance companies, having the control, receipt, disposal, or payment of fixed or de- terminable annual or periodical gains, profits, or income of another person subject to the tax, are required to withhold from payments to such person an amount equal to the normal tax of 1% on such gains, profits, or income; and to make a separate and distinct return of the income of each person from which the tax is thus withheld, show- ing the name and address of such person, or stating that the name or address, or both, are unknown if such is the case. (Par. D) The Law expressly provides that no return is required with respect to a person whose income does not exceed |3,000 (Par. D) ; and while the tax may be "deducted at the source" from income derived from the obligations of cori)orations, etc., or from foreign sources, although the total income is less than |3,000, if the exemption be not claimed (Par. E), such deductions are shown only by the list returns (see Sec. 19) of the debtor or withholding 30 NEW INCOME TAX MANUAL. agent, and no separate return is made for the individual from whose income the tax is withheld. The local representatives of non-resident aliens must make returns for them. (G. R. 8; T. D. 2013; T. D. 2090) A partnership, as such, is not required to make any return, but may be called upon for a statement of its profits, etc. (See Sec. 38) §13. TIME FOB, MAILING RETURN, An individual must make his return on or before March 1st of each year (Par. D) ; and a corporation, joint- stock company or association, or insurance company must make its return at the same time (Par. G, subd. c), un- less it has designated some day other than Dec. 31st as the closing of its fiscal year (see Sec. 26), in which case its return must be made within sixty days after the clos- ing of the fiscal year. (Par. G, subd. e) When the date on which a return is due falls on a Sunday or holiday, it must be made the next day. (G. R. 176) Extension of time.— Where the failure to make a return is due to sickness or absence, the Collector may allow an extension of time, not exceeding thirty days (Par. I), provided application therefor is made within the time for which the extension is desired. (G. R. 23, 173) Ex- cept under these circumstances, no officer has any discre- tion in respect to the filing of returns or any right to ex- tend the time. (T. D. 1950) Withholding agents should not file their returns until after the time allowed for claiming exemptions and deductions. (G. R. 33) liist returns of debtor corporations or ixrithholding agents.— Debtor corporations and with- holding agents are required to file their monthly list re- turns on or before the 20th day of each month, and their annual list returns on or before March 1st of each year. (T. D. 1914; G. R. 35) These returns are explained in Sec. 19. NEW INCOME TAX MANUAL. 31 Delay in Mails.— Where a return is mailed, prop- erly addressed and postage prepaid, in time to reach the Collector by the day when it is due, in the ordinary course of the mail, no penalty attaches if delivery is delayed. (G. R. 174) §14. TO TVHOM RETURN MADE. The law requires that an individual residing in the United States shall make his return to the Collector of Internal Revenue of the district where he resides or has his principal place of business (Par. D), and, under G. R. 15, an individual residing in one district and having his principal place of business in another district, was re- quired to make his return for 1913 in the district where his principal place of business was located. This has, however, been changed, and every individual residing in the United States, who is required to make a personal re- turn for 1914 must make such return in the district where he resides, regardless of where his place of business may be. (Instr. Form 1040; Letter of Dec. 12, 1914, to the author) Return of non-resident.— The return of an indi- vidual who does not reside in the United States is re- quired to be made to the Collector of Internal Revenue of the district where his principal business is carried on. (Par. D; G. R. 15; Instr. Form 1040) Retnm of corporation, association, etc.— The return of a corporation, joint-stock company or asso- ciation, or insurance company must be made to the Col- lector of Internal Revenue of the district where its prin- cipal place of business is located. (Par. G, subd. c) The principal place of business means the place or office in which the books of account and other data to be used in preparing the return of annual net income are ordinarily kept. (T. D. 2090) A foreign corporation having several branch offices in the country should designate one as its principal office. (G. R. 83) Corporations whose business is done wholly in Porto Rico and the Philippine Islands, even though incorporated 32 NEW INCOME TAX MANUAL. in the United States, are held to be resident corporations of those possessions, and must make their returns and pay the income tax to the Collectors of Internal Revenue hav- ing jurisdiction there. (T. D. 2090) Return of person having cnstody of fnnds or property of another.— The law permits the return by a guardian, trustee, executor, administrator, agent, re- ceiver, conservator, or other person acting in a fiduciary capacity, to be filed either in the district where such per- son resides or in the district where the will or other in- strument under which he acts is recorded. ( Par. D ) But the regulations of the Treasury Department require such return to be filed in the district in which the fiduciary re- sides. (Instr. Form 1041) §15. FORM OF RETURN GENERALLY, The form of return under the Income Tax Law is to be prescribed by the Commissioner of Internal Revenue with the approval of the Secretary of the Treasury. ( Par. D ; Par. G, subd. c ) Those making returns should be care- ful to use the revised forms recently issued and not the forms issued for 1913 returns. §16. RETURN OF INDIVIDUAL. The law in terms requires individuals to make re- turns "setting forth specifically the gross amount of in- come from all separate sources and from the total thereof, deducting the aggregate items or expenses and allowance herein authorized." (Par. D) This return must show all income from each specific source, and the total; all separate items of deductions; the specific exemption claimed; and income on which the tax has been withheld at the source. (G. R. 16) A member of a partnership must include in his annual return amounts due or accrued to him from the net earnings of the partnership, wliether api)ortioned and distributed or not. (Par. D; G. R. 11) A later ruling expresses the same idea in the following language : "The income from a partnership accrues to the NEW INCOME TAX MANUAL. 33 individual partner at the time his distributive interest is determined and reducible to possession. In the returns of income made by individuals for the calendar year, there- fore, there should be included such income accruing from the business of partnerships for their business years as may have been definitely ascertained by means of a book balance, whether distributed or not" (T. D. 2090) One ixrlio is the beneficiary of a tmst must show in his return the amount derived by him from the trust estate and from all other sources, so that it may be ascertained whether or not he is liable to an additional tax. (T. D. 2090) Income items not to be included in re- tnm.— In stating gross income the following items should be excluded: (a) the value of property acquired by gift, bequest, devise, or descent; (b) the proceeds of life insur- ance policies; (c) interest upon the obligations of the United States or any of its possessions, or of a State or any political subdivision thereof; (d) the compensation of the present President of the United 'States for his pres- ent term and of all United States judges in office on Oct. 3d, 1913; and (e) the compensation of officers or employes of a State or any political subdivision thereof, unless paid by the United States. (G. R. 5. See also T. D. 1943) In this connection some possible confusion or misunderstand- ing may be avoided by observing that the provision of the law is not that such items are to be "deducted," but that they are to be "excluded," which means that they are to be absolutely disregarded as though they had no existence. Income derived from corporations, etc., trliich are taxed on net income.— A person who is liable for the normal tax of 1% only (that is to say, a person whose net income does not exceed |20,000), whether in his own behalf or that of another, is not required to make any return as to income derived from dividends on capital stock or net earnings of corporations, joint-stock companies or associations, or insurance companies which are themselves taxable on their net income (Par. D), and is not required to fill out the blank spaces for such in- 34 NEW INCOME TAX MANUAL. come appearing on Form 1040. (T. D. 1945) But per- sons who are subject to the additional tax ( that is to say, persons whose net income exceeds $20,000) are required to make a personal return of net income from all sources, corporate or otherwise. (Par. A, subd. 2; T. D. 1945) Dividends from corporations, etc., are vested in the stockholder on the date on which they are declared, whether distributed or not, and regardless of the time when the surplus or undivided profits from which they are declared were earned and entered on the books of the corporation as such; and such dividends should be ac- counted for in full in the return of the individual for the year in which they became due and payable, when the in- come of the individuals is such as to require him to return income from corporate dividends, etc. (T. D. 2048) Stock dividends, when required to be included in the return, should be accounted for at the valuation placed upon the stock by the corporation when the dividends were declared. (T. D. 2090) Commissions not determinable until after end of year.— A person receiving a salary in excess of $4,000, and, in addition, a commission of 1 per cent on all sales, the exact amount due on account of commissions not being determinable until February following the year in which the commissions were earned, at which time both his salary for the preceding year and his commissions are I)aid to him, should return as income, for the year in which payment was made, the aggregate amount received on ac- count of salary and commissions. (T. D. 2090) Compensation for services for a fixed period, which is divided by the end of a taxing year, should be accounted for in the return for the year in which payment is made and received. (T. D. 2090) Wliere a service must be completed be- fore payment is due, the total amount of the com- pensation therefor should be included in the return for the year in which the compensation is received. (T. D. 2090) Where an individual is unable to make his own return, by reason of minority, sickness, or other NEW INCOME TAX MANUAL. 35 disability, or absence from the United States, it may be made for him by his duly authorized representative. (G. R. 17; Instr. Form 1040) In case of death, of one whose income for the part of the year during which he lived was $3,000 or over, his executor or administrator must make a return, and may claim all deductions, and the exemption, to which the decedent would have been entitled. (G. R. 17; T. D. 2090) As to the amount of exemption which may be claimed where decedent was married see Sec. 7. Income from bonds guaranteed free of taxation is returned as taxed at the source. (T. D. 1942; T. D. 1948; T. D. 2090) Form of return.— An individual must use Form 1040 (revised) in making his personal return. (T. D. 1928 ; G. R. 16) A specimen return made out on this form is given in section 41. § 17. RETURN OF CORPORATION, ASSO' CIATION, ETC. The return of a corporation, joint-stock company or association, or insurance company must show (Par. G, subd. c) : (1) The total amount of its paid-up capital stock outstanding at the close of the year, or, if it has no capital stock, the total amount of its capital employed in its busi- ness at such time. The statement of capital stock should not include unissued or treasury stock, but only such stock as has actually been issued and is outstanding at the close of the year, and for which payment has been received. Where the stock issued is payable in installments or upon assessment, only so much of the capital as has been actually paid in upon such installments or assessments should be reported under this item. In case no stock is issued there should be reported the amount of capital actually em- ployed in the business and property of the corporation at the close of the year. (Instr. Form 1031) (2) The total amount of its bonded and other in- debtedness at the close of the year. This should include 36 NEW INCOME TAX MANUAL. all interest-bearing indebtedness for the payment of which the corporation or its property is bound. In case of bank- ing corporations and like financial institutions, deposits should not be reported as indebtedness under this head. (Instr. Form 1031) Where a corporation is entitled to deduct as an ex- pense of doing business the amount of interest paid on in- debtedness secured by collateral subject to sale in the ordi- nary course of its business (See Sec. 5) such interest must be stated separately from interest which is subject to the limitation as to amount indicated above. (T. D. 1993) (3) The gross amount of its income from all sources for the preceding year; or, if it is organized under the laws of a foreign country, the gross amount of its income received within the year from business transacted or capi- tal invested in the United States. Interest received upon the obligations of the United States or its jwssessions or of a State or any political sub- division thereof must be shown in the return in a space specially provided therefor, although not included as in- come. (Instr. Form 1031) (4) The total amount of its ordinary and necessary expenses, paid out of earnings in the maintenance and operation of its business and properties, stating separately all rentals or other payments required to be made as a condition to the continued use or possession of property. If the corporation or association is organized under the laws of a foreign country, the return must show the amount so paid in the maintenance and operation of its business and properties in the United States. Interest on indebtedness wholly secured by collateral which is the subject of sale in the ordinary business of the corporation should be reported under this heading as an expense of doing business. (Instr. Form 1031) (5) The total amount of losses actually sustained throughout the year, and not compensated for by insur- ance or otherwise, stating separately any amounts al- lowed for depreciation of property. (6) The amount of interest accrued and paid with- NEW INCOME TAX MANUAL. ST in the year on its bonded or other indebtedness (such in- debtedness not to exceed one-half the sum of its interest- bearing indebtedness and its paid-up capital stock or, if it has no capital stock, the amount of its capital employed in the business). A bank, banking association, or trust company must state separately all interest paid by it within the year on dei)osits. Interest paid in lieu of rent on a mortgage secured by property which the corporation occupies, should not be returned under this heading, but should be included as an expense in doing business. (Instr. Form 1031) Mortgage indebtedness, assumed or unassumed, on property to which the corporation has taken or is taking title, or in which it has an equity, or in the acquirement of which the mortgage was considered a part of the pur- chase price, is held to be a debt of the corporation and in- terest paid on such indebtedness is deductible only under this item. (Instr. Form 1031) Corporations should be careful not to include in this item the interest paid on indebtedness wholly secured by collateral subject to sale in the ordinary course of the busi- ness of the corporation, as such interest is deductible as an expense of doing business and should be so returned. (T. D. 1993; Instr. Form 1031) (7) The amount paid by it within the year for taxes, stating separately the amount, if any, paid for taxes im- posed by the government of any foreign country. (8) The net income of the corporation or association after making the deductions allowed by law. Subsidiary companies.— A corporation having subsidiary companies must attach to its return a list of such companies, with the location of the principal place of business of each. (Instr. Form 1031) Payments to officers and employees.— A cor- poration is required to show in its return the names of officers and employees to whom salaries of three thousand dollars or more were paid during the year, and the amount paid to each. (Instr. Form 1031) 38 NEW INCOME TAX MANUAL. Form of returns.— For returns for the year 1914, two forms only are provided, Form 1030 for use by insur- ance companies, and Form 1031 for use by all other cor- porations. The numerous forms prescribed for use by various classes of corporations in making their 1913 re- turns are now superseded. §18. RETURN OF FIDUCIARY. A guardian, trustee, executor, administrator, agent, re- ceiver, conservator, or any person, corporation, or asso- ciation acting in a fiduciary capacity and holding in trust an estate of another person or persons, is referred to in the regulations as the "fiduciary." (T. D. 1906) Fiduciaries are required to make a return on Form 1041 whenever the interest of any one beneficiary in the income from the estate or trust subject to the normal tax is in excess of $3,000. This duty can not be delegated to another person. When the interest of any one bene- ficiary exceeds |3,000 and a return is required, the name and full address of each beneficiary and the share of income to which he or she is entitled, even though it be less than $3,000, must be shown. (T. D. 2090) Where there are two or more joint g:nar- dians, trustees, executors, administrators, etc., the return may be made by any one of them. (Par. D) Where the fiduciary is a corporation or oi^anization, the return must be signed and executed by a duly authorized officer of such organization. (G. B. 73; Instr. Form 1041) Form and contents of return.- The return of a fiduciary must give an itemized statement of the gross income coming to his hands as such fiduciary, and the de- ductions claimed ( T. D. 1906 ) , and must be made on Form 1041, revised. (T. D. 1928) Such return must also show the names and addresses of the beneficiaries, and particu- lars as to their respective interests in the amount of in- come received by the fiduciary, the amount of exemption claimed by each beneficiary, the amount of income of each NEW INCOME TAX MANUAL. » beneficiary on which the fiduciary is liable for the tax, and the amount of tax withheld, etc. (See T. D. 1906, G. R. 73) Wliat income to be included.— The fiduciary is required to include in the return made by him for the bene- ficiaries only such income as accrues and is payable through the fiduciary, and not any income which may accrue to the beneficiaries from other sources. The provision of T. D. 1945, to the effect that persona liable for the normal tax only need not show in their re- turns any income received from the dividends or net earn- ings of corporations, associations, etc., has been extended to cover returns by fiduciaries. (T. D. 1947) Expenses of administration of an estate, such as court costs, attorneys' fees, executors' commissions, etc., are chargeable against the corpus of the estate, and are not allowable deductions in the return of the fiduciary. ( T. D. 2090) Where tlie annual income is not paid or distributed to the beneficiaries of the trust, the fidu- ciary must nevertheless make an annual list return show- ing the name and address of each beneficiary whose dis- tributable interest in the income exceeds |3,000, stating the distributive amount to which each beneficiary is en- titled, and giving all information required in list returns. (T. D. 1906; G. R. 74) Detailed instructions for the preparation of a return by a fiduciary are given in T. D. 1943 and G. R. 71, and also on Form 1041. A fiduciary acting for a beneficiary in more than one estate or trust is required to ac- count for each estate separately, and if the amount of in- come from no one estate exceeds |3,000 no return or with- holding wi.ll be required. Unless the beneficiary is under some disability which requires the fiduciary to act, the beneficiary will make his own return and account for the tax upon his entire net income. (T. D. 2090) Personal return by guardian for urard.— A guardian acting for a single ward must make a return 40 NEW INCOME TAX MANUAL. for such ward on Form 1040, as agent of the ward, and not on Form 1041. Where there are two or more wards, the guardian must make a return as fiduciary on Form 1041, and a separate return on Form 1040 for each ward having a net income of P,000 or more. (T. D. 2090) Personal return for non-resident alien Ijeneficiary.— A trustee, executor, or administrator, who represents a single beneficiary, such beneficiary be- ing a nonresident alien, must make a return on Form 1040 for such beneficiary. Where there are two or more non- resident alien beneficiaries, the fiduciary must make a per- sonal return for each on Form 1040, and in addition there- to a return as fiduciary on Form 1041. (Instr. Form 1041) Fiduciary as agent or attorney.- A fiduciary, who is legally authorized to act for the beneficiary as agent or attorney in fact may make for such beneficiary the personal annual return (Form 1040) required by law. (T. D. 1906; G. R. 72) § 19. IjIST returns of person > COR' PORATION, ETC., OCCUPYING POSITION OF SOURCE OF INCOME. Debtors and withholding agents are required to make, in duplicate, monthly list returns on or before the 20 th day of each month, and annual list returns on or before March 1st of each year, showing what has been done in respect to withholding the tax during the preceding month or year. (T. D. 1914; G. R. 50) Certificates claiming ex- emptions and deductions must accompany the list returns. (G. R. 35) Where coupons or interest orders are ac- companied by certificates of ownership, the monthly list return of the debtor or its fiscal agent (Form 1012) must give a list of all coupon or interest payments on which the normal tax was withheld, and show the names and addresses of the owners of the bonds, etc., the amount of the income thereon, the amount of the exemption claimed, the amount of income for the tax on which the NEW INCOME TAX MANUAL. 41 debtor or withholding agent is liable, and the amount of tax withheld. (T. D. 1914) Substitute certificates of collecting agents (see Sec. 34) which are received by debtors or withholding agents are to be considered the same as certificates of owners (see Sec. 34 ) , and in making the monthly list returns, the name and address of the collecting agent and the number of the substitute certificate is to be entered in place of the name and address of the owner of the bonds or obligations. (T. D. 1914; G. R. 51) Where there is more than one issue of bonds or se- curities on which the tax is withheld, the debtor or with- holding agent must make a separate monthly list return for each issue, and such returns must be accompanied by a further return (Form 1012d), which is in the nature of a summary of such separate returns. (T. D. 1914) Where the owners of bonds, etc., are not subject to have the normal tax withheld at the source (see Sec. 34), no list return is required to be made of certificates of ownership accompanying coupons or registered interest orders filed with the debtor or withholding agent, but the certificates of ownership are to be forwarded by the debtor or withholding agent to the Collector of Internal Revenue of his or its district on or before the 20th day of the month succeeding that in which such certificates were re- ceived. (T. D. 1914 ; G. R. 51) The annual list return (Form 1013) is in the nature of a general summary of the monthly list returns, show- ing, for each month, the total amount of income from the obligations of the debtor, the total amount of the exemp- tions claimed, the total amount of income for the tax on which the debtor or withholding agent is liable, the amount of tax withheld, the amount remitted to the Collector of Internal Revenue, and the balance (if any) of tax due. The monthly list returns form part of the annual list re- turn, and the latter is not' required to show the amount of tax withheld from each person. (T. D. 1914; G. R. 51) WHere coupons or interest orders are not accompanied by certificates of oisrnersliip, the 42 NEW INCOME TAX MANUAL. withholding agent must file a monthly list return (Form 1044) giving a list of all coupon or interest payments made on which the normal tax was deducted and with- held and showing the name and address of the owner of the coupons, or, if the owner is not known, the name and address of the person presenting them, the amount of in- come subject to the tax, and the amount of tax withheld. (G. R. 53) The annual list return with respect to such income (Form 1044a) must show the amount of tax withheld during the preceding year, but as the monthly list returns form a part of the annual list return, the withholding agent is not required, in maJiing the latter return, again to make an itemized list of the tax withheld from each person, but must give merely the totals of the monthly list returns for the year. (G. R. 53) Income arising in foreign countries.— A per- son, firm, or corporation licensed to undertake the col- lection of income arising in foreign countries and with- hold the tax thereon (see Sec. 36) must, each month, ob- tain the names and addresses of the persons from whom foreign items are received, and prepare a list of same in duplicate (on Form 1043) and file it with the Collector of Internal Revenue for his or its district. The list must be dated and must contain the names and addresses of the taxable persons and show the character and amount of income, the amount of exemption claimed, the amount of income on which the withholding agent is liable for the tax, and the amount of tax withheld. (T. D. 1887; G. R. 59) The licensee must also file with the Collector, in dupli- cate, an annual return (Form 1043a) showing the amount of income paid and the amount of tax withheld by him dur- ing the preceding year. This return need not be itemized, but should give merely the totals of the monthly list re- turns. (G. R. 59) Income other than from corporate obli- gations or foreign sources.— A withholding agent charged with withholding and paying the tax with re- NEW INCOME TAX MANUAL. 43 spect to income other than from corporate obligations or foreign sources, must make an annual list return (Form 1042) in duplicate, to the Collector for the district in which he or it resides or has his or its principal place of business, showing the names and addresses of i)ersons who have received incomes in excess of |3,000, on which • the normal tax has been deducted and withheld during the preceding year. This return must be accompanied by all forms presented claiming exemptions or deductions. (G. R. 69) §20. VERIFICATION OF RETURN. The return of an individual must be verified by the 6ath or affirmation of the person by whom it is rendered (Par. D; G. R. 22), and the return of a corporation or association must be verified by the oath or affirmation of its president, vice-president, or other principal officer, and its treasurer or other financial officer. (Par. G, subd. c; Instr. Form 1031) Verification may be before the Col- lector for the district, or a notary public, commissioner of deeds, or other officer authorized to administer oaths. (G. R. 22) The annual list returns of debtors and withholding agents must be verified, but verification of their monthly list returns is not required. (T. D. 1997) Where a return is executed before a notary who is not required by the laws of the state to use a seal, and no seal is used, the notary must file with the Commissioner of In- ternal Revenue the certificate of an officer possessing a seal, showing that such notary is duly commissioned and authorized to administer oaths. A return by an individual residing abroad may be acknowledged before any duly ap- pointed officer of the country in which he resides author- ized to administer oaths and use an official seal. Returns acknowledged before commanding officers of naval vessels while at sea or in foreign ports will be accepted, but re- turns executed before a summary court officer, United States Army, will not be accepted. (T. D. 2090) 44 NEW INCOME TAX MANUAL. §21. RETURN BY COMMISSIONER OF INTERNAL REVENUE FOR DELINQUENT. Where an individual (Par. E; G. R. 25) or a cor- poration, association, etc., (Par. G, subd. c; G. R. 177, 184) neglects or refuses to make a return, or makes a false or fraudulent return, the Commissioner of Internal Revenue is required, upon the discovery of the fact, at any time within three years after the return was due, to make a return upon information obtained as provided for by the Income Tax Law or any other existing law (G. R. 21), and the assessment made upon such return must be paid immediately upon receipt of notice of the amount thereof. If one consents to disclose the necessary facts to a Collector or Deputy-Collector, such olBftcer must make a return for him, which when read and consented to, signed and verified by such i)erson may be received as his return. (G. R. 20) §22. INCREASING AMOUNT SHOWN BT RETURN. if the Collector or Deputy-Collector has cause to be- lieve that the amount of a person's income is understated in his return, he must give such person notice to show cause why the amount should not be increased, and upon proof of the amount by which the person's income has been understated, he may increase the amount stated bo as to show such person's true income. (Par. D) Appeal from decision of collector.— A x>erson who believes that he has been compelled by the Collector of Internal Revenue to make a return showing a larger income than he believes should be shown, has the right to take the case to the Commissioner of Internal Revenue. (Par. D) %23. COMPELLING TESTIMONY ANB PRODUCTION OF BOOKS AND PA- PERS. When any person is summoned to appear and testify or produce books in respect to the assessment of an in- NEW INCOME TAX MANUAL. 45 come tax, the United States District Court for the district within which he resides has power to compel him to at- tend, produce the books called for, and testify. (Par. K) The books of a corporation are subject to examination by revenue officers. (G. R. 186) §24. INSPECTION OF RETURNS. Returns made by a corporation, company, or associa- tion under the Income Tax Law are public records, but they are 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. The proper officers of a State imposing an income tax may, upon request of the Governor of such State, have access to the returns and make abstracts there- of. (Par. G, subd. d; G. R. 178, 179) This rule is held to apply also to returns of individuals. ( T. D. 2016 ) An executive order of the President authorizing such inspec- tion has been made, and rules and regulations governing such inspection have been duly made and approved. (T. D. 2016) §25. DISCLOSING OR rUBLISHING IN- FORMATION CONTAINED IN RETURNS. It is unlawful for any officer, agent, or employee of the United States to divulge or make known in any man- ner any information which is required to be set forth in the income tax returns, except as provided by law, or for any person to print or publish such information in any manner not provided by law. (Par. I; G. R. 181; T. D. 1962) §26. TAXING PERIODS. An income tax is imposed for each year ending Dec. 31st. This applies to individuals absolutely (Par. D), and to corporations, associations, etc., unless they have desig- nated some day other than Dec. 31st as the close of their fiscal year. (Par. G, subd. c) 46 NEW INCOME TAX MANUAL. Designation of closing of fiscal year.— A corporation or association may designate the last day of any month as the closing of its fiscal year, and if it does so, each assessment is based upon its net income for the fiscal year closing on the designated day next preceding the date of the assessment. (Par. G, subd. c; G. R. 165) Necessity for designation and notice.— The mere fact that a corporation has ordinarily kept its books so as to show a day other than Dec. 31st as the closing of its fiscal year is not of itself sufficient to authorize it to make returns and pay the tax on the basis of such fiscal year. In order to have this right, it must make a formal designation of the closing day of its fiscal year and give notice thereof; failing in which it must make returns and pay the tax on the basis of the calendar year. (T. D. 1897; G. R. 168, 170) A return made on the basis of a fiscal year of which designation and notice have not been properly made and given will not be accepted, and the corporation will be notified of such non-acceptance and that its return must be made to cover the business of the calendar year. (T. D. 1897; G. R. 171) "BLovr designation made.— Tlie designation of a time other than Dec. 31st as the closing of the fiscal year must be made by filing a written notice of the day desig- nated with the Collector of Internal Revenue of the dis- trict in which the principal place of business of the cor- poration or association is located. (T. D. 1897 ; G. R. 165) Tin&e for making designation.— The law pro- vides that the notice of designation shall be filed by the corporation "not less than thirty days prior to the date upon which its annual return should be filed." (Par. G, Bubd. c) This is construed to mean that the notice must be filed not less than thirty days prior to March 1st of the year in which the fiscal period of twelve months closes. Thus a corporation desiring to establish its fiscal year as ending on June 30th, 1915, would be required to file its notice on or before Jan. 29th, 1915. (T. D. 2001, T. D. 2029; T. D. 2090) Mode of change from calendar to fiscal year.— When a corporation changes from a calendar to NEW INCOME TAX MANUAL. 47 a fiscal year, a return for that portion of the calendar year preceding the commencement of the fiscal period of twelve months must be filed on or before March 1st of the year following the calendar year of which it is a part, and the return for the full fiscal year must be filed within sixty days after the close of such fiscal year. Thus if a cor- poration should designate June 30th, 1915, as the close of its fiscal year, it would be required to file, on or before March 1st, 1915, a return covering the period from Jan. 1st to June 30th, 1914 ; and a return for the first fiscal year period (July 1st, 1914, to June 30th, 1915) would have to be filed on or before Aug. 29th, 1915. Thereafter the returns would be made between July 1st and Aug. 29th of each year on the basis of a fiscal year ending June 30th. (T. D. 2001; T. D. 2029; T. D. 2090) §27. ASSESSMENT OF TAX. The tax to be paid by each person is to be assessed by the Commissioner of Internal Revenue. (Par. E; G. R. 25) §28. NOTICE OF ASSESSMENT. Each person (Par. E; G. R. 25) or corporation, asso- ciation, etc. (Par. G, subd. c; G. R. 177) against whom or which a tax has been assessed is to be notified of the amount for which he or it is liable on or before June 1st of each year. §29. Br AND TO WHOM TAX PAID GENERALLY. Ordinarily, the income tax will be paid directly by the person, corporation, or association, upon whom or which it is imposed ; but an important exception to this, so far as individuals are concerned, arises out of the pro- visions of the Law as to '^collection at the source of in- come." (See Sees. 32-37) The tax is paid, in the case of an individual, to the Collector of Internal Revenue for the district in which such individual resides, or in the case of a nonresident, 48 NEW INCOME TAX MANUAL. to the Collector of the district where he has his principal place of business; and a corporation, association, etc., pays to the Collector of Internal Revenue of the district where its principal place of business is located. The responsible heads, agents, or representatives of nonresident aliens, who are in charge of the property- owned or business carried on within the United States by such aliens, must pay any and all tax, normal and addi- tional, assessed upon the income of such aliens. (T. D. 2090) §30. TIME ANJ> MODE OF PAYMENT. The tax is payable on or before June 30th of each year (Par. E; G. R. 25) and payment may be made in cash or by certified checks drawn in favor of the Collector of Internal Revenue on national and state banks and trust companies located in the city where the oflSce of the Col- lector is located, or by such "out of town" certified checks as the Collector can cash without cost to the government. (T. D. 1990) A corporation must pay its tax on June 30th, the same as an individual, unless it has designated a day other than Dec. 31st as the closing of its fiscal year, in which case it must pay its tax one hundred and eighty days after such closing day. (Par. G, subd. c; G. R. 177) A witliliolding agent should not forward the amount withheld until after the time for filing claims for exemptions or deductions has expired. (T. D. 1965) Where a return is made by the Commis- sioner of Internal Revenue because of the neglect or refusal of a person (Par. E; G. R. 25) or corporation, association, etc. (Par. G, subd. c; G. R. 177), to make a return, or because of the false or fraudulent character of the return made, the tax assessed upon such return must be paid immediately upon receiving notice of the assess- ment. Penalty for delay in paynient.— Where a tax or any part thereof due from an individual (Par. E; Q. R. 25) or from a corporation, association, etc. (Par. G, NEW INCOME TAX MANUAL. 49 subd. c; G. R. 177) is not paid when due, and it is not paid within ten days after notice and demand for pay- ment by the Collector of Internal Revenue, five per cent is to be added to the amount unpaid, and interest is charged on the amount unpaid at the rate of one per cent a month from the time when the tax became due. This does not, however, apply to amounts due from the estates of insane, deceased, or insolvent persons. (Par. E) §31. RECEIPT FOR PAYMENT. The Collector of Internal Revenue is required to give receipts for taxes paid. One paying the tax for others is entitled to a separate receipt for each tax so paid, which receipt justifies him in withholding the amount so paid. He may be required to surrender this receipt to the per- son for whom the tax was paid if the latter gives him a written receipt for the entire amount due, including the tax so paid and withheld. (Par. J) §32. COLLECTION AT THE SOURCE OF INCOME GENERALLY. All persons, firms, copartnerships, companies, corpo- rations, joint-stock companies or associations, and insur- ance companies, in whatever capacity acting, including lessees or mortgagors of real or personal property, trus- tees acting in any trust capacity, executors, administra- tors, agents, receivers, conservators, employers, and officers or employees of the United States, who have the control, receipt, custody, disposal, or payment of interest, rent, salaries, wages, premiums, royalties, taxable annuities, compensation, remuneration, emoluments, or other fixed or determinable annual gains, profits, or income of an- other person, exceeding |3,000 for any year, other than dividends on capital stock, or shares in the net earnings of corporations or joint-^tock companies or associations which are subject to the tax, and who are required to make a return on behalf of another (see Sec. 12), are authorized and required to deduct and withhold from such gains, profits, and income an amount sufficient to pay the normal 50 NEW INCOME TAX MANUAL. tax of 1% thereon, and to pay over the same to the Col- lector of Internal Eevenue, and are personally liable for such amount. (Par. E; G. R. 30, 64) Such persons, cor- porations, etc., are referred to as "debtors" or "withhold- ing agents." (G. R. 31) Agents have no responsibility with respect to with- holding the tax upon income paid over by them to their principals, where such principals are citizens or residents of the United States ; but agents of nonresident aliens are required to pay the tax for them. (T. D. 2090) Tlie "source of income" means the place where the income originates. (T. D. 1890 ; G. R. 31) Amonnt on whicli tax paid — Necessity for claiming exemptions and deductions.— The nor- mal tax of 1% must be retained and paid over as to the entire amount received for or payable to another, unless such other tiles with the person required to withhold and pay the tax, at least thirty days before March 1st of each year, a statement claiming his exemption of |3,000 (or $4,000 as the case may be), in which case the tax is re- tained and paid over only as to the excess over such ex- emption. One who has failed to give notice of his exemp- tion may, however, apply for a refund of the tax paid on his exempt income. (Par. E; G. R. 33) If a person for whom the tax must be retained and paid by another claims any other deductions from net in- come, he must either file a statement of his annual gains, profits, and income from all other sources and of such claimed deductions with the one required to withhold and pay the tax, at least thirty days before March 1st of each year ( which statement becomes a part of the return to be made in his behalf by such other), or apply to the Col- lector of Internal Revenue (who should notify the with- holding agent of the application), at least thirty days be- fore March 1st, for such deductions. (Par. E; G. R. 33) Amonnt of tax to be paid at source of in- conie.— The provisions as to collection at the source of income relate only to the normal tax of 1%, and any addi- tional tax is assessed upon a return made by the individ- NEW INCOME TAX MANUAL. 51 ual, and paid directly by the individual. (Par. E; G. R. 29) Income of corporations, etc.— The provisions of the Law with respect to the deduction and payment of the tax at the source of income apply only to the normal tax imposed on individuals. (Par. E) Accordingly in- terest, rent, etc., accruing to a corporation, joint-stock com- pany or association, or insurance company must be paid in full by the one from whom it is due without any de- duction for the income tax, regardless of whether the amount be great or small. Income of partnerships.— The provisions of the Income Tax Law with respect to the deduction and pay- ment of the tax at the source of income are held not to apply to the income of partnerships as such. (T. D. 1957) Interest on deposits in banks, etc.— Banks, bankers, trust companies, and other banking institutions receiving deposits of money are not required to withhold the normal tax of 1% on the interest paid, accrued, or accruing to depositors, whether on open accounts or on certificates of deposit, but all such interest, whether paid, or accrued and not paid, must be included in his return by the person entitled to receive it. (T. D. 1893; G. R. €7) Alimony is regarded as fixed and determinable in- come, and the tax thereon must be withheld by the person by whom it is paid, where the amount exceeds |3,000. (T. D. 2090) Where profits are distributed to an em~ ployee by a corporation, and the aggregate of such profits and the employee's salary exceeds |3,000, the normal tax should be deducted and withheld therefrom. (T. D. 2090) Payment for surrendering contract of em- ploy ment.— Where an employee is paid a sum equal to two years' salary on condition that he surrender his con- tract of employment, and the sum paid exceeds f 3,000, the normal tax should be withheld therefrom. (T. D. 2090) Paynicnts to government ofBLcers and em- ployees in connection with quarters, heat and light, mile- 52 NEW INCOME TAX MANUAL. age, reimbursement for expenses, and allowances in lien of subsistence are not subject to withholding as "fixed or determinable annuals or periodical gains, profits, and in- come." (T. D. 2079; T. D. 2090) Pay of officers and enlisted men.—Where officers and enlisted men are entitled to foreign service pay, aids' pay, and pay for certificate of merit, such items of income are considered as fixed and determinable and subject to the withholding provisions of the Income Tax Law. (T. D. 2090) Corporations, associations, etc., not re- quired to ivitlUiold tax.— The corporations, associa- tions, etc., which are exempt from the income tax (See Sec. 1) are also exempt from the duty of withholding the tax from amounts which they receive for or pay to others^ and are subject to none of the obligations or requirements imposed on withholding agents. (T. D. 1967; T. D. 2090) They are, however, required to receive from the holders of their bonds, to whom interest payments are made, certifi- cates of ownership, which must be forwarded to the Col- lector of the district in which the particular organization is located; but no tax will be withheld, and no formal report of interest or other payments made will be required. (T. D. 2090) Form of certificates.-On May 2d, 1914, the Treasury Department issued a new set of forms for use in connection with the collection of the tax at the source of income. The certificates theretofore used were exten- sively revised, and in a number of instances entirely super- seded. (T. D. 1976) But certificates executed prior to Oct. Ist, 1914, on the old forms may be accepted. (T. D. 2020) In discussing the methods of collection at the source (Sees. 34-37) all references are to the new forms. Color of certificates.— The regulations require, in respect to the certificates used in connection with the collection of the tax at the source of income, that all cer- tificates claiming exemption shall be on yellow paper, all certificates not claiming exemption on white paper, and certificate Form 1002, for use by the first bank or collect- ing agency, on green paper. (T. D. 1976) NEW INCOME TAX MANUAL. S$ Filing of certificates by attorneys. — For income tax purposes, a person holding a power of attorney from another is authorized to file any certificate which hi» principal, as such, would be entitled to file. (T. D. 2090) Stamp tax on certificates.- The stamp tax im- posed by the War Kevenue Tax Act of Oct. 22d, 1914, does not apply to certificates in connection with the income tax, where such certificates are required only by the regula- tions and not by the Income Tax Law itself. (T. D. 2049) §33. ITEMS ON WHICH TAX NOT WITHHELH AT THE SOURCE. No tax is to be withheld at the source on : -- (1) Dividends on the capital stock, or from the net earnings of corporations, joint-stock companies or asso- ciations, or insurance companies which are subject to the tax. (T. D. 1890; G. R. 32) Such dividends are not sub- ject to the normal tax as against the person receiving them. (See Sec. 4) (2) Proceeds of life insurance policies paid upon the death of the person insured, or payments made by or credited to the insured, on life insurance, endowment, or annuity contracts, upon the return thereof to the insured at the maturity of the term mentioned in the contract, or upon the surrender of the contract (T. D. 1890; G. B. 32) Such items are not included as income within the meaning of the law. (See Sec. 4) Where, however, an insurance company pays interest income to the beneficiary under a policy, it is required to withhold and pay over the normal tax of 1% thereon. (T. D. 1890) (3) Income of an individual which is not fixed or cer- tain, and payable at stated periods, or is indefinite or irregular as to amount or time of accrual. This applies to the income which farmers, merchants, agents compen- sated on the commission b^sis, lawyers, doctors, authors, inventors, and other professional persons derive from fol- lowing their professions or vocations. Thus when a lawyer receives a retainer of $5,000 as a special fee, the payer is not required or entitled to make any deduction therefrom 34 NEW INCOME TAX MANUAL. for the tax. Such persons must make a personal return of all their income and pay the tax thereon, provided, of course, that the income exceeds the fixed exemption. It is otherwise, however, where such a person receives a fixed or certain income from another, payable at stated periods, as in such ease the payer must deduct the tax. For ex- ample, if a lawyer is employed under a retainer of 1 5,000 per year, payable yearly, quarterly, monthly, or at other stated periods, the payer must withhold and pay over the normal tax on that amount, or so much thereof as exceeds the fixed exemption claimed with respect thereto (T. D. 1890; G. R. 32), and obviously the same is true where a lawyer, doctor, author, etc., is employed by another at a fixed salary. The tax should not be withheld on commissions paid to a salesman where they are indefinite as to amount and time of accrual, nor are payments on account of mileage subject to withholding. ( T. D. 2090) (4) The value of property acquired by gift, bequest, devise, or descent. (T. D. 1890; G. R. 32) The tax is im- posed only upon the income from such property and not upon its value. (See Sec. 4) (5) Interest upon the obligations of the United States or its possessions, or of a State or any political sub- division thereof. (T. D. 1890; G. R. 32) Such interest is exempt from the tax. (See Sec. 9) (6) The compensation of the present President of the United States for his present term of office, and of Judges of the United States courts in office at the time of the passage of the Law; and also the compensation of officers or employees of a State or any political subdivision thereof, except when such compensation is paid by the United States government. (T. D. 1890; G. R. 32) These items are expressly exempted from the income tax. (See Sec. 8) (7) Salary received by a foreign employee of a do- mestic corporation for services rendered entirely in a foreign land. (T. D. 2090) As to income payable to a fiduciary, the tax is not to be withheld at the source if the fiduciary elects NEW INCOME TAX MANUAL. 55 to collect the entire amount and assume responsibility for the tax ; but if the fiduciary prefers to have the tax de- ducted at the source, the debtor or withholding agent must deduct it. This matter is explained fully in Sec. 37. § 34. COLLECTION OF TAX ON INTEREST ON BONDS, MORTGAGES, ETC, OF CORPORATIONS, ASSOCIATIONS, ETC. The normal tax of 1% on income, gains, or profits, accruing to a citizen of the United States, whether resid- ing in the United States or abroad, or to a person resid- ing in the United States although not a citizen thereof, de- rived from interest upon bonds, mortgages, deeds of trust,, or other similar obligations (including equipment trust agreements and receivers' certificates) of corporations, joint-stock companies or associations, or insurance com- panies, whether payable annually or at longer or shorter periods, must be withheld at the source, although such interest does not amount to |3,000 a year unless an exemp- tion is claimed. (Par. E ; T. D. 1887; G. R. 37; T. D. 2090) In this connection the term "similar obligations" of corporations means those obligations which, although not bonds, mortgages, or deeds of trust, are similar in form, in purpose, or in being extended beyond the time of ordinary bankable commercial paper; and investment certificates or securities issued by a corporation for a term of years are corporate obligations within the meaning of the law. (T. D. 2090) Interest payments on ordinary bankable commercial paper of corporations are not subject to withholding at the source unless the payments to a single individual within the year exceed |3,000, or unless the interest is pay- able to a nonresident alien, in which case the tax must be withheld regardless of the' amount of interest. (T. D. 2090) Where scrip certificates are issued by a corporation to its stockholders in lieu of dividends, and such certificates bear interest payable semi-annually and are redeemable at 56 NEW INCOME TAX MANUAL. a specified time not more than one year from the date of issue, the interest thereon is not subject to withholding un- less the amount payable to an individual in a calendar year exceeds $3,000. (T. D. 2090) No deduction is to be made from interest upon the obligations of the United States or its possessions, or of a State or any political subdivision thereof. (T. D. 1887; O. R. 37) Tlie term "debtor" is used in the regulations as covering all corporations, joint-stock companies or asso- ciations, and insurance companies upon whose obligations interest is payable. (T. D. 1887; G. R. 38) Appointment of fiscal agent by debtor.— The ^'debtor" may appoint paying or fiscal agents to act for it in all matters pertaining to the collection of the Income Tax, upon filing with the Collector of Internal Revenue for its district a proper notice of the appoint- ment of such agent or agents. (T. D. 1887; G. R. 38) Such withholding agent may file the necessary returns when authorized by the debtor. (G. R. 38) What is tlie "sonree" of income.- For the pur- pose of collecting the tax upon coupons or registered in- terest, the debtor or its paying or fiscal agent in the United States is regarded as the source of income. (T. D. 1887; O. R. 39) When tax to be -nritliheld by debtor or fiscal agent.— When a coupon or order for registered interest is accompanied by a certificate of ownership not claiming exemption (Form 1000) signed by the owner of the bond on which the interest is due, the tax is to be withheld by the debtor or its fiscal agent, and no other bank, trust company, banking firm, or individual taking the coupon or interest order for collection or otherwise may withhold the tax thereon. To make such course proper a separate certificate must be made out by each owner of bonds for the coupons or interest orders for each separate issue of bonds or obligations of each debtor. (T. D. 1887; G. R. 59) The ownership certificate need not be signed with the NEW INCOME TAX MANUAL. 57 full Christian name of the owner, but his ordinary or usual business signature may be used, provided it iden- tifies him and is accompanied by his complete address. (T. D. 1920) Where no street address is given in a certifi- cate it will be assumed that the same is not necessary in addressing mail, and the certificate will be accepted. (Let- ter of April 23, 1914, to National Park Bank) A corporation, collecting agency, or person first re- ceiving from the owner any interest coupon or order for the collection of registered interest, and to whom a certifi- cate of ownership is delivered, must require the person tendering such coupon or order satisfactorily to establish his identity. ( T. D. 1887 ; G. R. 52 ) Signing of cexrtificate of ownership by Agent.— The certificate of ownership may be signed in the name of the owner of the bonds by his duly authorized agent, in w^hich case the certificate must show the full name and address of both the owner and his agent. If the person, firm, or organization to whom or which such cer- tificate is presented is satisfied as to the identity and re- sponsibility of the person signing, he or it must stamp or write on the face of the certificate the words : "Satisfied as to identity and responsibility of agent," giving the name and address of the agent, and the certificate may then be accepted by persons, firms, or organizations to whom or which it is presented without requiring further evidence of the authority of the agent. If the person, firm, or or- ganization first receiving a certificate of ownership signed by an agent be not satisfied or cannot satisfy^ himself or Itself of the agent's authority, the agent must furnish evi- dence of his authority to act, and the person, firm, or or- ganization shall then endorse on the certificate the fact of his or its satisfaction as to the identity and responsi- bility of the agent, retaining the evidence of authority so furnished. (T. D. 1904 ; G. B. 43) Forwarding of or snbstitntion for certifi- cate of oimersliip by collecting agent.— Respon- sible banks, bankers, and collecting agents (in foreign countries as well as in the United States) receiving cou- 58 NEW INCOME TAX MANUAL. pons for collection with certificates of ownership attached may either present the coupons with the attached certifi- cates to the debtor or withholding agent for collection, or, at the option of the collecting agent, the certificates may be detached from such coupons and forwarded direct to the Commissioner of Internal Revenue at Washington, D. C, not later than the 20th of the month following that on which the coupons were received for collection. (T. D. 1903; G. R. 40) In the latter case, the bank or other collecting agent must substitute for the owner's certificate, and attach to the coupons, in lieu thereof, its own certificate ( Form 1058 if exemption was claimed and Form 1059 if exemption was not claimed) showing that the coupons were presented with a certificate of ownership attached, and that such certificate will be forwarded to the Commissioner of In- ternal Revenue within the time prescribed. (T. D. 1903; G. R. 40) The name of the bank or collecting agent may be printed or stamped on these substitute certificates; as may also the signature of the person authorized to sign the certificate for the bank or collecting agent, provided authorization for the use of such facsimile signature is first filed with the Commissioner of Internal Revenue. ( T. D. 1986) The certificate of ownership which is thus detached must be endorsed, preferably with a rubber stamp, with a statement showing that the collecting agent's certificate was attached to the coui>ons in lieu thereof. (T. D. 1903) Banks, bankers, and other collecting agents making such substitution of certificates are required to keep a complete record of all such transactions and substitutions (T. D. 1903; G. R. 40), but no license is required to au- thorize them to make such substitution of certificates. (T. D. 1903) Where interest checks are sent ont to the registered owners of bonds registered both as to principal and interest, the debtor must withhold the normal tax of 1%, unless the registered owner has filed with the debtor, at least five days before the date on which the interest is NEW INCOME TAX MANUAL. 59 due, a certificate claiming exemption. (T. D. 1887; G. R. 41, 42; T. D. 1974) The forms of certificate provided for the use of owners of coupon bonds (Form lOOOB for in- dividual owners, Form 1001 for firms or organizations, and Form 1004 for nonresident aliens) may be used by the owners of registered bonds for the purpose of claiming exemption. (T. D. 1974) Interest orders or checks so sent out must have stamped or written thereon the words "Exemption claimed by certificate filed with debtor" or "Income tax withheld by debtor" as the case may be, and when they are so en- dorsed they need not be accompanied by any certificate of ownership when presented for collection. (T. D. 1974) Where a part of the interest has been withheld for payment of the income tax, the debtor may, upon the proper certificate being afterwards filed, release and pay to the person entitled thereto the amount of income with- held, to the extent of the exemption claimed. (T. D. 1974) Interest checks sent out by corporations which are exempt from the operation of the Income Tax Law (See Sec. 1) should have stamped or written across the face thereof "Corporation exempt under paragraph G from withholding;" otherwise the first bank or collecting agent should deduct and withhold the normal tax therefrom. (T. D. 2090) When tax to be Trithheld by first colleet- ing agency.— When a coupon or interest order is not accompanied by a certificate of ownership (Form 1000 or Form lOOOB ) , the first bank, trust company, banking firm or individual, or collecting agency receiving such coupon or interest order for collection or otherwise must deduct and withhold the tax, and must attach to the coupon or interest order his or its own certificate (Form 1002) giv- ing the name and address Of the owner of the coupon or order, or of the person presenting such coupon or order if the owner is not known, describing the coupon or order, and stating that he or it (the bank or other collecting agency) is withholding the tax upon such coupon or eO NEW INCOME TAX MANUAL. order. Where this is done, the debtor cannot again with- hold the tax upon such coupon or order, but in lieu there- of must deliver to the Government the certificate of the bank or other collecting agency which withheld the tax. (T. D. 1887; G. R. 52) This does not apply to coupons representing the in- terest on bonds or other obligations of the United States or any of its possessions, or of a State or any political sub- division thereof, such as a city, county, etc. (T. D. 1892; G. R. 37) Claim of fixed exemption.— A citizen or resi- dent of the United States, who wishes to claim his fixed exemption of |3,000, or $4,000 as the case may be, with respect to the income accruing from interest on corporate bonds, mortgages, etc., must state this fact in the certifi- cate of ownership (Form lOOOB) which accompanies his coupons when presented for collection. When the interest is registered this certificate must be filed with the debtor at least five days before the date when such interest is due. (T. D. 1887; G. R. 44; T. D. 1974) Such a certificate must be signed by the claimant, and must contain his post-office and street address, and the date when signed. But a duly authorized agent, trustee acting in a trust capacity, etc., may sign such a certificate for the person for whom he acts. (T. D. 1887) Such a certificate need not be signed with the full name of the claimant, but the ordinary or usual business signature of the claimant may be used, provided it identifies him and is accompanied by his complete address. (T. D. 1920) Where no street address is given it will be assumed that the same is not necessary in addressing mail, and the cer- tificate will be accepted. (Letter of April 23, 1914, to National Park Bank) Where securities are owned jointly by several per- sons, and a certificate of ownership claiming exemption (Form lOOOB) is filed, the person signing such certificate may claim the exemption thereon only in his own right, and such other joint owners as desire to claim exemption against their pro rata share of the income should file with NEW INCOME TAX MANUAL. 61 the person who signs the certificate of ownership their own certificates of exemption on Form 1007, which should be attached to the ownership certificate when presented. (Let- ter of May 14, 1914, to Central Trust Co.) A claim for deductions, other than the fixed exemption, may be made by filing a statement of the de- ductions claimed (Form 1008) with the debtor at least thirty days before March 1st, or applying to the Collector of Internal Revenue, within the same time, for such de- ductions. (Par. E; G. R. 33; T. D. 1890) Bonds owned by corporations, etc.— The debtor is not required to withhold or deduct the tax upon income derived from interest upon bonds owned by cor- porations, joint-stock companies or associations, or insur- ance companies, or other organizations, associations, fra- ternities, etc. (Par. E), where the coupons or interest orders are accompanied by a certificate of ownership ( Form 1001) which certificate must be filed with the debtor when the coupons or interest orders are presented for payment. (T. D. 1887; G. R. 45) A corporation, association, etc., of a foreign country should use Form 1004 in making its claim of exemption. Bond or other obligation oiimed by part- nership.— Where a coupon or interest order, presented for payment, represents the interest on a bond or similar obligation owned by a partnership, it must be accom- panied by a certificate of ownership ( Form 1001 ) , evidenc- ing the fact of partnership ownership, and when such cer- tificate is filed the tax on such interest payment is not to be withheld. (T. D. 1957) Bonds oxmed by non-resident foreigners.— The tax will not be deducted from the interest on bonds, mortgages, equipment trusts, receivers' certificates, or other similar obligations the bona fide owners of which are non-resident aliens where the interest coupons or, in case of wholly registered bonds, the orders for the payment of such interest, are accompanied by a certificate showing the foreign citizenship and residence of the owner. ( T. D. 1887; G. R. 46; T. D'. 2017) €2 NEW INCOME TAX MANUAL. When the certificate is made by the owner, it should be on Form 1004, but it is also provided that responsible banks or bankers in the United States or in foreign coun- tries may execute a certificate (Form 1060) to accompany coupons or orders for interest on bonds owned by non- resident aliens. This certificate does not give the names of the owners, but is merely a declaration of the bank or banker of the fact of foreign ownership together with his or its agreement to pay the tax upon presentation of proof that the interest was taxable. (T. D. 1977; T. D. 1988) Bonds of exempt coxrp orations, etc.— When coupons from bonds of corporations, etc., which are exempt from the provisions of the Income Tax Law (See Sec. 1) are presented to a bank or collection agency for collection in the ordinary course, a certificate of ownership (Form 1000 or Form lOOOB) should be attached thereto, and in such case no tax should be deducted or withheld. But if such coupons are presented without a certificate of owner- ship, the bank or collection agency is required to deduct the tax and attach its own certificate (Form 1002) to the- coupon. (Letter of July 30, 1914, to Corporation Trust Co., as subsequently modified by ruling contained in Let- ter of Nov. 18, 1914, to Collector of Internal Revenue at St. Louis, Mo. See also T. D. 2090) Iiangnage of certificates to be used by for- eigners.— Certificates of ownership which are to be filed by non-resident foreigners and by foreign partnerships and organizations must be printed in the English language, but the text of the certificate may also be printed in a for- eign language underneath the lines of the English text. Values must be expressed in United States dollars in fill- ing in the blanks provided for that purpose. (T. D. 1926) Coupons maturing at different dates.— Where coupons from bonds of the same issue become due at different dates, a separate certificate of ownership should be filed for each maturity of coupons. (Letter of Dec. 7, 1914, to Brown Brothers, which changes the ruling contained in letter of Nov. 2, 1914, to Corporation Trust Company) NEW INCOME TAX MANUAL. 63 Showing numbers of bonds on certifi- cates.— The regulation requiring the filling in on cer- tificates of the numbers of bonds or other like obligations of corporations, etc., from which interest coupons are de- tached or upon which registered interest is paid, has been waived until further notice. (T. D. 2022) Disposition of certificates.— The debtor or its paying or fiscal agent must deliver all certificates received by or filed with it, together with a list of the names and addresses of those for whom the tax has been withheld, showing amounts, to the Collector of Internal Revenue of its district on or before the 20th day of the month succeed- ing that in which the certificates were received. (T. D. 1887) Amount actually received by oumer of bonds.— It is to be noted that the provisions as to who shall withhold the tax relate to responsibility to the gov- ernment, and do not affect the amount which the person presenting the coupons, etc., receives. That is to say, even though the coupons, etc., are accompanied by a proper cer tificate of ownership (Form 1000) the owner (not claim ing an exemption) must not expect the bank or other col lecting agency to credit him with the face value thereof but he will be credited only with the amount actually col lected thereon, that is, the face value less the tax of 1% The exchange of interest conpons for funding bonds is a payment of interest on the bonds and the income tax should be imposed and paid upon such interest as income for the year in which it matures and the payment is made, and in the absence of a proper claim for exemption the tax should be deducted and withheld upon the amount represented by the coupons. (T. D. 2090) Retirement of bonds.— Where bonds, under con- tract provisions therein, are retired within an interest period and prior to the expiration of the full term of the bonds, ownership certificates are required and should cover that part of the interest period affected between the begin- ning of such period and the retirement of the bonds. (T. D. 2090) 64 NEW INCOME TAX MANUAL. Securities guaranteed free from taxa- tion.— A corporation, company, or association which has issued bonds or other evidences of indebtedness with a guaranty that the interest thereon shall be free from taxa- tion, is not entitled to make any deduction for the pay- ment of the income tax. (Par. G, subd. b) A contract entered into after the Income Tax Liaur took effect cannot have any effect in re- gard to any income tax imposed upon any person liable to payment thereof. (Par. E; G. R. 27) This does not amount to a prohibition against the issuance of bonds con- taining a "tax free" or "no deduction" clause after the Income Tax Law went into effect. But in view of the pro- visions of the law, such a clause will not release a taxable person from liability for the income tax with respect to the income received on such bonds; and the debtor cor- poration, or its duly authorized agent in paying coupons from such bonds, will be held responsible for the normal tax due in such cases when no tax is withheld and no ex- emption claimed. (Letter of Dec. 11, 1914, to Collector of Internal Revenue at Boston, Mass.) §35. COLLECTION AT THE SOURCE OF TAX ON INCOME OTHER THAN INTEREST ON BONDS, MORT' GAGES, ETC, OF CORPORATIONS, ASSOCIATIONS, ETC. "Debtor" and "xrithholding agent."— A per- son, corporation, etc., occupying the position of a source of income is referred to as the "debtor," and the debtor's duly authorized agent to make the deduction and pay- ment is referred to as the "withholding agent." (T. D. 1890) By Tv-hom tax withheld.— The tax is to be de- ducted and withheld at the source of income, and payment made to the Collector of Internal Revenue, by the debtor or his, her, or its duly appointed agent authorized to make such deduction and payment; and no other person, firm, or organization, in whatever capacity acting, having the NEW INCOME TAX MANUAL. 65 receipt, custody, or disposal of any income is required again to deduct and withhold the tax thereon. (T. D. 1890; G. R. 34) Any person, firm, or organization, other than the debtor, who has withheld the tax is required to file with the Collector of Internal Revenue of his, her, or its district a certificate (Form 1006) showing the receipt, source, and nature of such income, the amount and owner- ship thereof, and the fact of the deduction of the tax. (T. D. 1890; G. R. 34) When and lioiir tax deducted.- When interest, rents, salaries, wages or other income is paid monthly or periodically during the year, nothing is to be withheld for the tax until the payments aggregate $3,000. But as soon as that amount is reached, the tax is to be withheld on the whole amount (the |3,000 already paid and the excess over that amount) unless the person entitled to receive the money files a notice of claim of exemption (Form 1007), in which case the tax is to be withheld only as to the excess over 13,000 or |4,000 as the case may be. (T. D. 1890; G. R. 64, 65; T. D. 2090) Rent.— Where rent in excess of $3,000 in a year be- comes due to an individual, it is the duty of the tenant or lessee to withhold the tax, and he cannot transfer his duty in this respect to a real estate agent who collects the rent. Nor is such agent authorized to withhold from the owner, on account of the income tax, any part of the amount which he receives as rent. ( T. D. 2090 ) Where a tenant rents two pieces of property from the same owner, the tenant should combine the payments, and when such payments so combined aggregate in excess of |3,000 the normal tax should be deducted and withheld, subject to authorized exemptions claimed. (T. D. 2090) A lessee paying rent in excess of |3,000 a year under a lease from two or more individuals must make deduction from all payments to individuals in excess of |3,000 un- less certificates of exemption are filed. He should ascer- tain in what proportion the rent is divided by the use of office Form lOOOB, which may be adapted and executed by one of the parties in interest, the others executing Form 1007. The withholding should be made from the incoane 66 NEW INCOME TAX MANUAL. of individuals and not from the aggregate amount paid. This situation is not different because the lessors are hus- band and wife if their individual interests are separate, nor is it changed because, by instruction, the actual pay- ments of rent are made to one lessor, to be distributed by him. (T. D. 2090) Where notes are given in payment of rent, the lessee's obligation to withhold is not altered, and the withholding should be at the time the notes are given, and not at ma- turity. (T. D. 2090) When rental payments in excess of |3,000 a year are payable to a fiduciary, who fails or refuses to file Form 1063, agreeing to act as the source, the beneficiaries are not entitled to file exemption certificates directly, the lease having been taken from the fiduciary. If the fiduciary's certificate is not filed, the lessee should withhold 1 per cent on the entire amount. The lessee is not presumed to have knowledge of the beneficiaries unless they are parties to the lease. (T. D. 2090) Where a board of education for a school district rents property at an annual rental exceeding |3,000, such board of education is regarded as a tenant and should with- hold the normal tax, subject to the exemption claimed. (T. D. 2090) Salaries are subject to withholding on the basis of the calendar year only, even though the corporation by which they are paid has a fiscal year different from the calendar year. (T. D. 2090) Status of individual mortgage assumed by corporation.— Where an individual issues coupon bonds secured by a mortgage upon real estate, and subse- quently a corporation purchases the real estate and as- sumes (as between the mortgagor and itself) the pay- ment of bonds and coupons, the character of the bond obligation remains unchanged and as created, even though the corporation is to pay all interest and will ultimately pay off the mortgage, and there will be no withlmlding by the corporation (it being placed in the stead of the mortgagor) until the interest payment to any one person in any year exceeds $3,000. (T. D. 2090) NEW INCOME TAX. MANUAL. 67 ClaiiUL of exemption.— Where a person entitled to receive income, the tax upon which is subject to be with- held at the source, wishes to claim his fixed exemption of |3,000 or |4,000 as the case may be, with respect to such income, he must file with the debtor or withholding agent, not less than thirty days before March 1st, a notice ( Form 1007) claiming such exemption. (T. D. 1890; G. R. 33) A landlord may file such a claim with his tenant. (T. D. 2090) Firms, organizations, or fiduciaries desiring to estab- lish their identity and non-liability to having the tax with- held as to them must use Form 1063 for this purpose. (T. D. 1998) Claim, of deductions.— Where a person, upon a part of whose income the tax is to be withheld at the source, wishes to avail himself of the deductions (as distinguished from the fixed exemption) which the law allows (see Sec. 4), he must file, not later than 30 days piior to March 1st, either with the Collector of Internal Revenue for the dis- trict in which a return is to be made for him or vrith the debtor or withholding agent a statement (Form 1008) showing his total income and the deductions to which he is entitled. (T. D. 1890; G. R. 33, 66) A landlord may file such a claim with his tenant or with the Collector of Internal Revenue. (T. D. 2090) Statement for exemption or deductions by ivithliolding; agent.— Where the one for whom the tax is to be withheld and paid is a minor, or insane, or is ab- sent from the United States, or is prevented by illness from making the statement or application, the statement for ex- emptions or deductions or the application for deductions may be made by the one required to withhold and pay the tax, if he has sufficient knowledge of the facts, which must be made to appear by his sworn statement. (Par. E ; T. D. 1890; G. R. 33; Form 1009) Coupons from bonds of United States, States, Municipalities, etc.— Coupons representing interest on bonds or other obligations of the United States or any of its possessions, or of a State or any political sub- division thereof, such as a city, county, etc., need not be 68 NEW INCOME TAX MANUAL. accompanied by any certificate of ownership, as the in- terest upon such obligations is not subject to the income tax. (T. D. 1892 ;G. R. 37) §36. COLLECTION OF TAX ON INCOME ARISING IN FOREIGN COUN^ TRIES. The normal tax of 1% must be deducted by those who- collect the proceeds of coupons, checks, or bills of exchange given in payment of interest upon bonds of foreign coun- tries, or foreign mortgages or other similar obligations, or dividends upon the stock or interest upon the obligations of foreign corporations, associations, or insurance com- panies engaged in business in foreign countries, although the interest or other income does not exceed |3,000 a year. (Par. E) liicense for collection from foreign conn- tries.— Any person, firm, or corporation undertaking as a business, for accommodation, or for profit (which in- cludes handling either by way of purchase or collections,, the collection of interest, dividends, or income, from for- eign countries, by means of coupons, checks, or bills of exchange, etc.), is required to obtain a license from the Commissioner of Internal Revenue, and is subject to such regulations as shall be prescribed by that officer, with the approval of the Secretary of the Treasury, enabling the Government to ascertain and verify the withholding and payment of the tax. (Par. E; T. D. 1887; G. R. 54) An application for a license (Form 1017) should be made to the Collector of Internal Revenue for the district in which the collecting agent is engaged in business. (T. D. 1887, 1909; G. R. 54) Such an appUca- tion, accompanied by a proper surety bond, when both had been approved by the Collector, was a sufficient compliance with the law to enable the person making the application to do business until Feb. 1st, 1914. (T. D. 1887) All per- sons applying for licenses must register their names and addresses with the Collector of Internal Revenue and state NEW INCOME TAX MANUAL. » the nature of the business in which they are engaged. (T. D. 1887) Tlie license (Form 1010) may be issued without cost to such persons as the Commissioner or Collector of Internal Revenue shall approve (T. D. 1887, 1909; G. R. 55), and continues in force until revoked. (T. D. 1909 i G. R. 55) Bond of licensee.— The Collector of Internal Revenue may require an applicant for a license to give a bond satisfactory to him, or may issue the license with- out a bond if satisfied of the applicant's business and finan- cial responsibiUty. (T. D'. 1887, 1909; G. R. 56) If a bond is required, it must be filed for each calendar year; and failure to give or renew the bond in cases where a bond is required will automatically revoke the license. (T. D. 1909) By ivlioni tax Trithlield.— The licensed person, firm, or corporation first receiving any such foreign items, for collection, or otherwise, must withhold therefrom the normal tax of 1%, and will be held responsible therefor. If the foreign item is in the form of a check or bill of ex- change, the words "Income tax withheld by " (giving name, address, and date) must be endorsed or stamped thereon by the licensee; but if the item is represented by a coupon or coupons from bonds, the licensee must attach thereto a statement identifying the same, and the endorse- ment showing that the tax was withheld must be placed on such statement instead of the coupon or coupons. Such endorsement or stamp is sufficient evidence of the with- holding of the tax to relieve subsequent holders or pur- chasers from the obligation of withholding. (T. D. 2023; T. D. 2090) Claim of exemption.- Where an individual pre- senting foreign items for collection claims his fixed exemp- tion with respect thereto (using Form lOOOB for this pur- pose) no tax is to be deducted for the amount of the ex- emption claimed. (T. D. 1887; G. R. 60) Where a cor- poration, joint-stock company or association, or insurance 70 NEW INCOME TAX MANUAL. company presenting foreign items for collection claims its exemption from deduction at the source with respect to such items (using Form 1001 for this purpose) no tax is to be deducted. (T. D. 1887; G. E. 60) In such cases the licensee first receiving such items must retain the certifi- cate for delivery with his list of tax collections to the Col- lector of Internal Kevenue for his district, not later than the 20th of the month next succeeding that in which such items were received. With respect to the coupons, checks, or bills of exchange, the licensee must attach thereto (identifying the items) or endorse or stamp thereon the words "Income tax exemption claimed through" (giving name and address of licensee) which is sufficient evidence to relieve subsequent holders or purchasers from the duty of withholding the tax thereon. (T. D. 1887; G. R. 61; T. D. 2090) Responsible banks and bankers, either domestic or foreign, may execute, for and on behalf of non-resident owners of stock of corporations of foreign countries, a cer- tificate (Form 1071) claiming exemption from the income tax on dividends on such stock. (T. D. 2030) Fiduciaries use Form 1015 in claiming exemption from withholding with respect to interest on bonds of foreign corporations. (T. D. 2090) Claims for exemption from withholding on income other than from interest on bonds may be made by in- dividuals on Form 1007, and by firms, organizations, or fiduciaries on Form 1063. (T. D. 2090) Claim of deductions.- If the person for whom interest or income arising in foreign countries is collected or to whom it is payable wishes to claim the deductions allowed by the Law (see Sec. 4), he must, at least thirty days before March 1st, of each year, file a statement there- of (Form 1008) with the one who collects the amounts, or apply to the Collector of Internal Revenue. (Par. E) Interest payable in the United States.— Where foreign corporations, either municipal or private, having fiscal or financial agents within the United States, have bond issues the interest on which is payable wholly NEW INCOME TAX MANUAL. 71 within the United States, or within or without the United States at the option of the holder, and such bonds are owned by citizens of the United States or aliens residing in the United States, the collection of interest oa such bonds is to be treated as a domestic transaction when cer- tificates of ownership are filed with the coupons, and the fiscal agents are charged with the duty of withholding and paying the tax. But coupons not accompanied by such certificates are to be treated as foreign items. (T. D. 1992 ; T. D. 2006) Non-resident aliens may use Form 1063 in claiming exemption from the income tax with respect to dividends payable in the United States from stock of foreign corporations. (T. D. 2012) Dividends from foreign corporation xrholly engaged in business in the United States.— Dividends declared and paid by a foreign corporation which derives its entire net income from business done wholly within the United States, and which pays a tax upon its net income under the Income Tax Law, should be treated in the same manner as dividends from domestic corporations. (T. D. 2090) Records to be kept by licensees.— Persons licensed to collect foreign items must keep their records in such manner as to show from whom each item has been re- ceived, and such records are open at all times to the inspec- tion of internal revenue officers. (T. D. 1887; G. R. 62) §37. COLLECTION OF TAX ON INCOME OF ESTATES HELD IN TRUST. A fiduciary must withhold the tax on the income of any beneficiary whose income from the estate held in trust exceeds $3,000, and is personally liable for such tax. (Par. E; T. D. 2090) The term "fiduciary" is used in the regulations to designate a guardian, trustee, executor, administrator, agent, receiver, conservator, or any person, corporation, or association acting in any fiduciary (or trust) capacity, and holding in trust an estate of another person or per- ions. (T. D. 1906; T. D. 2090) 72 NEW INCOME TAX MANUAL. While there may be a fiduciary relation between prin- cipal and agent, the word "agent" does not, of itself, de- note a fiduciary within the meaning of the Income Tax Law. (T. D. 2090) Where the annual inconLe is not distrib- uted or paid to the beneficiaries of the trust, the fiduci- ary must nevertheless withhold the normal tax of 1% on the distributive interest of each beneficiary whose interest exceeds $3,000, and pay the tax over to the Collector of Internal Revenue the same as though such income had been distributed to the beneficiaries. Such payment, how- ever, finally settles the normal tax on such income for all time, and neither the fiduciary nor the beneficiary can be required again to pay the tax on such income when it is distributed. (T. D. 1906; G. R. 75) Income taxable at sonrce.— Where a fiduciary receives, as such, income of such character that the tax thereon would ordinarily be withheld by the person or cor- poration paying over such income (as in the case of in- terest on corporate bonds or mortgages, income from for- eign countries, interest on real estate or chattel mortgages, rents, etc.), he may either permit the tax thereon to be deducted at the source as in ordinary cases (T. D. 1911; G. R. 70), or collect the entire income intact, without any deduction for the tax, in which latter case he is regarded as the source of income, and must withhold the tax from the amount so collected by him. (T. D. 1906; G. R. 70) Notice authorizing debtor or xrithholding agent to withhold tax.- Where the fiduciary prefers to allow the debtor or withholding agent to withhold the tax on income due him in his fiduciary capacity, he must file a notice stating that he does not claim the exemption from having the tax so withheld ( Form 1019 ) , and in such case the tax is to be withheld by the debtor or withholding agent as in any other case, and the fiduciary is not required to make any deduction from the income which he receives. (T. D. 1911 ;G. R. 70) Notice to prevent irithholding of tax on in- come due fiduciary as snch.— Where the fiduciary NEW INCOME TAX MANUAL. 73 does not wish to have the tax withheld on income arising from interest on corporate bonds, due him as such, he must file with the debtor or withholding agent a certificate (Form 1015) showing that the income accrues on a trust estate and that he (the fiduciary) assumes the duty of withholding the tax thereon, and on receipt of such cer- tificate the debtor or withholding agent must pay over the entire interest or income to the fiduciary without any de- duction for the tax, and is relieved from any liability for the tax thereon. (T. D. 1906; G. K. 70) Where the income arises from a source other than interest on corporate bonds, the fiduciary must use Form 1063 in claiming his exemp- tion from deduction of the tax. (T. D. 1998) A person holding a power of attorney from another has no authority to file the certificate (Form 1015) to prevent the withholding of the tax on income due to such other. (T. D. 2090) Bonds of same corporation, etc., belonging to different estates.— Where a fiduciary has the cus- tody of more than one estate or trust, and such estates or trusts have as assets bonds of corporations, etc., of the same issue, the fiduciary may adapt his certificate (Form 1015 or Form 1019) to show that it applies to more than one estate or trust. In such case the description of the estates or trusts and the interest of each must be shown on the back of the certificate, and reference thereto made in the space provided in the form itself for the description of the estate or trust. (T. D. 1961; T. D. 1987) Corporate dividends in the hands of a fiduciary and belonging to a beneficiary are not subject to the normal tax, but are subject to the additional tax, to be paid by the beneficiary, whenever his income from all sources ex- ceeds 120,000. (T. D. 2090) The fixed exemption may be claimed by the beneficiary or his legal representative by filing with the fiduciary notice of such claim (Form 1007) whether or not the income is paid over or distributed by the fiduciary. (T. D. 1906; G. R. 74) Where exemption is claimed, the fiduciary withholds 74 NEW INCOME TAX MANUAL. the tax only on the amount of income, if any, in excess of the exemption. (T. D. 2090) § 38. PROVISIONS AS TO PARTNEUSHIPS. A partnership, as such, is not required to pay an income tax or to make any return, but members of the firm are liable for such tax only in their individual capac- ity. Each individual partner is required to include in his return the share of the gains, income, or profits of the firm to which he would be entitled upon a division, whether or not a division has been actually made, and such share is included in the income upon which he is required ta pay a tax. It is made the duty of the firm, upon the request of the Commissioner of Internal Revenue, or of any District Collector of Internal Revenue, to forward to him a correct statement of the gains, profits, and income of the firm, and the names of the persons who would be entitled thereto upon a distribution. (Par. D; G. R. 12, 13, 94; T. D. 1957) The statement so furnished (Form 1065) must consist of a complete and correct report of the gross income of the partnership and a complete account of the actual legiti- mate annual expenses of conducting the business of the partnership (not including the living and personal ex- penses of the partners), and the net profits of the partner- ship; and must also give the name and address of each member of the partnership and show his interest in the net profits reported. (T. D. 1905; G. R. 12) Where undivided profits returned.— When the undivided profits of the partnership for a particular year are returned by the partners as part of their income and the tax paid thereon, and such profits are distributed in a subsequent year, the partners are not required to include such profits in their return of income for the year in which the distribution is made. (T. D. 1905; G. R. 14) That is to say, if Jones and Smith make a profit of $10,000 in the year 1914, but do not divide it, and each partner returns for the year 1914 |5,000 of income, consisting of his share in such profit; and in the year 1915 the amount NEW INCOME TAX MANUAL. 75 is actually divided and paid over to the partners, they are not required to include the amounts thus received in their returns for 1915, although they would, of course, return as income for that year their share of the profits earned by the partnership during the latter year. Premi-aius on life insurance taken out by a partnership upon the lives of individual partners con- stitute allowable deductions in ascertaining the net in- come of the partnership. But when such policies mature, or upon the death of the insured partner, the amount re- ceived on such policies must be included in the gross in- come of the partnership. (T. D. 2090) Tlie provisions for collecting the tax at the source of income do not apply to the income of partnerships as such. (T. D. 1957) Tracing partnership income to source for purpose of claiming individual exemption.— The Treasury Department holds that "income received from a partnership cannot be traced to its source behind the partnership for the purpose of claiming individual exemption." (T. D. 2090) liiuiited partnerships are considered as cor- porations, and are subject to the income tax as such. (G. R. 86) § 39. PENALTIES. The Income Tax Law imposes the following penalties : For failure of an individual to make a return or pay the tax required by law, a fine of not less than $20 nor more than |1,000. (Par. F; G. R. 26; T. D. 1950) For making a false or fraudulent return or statement with intent to defeat or evade the assessment of an income tax, a fine not exceeding |2,000, or imprisonment for not more than one year, or both, together with the costs of prosecution. (Par. F; G. R. 26, 164; T. D. 1950) For knowingly making /a false statement or false or fraudulent representation for the purpose of obtaining an exemption or deduction, either for oneself or for another person, a penalty of $300. (Par. E; G. R. 33) For failure or refusal of a corporation, joint-stock n NEW INCOME TAX MANUAL. company or association, or insurance company to make a return at the proper time, or for making a false or frau- dulent return, a fine not exceeding $10,000. (Par. G, subd. d; G. R. 164; T. D. 1950) For engaging in the business of collecting interest, dividends, or income from foreign countries by means of coupons, checks, or bills of exchange, without a license or without complying with the regulations prescribed, a fine not exceeding $5,000, or imprisonment for a term not ex- ceeding one year, or both. (Par. E; G. R. 55) For disclosing any information required to be set forth in a return under the Income Tax Law, or for print- ing or publishing any such information in any manner not provided by law, a fine not exceeding |1,000, or imprison- ment not exceeding one year, or both, in addition to which the offender, if an officer or employee of the United States, is to be dismissed from office and disqualified to hold office in the future. (Par. I; G. R. 164, 181) Increasing amount of tax.— In case of an un- excused failure to make a return at the proper time or the making of a false or fraudulent return, a further penalty is imposed by increasing the amount of the tax. ( Par. I ; G. R. 21, 164; T. D. 1950) §40. TimiE TABLE. The times for the various acts required by the Income Tax Law are as follows: Income to be computed to Dec. 31st. Return to be made on or before March 1st Notice of assessment to be sent on or before June 1st. Tax to be paid on or before June 30th. This time table does not apply to corporations or associations which have designated dates other than Dec. 31st as the closing of their fiscal years. In such cases the date so designated fixes the period on which the tax is to be computed, and the time for doing the other acts enu- merated above is substantially the same period after the closing of the fiscal year as the particular date given above for any particular act is after Dec. 31st. The method of designating a fiscal year is explained in Sec. 2&. NEW INCOME TAX MANUAL. 77 §41. PRACTICAL WORKING OF LATV — PREPARATION OF RETURN. To illustrate the practical working of the law, it will be useful to consider the suppositious case of John Brown, a married man residing with his wife ( who has no separate income) in the 22d Ward of New York City, and having his office in the downtown financial district. He is en- gaged in business as an insurance broker, and also as a dealer in real estate, besides which he has other business interests. He is also given to taking an occasional "flyer" in the stock market. His receipts for the year ending Dec. 31st, 1914, were as follows: (1) Commissions from various insurance com- - panics, $50,000.00 (2) Profit on various pieces of real estate purchased and sold during the year, . . 75,000.00 (3) Profits on corporate stock purchased and sold during the year, 5,000.00 (4) Share of profits of Jones & Co., a partner- ship, 7,000.00 (5) Salary as president of a bank, 5,000.00 (6) Salary as secretary of a lumber company, 2,500.00 (7) Dividends on stock of various domestic corporations, 10,000.00 (8) Dividends on stock of English corpora- tion, 1,000.00 (9) Interest on bonds of various domestic corporations, 15,000.00 (10) Interest on United States bonds, 2,000.00 (11) Interest on City of New York bonds,. . . 1,000.00 (12) Interest on mortgage on office building,. 5,000.00 (13) Interest on mortgage on farm, 1,500.00 (14) Rent of store building, 6,000.00 (15) Rents from apartment building occupied by ten families pacing $900 per year each, 9,000.00 (16) Legacy received during the year, 10,000.00 Total receipts $205,000.00 78 NEW INCOME TAX MANUAL. His expenses and losses for the same period were as follows : (a) Expenses of maintaining office (rent, clerk hire, etc.), $40,000.0a (b) Interest on mortgage on apartment build- ing, 4,000.00 (c) Taxes paid (including income tax for 1913) , 4,000.00 (d) Loss on stocks purchased and sold during the year, 20,000.00 (e) Loss on piece of real estate purchased and sold during the year, 30,000.00 (f) Loss on house destroyed by fire (value 15,000, insurance |3,000), 2,000.00 (g) Debt charged off because of bankruptcy of debtor, 1,000.00 (h) Depreciation of office furniture and fit- tings, 1,000.00 (i) Assessment for street improvement, 2,000.00 (j) Cost of building addition to residence,. . . 15,000.00 (k) Personal, living, and family expenses,... 40,000.00 (1) Donation to orphan asylum, 5,000.00 Total expenses and losses, |164,000.00 In determining his taxable income, and the amount of his tax. Brown will find it most convenient to make his entries directly on his return. He will accordingly pro- cure, from the Collector of Internal Revenue of his dis- trict, one or more copies of Form 1040, and proceed as fol- lows : , ^^ Turning first to page 2 of the return, he will find a form for a tabulated statement of his income, with sepa- rate columns, column A for items on which the tax has been paid or is to be paid at the source and column B items on which the tax has not been or is not to be so paid. On this page he will enter his income as follows : Item (1) will be entered on line 13, in column B. No matter how great an amount of commissions he may re- ceive during the year from any one insurance company^ NEW INCOME TAX MANUAL. 79 there can be no withholding of the tax thereon, for the reason that the amounts are not fixed or certain. The sum of items (2) and (3) will be entered on line 14, in column B. Item (4) will be entered on line 19, in column B. Item (5) will be entered on line 12, and placed in column A, because the bank will have withheld the normal tax on this amount. Item (6) will also be entered on line 12, but as the amount is not sufficient to warrant a withholding of the tax by the lumber company the item will be placed in column B. Item (7) will be placed on line 25. Brown must show this item in his return because he is subject to an addi- tional tax. If his net income (including this item) were less than |20,000, he would not be required to show his income from corporate dividends. Item (8) will be entered on line 20, in column A. Item (9) will be entered on line 17, in column A. Even though some of the bonds represented by this item may be guaranteed tax free the entry will be the same, for the tax on the interest will have been paid at the source of income although not withheld from Brown's in- terest by the debtor. Items (10) and (11) will not be entered at all. When the original Form 1040 was issued, it was subjected to some criticism on the ground that no place was provided for the deduction of these items, and the revised form also fails to provide any space for such deduction. In this re- spect, however, the forms are entirely proper, for the law is explicit with respect to such items, and does not pro- vide that they shall be "deducted," but that they shall be "excluded." That is, for income tax purposes, income from these sources is absolutely disregarded, as though it had no existence. / Item (12) will be entered on line 16, column A, the tax being paid by the mortgagor. Item (13) will also be entered on line 16, but as the amount is not sufficient to impose upon the mortgagor the 80 NEW INCOME TAX MANUAL. duty of withholding and paying the tax, the item will be entered in column B. Item (14) will be entered on line 15, in column A, as the tenant will have withheld and paid the tax. Item (15) will also be entered on line 15. But al- though the rents from the apartment building aggregate f 9,000, no single tenant pays a sufficient amount to sub- ject him to the duty of withholding and paying the tax. Hence the sum of these rents will be placed in column B. Item (16) will not be entered at all. The law ex- pressly provides that taxable income shall not include "the value of property acquired by gift, bequest, devise, or descent." On footing up the columns, as clearly indicated on the form. Brown will obtain the following results: Income on which tax has been paid or is to be paid at the source ( to be entered on line 23, in column A), $32,000.00 Income on which tax has not been paid or is not to be paid at the source (to be entered on line 23, column B), 150,000.00 Aggregate (to be entered on line 24), |182,000.00 Total dividends (to be entered on line 27), 10,000.00 Total gross income (to be entered on line 28), $192,000.00 Having completed his itemized statement of income. Brown will next turn to page 3 of the return and state thereon the general deductions to which he is entitled. Taking up the various items of expenditures and losses already enumerated, he will treat them as follows : Item (a) will be entered on line 29. Item (b) will be entered on line 30. Item (c) will be entered on line 31. Item (d) cannot be deducted, and no entry with re- spect thereto will be made. While Brown will probably feel it a hardship that he should be required to return his speculative gains as income, but not allowed to make any NEW INCOME TAX MANUAL. 81 deduction for his speculative losses, the law and the regu- lations are explicit on this point. Item (e) represents a loss while is allowable as a de- duction, because it was incurred in a business in which Brown was regularly engaged. It should be entered on line 32, and as item (f ) properly belongs on the same line, the entry will be the sum of these two items. Brown will also state briefly the particulars of these losses. Item (g) will be entered on line 33, with the par- ticulars which the form specifies. Item (h) will be entered on line 34, with a statement of the kind of property of which depreciation is claimed and the percentage charged to depreciation. The remaining items, (i), (j), (k), and (1) will not be entered at all, as Brown is not entitled to a deduction on account of any of these items. Footing up his general deductions. Brown will enter on line 36, the total general deductions to which he is en- titled, 182,000.00 Turning now to page 1 of the return Brown will pro- ceed to summarize his income and deductions and exemp- tions as follows : He will enter on line 1, his total gross income, brought from line 28, $192,000.00 On line 2, he will enter the amount of his gen- eral deductions, brought from line 36, 82,000.00 On line 3, he will enter the difference between these amounts, showing his net taxable income, so far as the additional tax is concerned,. .|110,000.00 He will then enter the deductions and exemptions to which he is entitled in computing his normal tax, as fol- lows : On line 4, corporate dividends, brought from line 27, |10,000.00 On line 5, income on which the tax has been paid or is to be paid at the source, from line 23, column A, 32,000.00 82 NEW INCOME TAX MANUAL. On line 6, his specific exemption, no part of which he has claimed before, and which, as he is married and living with his wife, amounts to, 4,000.00 The total of these deductions and exemptions he will enter on line 7, $46,000.00 Subtracting this amount from his total net in- come of $110,000, he will obtain, and enter on line 8, the amount on which the normal tax is to be computed, $64,000.00 He will now have no difficulty in filling out the remainder of the first page of his return, showing that his additional tax is, 1,950.00 And his normal tax is, 640.00 Making the total tax which he must pay directly, $2,590.00 Specimen return.— On the following pages is pre- sented a photographic reproduction of Brown's return as it would appear when fully made out and ready to be executed and delivered to the Collector of Internal Revenue. He must file this return, on or before March 1st, 1915, in the 3rd District of New York, instead of in the 2nd Dis- trict, where he filed his return for 1913. lOKFIllfDHBYCOllECTOit. NEW INCOME TAX MANUAL. Form 1040 (Revised). Assessment List 23-B^. — (Month.) INCOME TAX. folif. Line. owtacd THE PENAL.TY FOR FAILURE TO HAVE THIS RETURN IN THE HANDS OF THE COLLECTOR OF INTERNAL REVENUE ON OR BEFORE MARCH I IS $20 TO $1,000. ' (see instructions on PAOK 4.) UNITED STATES INTERNAL REVENUE. 83 TO K nU£D M BY INTQIUL REYIM BUSU. File No Examined by^-.. . Audited by — . . district and date received. IMPORTANT. Read this form through carefully. Fill in pages 2 and 3 before making entries on first page. RETURN OF ANNUAL NET INCOME OF INDIVIDUALS. (As provided by Act of Congress, approved October 3, 1913.) INCOME RECEIVED OR ACCRUED DURING THE YEAk ENDED DECEMBER 31, 191^ tU«dby(orfor)...^fttfevv...f^/M^rW>V.. ,of..).^.3. .W^tfitr.V. 5*rr .$.>^. r\ . ^-^ . A rstreet and.number.V (Post-offlce address. (Street and.number.] (Statel COMPLETE ANSWERS SHOULD BE GIVEN TO THE FOLLOWING QUESTld-._. Did you fender a return of income for the preceding year? \^A^ If bo, in what Internal Revenue District was it filed?. .V. . J(*. t*.*. . Were you tingle or ■married with wife or husband living with you on December 31, of the year for which this return is rendered? . IiWa? JSM4'.^JU¥!\yf4tUKUt^ ytf^n^ n mamed, give full name of wife or husband ...\VV«VSp. . Has jrour wife or husband income from eourcee independent of your own? Have you included your wife's or husband's income in this return? ^^. 1. Gboss Income (brought from lino 28).. i 2. Gbhxbai. DEDUcnoNS (brought from line 36) . ■S. Net Income ff.%0 O PP.. CO Specific deductions and exemptions allowed in compnting nonnal tax of 1 per cent. 4. Dividends (brought from line 27) 5. Income on which the nonnal tax has been paid or is to be paid at the source (brought from line 23, Column A) 6. Specific exemption of |3,000, or $4,000, as the case may be . Cm.im 00 oc Note. — If separate return is made by husband or wife and exemp- 1 '"''*° ...»- tion is prorated, state amount claimed by: I Wife %. 7. Total deductions and exemptions (Items 4, 5, and 6) 8. Taxable Ikcome on which the normal tax of 1 per cent is to be calculated - 4 4 oo oO NOTE. — When the net income shown above on line 3 exceeds $20,000 the additional tax thereon must be calculated as per schedule below. INCOME. Ti.X. One per cent on amount over $20,000 and not exceeding $50,000 Two per cent on amount over $50,000 and not exceeding $75,000 Three per cent on amount over $75,000 and not exceeding $100,000 Four per cent on amount over $100,000 and not exceeding $250,000 Mil $-. $-. $.- $-. $.. $.. \: p c p p p Caao .P.P. P. 9 Five per cent on amount over $250,000 and not exceeding $500,000 ~ ■■ ■ ■ '-' - Six per cent on amount over $500,000 ■" .. $.. $.. $.. - - 1 4 \f\ e OO 10. Total normal tax (1 per cent of amount entered on line 8 11. Total tax to be paid ) h c 00 P.P. 84 NEW INCOME TAX MANUAL. 2 GROSS INCOME. This statement must show in the proper spaces the ENTIRE AMOUNT of gains, profits, and inaome received by or acmied to the individual from all sources during the year specified on page 1, EXCEPT income derived from the obligations of the United States or «ny of its possessions, or of any State or political subdivision thereof, including district drainage bonds; and amounts paid by a State or any pohtical subdivision thereof for services rendered as an o£Scer or employee. DESCRIPTION OF DJCOMB. NOTK. — ^If hnstand and 'vrire render separate returns, only the income and dedactlons of the husband or wito (as the case may be) -who renders tbU return shall be Included herein ; but it separate returns are not rendered by both husband and -wife the Income and deductions of both husband and vU* ibail be included separately as proTldod on Uiis form. A. Income on which the tax has been paid or is to.be paid at the source. B. Income on which the tax has NOT been paid or is not to be paid at the source. ToTAi< AxouNT Dbbited fbom — muh $.. . - TkMi mmim JT Hu odn 0>u 06 Mil 1- Uou Tk. % ulivla Ca« 13. ProfessionB and vocations........... ..................... ...... . ^ ft r% iA „ 9 e o od 14. BmrineeB, trade, commerce, or sales, or dealings in property, whether X y kk C % o oc 15. Bents.. .^. ^..>.^.. ,.■ ^ 6 oo ? o oe 18. JnUrett on notes, mortgages, bank deposits, and eecnritiee other than $ 06 / if od 17. Interest on bonds, mortgages or deeds of trust, or other similar obliga- tiA inchid<^d as indicattyl in Iin6 ?^ hfilow). , X P: y^ «L __ •- A A -^ u ^ IS. Partnership gains and prc^ts, whether distributed or not. (Net gains y *■ U «. 1 oC 20, Interest upon bonds issued in foreign countries and upon foreign mortgages or like obligations (not payable in the United States), and also dividends upon the stock or interest upon the obligations of foreign corporations, associations, and insurance companies 1 cO J ft •x o 21, Eoyalties from mines, oil wells, patents, franchisee, or other legalised ,.A "V -v \A V > ■V- ^ ^ ,V "A '%. U _ •• ^ \ "A ■^ l> ^ Note.— State here sources from which income entered on 23. Totals (Note. — Enter total of Column A on line 5) $... / H p 6 od $.. 1 s- .f.^ 1 i % q o^ 26. Dividends on stock or from the net earnings of domestic corporations, joint stock companies, associations, or insurance companies subject 9-. ■ Q p fiQ. 26. Dividends received through fiduciaries (see line 18) 00 28. Total Oross Ikcoub (to be entered on linel) pp. • TlMnihauld be locloded noder thk Item aUliMWine reoetv«d tram (oardlaiM, tnoteat, MteoDton, edmiiilstretan, amots, rcoeivK«,«onMrvatan, or other ptnoas. — to a flduoiory cepaoity. NEW INCOME TAX MANUAL. 3 85 GENERAL BEDDCTIONS. NOTE. — Claims for deductions can not be allowed unless the information reqtiired below is clearly set forth. 29. The amount of necessary expenses actually jtaid -witliin the calendar year, for which the return is made, in carrying on any individual bv£i7uss. There must not be included under this head personal, living, or family expenses, business expenses of partnerships, or cost of merchandise. Amounts paid for permanent improvement or betterment of property are not proper expense deductions , Wife's deduction , .« Note. — State on the following lines the principal businesses in which the abovo expenses ■were incurred. . 80. All interest paid within the year on personal indebtedness of taxpayer. Wife's deduction - 31. All national, State, county, school, and municipal taxes paid within the year (not including those assessed against local benefits) Wife's deduction. 32. Losses actually sustained durine the year incurred in trade or arising from fires, storms, or ship- d b: ■ wreck, and not 'compensated Wife's deduction. )y insurance or otherwise. NoTB. — State (a) of what the loss consisted, (c) how it was determined to be a loss. (b) when it was actually sustained, and 33. Debts past due which have beeH actually aecertaii 33. Debts post ofi within the year.. Wife's deduction. [actually ascertained to be worthless and which have been charged Note. — State (a) of what the debts consisted, (6). when they were created, (c) when they became due, and {d) how they were actually determined to be worthless. J^.f:^flU%.fi^^^^^ or of property^tmsing out 34. Amount representing a reasonable allowance for the exhaustion, wear and tear of property^tuising out of its use or employment in business. No deduction shall be made for any amount of expense of restorin)j property or making good the exhaustion thereof for which a deduction is claimed elsewhere in this return Wife's deduction Note. — State (a) what the property was on which depreciation is taken (if buildings, state when erected, of what material constructed, and value of same, as of January 1, of the calendar year for which this return is rendered), and (6) what percentage of depreciation is claimed; 35. , Amount allowed to cover depletion, in case of mines and oil wells, not to exceed 5 per cent of the gross value at the mine or well of the output for the calendar year for which this return is rendered . . Wife's deduction -^ Note. — State (o) coetx>f mine or well, (6) gross value at the mine or well of the output for the calendar year for which this return is rendered, and (c) what percentage of depletion is claimed. 36. Total "Gbnerai Deductions'* (tobe«nteredon.line2) , ♦. Nots.— BqiM» is insaOciatUiaraisirariiig any qiMstiaaf,«ttadt%«iippl«n)MitariiMit to Od 06 Od 6 OS .^i m%P.9A oO 9S NEW INCOME TAX MANUAL. Page 4 of tlie oflBLcial form contains blank forms of verification and a set of instructions. Total burden of taxation.— If Brown should be interested in computing the total burden of taxation which he has to bear, he will see that to the tax which he pays directly, |2,590.00 He must add the tax which has been withheld by others from income which he would otherwise have received, or 1% of $32,000, 320.00 And also consider that he really bears pro tanto the tax of the corporations from which he has received dividends of |10,000, so that he must add 1% of that amount, 100.00 Showing his total burden of taxation to be, $3,010.00 InconLe of wife.— If Brown's wife had any sepa- rate income, he might include her income in his return, showing the items separately in the spaces indicated for that purpose; or, if her separate income exceeded |3,000, she might make a separate return, which should be at- tached to his. §42. HOW TO OBTAIN FORMS. Blank forms of all certificates, returns, etc., which are required will be furnished by Collectors of Internal Revenue on application; or corporations and others may have forms conforming to the oflflcial forms in all respects printed for themselves. (T. D. 1939; T. D. 1976) While forms should be furnished to all corporations, etc., subject to the tax, on or before Jan. 1st of each year, the failure of a corporation, etc., to receive a blank form will not excuse it from making a return or relieve it from any penalties for failure to make a return at the proper time. (G. R. 163) 87 INDEX (References are to pages.) ACCUMULATION OF INCOME: Consideration for purpose of additional tax, 22. ACTOR OR ACTRESS: Deduction for depreciation of costumes in computing in- come, 10. ADDITIONAL TAX: Computation of in case of hus- band and wife, 4. Consideration of accumulation of income in connection with, 22. Exemption of compensation of pubHc officers and employees applicable to, 25. Exemption of interest upon pub- lic securities applicable to, 25. Not collected at the source of income, 50. Rates of, 4. Specific exemption not applica- ble to, 24. ADMINISTRATION : Expenses of not allowable de- ductions in return of fidu- ciary, 39. ADMINISTRATOR: Duty to make return for dece- dent, 29, 35. See also FIDUCIARY. AGENT : Duty with respect to withhold- ing tax, 50. Not ordinarily included in meaning of term "fiduciary," 29, 72. Signing of certificate of own- ership by, 57. AGRICULTURAL ASSOCIA- TION: What is, within exemption, 2. ALIEN : Residing in United States sub- ject to tax, 1. See also NON-RESIDENT ALIEN. ALIMONY : Paid, not deductible in comput- ing income, 11. Received, to be included as in- come, 6. ^ Tax on to be withheld at the source, 51. ANNUAL LIST RETURN: See LIST RETURN. ANNUITY : When to be included as in- come, 6. APPEAL: From decision of Collector of Internal Revenue increasing amount shown by return, 44. APPLICATION: For license to collect income arising in foreign countries, 68. ASSESSMENT: Local or special, not deductible in computing income, 8. Of income tax: By whom made, 47. Notice of, 47, 76. On corporate stock, not de- ductible in computing in- come, 11. ASSETS : Appreciation in value, when in- come, 7, 14. Capital assets of corporation, mode of computing: Loss on sale of, 17. Profit on sale of, 14. ASSOCIATION: See CORPORATION. ATTORNEY: Filing of certificate by, 53. BAD DEBT: Debt charged off as, to be in- cluded as income if after- wards collected, 17. Deductible in computing income, 10, 17. BANK : Deduction of interest paid in computing income, 20. Not entitled to deduct reserve for guaranty of depositors in computing income, 16. Not required to withhold tax from interest on deposit, 51. Right to: Deduct taxes assessed against stockholders, 20. Execute claim of exemption with respect to foreign in- come on behalf of non-resi- dent alien, 70. To return interest on deposits as expense of business, 37. BENEFICIARY : Duty to show in return amount received from trust, 33. Particulars as to in return of fiduciary, 38. BEQUEST : See GIFT; LEGACY. 88 INDEX. BETTERMENT : Amount expended for not de- ductible in computing in- come, 20. BOARD OF EDUCATION: Duty to withhold tax on rent of property leased for school district, 66. BOND: Furnished by employee, deduc- tion of premium from in- come, 8. Guaranteed free of taxation, how income from returned, 35. Name and address of owner to be shown in monthly list re- turn of withholding agent, 40. Of licensee to collect foreign in- come, 69. BONUS : To employees, when deductible in computing income, 20. BOOKS AND PAPERS : Compelling production of, 44. BUILDING AND LOAN ASSO- CIATION: When entitled to exemption, 3. BUSINESS: Expenses of deductible from in- come, 8, IS. CAPITAL ASSETS: See ASSETS. CAPITAL STOCK: Amount of to be shown in cor- porate return, 35. CERTIFICATE: Color, 52. Filing by attorney, 53. Form of, generally, 52. Not subject to stamp tax, 53. To accompany coupon or in- terest order on bond owned by non-resident alien, 62. See also SUBSTITUTE CER- TIFICATE. CERTIFICATE OF OWNER- SHIP: Disposition of: Generally, 63. Where substitute certificate used, 58. Forwarding by collecting agent, 57. Language of, 62. Mode of signature, 56. Necessity for showing street address, 57. Need not be attached to coupons from public securities, 67. Numbers of bonds need not be shown, 63. CERTIFICATE OF OWNERSHIP (Cont.) : Separate certificate for: Coupons maturing at dif- ferent dates, 62. Each issue of bonds, 56. Signing by agent, 57. Substitution of collecting agent's certificate for, 57. To be forwarded to Collector of Internal Revenue where owner of bonds not subject to have tax withheld at source, 41. CITIZEN : Subject to tax, 1. Who is, 1. CITY: Bonds or securities issued by, see PUBLIC SECURITIES. Exemption of compensation of officers and employees, 24. CLERGYMAN : What to be included as income of, 7. CLUB: Right to exemption and estab- lishment thereof, 3. COLLATERAL: Deduction of interest on obliga- tions secured by in comput- ing corporate income, 19. COLLECTION AT THE SOURCE : Generally, 49. Amount on which tax col- lected, 50. Applicable to normal tax only, 50. As affecting duty to make in- dividual return, 28. Duty of person withholding to make return, 29. Items on which tax not with- held, 53. Not applicable to income of: Corporation, 51. Partnership, 51, 75. Of tax on : Income arising in foreign countries, 68. Income of estates held in trust, 71. Income other than interest on bonds, mortgages, etc., of corporations, etc., or income of estates held in trust or arising in foreign countries, 64. Interest on bonds, mort- gages, etc., of corpora- tions, associations, etc., 55. INDEX. 89 COLLECTOR OF INTERNAL REVENUE : Increase by of amount shown by return, 44. COLOR: Of certificates used in connec- tion with collection at the source, 52. COMMERCIAL PAPER: Of corporation, withholding of tax on interest, 55. COMMISSION: In what year returned as in- come, 34. On renewal insurance premiums included as income, 6. To real estate agent, deductible in computing income of in- dividual paying, 8. To salesman : Deductible from income of employer, 8. Included as income of sales- man, 6. Withholding of tax on, 54. COMMISSIONER OF INTERNAL REVENUE : Return by for delinquent, 44. To assess tax, 47. To prescribe form of return, 22. COMPENSATION: For fixed period, in what year returned, 34. For service which must be com- pleted before payment due, in what year returned, 34. Of public officers and employees : Exempt from tax, 24. Not to be included in re- turn, Z2>. CONSERVATOR: See FIDUCIARY. CO-OPERATIVE COMPANY: Computation of income of, 21. CO-OPERATIVE DAIRY: Computation of income, 21. Not exempt, 3. CORPORATE OBLIGATIONS, COLLECTION OF TAX ON : Generally, 55. Obligations of exempt corpora- tion, etc., 62. Obligations owned by: Corporation, 61. Non-resident alien, 61. Partnership, 61. On what obligations tax col- lected at the source, 55. , Securities guaranteed free from taxation, 64. When tax to be withheld by: Debtor or fiscal agent, 56. First collecting agency, 59. Where bonds retired, 63. CORPORATE OBLIGATIONS, COLLECTION OF TAX ON (Cont.) : Where checks for registered in- terest sent out, 58. Where interest coupons ex- changed for funding bonds, 63. CORPORATE RETURN: Generally, 35. CORPORATION : Amount on which taxable, 5. Computation of income of, 13. Consideration of sales of own stock in computing income, 21. Designation of fiscal year, see FISCAL YEAR. Duty to make return, 27. Establishment of right to ex- emption, 3. Examination of books, 45. Exempt from tax, see EXEMPT ORGANIZATION. Exemption of interest upon pub- lic securities applicable to securities owned by, 25. Failure to receive form no ex- cuse for failure to make re- turn, 86. Foreign, see FOREIGN COR- PORATION. In existence only part of year, bound to make return, 28. Individual mortgage assumed by does not become corpor- ate obligation for purpose of withholding tax, 66. Not entitled to specific exemp- tion, 23. Return of as fiduciary, 38. Tax not withheld on bonds owned by, 61. Tax on income of not collected at the source, 51. To whom return made by, 31. Transacting no business, bound to make return, 28. When to pay tax, 48. COSTUMES : Deduction for depreciation of in computing income of actor or actress, 10. COTTON : When loss on may be deducted in computing individual in- come, 10. COUNTIES : Exemption of compensation of officers and employees, 24. DAIRY: See CO-OPERATIVE DAIRY. 9a INDEX. DEATH: Return of decedent to be made by executor or adminis- trator, 35. DEBT: See BAD DEBT. DEBTOR: Meaning of term, 50, 56, 64. DEDUCTIONS: Allowable in computing income, 8, 15. Claim of with respect to income taxable at the source, SO, 61, 67, 70. Not authorized in computing in- come, 11, 20. Penalty for making false state- ment or fraudulent repre- sentation to obtain, 75. Statement for by withholding agent, 67. DELAY IN MAILS: Not chargeable to person mak- ing return, 31. DEPOSIT: In bank or other financial in- stitution, not to be returned by corporation as indebted- ness, 36. Interest on to be stated sepa- rately in return of bank, 37. Tax on interest not collected at the source, 51. DEPRECIATION : Deduction for in computing in- come, 10, 17. DEVISE OR DESCENT: Property acquired by : Income from taxable, 6. Tax not withheld on value of, 54. Value of not included as income, 6. Value of not to be shown by return, 33. DISCLOSURE: Of information contained in re- turn : Penalty for, 76. Prohibited, 45. DISTRIBUTION: To beneficiaries not necessary to impose upon fiduciary duty of making return, 39. DIVIDENDS : Deduction of in computing in- dividual income for purpose of normal tax, 11. Not subject to tax in hands of fiduciary, 73. Not to be included in return of individual unless subject to additional tax, 33. DIVIDENDS (Cont.): Of foreign corporation wholly engaged in business in United States, status, 71. Receipt of as affecting duty to make return, 28. Received, to be included in cor- porate income, 14. Tax on not withheld at the source, 53. When to be shown in fiduciary return, 39. DONATION : Consideration in computing cor- porate income, 16, 20. EMPLOYEE: Amount received by for surren- dering contract of employ- ment to be included as in- come, 7. Deduction from income of pre- mium on bond furnished, 8. Deduction of bonus to, or shar- ing of profits with, in com- puting corporate income, 20. Gift, donation, or endowment for benefit of, deductible in computing corporate in- come, 20. Of exempt organization, tax not withheld from salary, 7. Of state or political subdivision thereof : Exemption of compensa- tion, 24. Tax not withheld from com- pensation, 54. Tax not withheld on salary of foreign employee of do- mestic corporation, 54. ENDOWMENT: Not deductible in computing corporate income, 20. ENDOWMENT CONTRACT: When amount received under to be included as income, 6. EXECUTOR: Duty to make return for dece- dent, 29, 35. See also FIDUCIARY. EXEMPT ORGANIZATION: Certificate to accompany cou- pons from bonds of, 62. Not required to withhold tax, 7, 52. Salary paid by to be included as income, 7. What is, 2. EXEMPTION: Certificate claiming to be on yel- low paper, 52. Claim of with respect to reg- istered interest, 59. Establishment of right by cor- poration, 3. INDEX. 91 EXEMPTION (Cont.): From withholding of tax, how claimed, 61, 62, 67, 69, 70. Of compensation of public of- ficers and employees, 24. Of interest upon public securi- ties, 25. Penalty for making false state- ment or fraudulent repre- sentation to obtain, 75. Statement for by withholding agent, 67. What corporations entitled to, 3. See also SPECIFIC EXEMP- TION. EXPENSE: Of administration not an allow- able deduction in return of fiduciary, 39. Of conducting business: Deductible from income, 8, 15. To be shown by return, 36. FARM BUILDING: Deduction for depreciation of in computing individual in- come, 10. FARMERS' INSURANCE COM- PANY: Computation of income of, 21. FIDUCIARY: Claim by of exemption from withholding with respect to income arising in foreign country, 70. Corporate dividend not taxable in hands of, 73. Duty to withhold tax, 71. Election by, as to whether debtor or withholding agent shall withhold tax, 72. Meaning of term, 38, 71. Personal : Liability for tax on income of trust estate, 71. Return by, as agent of ben- eficiary, 40. Return of, see FIDUCIARY RETURN. Withholding of tax on: Income payable to gen- erally, 54. Rent payable to, 66. FIDUCIARY RETURN: Generally, 38. Duty to make, 28, 38. To whom made, 32. ' What income to be included in, 39. Where fiduciary acts for bene- ficiary in more than one es- tate or trust, 39. FISCAL AGENT: Appointment of by debtor, 56. FISCAL YEAR: How designated, 46. Mode of change from calendar year to, 46. Necessity for designation, 46. Right of corporation to desig- nate, 46. Time for designating, 46. FOREIGN CORPORATION: Computation of income of, 21. Extent to which interest on in- debtedness allowable as de- duction, 19. Income on which taxable, 5. Liability to tax, 1. What income to be shown in return, 36. Wholly engaged in business in the United States, status of dividends, 71. FOREIGN COUNTRY: Taxes imposed by to be sepa- rately shown in corporate return, 37. FOREIGN INCOME, COLLEC- TION OF TAX ON: Generally, 68. By whom tax withheld, 69. Indorsement of foreign item, 69. License for collection, 68. List return of person or cor- poration collecting, 42. Records to be kept by licensee, 71. Where interest payable in the United States, 70. FORMS: Failure of corporation to receive no excuse for failure to make return, 86. Of certificates for use in con- nection with collection at the source, 52. Of returns, 32, 35, 38. Private, must conform to of- ficial forms, 86. To be furnished by collectors, 86. FRUIT GROWERS' ASSOCIA- TION: When entitled to exemption, 3. FUNDING BONDS: Effect of exchange of interest coupons for, 63. GAINS : Derived from gift taxable, 6. GENERAL INCOME, COLLEC- TION AT THE SOURCE OF TAX ON: Generally, 64. By whom tax withheld, 64. When and how tax deducted, 63. 92 INDEX. GIFT: Not deductible in computing in- come of donor, 11, 20. Property acquired by: Gains, profits, or income from taxable, 6. Value not included as in- come of individual, 6. Value not included in return of individual, 33. Tax not withheld from value of, 54. To corporation, included as in- come, IS. GOOD WILL: To be eliminated in calculating depreciation of corporate property, 18. GOVERNMENT OFFICERS AND EMPLOYEES : Payments to, which are not sub- ject to withholding of tax, 51. Special provisions with respect to computation of income of, 12. GRAIN : When loss on may be deducted in computing income, 10. GRATUITY: Payment to widow of employee GROSS INCOME: Of corporation, 13. Of individual, 5. GUARANTY FUND: Maintained by bank not deduct- ible in computing income, 16. GUARDIAN : Personal return by for ward, 39. See also FIDUCIARY. HORTICULTURAL ASSOCIA- TION: What is within exemption, 2. HUSBAND AND WIFE: American woman marrying for- eigner not entitled to spe- cific exemption, 24. Computation of additional tax on income of, 4. Return of income of, 27. Specific exemption allowable from joint incomes of, 23. IDENTITY: Of person tendering coupon for collection to be established, 57. IMPROVEMENT: Amount expended for not de- ductible in computing in- come, 11, 20. Loss incident to not deductible in computing income, 17. INABILITY: Of individual to make return, return by representative au- thorized, 34. INCOME: Computation of income of : Corporation, 13. Individual, 5. Non-resident alien, 13. From bond guaranteed free of taxation, how returned, 35. From property acquired by gift, bequest, devise, or descent, taxable, 6. Not subject to withholding at the source when not fixed or certain and payable at stated periods, S3. Of beneficiary to be shown in return of fiduciary, 38. Of corporation to be shown in return, 36. To be included in return of fiduciary, 39. INCOME TAX: Additional, rates of, 4. Amount on which payable, 5. Assessment of, 47. By and to whom paid, 47. Normal, rate of, 4. Receipt for payment, 49. Time and mode of payment, 48. INCREASE: Of amount shown by return, 44. INDEBTEDNESS: Amount of, interest on which may be deducted in comput- ing corporate income, 18. Deduction of interest on in com- puting individual income, 8. Deposits in banks and finan- cial institutions not return- ed as, 36. Secured by collateral, interest on to be returned by corpora- tion as expense of business, 36. To be shown in corporate re- turn, 35. INDIVIDUAL: Amount on which taxable, 5. Deductions allowed in comput- ing income, 8. Having income not exceeding $3,000 exempt, 3. Income of, how computed, 5. INDIVIDUAL RETURN: Generally, 32. Duty to make, 27. Form to be used in making, 35. Income items not to be in- cluded in, 33. Practical illustration of prepa- ration of, 77. INDEX. 93 INDIVIDUAL RETURN (Cont.) : Specimen return, reprint of, 83- 85. To whom made, 31. INSPECTION: Of books of corporation, 45. Of returns, 45. INSTALLMENTS : Stock payable in, to what extent included in corporate re- turn, 35. INSURANCE: On leased property, deduction of premium in computing in- come of owner, 8. See also LIFE INSURANCE. INSURANCE COMPANY: Deduction for loss or deprecia- tion allowed to, 18. Form for return of, 38. Mutual, not exempt, 3. INTEREST: On corporate indebtedness : Deductible in computing in- come, 18. To be shown in return, 36. On deposit in bank: Deductible in computing in- come, 20. Not taxable at the source, 51. To be stated separately in return of bank, 37. On indebtedness secured by col- lateral, how returned by cor- poration, 36, 37. On individual indebtedness, de- ductible in computing in- come, 8. On mortgage assumed by mu- nicipality, not exempt, 25. On mortgage, paid by corpora- tion in lieu of rent: Deductible in computing in- come, 16. To be returned as expense of business, 37. On public securities, exemption of, 25. Received, to be included in cor- porate income, 14. INTEREST CHECK: Indorsement on with respect to income tax, 59. INTEREST COUPONS: Effect of exchange for funding bonds, 63. / INVESTMENT CERTIFICATE: Interest on subject to withhold- ing, 55. JOINT FIDUCIARIES: Any one may make return, 38. JOINT-STOCK COMPANY: See CORPORATION. JUDGE: See UNITED STATES JUDGE. LANDLORD: Right to file claim for exemp- tion or deductions with ten- ant, 67. LAWYER: When tax to be withheld at the source, on payments to, 53. LEASED PROPERTY: Computation of corporate in- come from operation of, 15. See also RENT. LEGACY: Income from taxable, 6, 7. Tax not withheld on value of, 54. Value not included in: Individual income, 6. Individual return, 33. See also GIFT. LESSEE : Duties with respect to withhold- ing tax on rent, 65. LICENSE: For collection of income arising in foreign countries, 68. Penalty for engaging in business of collecting foreign in- come without, 76. LIFE INSURANCE: On lives of corporate officers and employees : Premiums deductible in com- puting income, 16. Proceeds to be returned as income, 15. On lives of partners: Premiums deductible in com- puting partnership in- come, 75. Proceeds to be included in partnership income, 75. Premium not deductible in com- puting individual income, 11. Proceeds not included in gross income of individual, 5. Proceeds not subject to with- holding at the source, 53. Proceeds not to be included in individual return, 33. When amount received under to be included as income, 6. LIMITED PARTNERSHIP: Considered as corporation and taxable as such, 75. LIST RETURN: Generally, 40. Form and contents of: Annual list return, 41, 42, 43. Monthly list return, 40, 41, 42. Separate monthly list return for each issue of bonds, 41. 94 INDEX. LIST RETURN (Cont.) : Time for filing, 30. To show name and address of owner of coupons, 41. When to show name and address of person presenting cou- pons, 42. With respect to income other than from corporate obliga- tions or foreign sources, 42. LIVING EXPENSES: Not deductible in computing in- come, 11. LOAN OR TRUST COMPANY: Deduction of interest paid in computing income, 20. LOCAL ASSESSMENT: Not deductible in computing in- come, 8, 20. LOSS: Deductible in computing in- come, 9, 16. To be shown by return, 36. MAINTENANCE: Of corporate property, expense of deductible in computing income, 15. MILEAGE: In excess of actual expenses to be included as income, 6. Tax not withheld from payments on account of, 54. MINING COMPANY: Deduction for depreciation al- lowable to, 18. MODE: Of payment of tax, 48. MONTHLY LIST RETURN: See LIST RETURN. MORTGAGE: Assumed by municipality, inter- est on not exempt, 25. Of individual assumed by cor- poration, not a corporate ob- ligation for purpose of with- holding tax, 66. MUTUAL COMPANY: Computation of income of, 21. Mutual insurance or telephone company not exempt, 3. NON-RESIDENT: Subject to tax, 1. To whom return made by, 31. NON-RESIDENT ALIEN: Qaim of exemption with respect to foreign income on behalf of, 70. Computation of income of, 13. Duty of local representative to: Make return for, 30. Pav tax for, 48, 50. Form tor use of in claiming ex- emption with respect to divi- dends of foreign corpora- tions payable in the U. S., 71. NON-RESIDENT ALIEN (Cont.) : Income on which taxable, 5. Liability to tax, 1. Not entitled to specific exemp- tion, 24. Personal return for by fiduciary, 40. Tax not withheld on income from corporate obligations owned by, 61. NORMAL TAX: Deductions allowed in comput- ing individual income for, in addition to deductions for purpose of additional tax, 11. Rate of, 4. NOTICE: By fiduciary to debtor or with- holding agent: Authorizing withholding of tax, 72, 73. Precluding withholding of tax, 72, 73. Of assessment of tax, 47, 76. OFFICER: Of corporation, extent to which salary deductible in comput- ing corporate income, 15. Or enlisted man, what pay sub- ject to withholding at the source, 52. PARTNERSHIP: Insurance on life of partner : Premium deductible from partnership income, 75. Proceeds to be included in partnership income, 75. Limited partnership taxable as corporation, 75. Member to include share of earn- ings in personal return, 32, 74. Not taxable as such, 3, 74. Provisions with respect to, gen- erally, 74. Share of individual partner in profits taxable, whether or not profits divided, 3, 74. Statement of gains and profits by, 74. Tax not withheld on corporate obligations owned by, 61. Tax on income of not collected at the source, 51, 75. PAYMENT OF TAX: By and to whom made, 47. Mode of, 48. Penalty for delay, 48. Receipt for, 49. Time for, 48, 76. When to be made irnmediately upon receiving notice of as- sessment, 48. INDEX. 95 PENALTIES: For various violations of Income Tax Law, 75, 76. PENSION : Paid, deductible in computing in- come, 15. Received, included in taxable in- come, 6. POWER OF ATTORNEY: Person holding not authorized to sign certificate precluding withholding of tax by debtor or withholding agent, 73. PREMIUM : On bond furnished by employee, deductible from income, 8. See also INSURANCE; LIFE INSURANCE. PRESIDENT OF THE UNITED STATES: Compensation of : Exempt from tax, 24. Not to be included in return, 33. Tax not withheld from, 54. PROFITS : Derived from gift taxable, 6. Distributed to employees, taxable at the source, 51. From sale of real estate, compu- tation of, 12. PROFIT-SHARING: With employees of corporation, deduction for in computing corporate income, 20. PROMISSORY NOTE: In payment of rent, withholding of tax, 68. PUBLIC OFFICERS: Compensation of : Exempt from tax, 24. Not to be included in return, 33. Tax not withheld from, 54. PUBLIC SECURITIES: Coupons from need not be ac- companied by certificates of ownership, 67. Interest on: Exempt, 25. How treated in corporate re- turn, 36. Not_ included in corporate income, 14. Not included in individual return, ZZ. Tax not withheld from, 54, 56, 60. PUBLIC UTILITY: Amount paid from earnings of to state, territory, city, etc., deductible in computing cor- porate income, 16. Exemption of income derived from operation of, 26. PUBLICATION : Of information contained in re- turn, 45. PURCHASED PROPERTY: Computation of corporate in- come from operation of, 15. QUARTERS : Rental value of living quarters furnished to be included as income, 7. REAL ESTATE: Computation of profit from sale of, 12. When losses in connection with deductible in computing in- come, 17. REAL ESTATE AGENT: Commission paid to deductible in computing income of in- dividual, 8. RECEIPT: For payment of tax, 49. RECEIVER: See FIDUCIARY. RECORDS: To be kept by persons licensed to collect foreign income, 7L REMOVAL: Of buildings, etc., losses due to, not deductible in computing income, 17. RENT: Collection at the source of tax on, 65. Included in corporate income, 14. Interest on mortgage paid by corporation in lieu of, to be returned as expense of do- ing business, 37. Paid by corporation, deductible in computing income, 15, 16. RESERVE : For anticipated or probable losses not deductible in com- puting corporate income, 17. For taxes not deductible in com- puting corporate income, 20. Maintained by banks not de- ductible in computing in- come, 16. RESIDENCE : What constitutes, 1. RETIREMENT : Of corporate bonds, collection of tax on, 63. RETURN : By Commissioner of Internal Revenue for delinquent, 44. Disclosure or publication of in- formation contained in, 45. Extension of time for making, 30. Form of, generally, 32. Increasing amount shown by, 44. 96 INDEX. RETURN (Cont): Inspection of, 45. Made by representative in case of inability or absence of taxpayer, 34. Necessity for, 26. Penalty for failure to make, 75, 76. Penalty for making false or fraudulent, 75, 16. Time for making, 30, 1(>. To whom made, 31. Verification of, 43. Who required to make, 1^ . See also CORPORATE RE- TURN; FIDUCIARY RE- TURN; INDIVIDUAL RE- TURN; LIST RETURN. SALARY: Of corporate officer, extent to which deductible in comput- ing corporate income, 15. Of foreign employee of domestic corporation, not subject to withholding of tax, 54. Of public officer or employee, ex- emption of, 24. Of $3,000 or more paid by cor- poration to be shown in cor- porate return, 37. Paid to widow of officer or em- ployee not deductible as busi- ness expense, 8, 15. Received from exempt organiza- tions to be included as in- come, 7. Tax to be withheld from, on basis of calendar year, 66. SALE: Of real estate, computation of profit from, 12. Of real or personal property, when loss on deductible in computing income, 9. SALESMAN : Commission paid to deductible as business expense, 8. Spending or treating money ad- vanced to deductible as busi- ness expense, 16. Withholding of tax on commis- sion, 54. SCRIP CERTIFICATES: Withholding of tax on, 55. SECRETARY OF THE TREAS- URY: To approve forms of returns, 32. SECURITIES: Fluctuations in value not deduc- tible as losses in computing income, 9, 17. Public, owned by corporation, interest on exempt, 25. SOURCE OF INCOME: Meaning of term, 50. Who regarded as, 56. See also COLLECTION AT THE SOURCE. SPECIAL COMPENSATION: Paid by state or subdivision thereof for professional ser- vices, exempt, 24. SPECIFIC EXEMPTION: General discussion of, 22. Claim of with respect to income taxable at the source, 50, 60, 67, 69, 73. Claimed by beneficiary, to be shown in return of fiduciary, 38. Claimed by owners of bonds to be shown on monthly list returns, 40. SPENDING MONEY: Advanced to salesmen deductible in computing corporate in- come, 16. STAMP TAX: Application to income tax certifi- cates, 53. STATE: Bonds or securities issued by, see PUBLIC SECURITIES. Exemption of compensation of officer or employee, 24. STOCK: Consideration of sale by cor- poration in computing cor- porate income, 21. Shrinkage in value not de- ductible in computing in- come, 9, 17. When loss on deductible, 10. STOCK DIVIDEND: Valuation at which accounted for in individual return, 34. SUBSIDIARY COMPANIES: List of to be attached to cor- porate return, 37. SUBSTITUTE CERTIFICATE: Of collecting agent, authority to make substitution, 57. Record of substitutions to be kept, 58. Reference to in monthly list re- turn, 41. SURRENDER OF CONTRACT : Of employment, amount paid for: Included as income, 7. Taxable at the source, 51. TAXATION : Securities guaranteed free of, collection of tax^ on inter- est, 64. INDEX. 97 TAXES : Deduction of in computing in- come, 8, 20. Paid by tenant deductible from income, 8. Paid to foreign country not de- ductible in computing indi- vidual income, 8. To be shown in return of cor- poration, 37. TAXING PERIODS: Generally, 45. See also FISCAL YEAR. TEACHER : Exemption of salary of public school teacher, 24. TELEPHONE COMPANY: Mutual or co-operative : Computation of income, 21. Not exempt, 3. TENANT: Duties with respect to withhold- ing tax on rent, 65. Right to deduct taxes paid on leased property, 8. TESTIMONY: Compelling, 44. TIME: For making and filing return, 30, 76. For notice of assessment, 47, 76. For payment of tax, 48, 76. TREASURY STOCK: Not included in corporate re- turn, 35. TRUST: Duty of beneficiary to show in return amount received from, 33. TRUST COMPANY: Deduction of interest paid in computing income, 20. See also BANK. TRUST INCOME, COLLECTION OF TAX ON : Generally, 71. Corporate dividends in hands of fiduciary, 73. Tax to be withheld although in- come not distributed, 72. TRUSTEE: See FIDUCIARY. UNITED STATES JUDGE: Compensation, exempt, 24. Compensation not to be included in return, 33. Tax not withheld on compensa- tion, 54. WARD: Personal return by guardian for, 39. WEAR AND TEAR: Deduction for in computing in- come, 10, 17. WIDOW: Of officer or employee, salary paid to: Not considered as income, 7. Not deductible as business expense, 8, 16. WITHHOLDING AGENT: List returns of, 40. Meaning of term, 50, 64. Statement for exemption or de- ductions by, 67. Time for return of, 30. When to forward amount with- held, 48. WITHHOLDING AT THE SOURCE : See COLLECTION AT THE SOURCE. WORTHLESS DEBT: See BAD DEBT. UNTVERSIT X,-TfC}^ n THIS BOOK IS DUE ON THE LAST DATE STAMPED BELOW AN INITIAL FINE OF 25 CENTS WILL BE ASSESSED FOR FAILURE TO RETURN THIS BOOK ON THE DATE DUE. THE PENALTY WILL INCREASE TO 50 CENTS ON THE FOURTH DAY AND TO $1.00 ON THE SEVENTH DAY OVERDUE. JAN 28 T_:. 9 b LD 21-95m-7.'37 YD 0549 312488 UNIVERSITY OF CAUFORNIA UBRARY 'M ,-, ^ ■' . .-v"-;. ■:■■ -' ,' ■■■■■.• : ■-;:!( .■ -^'-.^v- ■■ ■; ->, ^r.y-- ■yiY/A■,'^bcr■^^'i<;:?^\'[rt]y^.r,.